Our Internet Site: http://www.worldbank.org/html/prddr/trans/trans.htm                  7                5
E..
TransitionEconomics Division               *      Policy Research Department         *        TheWorld Bank
China's Transition Experience,
Reexamined
by Jeffrey Sachs and Wing Thye Woo
he most remarkable difference   Chinese-style reforms to Russia or to   *1. In 1978, at the start of the reform
between reforms in China and    other countries of CEEFSU would not   period, China's heavily subsidized state
T in countries of Central and East-   be possible or desirable. Supporters of   sector employed a relatively small share,
em Europe and the former Soviet Union   introducing Chinese gradualism in Rus-   18 percent, of the labor force while the
(CEEFSU) is that China succeeded in   sia might as well advise Russia to solve   agricultural sector-not subsidized by
producing more than a decade of phe-  its agricultural problems by shifting from   the state-accounted for 71 percent of
nomenal growth, while countries of   wheat to rice. We can summarize the   the labor force. State-owned enterprises
CEEFSU, no matteT which reform strat-   structural differences, and their impli-  (SOEs) offered a generous package of
egy has been tried, have seen a sharp   cations, as follows:               wages and social protection, pensions,
initial downturn in production, usually                                    heavily subsidized housing, medical cov-
with a significant rise in unemployment.
Theundoubted Chinese success ledmany   What's inside.
economists to urge CEEFSU to adopt     Latvian Banking Crisis: Stakes and   respond to Michael Gray and Aleksandr
the Chinese dual-track approach (see   Mistakes-ThefallofBaltijaBankisana   Zhilin. (page 20)
box next page). By 1996, however, the  omen-to avoidtremors intheirfinancial
call for thsul-raksectors, transition economies should   BookoftheMonth-LeszekBalcerowicz:
call for this dual-track approach has    tighten bank supervision, warn Alex   Socialism, Capitalism, Transformation
basically disappeared in the fast-reform  Fleming and Samuel Talley. (page 6)  Reviewed by Martin Schrenk (page 22)
countries of CEEFSU, since their sharp
initial downturn has been followed by  Using World Bank Credit Lines. Alex   QuotationoftheMonth: "WeWill Regu-
rapid growth. Poland's per capita GDP  -sFleming reports on an innovative method   late Foreign-controlled Enterprises. " If
rapi grwth Pol-nds pr caitaGDP -used in the Baltics-to recapitalize   Zyuganov wins..-a leading Communist
growth was around 6 percent in 1995,   banks. (page 9)                     outlines a scenario for Russia. (page 24)
around the levels of the East Asian ti-
gers. A similar rate of growth is ex-  HowtoTenderinBosnia.Ourcompilation   Milestonesof Transition (page 25)
pected in 1996.                        includes an interview with Procurement
Coordinator Naushad Khan; a look at the   World Bank/IMF Agenda (page 28)
Shifting from Wheat to Rice?           specifics of reconstruction procurement;
and a basic primer on World Bank pro-   Conference Diary (page 30)
The differences in initial conditions and  curementprocedures. (pages 11-18)
New Books and WorkingPapers
economic structures are so profound    PurchasingPower Parities (page 19)    (page32)
that it has been necessary for countries
of CEEFSU to follow a fundamentally    LettertotheEditor-RussianEconomic   BibliographyofSelectedArticles
different kind of reform from Chinese  Crime:TheFlipSide                   (page39)
gradualism. A simple transplantation of  Leonid Grigoriev and Gregory Kisunko



The World BanklPRDTE
erage, childcare, food, and&recreational   .2. Market reforms in the CEEFSU     3. In both regions partial liberalization
facilities. The peasants received none   countries necessarily involved an initial   unleashed macoreconomic pressures,
ofthese benefits and are still consuming    decline in industrial production. In these   especially by allowing state enterprises
roughly one-third of what urban resi-   countries heavy industry was overde-   to reduce actual and reported profits, so
dents consume. While most state enter-   veloped under the old regimes' bureau-   their tax payments decreased. These
prise workers have chosen to keep their   cratic directives while the service sec-   pressures were more manageable in
privileged positions (at least during the   tor was correspondingly underdeve-   China, partly because the state enter-
first fifteen years of reforms), the peas-   loped. In China a decline ofagriculture's   prise sector employed a smaller part of
ants have been only too glad to shift out   contributionto the GNP itselfgenerated   the labor force, partly because of rapid
oflow-income agricultural activities and   growth, without a squeeze of the exist-   growth in other sectors, and partly be-
into the new, higher-income jobs in the   ing industry. Besides, industry was not   cause of adequate monetary policy. The
nonstate sector, notably in the township   as excessively built up, since it had en-   pressures turned explosive in much of
and village enterprises (TVEs) and in   duredamuch shorter period under stable   the CEEFSU, particularly Bulgaria,
enterprises in special economic zones   central planning than the industries in   Poland, and the (former) Soviet Union,
of the coastal provinces (see box on   the CEEFSU. The experience of China   because of deeper structural problems
page 3). Thus, the nonstate sector grew    and the CEEFSU countries suggests   as well as gross macroeconomic mis-
despite the preservation of the state   that the marketization of a planned   management during the communist re-
sector. Itis importanttonotethat China's   economy inevitably shifts resources to-   form  period  (and  well into  the
rural reforms contributed directly to a   ward the service sector: from the agri-   postcommunist reform period in much
one-timejump inproductivityinagricul-   cultural sectorin China, andfromindus-   of the former Soviet Union).
ture between 1979 and 1985, but after   try in the countries of the CEEFSU.
that, agricultural productivity returned    Seen this way, much or all of the initial   *4. One key macroeconormic burden is
to its historical trend. Therefore, rapid   drop in industrial production in the   social expenditure. In China social
growth in China has come mainly from    CEEFSU countries after the start of   spending from the central government
the non-state, nonagricultural sectors.    reforms was a natural part ofthe needed    covers a small fraction ofthe workforce,
reallocation of employment and re-   much less than 20 percent. In CEEFSU.
Countries in the CEEFSU, by contrast,   sources.
lacked a vast surplus-labor sector, and
the (also heavily subsidized) state sec-    What Is the Dual-Track Approach?
tor workers were eager to keep their    The basic Chinese strategy for moving    This approach was introduced at the end
privileges rather than risk the transition  from economic planning to a market sys-   of 1978 withrapid and comprehensive lib-
to the nonstate sector. In Russia, around  tem has been the gradual decentralization   eralization ofthe agricultural sector while
three-fourths of the population are ur-    of economic decisionmaking, including the   the industrial sector remainedundertradi-
ban residents, and as of1991, morethan  liberalization of the non-state-owned   tional central planningmanagement. The
economy. The dual-track approach of es-   agriculture communes were disbanded
90 percent of the population were em-    tablishing a market track, parallel to an   overatwo-yearperiod by distributing the
ployed in state-owned enterprises. Fur-    existingplantrack, pervadesalmostevery   land with multiyear (usually fifteen-year)
ther, Russian farners on state farms    area of economic policymaking: sectoral   leases to the peasants, and allowing the
(sokhozes) and collective farms (kolk    reform, price deregulation, enterprise re-   leasestoberelativelyfreelytradable. State
hozes) received approximately the same  structuring, regional development, trade   procurement prices for agricultural prod-
promotion, foreignexchangemanagement,   ucts were raised, and free marketsfor some
income and benefits as SOE workers,    central-localfiscal arrangements, anddo-   agriculturalproductswereallowed. Farm-
thanks to very large subsidies from the  mestic currencyissuance. Forexample, the   ers now enjoy wide-ranging production
central government. Therefore, when    typical process of dual-price transition is  freedom: only 5 percent oftheirproduction
the new. nonstate sector was progres-    as follows:                          in 1993 was set by the state plan.
sively legalized during 19 8 6-9 1, an SOE  * Opening the free market while keeping
worker sitnitthstate supply unchanged at the (lower) plan   In 1984 the dual-track arrangement was
price.                                extended to industrial goods, with state
could experience a drop in income and   * Adjusting the plan price incrementally   procurement quotas for consumer goods
security. The flow of workers to the    overtimetoapproachthemarketprice. The   much lowerthan for producer goods. The
nonstate sector was insufficient to rein-    supply offered at the plan prices is nor-   proportion of planned production of total
vigorate the economy.                   mally fixed by quota, if not reduced, over   industrial output value has been reduced
time. Generally, no "shock" is observed   from more than 90 percent in 1978 tO 5
when convergence of the two prices oc-   percent in 1993.
curs.
2                                                                                                    March-April 1996



Transition
by contrast, social spending from the   are still running losses, a d'ecaXd& after   without endangering macroeconomic
central government covers nearly the   the start of enterprise reforms. In 1992,   stability, and to retain some control over
entire population, and public demands   a boom year, output grew 13 percent,  the enterprises, especially overtheirful-
for social guarantees outrun the fiscal   and yet two-thirds of Chinese SOEs   fillment of production quotas at plan
capacity of the state.                 were loss-makers. The heavy losses   prices. With the state still being able to
have continued to the present. Some   monitor the SOEs, there was less need
No Such Thing as Free Subsidies       blamethetoughcompetitionbynonstate   to consider immediate privatization be-
enterprises. But decline in profits oc-   cause widespread spontaneous privati-
The usual argument for the superiority   curred across the board, even in heavy   zation did not occur. But the fact re-
of China's two-track approach com-   industries with negligible new entry by   mains that just as it did not succeed in
paredwithaPolish-style "bigbang" goes   nonstate firms. Excessive wage in-   producing the new socialist man during
something like this. Economic reform    creases throughoutthe SOE sector may   the Cultural Revolution, China, like Eas-
involves substantial upheaval, so it is   have been a more relevant reason for   em Europe and Russia, has not su.
desirable to moderate the size of the   the profitability decline. Managers have   ceeded in producing profitable SOEs
shocks that will hit the economy during   little incentive to resist wage demands
the transition. Therefore, it is useful to   because their future promotionto larger   Another Look at China's Succes.
protect the old sectors of the economy    SOEs is determined in part by increases   Story
at the same time that new economic   in worker welfare during their tenure.
opportunities are introduced by market                                        In addition to the "advantages of bacl
liberalization. Since the old sectors are   The financial weakness of SOEs under-   wardness" in economic structure, thei
inefficient, they will lose out in compe-   mines macroeconomic stability; it re-   are several other factors that have con
tition with the new sectors, but this will   duces fiscal revenue, widens the budget   tributed to China's superior growth per-
happen graduallyas workers voluntarily   deficit, and causes faster monetary   formance:
flow from the old state enterprises to the   growth; and it forces the central bank to
new and more efficient nonstate enter-   cover the bulk of SOE losses through    * China's reforms did not start at a
prises. A direct "assault" onthe existing    bank loans. The relatively small size of   time of high macroeconomic crisis
state enterprises-by cutting subsidies,  the SOE sector (compared with coun-   and severe external debt requiring
raising input prices, privatizing owner-  tries of the CEEFSU) enabled the gov-   implementation of an austerity pro-
ship-is both unnecessary and trau-   erminent to help out the loss-makers   gram.
matic. But in China the proportion ofthe
labor force employed by state-owned     SOE, COE, TVE, FFE, SEZ
units was 18 percent in 1978 and was
still 18 percent in 1993. This means that    In China, an SOE is a nationally owned   predominantly established in the SEZs,
there were actually 35 million more    enterprise; the central government is the   Special Economic Zones.
Chinese working.m state-owned unis in . ultimate authority for the enterprises' op-
Chinese working in state-owned units in    erations and the disposition its assets, even   Opening of the economy to foreign trade
1993 than in 1978. The state-owned    though the SOE in most cases has been   and investment has caused Chinese ex-
sector is not "withering away."         assigned to the provincial or county gov-   ports toboom, especially exports from the
emmentfor supervisionand management.   TVEs in recent years (see table).
Several studies have concluded that to-    Thenonstateenterprisesarethose inwhich
tal factor productivity (TFP) growth of    the central government lacks final author-
talfactorproductlvlty(TFP)growthof    ity over the disposition of assets. The   China'sExportBoom,1987-94
the Chinese SOE sector has been posi-    nonstate sector consists of community-               TVEshare  Total
tiveinthereformnperiod.However,these    owned (collective-owned) enterprises        TVE  Total in totalexport-GDP
calculations are based on questionable    (COEs), cooperatives, individual-owned    Year exportsexports exports   ratio
price defiators of intermnediate and final    enterprises, private corporations, and for-
eignjointventures. COEsare ownedby all   1987  16   147    10.9     13
outputs. Evencalculatingwiththesedata,    the residents of the city, township, or vil-   1988  27    177    15.3  13
annual TFP growth of SOEs reached    lage, andcoopeTativesby a small group of   1989  37    196    18.9     12
only about half of that achieved by the  persons. The most prominent type of   1990  49-   299    16.4      17
collectively owned enterprises (which   nonstate enterprise is the community   1991  167    383    17.5     19
include town and village enterprises)   -ownedenterprisesintheruralareas,known    1992  119    468    25.4  19
astownshipandvillageenterprises (TVEs).   1993  235   529    44.4   17
Besides, overall profitability ofthe SOE  Foreign Funded Enterprises (FFEs) were   1994  340  1042    32.6  23
sector has been declining. Many SOEs
Volume 7, Number 3-4                                                                                            3



The World Bank/PRDTE
* China's saving rate is unusually  the continuation of economic reforms.   Ofall the factors identified as important
high even by East Asian standards.  (When the conservatives sought to re-   causes of China's achievements in the
Household saving is about 23 percent of  impose a Stalinist central planning econ-   1978-92 period, onlythehigh saving rate
disposable income in China versus 21   omy in the immediate aftermath of the   could be considered (in part) a policy
percent in Japan, 18 percent for Taiwan,   Tiananmen shootings in 1989, the pro-   lesson for economic reforms. The other
16 percent for Belgium, 13 percent for   vincial representatives were strong   factors are rather specific to China's
West Germany, and 8 percent for the   enough to repel the recidivist tendency   circumstances.
United States. The annual flow of house-  toward centralplanning. Furthermore, it
hold saving intothe formal financial sys-   was the mobilization of this new decen-   Keeping the Bird Happy
tem (the state banks and rural credit  tralizedpoliticalpowerbyDengXiaoping
cooperatives) rose steadily from 3.4   after the collapse of the Soviet Union   Gradualism in China is as much the
percent of GDP in 1980 to 11.7 percent  that forced the conservative faction to   result of a political struggle between the
in 1991.                            accept the new vision of a socialist   Stalinists and the refon-ners, and of a
market economy.)                    general lack of consensus in the society
The high household saving rate plays an                                  at large, as it is the result of a particular
important role in stabilizing the Chinese   *Central planning in China was al-  theory of reform. The Stalinists sub-
economy. It has enabled the govern-   ways much shallower than in the   scribe to the "birdcage economy" doc-
ment to rely on seignorage (money-  CEEFSU. The Soviet central plan con-  trine. In the conception of its originator,
financing of the budget deficit and off-  trolled 25 million commodities whereas   Chen Yun, the central plan is the cage
budget SOE subsidies), sincethe house-  the Chinese central plan controlled only   andthebird is the economy. The premise
holds are willingholders ofthe increased   1,200 commodities, Furthermore, the   is that without central planning, the
money supply. (Comparable subsidiza-   breakdown of the national distribution   economy will be in chaos and produc-
tion of industry in Russia has so far   system during the decade of the Cul-  tion will be inefficient-that is, without
produced very high inflation, because  tural Revolution forced local authorities   the cage the bird will fly away. The
theincreasedmoney supplyhas notbeen   to promote small and medium-size in-   amount of market activity that is to be
willingly held by households and firms).   dustrial enterprises in order to meet lo-  tolerated to keep the economy working
cal demand.                         is analogous to the amount that the cage
- The two disastrous leftist cam-                                        needs to be swung to create the illusion
paigns, the Great Leap Forward   * Existence of family ties between   of greater space and  keep the bird
(1958-62) and the Cultural Revolu-   the mainland Chinese and the over-   happy.Thereformers,ontheotherhand,
tion (1966-76), undermined belief   seas Chinese has facilitated the con-   believethatonlyamarketeconomywill
in Marxist dogmas, weakened the   duct of business. The explosive growth   promote long-term economic develop-
state's administrative capacity, and   of the Special Economic Zones (SEZs)   ment.
discredited central planning. The   in southern China is a result of whole-
Great Leap Forward program of crash   sale movement oflabor-intensive indus-   "Muddlingthrough" hasnotbeenastrat-
industrialization starved around 30 mil-  triesfromHongKongandTaiwan,which   egy, as claimed by some observers, so
lion to death in the 1958-61 period, and   were losing their comparative advan-   much as a result of the lack of political
the Cultural Revolution purged around   tage intheseindustries. China was closer,  consensus. The reformers were able to
60 percent of party officials.      wages were lower, and language diffi-  convince the Chinese leadership in Oc-
culties were nonexistent, compared with  tober 1992 to formally abandon "the
The legacy of these two disasters en-  the alternative sites in Southeast Asia.   planned commodity economy" in favor
abled Deng Xiaopingto quicklytransfer   Managers could commute daily from    of "a socialist market economy with
a significant amount offormal and infor-   Hong Kong to supervise their factories   Chinese characteristics."
mal economic policymaking power and   in Shenzhen. The family connections
resources to the provinces when he re-   greatly reduced the transaction costs of  In November 1993, forthe firsttime, the
tumed to power in 1978. The central  the investment by providing reliable lo-   party identified ambiguous property
ministerial and party apparatus were   cal supervisors, inside information on   rights as an important cause ofthe inef-
too politically exhausted and too dis-  the enforcement of regulations, and   ficiency of the state enterprise sector,
credited to resist his decentralization.   contacts with the local authorities.  and decided that large and medium-size
This ending ofBeijing's stranglehold over                                state-owned enterprises should experi-
political power has been fundamental to                                  ment with the corporate system, and
4                                                                                            March-April 1996



Transiton
that some small state-owned enterprises   National Peoples' Congress-Waits and Sees
could be contracted out or leased; other  China's economic targets imply a strategy   tobecontrolled, especiallyhigh-grade real
SOEs shifted to the partnership system   of continued austerity. However, pressure   estate and urban construction projects.
in the form of stock sharing, or were    from ailing state enterprises and inland
sold to collectives and individuals.     provinces fora selective easing of credit is   Inflation. Beijing enjoyed considerable
intense. AllofthekeyreportstotheMarch    success in reducing inflation last year to
session of the National Peoples' Congress   less than 15 percent from 21.7 percent in
Since there IS now more political con-   stressed that the government would con-   1994, albeit with the aid of price freezes,
sensus at the elite level, popular support    tinue its "appropriately" tight monetary   administrative measures, and subsidies.
at the mass level, and better knowledge  policy through 1996 and for the next five   The government hopes that inflation will
generally of the steps required to estab-  years in order to control inflation. Prime    drop to 10 percent in 1996 and remainbe-
lish a market economy. it is not surpris-  Minister Li Peng acknowledged, inhisre-   low 8 percent through the next fiveyears.
ing that Chinahasccelrateport, the need for a "reasonable scale" of
ing that China has accelerated its eco-    investment in fixed assets and in ongoing    Budget. The draft budget provides for a
nomic reforms since 1994. The new         construction projects. There is debate   deficit of61.4billion renminbi in 1996, a
reform measures included unification of    among Chinese leaders over whether to   slight improvement over last year's 62.1
the exchange rate, making the currency    relax credit. Some leading officials argue    billionrenmtinbi. Totalrevenuewill amount
convertible for current account trans-    that any loosening now would risk a new    to an estimated687.2billionrenminbi, an
actions, a new tax system, the comimer-    bout ofinflation. However, alarge number   increase of 11. I percent over 1995, with
of SOEs and less-developed inland prov-   expenditurestotaling748.6billionrenminbi,
cialization of the state-owned banks,    inces are pushing for a loosening-up.   up 9.9 percent. Tax reform, including im-
and the corporatization of SOEs.         Nonetheless, economic targets are based    provements in collection andthenew rev-
on the continuation of the tight credit   enue-sharing agreements with the prov-
To sum up, the different results that we  policy.                               inces, has helped to stabilize government
saw in China, Poland, and Russia imme-    EconomicfGLipredictedGDPgrowth
diately after the implementation of dif-    of 8 percent this year and average annual   State-owned Enterprises. To assist ailing
ferent economic reform programs arose     growth of 8 percent thereafter up to 2000.   state-ownedenterprises (SOEs), whichare
more from differences in their economic   This is down from average growth of 11.8   burdened by excess workers, outdated
structure than from the economic strat-    percent in 1991-95. On the basis of these   equipment, andpoormanagement, reform-
egies implemented. China's reformprob-    and further projections, GDP is expectedto   ers last year proposed a two-tier strategy
risefrom 5.8trillionrenniinbi ($700 billion)   (see Transition, November-December
lem is basically the classic development    to 8.5 trillionby 2000, and to doubleby 17    1995):
problem of promoting the movement of    trillion by 2010. Actual GDP growth this
low-productivity, surplus agricultural la-  year couldbearound 9 to 10percent. Tight   * One thousandkeySOEs are to be singled
bor into industry and services, while    credit and strong demand have led to up-   outfor special assistance, including low-
wardpressure onthe exchangerate, which   interest loans, debt forgiveness, and tech-
Central and Eastern  Europe's and       has eroded much of the gain in external   nical aid, in order to transform them into
Russia's reform problem is the much       competitivenessthatresultedfromthe 1994    modern corporate entities capable of oper-
moredifficultand conflictual adjustment   devaluation.                           ating independently from the state and
problem of inducing labor to move from                                           assumingresponsibilityforttheirownprof-
uncompetitive, heavily subsidized indus-  However, althoughafall in net exports will  its and losses.
tries to newly emerging, efficient indus-    tend to slow the economy-trade was in
deficitinDecemberandJanuaryafternine-   *A special fund is to be established to
tries.                                   teen consecutive months of trade sur-   encourage other SOEs to merge, offset
pluses-this may be offset by strong con-   debts, and improve efficiency. It is also
This article is drawnfrom the articles   sumption and capital investment. After   understood that many ofthese companies
and ongoing research of the authors.      growth in fixed assets investment came   will declare bankruptcy. (Mergers, how-
down to 18.8 percent last year, Li envis-   ever, may create monopolies and can
ages a 32 percent expansion in 1996 and    couple more efficient firms with less effi-
Jeffrey Sachs is professor of Interna-    average annual growth of 30 percent to   cient ones.)
tional Trade at Harvard University        2000. Total fixedassetinvestmentin 1996
and advises governments in several    is expected to reach 2.1 trillion renminbi,   Theparliament's recentsession didnotyet
countries including Bolivia, Estonia,    with 1.4trilliongoingto SOEsandinstitu-    discuss these proposals.
Mongolia, Poland, and Russia.             tions, and 660 billion to community-run
and private organizations. Priority will   Basedon reports ofOxfordAnalytica, the
apparently be given to key projects under   Oxford (U.K.)-based international con-
Wing Thye Woo is professor of Eco-       construction ininfrastmrcture, agriculture   sulting firm. (Email: ra@oxford-analy
nomics at the University of Califor-      and industry, as well as to inland regions.   tica. com).
nia, Davis.                              The startup of new projects will continue
Volume 7, Number 3-4                                                                                                5



The World BanIkPRDTE
Latvian Banking Crisis: Stakes and Mistakes
By Alex Fleming and Samuel Talley
I  n the spring of 1995 Latvia expe-   Earlier. however, the Bank of Latvia did   Rise and Fall of Bank Baltija
rienced the largest banking crisis   not play any type of governance role in
of any country ofthe former Soviet  the branches under its wing. Branch   Bank Baltija expanded at unprecedented
Union (FSU) to date: the banking sys-   managers followed a business-as-usual   speed between 1993 and 1995. In 1994
tem lost about 40 percent of its assets   policy, and as a result, a significant  it became the largest Latvian commer-
and liabilities, and depositors are esti-  amount of bad lending took place. Most  cial bank in tenns ofassets, own capital,
mated to have lost almost $800 million in   bad loans were concentrated in the   and deposit funding. Nine main share-
savings. Earlier, bankers had hopes that   branches of Unibank. An audit showed   holders owned 91 percent of the total
their country would become the Swit-  that as of March 1994, Unibank owned   shares; roughly 59 percent were owned
zerland of the Baltics. Offering exceed-   40 percent of all nonperforming loans in   bythe family of Alexander Lavent, chair-
ingly high rates ofinterest and operating   the banking system, which totaled about   man of the bank's supervisory board.
under a liberal regulatory and disclosure   25 million lat ($50 million). These loans   Among Lavent's companies, several are
regime. Latvian banks attracted large   were taken off Unibank's books and   Russian-dominated and registered off-
capital inflows and short-term deposits  replaced by government bonds.  shore.
from Russia and the CIS. Butthen banks
began to fail with alarming frequency   Government policy toward the evolving   Baltija's assets grew from about $25
toward the end of 1994. The crisis   commercial banking sector was driven   million in January 1993, to almost $500
reached its peak when Bank Baltija, by   primarily by parliament's insistencethat   million by early 1995. Its own capital
far the largest bank in the country, was   any person or entity should have the   grew from about $1 million in early 1993
forced to suspend its activities.   right to establish a bank. As a result, a   to $44 million in January 1995. Baltija
plethora of banks emerged: by 1993   had thirty-seven branches and forty-
The Evolving Banking System         morethan sixtybanks hadbeenlicensed.   nineofficesthroughoutLatviawith 1,300
Some were pocket banks owned by   employees in total. In April 1995, when
When Latvia gained independence in  state enterprises; some were purely pri-  the banking crisis began, the bank had
1991, it inherited branches of the same   vate, dedicated to raising deposits to  total deposits of$3 92 million and a loan
specialized Soviet banks as other FSU    onlend to the owners; and some were   portfolio of $283 million. The bank was
countries: the savings bank, the indus-  set up with specific functions in mind   ready to develop a large network of
trial/construction bank, a social bank,  (Olympija Bank was set up to help fi-  branches and become the number one
and an agricultural bank. While most  nance the Latvian Olympic team).  retail bank, in competition withthe sav-
FSU countries convertedthesebranches                                    ings bank. It offered extremely high
into nationally owned banks that contin-   The incentive for establishing a bank   interest rates on lat deposits-90 per-
ued their former specialization, the   was simply to gain access to a much   cent for one-year deposits-at a time
Latvian government decided to com-   cheaper source of funding than would   when the savings bank was offeringjust
bine the forty-five branches of these   be possible through existing banking in-   14 to 20 percent, and other banks a
former Soviet banks and place them   stitutions. All of these private or quasi-   maximum of 52 percent. By the end of
underthe auspices ofthe Bank ofLatvia.   private banks were allowed to develop   1994 Baltija attracted some 200,000
This enabled the government to pursue   with little supervision from the Bank of   personal accounts.
a flexible bank restructuring strategy. In   Latvia. From 1992 to 1994 the private
1993 nine branches were sold to private   banks' share of total assets in the bank-   In March 1995 the central bank invited
commercial banks (seven of them to  ing sector grew from 47 percent to 85   all banks to prepare and present fman-
Bank Baltija); fifteen branches were   percent. Credits granted by the new    cial statements that had been audited on
consolidated into eightprivate banks and   commercial banks accounted for 89   thebasis ofintenationalaccountingstan-
sold through offerings of shares; and the   percent of the total by the end of 1994,   dards. Bank Baltija failed to present
rump of twenty-one branches were   a huge jump from 23 percent two years  such accounts, or to give its auditors-
structured into one state bank-the   earlier.                           Coopers and Lybrand-full access to
Universal Bank of Latvia, or Unibank.                                   needed documentationforthe audit. That
6                                                                                           March-April 1996



Transition
behaviorraisedconcernthatBaltijamight   million to the Russian Inte#wk bank.   was again declared bankrupt and this
have an insolvency problem, even if  (Moscow-based Intertek is a pocket  time was put in the hands of a liquidator.
moderate in size.                    bank, owned by major oil companies,
along with the Russian Ministry of En-   Besides Bank Baltija, other middle-size
As enterprises started to withdraw their  ergy, its largest shareholder. Some cross-   banks were involved in the crisis, in-
deposits from the bank, followed by   ownership between Baltija and Intertek   cluded the Latvian deposit bank, the
households, which were slower to grasp   was also suspected.) In return, Baltija   Centrabank, and Olympija Bank. Those
the gravity of the problem, the Bank of   was to receive Russian government   were eventually declared insolvent. A
Latvia provided modest support for   bonds equal to 29 percent of the par   number of smaller banks also experi-
Baltija, as did a few large corporations   value of the loans sold. The Russian   enced difficulty. In all, about 40 percent
and commercial banks. It also initiated   banknever deliveredthebondsto Baltija.   ofthe assets andliabilitiesinthebanking
an across-the-board investigation ofthe                                    system were compromised, totaling al-
bank's financial operations. The accoun-   Finally, Baltija was declared insolvent in   most$900million.
tants dug deeper and deeperinto Baltija's  July 1995 and placed under the control
books and learned that the bank's nega-   ofthe central bank. Ofthe roughly $500   What Caused the Crisis?
tive networth was about $320 million, or   million inassets on Baltija's books, some
7 percent of Latvia's expected 1995   $260millionhaddisappearedbythetime   Questionable banking practices during
GDP. The Bank of Latvia refused to  the administrator took over. Attempts to  transition, the effects of stabilization,
provide further liquidity support. The   cancel the loan-sale agreement with   and ill-fated responses to developments
crisis had come to a head.           Intertek and have the loans returned to   in the Russian commodities market all
Baltija failed. Intertek has refused even   had ahandintheLatvianbanking crisis.
Officials of the Bank of Latvia and the   to confirm that a loan agreement was
government began protracted negotia-   ever signed and claims that all original   *Transition uncertainties. Major play-
tions with Baltija's owners and manage-   documents on the loans have been re-   ers in the banking system-the enter-
ment. But the bank's managers and   turned to Baltija. Funds were also   prise borrowers, the bankers, and the
owners were just maneuvering to gain   blocked at Baltija's correspondent ac-   banking supervisors-are all prone to
time and opportunityto strip the bank of   counts with banks in Russia, Belarus,   mistakes as the economies make the
its assets. In late April 1995. for ex-   and Ukraine. But Baltija has refused to   transition from a command to a free
ample, Bank Baltija allegedly sold more   die. It was declared bankrupt, but later,   market system. As a consequence,
than half of its loan portfolio of $160   received a reprieve. On April 4, 1996, it  nonperforming loans increase across the
banking sector; moreover, a lack of laws
governing loan collateral may inhibit col-
lections. (In Latvia commercial banks
had to make provisions of about $140
OA~~~  ~4                   mifllion at the end of 1994, and another
A X27lSSS  >11   k o   S sA         GPI      bD ae l:l jP          $86 million in the first half of 1995.)
HAtVEA SgE}      ||ij b *            <i
PIAM TO                                           -~~~~~~~~~~~~~~~Dubious bank activities. During tran-
YOU t4(NEY                                         ~~~~~~~~~~~~~~~sition, many banks were created to sat-
isfy the rent-seeking of owners and
management. Such get-rich-quick am-
bitions are fostered by a loose legal and
supervisory framework. (Loopholes
characterized banking laws in Latvia
and other FSU countries during at least
the first phase of transition.)
*Stabilizationfallout. As observed pri-
marily in Latin America, banking be-
comes susceptible to crisis as stabiliza-
From the magazine Business Central Europe, Vienna                          tion takes hold. Tight monetary policies
Volume 7, Number 34                                                                                        7



The World Bank/PRDTE
force up nominal interest rates and si-   1994 to $369 million at the end of June   reparations and strengthening of bank-
multaneously reduce rates of inflation,   1995 as the Bank of Latvia intervened   ing regulation and supervision:
creating a strong movement from nega-  to maintain the lat's parity vis-a-vis the
tive to positive real interest rates. This,  special drawing right (SDR).  *Compensation. To rekindle confidence
in turn. can impede borrowers' ability to                                 in the banking sector, the former gov-
repay loans, with an adverse impact on   -The budget. A severe budgetary crisis   ernment decided to compensate house-
the quality of the banks' loan portfolio.   in 1995 has been worsened by the bank-   hold depositors who lost funds in the
In Latvia, before stabilization took hold  ing crisis in two ways. First, the lost  failedbanks, upto$1,000perdepositor.
in 1992, inflation was running at more  liquidity ofenterprises has reduced their   The new government will onlypaycom-
than 500 percent and real interest rates   ability to pay taxes. The expected bud-   pensation to the extent that there are
were significantly negative. As a con-   get deficit of $80 million for 1995 has   proceeds from the bank liquidation
sequence of tight monetary policy, by   ballooned to $140 million, or about 3   process.
mid-1993 both real deposit and lending   percent of GDP. Second, the fall in
rates had become highly positive.  liquidity of the banking sector led to a   *New banking legislation. The Bank
Through 1994 and into 1995 the rate of   decline in the banks' demand for short-   of Latvia developed, and the govern-
inflation fell further, and real interest  term treasury bills. Their outstanding   ment approved, anew banking law in an
rates rose again, though temporarily.  stock from a peak of about $115 million   effort to rebuild shattered public confi-
in early March 1995, shrunk to almost   dence in the banking system and to
*Particular circumstances. During   half that level just three months later.    strengthen the legal and institutional
1993 and 1994 selling Russian metals                                      framework. The new commercial bank-
and othercommoditiestotheWestproved   -Other banks. Although there were  ing law, already enacted, gives the Bank
very profitable for traders and financing   some confidence-related runs on a num-   of Latvia a broad range of enforcement
banks, as prices remained well below    ber of banks, the banking sector as a   powers for supervisingthebanking sys-
world market prices. Latvian banks used   whole remained relatively immune to  tem, such as cease-and-desist authority
the high-return opportunity and charged   the crash of the Baltija, since the inter-   and the power to remove bank manage-
high interest rates on financing. When   bank market-a possible channel for   ment or fine banks-provisions typi-
Russian prices increased to near world   contamination-accounted for only 6   cally found in effective banking laws,
levels, financing opportunities began to   percent of total bank liabilities (at end-   but absent from the 1992 Latvian bank-
dry up, and banks scrambled to find   April 1995).Some stronger banks have   ing laws, which mandated either moral
equally profitable, thoughperhaps riskier,  benefited significantly from the difficul-   persuasion or revocation oflicenses, but
lending outlets. Thus, Bank Baltija-   ties elsewhere in the sector. Unibank,   did not leave room for other, intermedi-
and possibly other banks-bid for lat  for instance, has continuously gained   ate sanctions.
deposits at high interest rates. This   deposits.
strategy backfired as market interest                                     * lghter supervision. Supervision of
rates fell, exposing Baltija to significant   *Politics. In the elections last fall, the   the Bank of Latvia has been reinforced,
net interest margin pressures.      ruling centrist parties, most of which   and its organization restructured. The
were associated with the banking col-  central bank has moved to tighten pru-
Banking Crisis Impact                lapse, lost power. Gaining seats were   dential regulations; it is requiring banks
the parties at the extremes of the politi-  to establish internal control departments
The effects of the banking crisis were   cal spectrum, some ofwhich had strongly   and has contracted with foreign account-
wide-ranging. Decreasedliquiditycaused   criticized the government's handling of  ing firms to supplement the work of
by the loss of deposits (money supply in  the banking crisis. While the banking   onsiteexaminers. Somebankshavebeen
real terms declined by 17 percent during   crisis may not have been the primary   forced to close. At present, ofthe thirty-
thefirstfivemonthsof 1995), alongwith   cause of a shift in voter sentiment, it was   nine banks permitted to operate, only
other results ofthe crisis (adverse wealth   certainly a contributing factor and an   fourteen are authorized to accept house-
effects, shaken economic confidence),  element in political campaigns.    hold deposits. Theothertwenty-five have
prevented the 5 percent real growth                                       restricted licenses.
expectedfor 1995: (growthwascloseto   Dealing with the Aftermath
zero for the year). Net international re-                                 Alex Fleming is Principal Financial
serves of the Bank of Latvia declined   Corrective measures in the wake of the   Economist and Samuel Talley is Con-
from a high of $466 million at the end of   banking crisis have included financial   sultant at the World Bank.
8                                                                                             March-April 1996



Transition
Using World Bank Credit Lines for Bank
Rehabilitation: Pioneer Practice in the Baltics
by Alex Fleming
In the FSU and beyond, the World   ciples are applied to such a bank, with   eliminates the need to spend manage-
Bank has been asked increasingly   appropriate capital deductions (reserves   ment time to collect on bad loans.
toassistintherestructuringofbank-   and writeoffs) for these bad loans, the
ing systems. In the past, the World Bank   result is insolvency-an excess of the   Few transition governments can afford
has largely supported bank restructur-   bank's liabilities, primarily deposits, over  to make such cash payments all at once,
ing and recapitalization efforts through   the fair value of its assets (see stage I   which is where the World Bank can
structural adjustment loans, if the eli-  of the figure on page 10).    assist. While, in theory, the World Bank
gible member country puts in place a                                    could lend the government money to
restructuring program, and if domestic   An insolvent bank can continue to oper-   pay over to the insolvent bank, in reality,
currency counterpart funds are used for   ate for a period, so long as it does not  there is a timing problem since the situ-
recapitalization.                   become illiquid, that is, if the revenues   ation is usuallytoo urgent to wait for the
and repayments from its good loans pro-   World Bank to process a loan. In such a
In the Baltics a new approach to recapi-  vide a cash flow sufficient to discharge   case, the government can make its pay-
talizationis being used, developed in the   the bank's liabilities as they fall due.   ment in the form of government bonds,
context ofthe $35 million Enterprise and   This will occur if the magnitude of the   which immediately take their place as
Financial Sector Restructuring Project   bad loans is small in proportion to the   earning assets on the commercial bank's
for Latvia. It is now also being repli-  total assets. It can also occur if the   balance sheet (see stage 2 of the figure
cated under the Private Agricultural   holders of the bank's liabilities are will-  on next page). To provide sufficient
Development Project for Lithuania.  ing to defer collecting the amounts that   value to fill the balance sheet gap, the
are due them. In the FSU this com-   govemmentbondsareusuallyhigh-yield-
Preconditions for using a credit line for   monly occurs in state-owned banks,
a recapitalization program are:     because the state, as the bank's domi-
-A strong argument for the bank (or   nant creditor, and state-owned enter-      I
banks) concerned to remain operational.  prises, as the major depositors, forpoliti-
*A strong business plan.            cal reasons do not call on the bank to  .f l
-A government committed to the bank's   make payment on its liabilities or to pay
revival.                            out deposits. The situation, however, is  J   .
*An effective institutional development   not sustainable over a long period of
program to strengthen the bank.     time, because the bank has no way to
*An established timetable for the priva-   generate profits sufficient to fill the gap
tization of the bank.               created by its bad loans. In the end, an  Y. I
insolvent bank has no value and cannot
The core problem of insolvent banks in   be privatized.
the FSU is that their loan portfolios con-
tain  a significant proportion  of  In this situation, the government typi-
nonperforming loans. Some are the   cally has only two options: either liqui-
product of directed, politically based   date the bank, or recapitalize it, replac-       .
lending decisions and some have re-  ing the bad assets with good assets. In
sulted from the economic distress bor-  the simplest terms, for a 100 percent  . K      y
rowers have experienced as a result of   state-owned bank, the recapitalization   this medicin    yoe Yot must
transition. In either case, the result is  can be done by transferring cash to the   this medicine anymore. You must
that an intolerably large proportion of   bank in exchange for its bad loans. This  switch to another disease."
the bank's assets produces no earnings,  allows the bank to use the cash to earn
cannot be repaid when due, and thus has   revenues (that is, make new loans) and   From the Hungarian daily Nepsza-
no value. If Western accounting prin-                                   badsag
Volume 7, Number 34                                                                                     9



The World Bank/PRDTE
ing, medium-term obligations. TheWorld  is redeemed in a typical construction   *It is consistent with World Bank lend-
Bank funding, in contrast, is much longer-   project. The commercial bank then trans -   ing principles in providing resources for
term, and carries a much lower interest  fers the funds received from the gov-   completely new investment or associ-
cost (although an exchange risk is in-   emmentto its sub-borrower, which cre-   ated working capital. Filling agap inthe
volved forthe government). IntheLatvia   ates an earning asset on the bank's  balance sheet of the bank undergoing
Enterpnse and Financial Sector Restruc-   balance sheet.                recapitalization, it is not refinancing ex-
turing Project a standard World Bank                                     isting loans for productive assets. The
credit line was used, in part, to gradually   To clarify the mechanism it is useful to   bonds on the bank's balance sheet sim-
replace one expensive government ob-   compare it with a traditional credit line.   plyperform a bridging function enabling
ligation (the government bonds held by   Suchacreditlinewillbedisbursedthrough   the bank to generate income until the
the commercial bank) with a lower-cost  the government and onlent to a partici-  subloan comes onstream.
obligation (the government's obligation   pating bank. The onlent funds would   *The budgetary pressures associated
to repay the World Bank loan).      appearas aliabilityonits balance sheet-   with recapitalization are amortized over
a liability to the government-and then   a longer timespan than would be pos-
This replacement is accomplished when   flow through the balance sheet as a   sibleusingnormalgovernmentrevenues.
the commercial bank locates a subloan   subloan to an enterprise on the assets   *As privatization istheultimate goal, itis
project acceptable under World Bank   side of the balance sheet. In contrast,  important to remove the government
standards and funds that subloan with a   and as illustrated in the attached figure,   commitment to the bank as quickly as
World Bank loan disbursement under  the recapitalization technique described   possible. The recapitalization method
the line of credit. Initially; the disburse-   above creates an asset on the balance   described above permits the govern-
ment is made to the government. It is  sheet of the bank involved, but there is   ment to take bonds offthe balance sheet
thentransferred to the commercial bank,   no corresponding liability. The liabilityto  rapidly.
in exchange for an equivalent value of  the bank is directly with the govern-   *The technique provides for recapital-
theoriginal govemmentbonds (see stage   ment.                            ization of a bank simultaneously with
3 ofthe figure). In this way the govern-                                 restoration of the bank's lending capac-
ment is redeeming its bonds, in precisely   There are several advantages to this  ity.
the same way in which bridge financing   approach:
Bank Recapitalization
Stage I                               Stage 2                           Stage 3
l                                     l
World Bank
I                                     I        _ RO I  30
Government              IGovernment                           I          Government
Aeta .  Liabilities                Aasets    LiabUiities
ek  _U 36Tanis.30                     Lwrns: 3C  EstE}l tcdf; 3i
ftas3ds   f:Nd I- ns             WBLwn -tl
C:ommtercal Bank                      Commercila Bank                    Comrmercilll Ban
Asset     Liabiliities               .Assets   _ Lbi3blities             Assets    vi abilities 
hJ  {-4. ~~~~~~~~~~GVt acwpasizs 3o' d 0  oc"Yiix- '1a         WU swWsoAmX  ; DeCosim 7 4
Good Lio"I 70 13arfowiapg. .XC Lowm: 70  uirm"gS: 3n                      l      'Pom 70afoisx 
S1 W                                                  t
S ourc. eWrd i Bankomrca  Bn                                            World   ercia S bankrowr



Transition
Tendering in Bosnia
Interview with the Procurement Coordinator
E      nterprises all over the world   Q. What major information sources,  tion: the World Bank will soon set up a
are flexing their muscles to par-   would you recommend to interested    Bosnia Reconstruction Home Page-a
E     ticipate in lucrative Bosnia re-   bidders?                          Web site on the Intemet-with major
construction projects. Contracts for                                        details about available business oppor-
goods and works, worth billions of dol-   A. General Procurement Notices, pub-   tunities, and further Email addresses
lars are being awarded to lucky bidders.  lished in the UN publication "Develop-   and phone and fax numbers of World
Mr. Naushad Khan, responsible for su-   ment Business," provide the most es-   Bank task managers and other officials
pervisingWorldBankprocurementpro-   sential information about the Bosnia-   dealing with the Bosnia reconstruction
cedures for Bosnia, was interviewed by   Herzegovina reconstruction projects;   projects. The World Bank has just re-
Transition editor Richard Hirschler.    these list the required goods, works, and   leased a summary oftwenty reconstruc-
services, and give names, addresses,  tion projects approved as of April 30,
Q. How different are the procure-   and phone and fax numbers of the local   1996 (see table).
ment procedures for the Bosnia   projectmanagersinBosnia.Theselocal
projects?                             project managers are the best source of   Available from Jennifer Keller, World
informnation. World Bank task manag-   Bank, Room no. H 10-096, (202) 473-
A. The major difference is that the time   ers can also supply important details.   1448, Email. Jkeller@  worldbank
factor is extremely important; because   And there's a new source of informa-   . org).
ofthe urgency, we have radically simpli-
fied the procurement procedures and
cut the required time. For example, in
certain thendequredtingroresfaxles can   World Bank Projects in Support of the Priority
certaintenderingprocedures, faxes can 
be used for sending out invitations to   Reconstruction Program  in Bosnia and Herzegovina,
ans d freeivingtheir offers. n as of April 30, 1996
suppliers andreceivingtheiroffers.This   (US$ mIillion)
and other procedures have enabled us
to reach the implementation stage for                                                 WB Group  Appproval Date
several projects in record time-this is   ProjectName                     Project Cost Support  Actual/Proposed
important, because the reconstruction    Trust Fund-supported Projects
efforts cannot tolerate any delays.   Emergency Recovery                       160      45      February29,1996
EmergencyFarmReconstruction               50      20     March28,1996
Water, Sanitation, and Solid Waste Urgent Work  70  20   March28,1996
International suppliers and contractors   Emergency Transport Reconstruction   152      35     March29,1996
have participated and will continue to   WarVictimRehabilitation                30      10     May 14,1996
participate  in the reconstruction of   Emergency Education Reconstruction      33      10     May14,1996
Bosnia and Hezegovina; but some works   Emergency District Heating Reconstruction  58   20     May 14,1996
aIDA-supportedProjects
are more suitable for local contractors,   Transition Assistance Adjustment    110      90     June1996
particularly since they will generate   Emergency Electric Power Reconstruction  140    30     June/July 1996
much-needed jobs in the country. Also,   EmergencyLandmine Clearing             70      15      June/July 1996
if a major plant was damaged during the   Demobilization Support and Local Public Works   43  15    June/July 1996
war the reparation or restoration order   Microbusiness/Local Initiatives       25      15      Summer 1996
war,  the reartong  or restor.Ationera   Demobilization Support and Training  20       7      Summmer 1996
will go to the origial supplier. A general   Emergency Natural Gas System rehabilitation  58  15  Summer 1996
piece of advice for both domestic and   Emergency Housing Repair and Reconstruction  140  15    Summer 1996
international bidders: your chances are   Essential Hospital Services           95      15     Fal 1996
better if your bid meets all the criteria in   Education Reconstruction         60      20     Fall 1996
the bid document, especially the dead-   Transport Reconstruction II           158      20     Fall 1996
Emergency Forestry                        35      15     Fall 1996
lines, considering the extreme urgency   WaterManagementRehabilitation          80      15     Fall 1996
of implementation.
Source: World Bank.
Volume 7. Number34 131



The World BankJPRDTE
Procuring Bosnia Emergency Projects
Procurement procedure of the World   *International shopping will be used   Bidding documents will be sent to
Bank has been customized to the emer-  for procuring equipment and materials   prequalified contractors who will be al-
gency projects under the Bosnia Re-   of standard specification commodities,  lowed four weeks to submit their bids.
construction Program (see page 11).    estimatedtocost$200,000to$2million   Deutsche marks will be used as the
per contract. Procurement is based on   currency of bid pricing and contract.
Procurement for Goods:              comparison ofprice quotations obtained
from at leastthree suppliers in two coun-   *National competitive bidding (sim-
*International competitive bidding   tries.                              plified) will be used for works contracts
(simplified) will be used for procure-                                   estimated to cost up to $1 million per
ment packages estimated to cost more   *National shopping will be used for   contract. These works will be procured
than $5 million each. For every project   contracts for goods available in Bosnia   under lump-sum, fixed price contracts
a General Procurement Notice will be   and Herzegovina up to an estimated   awarded on the basis of quotations ob-
published in the United Nation's "Devel-  cost of $200,000 per contract with at  tained from three qualified contractors
opment Business." It will cover pro-   least three quotations.          in response to a written invitation. The
curement packages and consultant ser-                                   invitation shall include a detailed de-
vicestobeprocured, andinviteinterested   *Direct contracting will be used for   scription ofworks, including basic speci-
eligible suppliers, contractors, and con-   proprietary items, for reasons of com-   fications, the required completion pe-
sultants to send their inquiries to project   patibilityandstandardization, inany other  riod, a basic form  of agreement
implementation agencies in Bosnia and   justified case. All direct contracting   acceptable to the bidder, and relevant
Herzegovina. Suppliers, responding to   packages should be identified inthe pro-   drawings, where applicable. The award
this notice. will receive the World Bank's  curement plan for each project and be   shall be made to the contractor who
standard bidding documents. The Gen-   preapproved by the Bank. Any direct   offers the lowest price quotation for the
eral Procurement Notice will also be   contracting during project implementa-  required work, and who has the experi-
published in the local press, followed by   tion will need prior Bank approval. Ex-   ence and resources to successfully com-
specific adds for individual contracts.  isting contracts will not be extended.    plete the contract.
The period allowed for submission of
bids may be reduced to four weeks. Bid   Procurement for Works:          *Direct contracting for works. Any
and payment currency will be limited to                                  direct contracting not identified in the
one currency widely used in intema-   *International competitive bidding   procurement plan will be subject to the
tional trade.                       packages will usetheWorld Bank's stan-   Bank's prior approval.
dard bidding documents for works. The
*Limited international bidding (LIB),   advertisementprocedurewill bethe same   Procurement for Services:
tendering by invitation, will be used for   as for goods. Given the dispersed nature
procurement packages estimated to cost   of works (repairs to roads, and the like)   Consultants will be procured in accor-
$2 million to $5 million each. Ifthenum-   and the lack of interest from foreign   dance with the bank guidelines, includ-
ber of suppliers is limited, all should be   contractors, national competitive bid-  ing provisions related to both competi-
included in the tender. Dispatch of bid-   ding is proposed for contracts amount-  tion and sole-sourcing. The sole-sourcing
ding documents and receipt ofbids should  ing to $1 million to $5 million per con-   packages will be identified and justified
be done by the fastest means of com-   tract. However, interested foreign   intheprocurementplanforeachproject.
munication, such as fax machines.   contractors will be allowed to partici-   Directcontractingduringprojectimple-
(Proj'ect implementation agencies and   pate in the bidding. Contractors will be   mentation will need the World Bank's
procurement agents will be required to   requested in the local press to express   prior approval. Procurement documen-
put in place a mechanism to ensure  their  interest  for  a  general  tation for consultant contracts procured
transparency and fairness and to avoid   prequalification. The prequalified con-   competitively and exceeding $2 million
any manipulation of bids received by   tractors will be listed in a registry that   each will be subject to the Bank's prior
fax.) LIB contracts of less than $5 mil-   will remain open for additions or dele-  review. Followup assignments will be
lion-related to the list of suppliers and   tions during the course ofproject imple-   permissible to the extent that this will be
technical specifications-will require   mentation. The prequalification criteria  indicated in initial terms of reference.
prior approval by the World Bank.   shall be approved by the World Bank.
12                                                                                           March-April 1996



Transition
Secondhandequipment, such as buses,   Textbooks, Pharmaceutical (ICB). Sup-   signments), and Standard EvaluationRe-
can be procured through sole-sourcing   ply and Installation, Procurement of   port for Consultants.
withthe Bank's prior approval, provided   Computer Systems (Single- and Two-
the equipment is appraised by an inde-   Stage), and Standard Evaluation Report   Lack of institutional capacity in Bosnia
pendent agency to confirm that the used   for (Goods/Works). These documents  and Herzegovina requires that procure-
equipment being considered will meet   are organized in fixed and variable parts;   ment agents and construction managers
the criteria for quality, technical require-   changes specific to a procurement ac-   be responsible for the whole process of
ments, and economic value, and that  tion are made only in the variable sec-   procurement. Sole-sourcing may be
spare parts and service for the equip-  tions. Other documents to facilitate   accepted if justified. The agent's con-
ment will be available for the operation   document preparation and expeditepro-  tracts would cover "door to door" ser-
of the equipment.                   curement: Works (NCB), Simplified   vices, including bidding. contracting,
NCB (Works), Shopping (Civil Works),  verification/inspection, certification, and
The Bank has prepared several stan-   and Shopping (Goods).             preparation ofwithdrawal applications.
dard procurement documents, which                                       These requirements will be reflected in
are required to be used in Bank-financed   *Consultant standard documents:  the terms of reference for procurement
projects. These include:            Standard Letter of Invitation for Con-   agents. The procurement agents will
sultant Services, Lump-Sum Standard   report to their principals, that is, the
*Standard  bidding   documents:   Consultant Contract, Time-based Stan-  implementation agencies, and will coop-
Prequalification (for Goods/Works),   dard Consultant Contract (ComplexAs-   erate fully with them.
Goods (ICB), Works, Commodities,
What You Always Wanted to Know about
Procurement-But Were Afraid to Ask
Ws   rorld Bank-supportedprojects  ones, can profit from business gener-  any stage in the project cycle, but the
cover a variety of develop-    ated by the World Bank.         need is greatest in the preparation and
)     ment activities, in a range of                                  implementation stages, when consult-
sectors, including agricultural projects;   Business Opportunities and the   ants may be used by borrowers to begin
infrastructureprojectstoconstructports,   Project Cycle                 identificationandpreparationofprojects,
roads, water systems, and power plants;                                 to draft bidding documents,to supervise
and projects in education, environment,   Project identification, preparation, ap-   procurement and contract execution, or
finance, law, population, health and nu-   praisal, implementation, supervision, and   to provide other technical assistance.
trition, urban and rural development, in-   postevaluation constitute the project
dustry, information systems, telecom-   cycle.Dependingonthenatureandcom-   Identification
munications,  and   privatization.   plexity of the project, it will take one or
Bank-supported projects range from the   two years-sometimes longer-from    Only governments can propose projects
complex and equipment-intensive to  the time a prospective project is identi-  for World Bank assistance but identifi-
those in which training skills and spe-  fled until a loan is approved. By follow-   cation can come from several sources,
cific knowledge are the principal re-  ing where each project is in the cycle  including Bank-sponsored identification
sources transferred (see chart on page   and understanding what takes place   missions, othermultilateral development
14 for a breakdown of lending by sec-   during each stage, consultants, civil  agencies, and sometimes even private
tor).                               works contractors, and suppliers can   sponsors. A list of all identified projects
identify business opportunities and de-  is published in the United Nation's "De-
Annually, World Bank fund borrowers   velopmarketingplans. The biddingpro-   velopment Business." Each identified
award some 30,000 contracts (about 70   cess typically begins at the preparation   project is the subject of a World Bank
percent are for goods and equipment, 20   stage, although some procurement may   Project Information Document (dis-
percent for civil works, and 10 percent   occur this  early  (for  example,   cussed later). Contractors, suppliers, and
for consultant services). Small and me-   contractor's prequalification). Consult-  consultants should contact borrowing
dium-size companies, as well as large   ing services may be procured at almost  countries during the project identifica-
Volume 7, Number 3-4                                                                                   13



The World Bank/PRDTE
tion stage to express interest in supply-   ButAhe 3ank frequently helps arrange   cumstances, to hasten a project's future
ing goods, works, or services for a spe-   financing for consulting services during   implementation, procurementmay start.
cificproject. They should obtain as much   this phase.                        After the appraisal report is issued and
information as possible on what goods                                         reviewed, formal loan negotiations take
and services will be needed and when,   Appraisal                             place between the Bank and the bor-
and on how to submit bids and propos-                                         rower. These agreements, including pro-
als. However, a potential private inves-   After project preparation has been com-   curement arrangements, are then for-
tor may contact either the International   pleted by the borrower, the Bank re-   malized in loan documents that are
Finance Corporation (IFC) foradditional   views the proposals and undertakes a   submitted to the Executive Directors of
financing, orthe Multilateral Investment   full-scale project appraisal. This is a   the World Bank for approval.
Guarantee Agency (MIGA) to guaran-   comprehensive review of the technical,
tee an investment.                     economic, financial, and institutional   Implementation and Supervision
aspects of the proposal. It is conducted
Preparation                            by Bank staff under the guidance of a   After the loan is approved, funds are
task manager, sometimes with the aid of   available to implement the project and
Preparation of a project entails develop-   external consultants. The types of   purchase the items, works, and exper-
ing an identified idea into a detailed pro-   works, goods, services, and equipment   tise needed. Construction activities,
posalthatconsiders technical, economic,   necessary for the project are reviewed   equipment, and supplies are generally
financial, social, environmental, and in-   during appraisal. The procurement pro-   purchased during the implementation
stitutional aspects of the project. The   cedures and schedule are also deter-   stage. Implementation of the project is
goal is to determine the best method of   mined at that stage. The complete fi-  the responsibility of the borrower, as is
achieving a project's objectives by com-   nancing plan is examined to ensure that   procurement of goods and services.
paring the relative costs and benefits of   cost estimates are accurate and that   Though the World Bank is not a party to
alternatives. Usually, consultants are   sufficient funds are available to com-   any procurement contract, procurement
hired by the borrowing country to assist   plete the project.                 procedures-as reflected in the loan's
with feasibility studies, design analysis,                                    legal documents-must be followed
environmental impact assessments, and   At this stage bidding documents will   before funds may be disbursed. The
other aspects of project preparation.   normally be prepared. In certain cir-   Bank supervises project implementa-
World Bank Average Annual Lending by Sector
Percent
US$ million
Agicultire and Riral Developrnent                 __                                               4160
Transportation  15.9%                                                     3490
Energy                                                     2950
Eduation 1                                       2290
Mlhti-S&ctor 6.                      1520
Uian Deve1opm n6n                      1360
Water Supply and &vera_ 4            1030
Population, Health, and Nutrition      950
Industry    _       750
Pttlic Sctor Management 3       750
Environnment          700
Telecorrmunications .20  440%
0       500     1000      1500     2000     2500     3000     3500     4000     4500
Source: World Bank.
14                                                                                                 March-April 1996



Transition
tion and the procurement process to   After a firhi receives the biddiAg &cu-   *To give all qualified bidders from the
ensure that these procedures are fol-   ment, it should carefully examine the   Bank's eligible countries an equal op-
lowed and that the process is transpar-   provisions and requirements to decide   portunity to compete for Bank-assisted
ent, fair, and impartial. Once the project   whether it can submit a competitive,   contracts.
is completed and the loan is fully dis-  responsive bid. The bidder should be
bursed, the Bank undertakes an inde-   certainthatitunderstandsboththecom-   *To encourage development of local
pendent evaluation, comparing actual   mercial and technical requirements, and   contractors and manufacturers in bor-
with expected results, and applies the   follows them in bid preparation. No as-  rowing countries.
lessons learned to future projects.  sumptions should be made regarding
bidding terms and conditions. Any ques-   *To promote transparency in the pro-
The borrower prepares bidding docu-   tions or doubts should be clarified with   curement process.
ments. They must include instructions   the purchaser before preparing the bid.
to bidders, evaluation criteria, conditions   If a company decides to bid, it must   Experience has shown that these objec-
of the proposed contract, and a detailed   follow precisely the instructions spelled   tives can best be achieved through an
description of the goods or works to be   out inthe document and submitits bid by   international competitive bidding
procured. Bidding documents must be   the required time and date to the speci-  (ICB) process with a margin of prefer-
made available to everyone who asks   fied place.                          ence given to domestic goods, plants,
for them and pays the borrower's fees,                                     and, under certain conditions, domestic
if any.                              For any contract to be eligible for fi-  contracting services in developing coun-
nancmg from a World Bank loan, the   tries. The bidding procedure for goods
To help with a bid preparation, the Bank   procurement must be completed in ac-   and works is similar, althoughthe evalu-
has developed Standard Bidding Docu-   cordance with the procedures set out in   ation criteria differ. In the case of civil
ments (SBDs) that are to be used by the   the loan agreement, which incorporates   works, for instance, the price and some-
borrowers. By using the SBDs, borrow-   those in the Bank's "Guidelines: Pro-   times the completion period may be
ers can considerably accelerate the   curement under IBRD Loans and IDA    considered. When goods are purchased,
preparation process. Suppliers and con-   Credits." For each loan, there are addi-  technical factors such as capacity, main-
tractors should also be familiar withthese   tional specific agreements between the   tainability, fuel efficiency, and after-sales
SBDs. The Bank monitors the procure-   Bank and the borrower on carrying out   service may be considered in addition to
ment process to ensure that its guide-   procurement, which may include the   price.
lines are followed. Bank staff review    criteria for packaging the contracts; the
bidding documents for most contracts   various methods of procurement to be   Public notification for each project,
before they are issued, the borrower's   used; the thresholds within which those   ICB is achieved through a General Pro-
evaluation of the bids, and the proposal   methods apply; and the rules for prior   curement Notice for goods and works,
for contract award. Smaller contracts   and ex-post review of specifications,   which appears in the United Nations
are reviewed ex-post. When the con-   bid documents, and contract award de-   publication "Development Business."
tract is awarded. the Bank reviews it to   cisions.                        The notice gives general information
ensure that it corresponds with the bid.                                   about the procurementto be carried out.
ICB and Other Methods                Borrowers are required to keep infor-
Bids and Pieces                                                            mation on those who express interest in
Since specific procurement rules and   biddingfortheprojectandtonotifythem
When a firm learns that procurement is   procedures differ depending on the type   when specific bids are announced. Invi-
aboutto occur, it should writeto, or have   of project, the World Bank has four   tations to bid for specific contracts will
a representative or agent visit, the bor-   basic concerns that govern its procure-   also be advertised in at least one major
rower and ask to receive the bidding   ment policies:                     local newspaper. Further, for large spe-
documents as soon as they are avail-                                       cialized contracts invitations will be ad-
able. Interested bidders should send the    To ensure that the loan is used to pro-   vertisedin "Development Business" and
borrower the fee specified for the docu-   cure only those goods and services   in well-known technical magazines,
ments. Embassies will sometimes pur-   needed to carry out the project, and that   newspapers, and trade publications of
chase documents on behalf of compa-   procurement is done in the most effi-   wide international circulation. Borrow-
nies.                                cient and economical manner possible.  ing countries are also invited to provide
copies of advertisements to Bank mem-
Volume 7, Number 3-4                                                                                      15



The World BanklPRDTE
ber country representatives-usually   by invitation rather than in response to   sive and other appropriate technologies.
commercial officers or attaches-lo-   an advertisement.                    Procurement procedures are broadly
cated in their country.                                                    consistent with ICB procedures.
*National competitive bidding (NCB),
In the comparison of bids. manufac-   when the type of goods or scope of   *International and local shopping
tured goods with a minimum of 30 per-   work is unlikely to attract foreign com-   (generally soliciting at least three bids)
cent domestic content-raw materials,   petition. A similar method of procure-   for purchasing low-value, off-the-shelf
components-are afforded a margin of   ment may also take place in projects  items.
preference equal to the applicable cus-   where local communities or local non-
toms and import tariff, or 15 percent of   governmental organizations (NGOs), or   *Direct purchase, normally on a nego-
the cost, insurance, and freight (CIF)   both, could participate in order to in-  tiated basis, when proprietary equip-
price of the imported goods offered by   crease the utilization oflocal know-how    ment can be obtained from only one
the competitor, whichever is less. In the   and materials or to employ labor-inten-   supplier.
case of domestic civil works contrac-
tors, the margin of preference is 7.5
percent over the price of the competing  Consultants in the Middle Ages
foreign contractor. This preference is
available only to low-income countries.
The bidding documents will clearly indi-
cate any preference to be granted and
the detailed bid evaluation procedure.
All Bank-assisted ICB contracts must
be awarded to the lowest evaluated re-
sponsive bid, based on the evaluation
criteria set forth in the bid documents.
The lowest evaluated bid may not nec-          A       J               X 
essarily be the lowest priced bid. Other
factors may also be taken into account,             k
such as quality, durability, availability of                           i
after-sale service and spare parts, train-
ing, and even maintenance and operat-
ing costs. These factors will be clearly
conveyed in the bid documents. There
is no quota system that links the award
of contracts to the size of contributions
or share of membership by a country in   ,
the Bank.
Where ICB is not the most economical
and efficient method of procurement
(for example, the amount of the pur-
chase may be small, the goods or works
may be urgently needed, or there may
only be a few suppliers), more appropri-
ate methods of procurement should be
used. The more common forms are:
*Limited international bidding (LIB),
in which suppliers or contractors of spe-
cialized goods and services participate   From the magazine Hungarian Economy
16                                                                                             March-April 1996



Transition
Althoughtheprimary focus ofthe Banks   communication systems, satellite com-   country, and one from a less-developed
lending is on specificprojectinvestments,   munication systems, school textbooks,   country. If requested by the b-rower
a notable amount (around 20 percent) is   furniture, spare parts, and raw materi-  the Bank will provide a long list of firms
distributedthrough structural adjustment   als.                               for consideration for the shortlist. The
loans (SALs) and sectoral adjustment                                          borrower evaluates the proposals, in-
loans (SECALs) for country adjustment   *For procurementfor civil works. con-   cluding consideration of alternative
operations in reforming economic and    struction of ports, highways, schools,   methodology, and negotiates the terms
fiscal policies and addressing balance of   hospitals, housing, railways, bridges, ir-   of the contract. The winning proposal
payments problems. Most SALs pro-   rigation works, water supply and sew-   and the draft contract are also reviewed
vide foreign exchange to finance gen-   erage facilities, and power plants.   by the Bank.
eral imports. The funds are made avail-
able to public and private sector entities   *For procurement of services: design    To assess the qualifications of firms and
to purchase imported goods and ser-   and feasibility studies, supervision of   to assist borrowers in establishing a
vices, and are not linked to the procure-   installation and construction, environ-   shortlist, the Bank maintains a comput-
mentofparticularinputsneededtoimple-   mental assessment studies, monitoring    erized roster of consulting firms inter-
ment specific investment projects. They    of management activities, aerial pho-   ested in doing business on Bank-as-
may also be used for payments ofgoods   tography and mapping, oil and gas ex-   sisted projects, called the Data on
already procured or delivered within a   ploration, financial services, and audit-   Consulting Firms (DACON) system.
certain period. Certain items, such as   ing assistance.                      (There is no similar registration system
luxury goods, military supplies, environ-                                     for manufacturers and other suppliers
mentally dangerous materials, and other   Procuring Consultants               of goods or contractors for works.)
commodities, are prohibited, and are                                          Consultingfirmsarenotrequiredtoreg-
specified in the loan agreement. In the   As with procurement of goods and   ister, and registration does not signify
case of SECALs, funds may be allo-   works, the consultant selection process   Bank endorsement of the firm's qualifi-
cated to purchase particular categories   is entirely the borrower's responsibility.   cations or Bank approval of the firm's
of goods related to a specific sector.  The Bank's role is to ensure that only   appointment for any specific project.
capable firms are considered for selec-   The information contained in DACON
Procurement is usually conducted   tion, that the selection process is equi-  is purely descriptive, not evaluative.
through established procedures of the   table, and that the chosen firm or indi-   Registration with DACON can benefit
public sector, provided these have been   vidual is able to provide the required    a consulting firm, however.
examined and found acceptable to the   services. The same rules of eligibility
World Bank, or through normal com-   apply: consultants fromallmembercoun-   Opportunities for consultants are avail-
mercial procedures in the private sec-   tries are eligible for consideration to   able in many areas. In the early stages
tor. In large contracts-generally ex-   work on any project financed by the   ofprojectpreparation, forinstance, con-
ceeding $5 million-simplified ICB    World Bank.                              sultants may be required to prepare fea-
procedures are followed. Potential sup-                                       sibility studies, environmental assess-
pliers should track these operations in   Procedures for competitive selection of   ments, engineering and project design,
order to identify both the types of goods   consultants include a series of steps to   and cost estimates. During the imple-
and products that the borrower envis-   be undertaken by the borrower and re-   mentationphase, consulting services are
ages procuring and the procurement   viewed by the Bank. These include   frequently necessary to prepare bidding
procedures that will apply.            preparation of a description of the as-   documents, evaluate bids, and super-
signment (terms of reference), a bud-   vise construction and installation. Con-
The wide variety of projects involved   get, the selection process to be followed,   sultants are also used to conduct studies
provides a broad scope of opportunities,   preparation of a shortlist of firms to be   in such areas as marketing, distribution,
which range in value from a few to   invited to propose, and the letter ofinvi-   exportopportunities, sector masterplans,
millions of dollars:                  tation (LOI) to submit a proposal. The   and investment. There are also opportu-
shortlist, not containing more than six   nities to prepare feasibility studies for
*For procurement of goods: vehicles,   firms, should reflect both competence   follow-on projects and to provide all
machinery, tractors, farm implements,   and diversity, and ideally should have no   types of training needed by the bor-
fertilizer, transport equipment, electrical   more than two firms from any one coun-   rower.
machinery and plants, industrial facili-  try, at least one from the borrower's
ties, mining equipment, hardware, tele-
Volume 7, Number 34                                                                                            1 7



The World Bank/PRDTE
If a consulting firm accepts a contractto   -Specific Procurement Notices (SPNs)  the project from inception to comple-
provide services on a project, it cannot   are invitations tobid forspecific items or   tion, includingmonitoring, procurernent.
bid to supply goods because the firm    works. SPNs describe the item(s) being   and consultant selection. The task man-
would have prior knowledge that might   procured and give details about pur-   ager is selected from the professional
give it an unfair advantage over other   chasing bid documents, deadlines for   staff based on experience and profes-
bidders. The Bank does not object, how-   submittingbids, andother requirements.   sional training. The task manager can
ever, if the firm accepts an assignment   Publication of SPNs in "Development   answer specific questions about a given
for instance, to prepare the engineering   Business" is mandatory for large con-   project and is therefore a useful source
design for a project and-in a follow-on   tracts. SPNs are also published in the   of informnation for interested suppliers.
assignment-prepares bidding docu-   local press of the borrowing country.  Each region has a procurement adviser
ments, evaluates the bids, and super-                                     in the office of the vice president who
visesthe contract fortheborrower. Like-   *Major Contract Award Notices iden-   monitors procurement activities, reviews
wise, in a turnkey contract, consulting   tify the successful bidders for contracts   documents, and provides advice and
firms and suppliers may be associated in  that have recently been awarded. This   assistance to the task managers on pro-
a joint venture.                     information is useful in identifying suc-   curement matters.
cessful firms for possible collaboration
Information Sources-Where, Who,   on future contract competitions.         The Procurement Policy and Coordi-
What?                                                                      nation Unit, (Web; http://oprlhtml/opr/
Information about the Bank's activities   procure/contents.html) located in the
The UnitedNations publishes abiweekly   is available at the Bank's Public Infor-   Operations Policy Department, is re-
called "Development Business," which   mation Center (PIC), (Web; http://  sponsible for developing policies and
is available by subscription. "Develop-   www. worldbank.org/html/pic/PIC.   guidelines on procurement and consult-
ment Business" carries information on   html). The PIC offers a complete set of   ant selection and ensuring that they are
business opportunities generatedthrough   Project Information Documents (PIDs),   properly and consistently followed by
the World Bank, regional development   Environmental Data Sheets (Eds), staff   borrowers and suppliers. Business Af-
banks, and other development agencies.   appraisal reports (SARs), a sunrnary of   fairs Services, which provides informa-
The text of "Development Business" is   postevaluation reports (OED Precis),  tion to the business community, and the
also availablethrough an on-line service   and a catalog of Bank documents. Fac-   DACON Center, which handles con-
called Scan-a-Bid.                   simile and Intemetusers worldwidemay   sultantregistrations, are partofthis unit.
select and request the documents they
"Development Business" includes the   need. PIDs are provided free of charge,   The Bank's resident missions inthebor-
following information:               either in electronic form or as hard copy.   rowing countries may provide useful
information on Bank activities and busi-
*Monthly  Operational  Summary   The World Bank also provides regular   ness opportunities inthe respective coun-
(MOS) is a monthly report (also avail-   business briefings at its Washington   tries. The single most usefultool iniden-
able as a separate subscription) listing   headquarters and its Paris office. These   tifying individuals invarious positions in
all of the projects being considered for   briefings cover the Bank's financing   theorganizationistheWorldBankGroup
financing by the World Bank.         activities, methods of operation, pro-   Directory. It can help companies locate
curement policies and procedures, and   and direct their inquiries to the right
*General  Procurement  Notices   procedures for selecting consultants.   person or persons within the Bank, as
(GPNs) are issued by the borrower for   The next seminars in 1996 are sched-   well as the IFC and MIGA. It also pro-
projects that contain ICB, generally   uledforThursdays,June6,July ll,Sep-   vides the addresses of resident mis-
aroundthetime ofprojectappraisal, and   tember 5, October 10, November 7, and   sions.
at least eight weeks before bid docu-   December 5. Interested companies can
ments are available. This is the earliest   alsoobtainsupplementalinformationon   Based on Guide to International Busi-
public notice of procurement, and is the   specific projects from the Bank's op-   ness Opportunities in Projects Funded
time for companies to contact the bor-   erational staff and from the Executive   by the World Bank. To order: See
rower if they are interested in supplying   Director's office.             World Bank publications ordering
the goods or services listed in the notice.                               information on page 32.
Publication of GPNs in "Development   Each project is handled by a task man-
Business" is mandatory.              ager who has overall responsibility for
18                                                                                             March-April 1996



Transition
Purchasing Power Parities
Purchasing power parities (PPPs) are   GDP Per Capita in Austrian           PPPs, Exchange Rates, and
the rates of currency conversion that   Schillings and U.S. Dollars,        Comparative Price Levels
eliminate the differences in price levels   1993                            (CPL), 1993
between countries. As such, they are an   Country  Schillings   Dollars                        Exchange
important tool for cross-country com-   United States    336,937    24,301              PPPs    rates
parative analyses ofmacroeconomicag-   Austria       265,028     19,115     Country  (100 Ats) (100 Ats) CPL
gregates, such as GDP per capita.They    Sloveria    127,693      9,210     Slovenia   563.0    973.0   58.0
can be particularly useful whenmaking    CzechR.     116,766      8,422     CzechR.    75.5    251.0   30.0
interational comparisons of price 1ev-   Hungary      82,668      5,962     Hungary   416.0    791.0   53.0
els andreal ncomepansoeens econof ies l Slovakia      79,944      5,766     Slovakia    79.5    265.0   30.0
els and real income between economies   Russia        68,633      4,950     Russia   1,665.0   7,644.0   22.0
that have high rates of inflation such as   Belarus   68,792      4,962     Belarus   1,372.0  21,087.0    7.0
those that have been experienced in the   Poland      64,741      4,669     Poland   62,532.0  156,023.0   40.0
majority of the transition economies.  Bulgaria       58,139      4,193     Bulgaria    60.7    238.0   26.0
Croatia         53,068      3,827     Croatia  16,773.0  30,639.0   55.0
Estoria         52,727      3,803     Estonia     27.7    114.0   24.0
Intemationalpriceandvolumecompan-   Lithuania         51,035     3,681      Lithuania    5.8    34.4   17.0
sons between OECD countries and   Romania             50,510      3,643     Romamia  1,717.0  6,524.0   26.0
transition economies are undertaken   Ukraine         45,889      3,310     Ulraine   6,223.0  41,766.0   15.0
within the framework of the European   Latvia         42,563      3,070     Latvia       1.3      5.8   23.0
Comparison Program (ECP), which is   Moldova          30,710      2,215     Moldova      1.7    14.3   12.0
organized and coordinated by the Aus-
trian Central Statistical Office, Statis-   The most recent comparison, covering   publication Short-term Economic In-
tics Finland, Eurostat, andthe OECD, in  twenty-four OECD countries and fif-   dicators, Transition Economies, num-
consultation with the Economic Com-   teen transition countries of Central and   ber 1/96, published in mid-February.
mission for Europe. The ECP was es-   Eastern Europe and the former Soviet
tablishedin 1980. To date, four compari-   Union, has just been completed, with   Excerpted from  the Transition Brief
sons have been completed, with an    1993 as the reference year. Selected   a quarterly published by the OECD.
increasing number of countries partici-  results from this comparison are avail-  (Web site: http://www.oecd.org/sge/
pating in each.                       able as a special annex in the quarterly   ccet/trans. htm)
Per Capita Indexes for GDP,
1993
Country      Volume,   Valueb 'e
Slovenia       48         28
CzechR.        44          13
Hungary        31          16                            IF
Slovakia       30          9
Russia         26          6
Belarus        26          2                             c7 a1
Poland         24          10
Bulgaria       22           6                             . /
Croatia        20          11                                         -
Estonia        20          5                                   c
Lithuania      19           3
Romania        19           5                             1I
Ukraine        17           3                             -             .
Latvia         16          4                                   _-_
Moldova        11           1
Note: Austria=100.                                    "Statues of Lenin-buy, buy, buy!"
a. Using PPP conversion.
b. Using nominal exchange rate.       From the World Press Review
Volume 7, Number 3-4                                                                                        19
From th



The World Bank/PRDTE
Letter to the Editor
Russian Economic Crime: The Flip Side
by Leonid Grigoriev and Gregory Kisunko
T        wo articles in the November-  of Michael Gray's article. But in Russia   Liberalization and privatization of an
December issue of Transition    the classical money laundering-trans-   economy without there being a clear
T    focused on economic crime in  formation of drug money into legal rev-   and enforceable legal and institutional
Russia ("Russia Fights Crime and Cor-   enues-is still a secondary problem.   framework in place, may weaken the
ruption," by Michael Gray, and "Quota-   Primary attention should be focused on   ownership function, leaving a system in
tion of the Month: Criminal Financial  fighting crimes in the formal economy.   which there is no clearcut control of
Dealings Dramatically Increased in                                        privatized assets by formal owners. This
Russia," by Aleksander Zhilin). Both   Western theory focuses mainly on eco-   can encourage the criminal element to
represented typical views on the Rus-   nomic analysis of entry decision-in   profit from loopholes in the law, appro-
sian criminal scene: one, the views of a   other words, what conditions motivate   priating the incomes of households, en-
legal professional, and the other, the   individuals to shifttheir lawful behavior   terprises, or even whole industries.
views of ajournalist. But there are few   to criminal acts. Andthat is the basis for
(if any) studies that investigate the root   Michael Gray's evaluation of Russian   On the other hand, if privatization were
causes of economic crimes in the tran-   legislation on economic crime. He ap-   carried out with adequate transparency,
sition economies. In our view, protec-   plauds the new laws for attempting to   public supervision, and focus on corpo-
tion (racket), fraud, money laundering,   create a structure that makes possible  rate governance, it will ensure the sup-
and other crimes-certainly widespread   the effective enforcement of the legal   port of property owners and entrepre-
in today's Russia-should be perceived   prohibitions. True, this is amajortask for   neurs, with clearly defined legal rights,
as economic phenomena, not just as  the Russian legal and enforcement agen-   who could become increasingly sup-
legal, moral and law enforcement prob-   cies. But in the transitional economies a   portive of law enforcement agencies.
lems. Correspondingly, ways should be   successful strategy against economic   This, in turn, would safeguard the civil
found to understand, cope with, and   crimes must aim at isolating criminals   and criminal code. A growing number
eventually uproot these crimes       and this, in the long run, will require a   of entrepreneurs would discourage
stable society. In the short run the first   costly backstage agreements and pay-
The textbooks fail to describe the effect   priority shouldbeto establishclearprop-   ments of "protection fees."
of widespread economic crime and cor-   erty rights; otherwise, legal initiatives
ruption on economic life. The continued   will setprecedents for exemptions rather   At present, to require "financial institu-
operation of the criminal element, with  thanbowingtoestablishedgeneralrules.  tions to report all suspicious transac-
its threat of violence, can substantially                                 tions (with suspicious clearly definedby
alter the behavior of enterprises and   Historically, any serious weakening of a   the law)," as proposed by Michael Gray,
individuals, and in the process the rules   state and its legal institutions has led to   would not be immediately effective in
of the economic game. The influence of   a deterioration in public safety. Govern-   curbing crime. Privatization, as it has
criminal forces undermines market effi-   ment (read law enforcement agencies),   been conducted to date, has involved
ciency, and may undermine democracy,  to be effective, need the support of the   transactions with large amounts ofcash.
inthe transition economies. Understand-   public, ofthose who are most concerned   Cashplays amajor role in othertransac-
ing the extent of economic crime, its   with protecting their income and prop-   tions as well. Indeed, about 40 percent
development from petty to larger scale   erty interests. Therefore it is extremely   of the working capital used in the Rus-
crimes and corruption, as well as "indus-  important to develop a strong ownership   sian economy in 1993 was cash (the
trialization" of economic crime into or-  function. Michael Gray's call for better  level was only 20 percent in 1992).
ganized crime-this is what economists  laws is timely, but clearcut property   Recording these cash transactions is
focus at present.                   (commercial) regulations should take   extremely difficult. Beyond such ac-
precedence, while tough criminal laws   counting problems there is the fact that,
Money laundering-a major headache   should play only a supporting role.   according to some Russian estimates,
for American law enforcement along                                        about half of all foreign investment in
withdrugtrafficking-is aprincipaltopic                                    Russia has been financed from money
20                                                                                            March-April 1996



Transition
of "dubious" domestic origin (but not   "Criminal financial dealing dramatically   tor, but the growth rate is slowing-
necessarily derived from organized   increased in Russia," Mr. Zhilin states.   banking crimes increased fourfold be-
crime).                              This is true, but not necessarily just be-  tween 1992 and 1993, but "just" doubled
cause of maffia connections. The fi-   between 1993 and 1994. Criminal dol-
As to the increasing criminality in the   nancial and banking sectors grew rap-   lars at one stage or another have to go
financial sector, presented in Alexsander   idly in the past several years, but   through a bank to become "legal" dol-
Zhilin's article, the claim that "shadow    mechanisms to account for their finan-   lars, and Russia is no exception.
capital" in circulation in Russia, equals   cial flows were missing. Thus, it is not
"legal government funds," means little   clear that the share of criminal activity   In our view. the fast and relatively unre-
without clarifications.   Enormous   in banking and finance has risen in re-   stricted growth of banks helped the de-
amounts of cash circulated in the   cent years. The public is still focusing   velopment of Russia's market economy.
economy, much ofit absolutely untrace-   very much on these sectors because of   Unfortunately, legislation to regulate
able. No one knows, whether itis "legal"  the large amount of funds misappropri-   corporations. securities, andthelike, and
or "criminal" money. And how does one   ated in the past.                 to facilitate much-needed institution
define money that has origins in the                                       building, was delayed. These shortcom-
"gray" zone but has made two or three   Withthe development of institutions and   ings-fallout from the Big Bang-have
legal rotations?                     regulations, the number ofcrimes (though   hindered assets redistribution. The Rus-
not necessarily the amount of financial   sian government-with the support of
The same reasoning can be applied to   damage) presumably will drop. In Rus-  its business sector and the general pub-
the crime rate. The numbers may actu-   sia in 1994 the relatively new banking   lic. as well as the benefits of intema-
ally be higher than thought, because of   sector accounted for 80 percent of all  tional experience and assistance-could
underreporting. What is crucial, espe-   crimes committed in the financial sec-   solve these problems.
cially for crime in the financial sector, is
not the number of cases but the financial
damage done. For example, in 1994 St.                                s-;    V
Petersburg registered the most fraud                        N hl AMBE:E. 0AI V 1Tr  E             X
cases of any Russian city (with 2,062
cases, it surpassed Moscow by 100).
But only 2.8 percent (57) of the inci-
dentswereclassifiedascasesof"skilled"
fraud. The other 97 percent were basi-    'f
cally crimes of petty theft. "Skilled"
crimes should also include the 1994
champion of economic crimes: the pyra-
mid schemes. Reported damage in 1994
from this type offraud totaled 20 trillion
rubles, or $9.1 billion (3.2 percent of                         i5 
Russian GDP in 1994).                                f
Ninety-five percent of Moscow banks
and their affiliates are controlled by
criminalkingpins, accordingto Mr. Zhilin,
who quotes interior ministry experts.
While it is true that organized crime has
triedto controlthe financial and banking
sectors-still the most profitable sec-
tors in the Russian economy-many of
Russia's large banks are resisting these
pressures. This is why, as Mr. Zhilin                                                        'v
himselfacknowledges, "banking appears
to be one of the most dangerous occu-
pations in Russia."                  From the Washington Times
Volume 7, Numnber 3-4                                                                                     21



The World Bank/PRDTE
Book of the Month:
Leszek Balcerowicz: Socialism, Capitalism,
Transformation
A Review by Martin Schrenk
A       fter two decades of theoreti-   by the expansion of conventional neo-   Themessageis notnew,noris ituniver-
cal work on the defects of the   classical economics [that] brought to   sally shared. Eventhe "gradualists" agree
Polish variant of "real social-  economics rigor in reasoning from as-  that instantaneous change from one
ism," in the fall of 1989 Leszek   sumed premises, but at the cost of prac-   system to the other would minimize the
Balcerowicz was given virtually free  tical relevance."                 incidence  of-what  Balcerowicz
handto translatehis vision ofanaltema-                                  calls-the "compatibilityproblems." But
tive economic system into a bold politi-   The introductory chapter then proceeds  they doubt whether it is a feasible op-
cal program. His intellectual determina-  to identify four problems for the rest of  tion, as the socialization of actors is
tion is matched by the political courage   the book: first, the definition of a sound   rooted considerably in institutional fac-
with which he guided Poland's transition   analytical framework for studying insti-  tors-such as beliefs in stylized facts,
through its most difficult initial period.  tutions and human behavior; second, the   and the role ofunwritten rules in shaping
Afterall,a"radical"or"Big Bang"(terms   "compatibilityproblem" that arises ifin-   codes of behavior and organizational
he prefers over "shock therapy") ap-   stitutional arrangements originatingfrom    routines. This makes the actors resis-
proach to transition from real socialism    differentsystems coexist;-third, the "per-  tant to instantaneous change, they ar-
to full-fledged capitalism hadneverbeen   formance problem," that is, the eco-   gue.
tested before.                      nomic outcomes of different institutional
arrangements; and fourth, the "institu-   Most analysts would probably also agree
Although Poland still faces serious prob-  tional dynamics, "or the forces that gov-  that there may be an optimal path of
lems, the economic feasibility of its  em institutional change. A conceptual  transition for each particular country
traverse from socialism to capitalism is  framework for addressing these prob-   (as to speed and sequence) that is fea-
no longer seriously questioned. This dual  lems is presented, reflecting the con-   sible given the country's economic,
success propelled Balcerowicz to the   cerns noted above-and stimulating the   sociopolitical, and cultural conditions.
position of celebrated spokesman for   expectations of the reader.      But they tend to disagree on the relevant
the radical approach to transition. As its                              sets of conditions, and the selection of
policyprescriptions-radicalmacroeco-   Unfortunately, the rest of the book does  facts and choice of assumptions depend
nomic stabilization, rapidniicroecononic   not quite live up to the expectations   ontheirphilosophical predisposition. All
liberalization, and initiation ofprivatiza-   raised by the introductory chapter. For   arguments seem to have been made by
tion at the most rapid pace possible-   instance, most chapters in part 1, deal-  now, and mere repetition clearly offers
have by now become the current ortho-  ing with the legacy of central planning,   diminishing retums for advancing the
doxy, they will not be discussed in the   are hardly deploying the sophisticated   state of knowledge or convergence to-
remainder of this review,           conceptual framework of the Introduc-   ward a consensus.
tion.
The opening statement of the book-                                      Similarly,alltransitioncountrieshaveby
coming as quite a surprise-sides with   Vintage Arguments-Vintage Splits   now chosen their specific path some-
the institutionalists. It points out that                               where on the scale between the two
"[the book] deals with human behavior   The central proposition of the book is  polar cases (shock therapy and incre-
and its outcomes under both stable and   thatthe radical approachto systemtrans-   mental change) and moved some dis-
changing institutional conditions. It be-  formation works in all conceivable cases,  tance down the respective path of tran-
longs to a growing body of research   whereas its converse-a "gradualist" or   sition. The superiority ofoneorthe other
which takes institutions as the central   "evolutionary" approach-cannot pos-   strategy-provided one could prove it
variable and tries to explain this change   sibly work in the long run. A few com-   persuasively at this juncture-is imma-
ortheirimpact. These [institutional] prob-   mon sense observations aboutthis propo-  terial for practical purposes. Entering a
lems were pushed into the background   sition are in order.             specific  transition  path  creates
22                                                                                          March-April 1996



Transition
path-dependencies that make a country   for the exhaustion of political capital is   siders are perceived to emerge as the
unable to backtrack to the initial point  the sudden emergence of conspicuous   "winners" on the basis of shady, if not
and try another route. And broad-brush   inequities in the distributions of income,  illegal initiatives, at the very same time
predictions of ultimate success or disas-   consumption, and wealth early on in the   that median incomes are falling drasti-
ter are exercises in prophesy. In short,   process. The author acknowledges this   cally.
at this juncture it is too late to influence   dimension, but dismisses it as the mani-
transition strategy choices and too early   festation of "envy," suggesting just an-   Free initial distribution of assets in pur-
to judge outcomes.                    other distorted perception inherited from    suit of some form of "peoples capital-
the past.                            ism" is increasinglyperceivedas apopu-
Nonertheless, reading many of the pas-                                      listmovetomobilizeadditional "political
sionate assertions, one cannot help ask-   Envy and Social Acceptance       capital" for the government, and un-
ing oneselfthe question "and what about                                     likelytomake a sustained difference.The
China?" China is hardly evermentioned,   Envy is conventionally defined in eco-   process of rapid economic appropria-
and if it is, then to emphasize that it does   nomic discourse as the response of an   tion of assets is therefore unlikely to
not provide useful lessons. China and   individual tothe impossibility oftrading   produce a complementary social ac-
Viet Nam are "specials" (whereas all  in his bundle of efforts and rewards for   ceptance. " Social capital," thus, is inthe
other transition countries are presumed   that of another individual. Envy, thus,   final analysis equivalent to the capacity
to be of basically the same kind). Like   reflects a perception that there is lack of   of societytomaintainapoliticalmomen-
other proponents ofthe radical approach,   "fairness."  Only in the neoclassical  tum supportive oftransformationthrough
the author also seems to subscribe to the   framework of methodological individu-   its potentially explosive phase without
presumption that China's path is unlikely   alism and individual utility maximiza-   losing the political legitimacy ofthe new
to be sustainable.                    tion-the narrowness of which the au-   order in the process. In several transi-
thor rejects in his advocacy of the   tion countries we are beginning to see
Diminishing Political Capital         institutionalapproach-canenvybedis-  the limits at this political sustainability,
missed as irrational or irrelevant.   with unpredictable ramifications. Read-
The author stresses time and again that                                     ers who hoped for athorough discussion
radical changes of the economic regime   Arguably, the concern with depletable   of these vital questions on the basis of
are possible only during a limited period   "political capital" is economically rel-  the inspiring introductory chapter, are in
of "extraordinarypolitics", when radical   evant also in the long run, because the   for a disappointment.
changes of the political regime, carried   economic efficiency ofasociety is linked
by a spirit of revolutionary enthusiasm   to a perception of sociopolitical legiti-   Martin Schrenk is Consultant, Tran-
and accompanied by readiness to as-   macy ofits elite, a connection frequently   sition Economics Division, the World
sume sacrifices for the sake of a better   referred to as "political sustainability."   Bank.
future, release "political capital," that is   Such legitimacy includes a communal
an essential resource for the completion   consensus on the fairness of the distri-   Balcerowicz, Leszek: Socialism, Capi-
of system change. Once it is exhausted.,  bution of economic pains and gains of   talism, Transformation, CEU Press
"normal politics" returns, and organized   transition.                      Budapest, London, New York, 1995,
opposition reduces the scope for further                                    377p.
progress to incremental changes.      Clearly, economic transition involves
serious distributional dilemmas. An effi-
This potentially powerful political   cient capitalistmarketeconomy requires   To Our Readers,
economy argument-the ultimate justi-   efficient ownership, which is by defini-   Our reader's Survey, published in
fication of radical reform" for its advo-   tion highly concentrated. Reliance upon   the January-February 1996 Transition
cates-would have deserved further   traditional textbook virtues-such as   issue, received overwhelming
development. Arguably, the destruction   diligence, frugality, and thrift-for the   response. In the next issue we will
ofpolitical capital inthe process oftran-   creation ofa "fair" distribution of wealth   report the results.
sition is rather due to the growing disil-  froman egalitarian initialpositionwithin
lusionment with outcomes that do not   a few years is not a serious proposition.   Many thanks for your enthusiastic
match the exaggerated expectations-   On the contrary, rapid economic transi-   responses and helpful suggestions.
fueled, if not created, by the proponents  tion is inevitably and transparently a   The Editor
of radical economic reform. Worse yet   rough-and-tumble affair from which in-
Volume 7, Number 34                                                                                         23



The World Bank/PRDTE
Quotation of the Month: "We Will Adopt a Package
Designed to Regulate Foreign-controlled Enterprises."
If Zyuganov Wins....-Predictions of a Communist Banker-Entrepreneur
Vladimir V  Semago, Communist   Q. Aren't you worried that the vot-  trolling shares in violation of the law,
Deputy, Central Committee Member,  ers you are counting on to bring you   should definitelybe investigated. This is
and Banker-Entrepreneur, was inter-  to power will eventually force you to   up to the Prosecutor's Office. Our
viewed by Yevgeny Krasnolobov, cor-  take a different path? Those who   people have every right to file lawsuits
respondent for Moscow's Open Ra-   vote for Zyuganov are often equally  inthe courts against illegal privatization
dio. The interview was published in   willing to back Anpilov. [Viktor   maneuvers. Such legal proceedings are
Prism, a biweekly publication of the   Anpilov is head of the Communists-   beyond the competence of political
Jamestown Foundation on the Post-   Working Russia-for the Soviet Union   forces and movements, including my
soviet States. This article is excerpted   Party. The editor.]          party.
from the interview.
A. The Commnunist Party and Anpilov's   Q. Is it true that your party has com-
Q. Many predict that if Gennadii  party have different constituencies.   piled a blacklist of foreign compa-
Zyuganov is elected president of   DuringthelastDumaelectionsAnpilov's   nies to be excluded from Russian
Russia, the Communist Party will  party received some 4 percent of the   businesses?
change the rules of the game, abol-  votes while Zyuganov's party received
ishing   private  property  and   more than 20 percent. We expect our   A. Whycompile suchalist?Irepeat, we
renationalizing  enterprises  that   societyto accept Marx and Lenin's ideas   advocate handling the economy on the
have been sold to foreign compa-   gradually. Anpilov's people are more   basis of common sense, not of settling
nies.                               decisive. We know all too well that an   scores with anybody. We do not have a
economy run fully by the state is detri-  blacklist of state officials either, although
A. I would like to remind you that for-   mental to society. The state, with its  the latter believe we have drawn one
eign companies appeared in Russia when   success in certain economic areas, rel-  up. We are ready to cooperate with
Vladimir Lenin offered them conces-  egates other actors to secondary roles.  them, including the most high-ranking
sions. The last concession dates back to   Full state control strengthens the coun-   ministerial officials, if they act for the
1947. Later, in 1986-87, the Central  try-but it degrades the individual, di-  good of the country. We are against
Committee of the Communist Party   minishes his role.                   assigning to every post politically
approved the revival of the cooperative                                 like-minded people.
movement and, with some limitations,   Q. What will actually change for for-
allowed the operation of private firms.   eign investors if the Communists   Q. If you come to power, which coun-
All these were initiated by the Commu-   come to power?                 tries will you consider as Russia's
nists. If we did that in 1987, why would                                allies and which as adversaries?
we destroy it now, in 1996? The demo-   A. There will be more order. We will
crats claim that the versatile economy,   adopt a package designed to regulate   A. All our neighbors could become our
based on many forms of ownership, is  foreign-controlled enterprises. It is defi-  allies. We will try to cooperate with all
their brainchild. In fact, they have sim-   nitely better to play by the rules, even if  countries. The Cold War is over. We
ply ruined the country with their ill-ad-  they are not perfect, than to play without  intend to convert and reorganize our
vised and unprofessional actions. We   any rules at all. A good example is the   defense industry, which will become a
want to improve the situation, based on   earlier cooperation between the former   normal segment of our economy.
common sense and consolidation of the   Soviet Union and the West; all countries
society. We want to achieve economic  traded and cooperated with us. A rea-   Q. What is the Communist Party's
expansionwithoutappealingto ideology   sonable policy, based on common sense,  stance on the plans for NATO's east-
andwithout anypolitical action. We want  is always beneficial. It would not be   ward expansion?
our people to live in normal conditions.  right to try to revise all foreign invest-
ments in Russia, but certain deals, such   A. Negative. Russia definitely does not
as appropriations of enterprises' con-   need this.
24                                                                                          March-April 1996



Transition
Q. What practical steps do you con-   Becoming a monolith-as the Commu-   Q. How many Communists stand on
sider appropriate to deter NATO's  nist Party was in Stalin's time-would   a similar platform?
expansion?                          mean the end of the party. A monolithic
party that rejects change or innovation   A. Many, perhaps the majority, under-
A. I do not believe that any practical  is a bad idea. Rather,a party should be a   stand the realities of the modem world,
measures are required or that we should  living organism that grows and evolves   and share social-democratic values such
seek to build up a new military bloc. We   overtime. The possibility that orthodox   as pluralism in ownership.
should rather use economic levers of   communist ideas will prevail and ulti-
influence. For example, if the Baltic   mately determine our course, cannot be   The Jamestown Foundation can be
States decide to join NATO, we can   completely ruled out. But while in  reached by (E-mail at Long@james
reconsiderour economic policies toward   1917-18 the civil war helped the ortho-   town.org) or fax (202) 483-8337.
them. Probably, this will make them    dox wing to gain the upper hand, the   Postal mail: The Jamestown Founda-
change their mind. However, if NATO    present circumstances favor a social  tion, 1528-18th St., NW  Washington,
countries agree to provide everything   democratic trend.               DC 20036.
necessary to these states to help them in
their economic development, then let it
be so.                              Milestones of Transition
Q. Your program calls for the rein-
tegration of the former USSR states.   Foreign direct investment in Central  total annual losses and 17,000 employ-
How do you plan to achieve this?    and Eastern Europe almost doubled   ees. A further 58 state firms-includ-
last year to nearly $14 billion, as the   ingthenationalairline,theraillways,and
A. The USSR and Russia had always   region began to compete more strongly   oil refineries-would be downsized or
been one and the same state. In the   with other emerging markets, in Asia   placed on a strict rehabilitation regime.
present situationreintegration is dictated   and Latin America. The sharp increase
primarily by economic considerations.  resulted mostly from the sell-off of big   Hungary plans to privatize two of its
We advocate a gradual reintegration.    stakes in energy and telecommunica-  largest banks, Kereskedelmi Bank Rt
tions utilities inHungaryandintelecom-   and MagyarHitel Bank Rt, byt,ie end of
Q. So if the Communists come to   munications in the Czech Republic.    this year, Privatization Minister Tamas
power in Russia, those American                                         Suchman announced. Smaller state-
investors doing business, say, in  IMF BulgariamissionchiefAnnMcGirk   owned banks will be sold off by the end
Kazakhstan, will not have to deal   arrived in Sofia on May 8, just as the   of 1997 at the latest. Generating cash is
with Moscow in the next two years?   leva dropped significantly against the   less important than boosting the banks'
U. S. dollar (on May 9 the exchange rate   capital, Suchman added. Hungary has
A. That is right. In all likelihood there   dropped to 112.84 leva to $ 1). The Bul-  injectedmorethan 300 billionforints [$2
will be no return to an old-style soviet   garian National Bank acknowledges it  billion] into the banks over the past few
system of govermnent. The system that  is powerless to arrest the decline be-   years through a bank consolidation pro-
will establish itselfwill be more flexible.   cause of its tiny foreign reserves ($670   gram introduced by the previous gov-
Perhaps there eventually will be twenty-   million on April 30) and massive immi-   einment. Hungary is to sell state assets
seven or thrity-two new, full-fledged   nent foreign debt payments. Bulgaria's   worth over 300 billion forints this year.
entities in the Russian Federation. In all  extemal debt totals nearly $11 billion,
probability this process will take 10-15   with more than $1 billion due this year.  In Hungary the first two months of
years. It is a common delusion that the   According to a World Bank official,  1996 saw the pace of imports overtake
Communists, ifthey come to power. will   Bulgaria must act quickly to close its  that of exports, turning around an ex-
begin to pull the republics together by   loss-making firms and restructure its   port-oriented trend that had lasted sev-
force. We will not seek to have a rein-   heavily indebted banking system or lose   eral months, the Central Statistics Of-
tegration completedtomorrow orwithin,  the trust of international lending institu-   fice (KSH) reports. Exports came to
say, the next five years. The main thing   tions. Aproposedprogram calls for shut-   $1.8 billion from the beginning of the
is to promote such a process and let it  tering more than 100 debt-ridden state   year through February, which at current
proceed gradually and peacefully over a   companies withmorethan $80 million in   prices is 5.5 percent more than during
lengthy period.
Volume 7, Number 3-4                                                                                   2 5



The World Bank/PRDTE
the same period in 1995. Imports totaled   gations since it assumed responsibility   Russia's government spent 6 trillion
$2.4 billion. an 11 percent increase. The   for $103 billion of debt amassed by the   rubles ($1.2 billion) onthe economicand
upshot was a trade deficit of $630 mil-   Soviet Union. It was due to repay $8   social reconstruction of Chechnya in
lion for the period, $145 million more   billion to sovereign creditors alone this   1995, ITAR-TASS reported on March
than a year earlier. The KSH accounts   year. The Paris Club deal will consider-   31. There are no reliable figures for
for the deficit by pointing to the high   ably ease the burden, giving Russia a   military outlays, butthe operational costs
energy imports necessitated by the un-   six-year grace period on principal re-   of the 40,000 or so troops in the
usually long winter. consumer prices   payments and phasing its remaining   breakaway republic can be assumed to
showed an annual increase of 27.6 per-   obligations over twenty-five years. Rus-   have been several times that amount.
cent in the first quarter of this year,   sia will continue to make annual interest
while real wages declined by 5.9 per-   payments which will amountto $2 billion   Russian President Boris Yeltsin issued
centduringtheperiod. Grosspublic sav-   this year. Russia's payments under the   a decree on 8 April ordering the govern-
ings came to 2,200 billion forints at the   agreement would total about $2 billion in   ment to grant a six-month loan of 4
end of February, 3.6 percent higher at   1996 compared with $1 billion paid in  trillion rubles ($818 million) to the Pen-
current prices than two months earlier.   1995.                             sion Fund. The state owes pensioners
more than 6 trillion rubles in overdue
Hungary on March 29 became the   Russia's monthly inflation in April was   payments. Russia'snationalpensionfund
twenty-seventh country to join the Or-   2.2 to 2.4 percent compared with 2.8   needs an immediate bailout to cover a
ganization for Economic Cooperation   percent in March. The economy will  shortfall of nearly 13.8 trillion rubles
and Development (OECD). The Czech   grow by about 6 percent a year in 1997   ($780 million). The fund depends on
Republic became the first fonner com-   and 1998, Russian Central Bank Chair-   payroll taxes for revenue, but wide-
munist country to join the OECD, last   man Sergei Dubinin told the EBRD an-   spread tax evasion has substantially re-
December. Poland is expected to join   nual meeting in Sofia. Annual inflation   duced collections in recent months. In
later this year.                     this year will not exceed 20 to 25 per-   February  and  March the federal
cent, he said.                        government's tax income reportedly fell
Poland liberalized capital flows linked                                     below 5 percent of GDP. Federal Tax
to direct investment as of April 1 and   The Russian Duma in mid-April ap-   Inspectorate ChairmanVitalyArtyukhov
plans further dismantling of capital bar-   proved a land law that sharply restricts   warnedthat officials are drafting apresi-
riers for early 1997, deputy finance min-   land privatization (bars foreigners from    dential decree that will make ministers
ister Krzysztof Kalicki announced. The   owning land and puts a two-year mora-   and department chiefs personally re-
next step, planned for January 1, 1997,  torium on the resale of land that was   sponsible for meeting tax collection tar-
will be easing curbs on portfolio invest-   given free to fann workers). The law    gets.
mentgiving Polishcitizens the latitudeto   directly challenges an earlier decree is-
buy stocks onintemational markets. The   sued by President Boris Yeltsin, on   President Yeltsin, with continued em-
move will require a bill upgrading the   March 7. The decree would have made   phasis on social issues in advance of
current law on public trading in securi-  it easier forthe 12 million former collec-   Russia's presidential elections, decreed
ties. The liberalization aims to facilitate  tive and state farm members to claim   the partial restoration of savings wiped
Poland's entry into the OECD later this   personal land shares from their farm    out by inflation as a result of the eco-
year. The risk of capital outflow from    and to sell the land or bequeath it to their   nomic reforms begun at the end of 1991.
Poland as a result ofthe liberalization is   heirs.                         The decree orders the government, the
thought to be low: economic growth and                                      central bank, and Sberbank to draw up
the attractiveness of the Polish market   In March wage arrears directly attribut-   within three months a federal program
encourage the flow of capital into Po-   able to Russia's federal government   torepaysavingsdevaluedbetweenl991
land, with much less flowing out.     amounted to 8 trillion rubles, whereas   and 1995. The total Sberbank debt is
total wagearrears were 24 trillionrubles.   estimated at 800 trillion rubles ($160
Russia signed a long-term reschedul-   This is partly the result of a slowing of   billion) in current prices. Compensation
ing agreement with the Paris Club that  inflation, which reduces nominal profits   payments will beginto be paid in 1997 in
includes the repayment of $40 billion   and therefore the profits tax collected   a process that will take decades to com-
over twenty-five years with a six-year   by the state.                      plete.
grace period. Russia has been strug-
gling to meet its international debt obli-
26                                                                                               March-April 1996



Transition
President Yeltsin has decreed that sup-   bills. Inflation in April was 2.4 percent,   The economies of Eastern Europe
porting small businesses should become   Ukrainian Radio reported on May 7.   excluding the CIS are expected to grow
a government priority in Russia,   ThisisthelowestrateofinflationUkraine   by 5 percent this year, an EBRD report
Finansovye izvestiya reported on April   has seen in recent years. But at the   forecasts. The EBRD said some parts
9. The decreepromises 500 billionrubles   sametime, realincomes inthe firstquar-   of Eastern Europe and the Baltic region
($102 million) for investment credits to   ter of 1996 fell by 19 percent.  are beginning to be underpinned by the
smallbusinesses, and$200millionworth                                        same factors that have supported high
in guarantees to foreign companies that   Czech real gross domestic product   growth in Southeast Asia. This year
open credit lines to small businesses in   (GDP) rose 5 percent year-on-year for   Poland will become the first country in
Russia. The Federal Fund for Small  the fourth quarter of 1995, putting GDP    the region to reach its pre-1990 level of
Business Support should receive 5 per-   for the year 4.8 percent higher than in   output, to be followed next year by
cent of the privatization revenue annu-   1994, when growth was 2.6 percent, the   Slovenia. Output inmost other countries
ally, which means that in 1996 small   Czech Statistical Bureau reported. The   intheregionis likelytoreturntopre-l 990
companies should get 707 billion rubles   government has forecast GDP growth  levels during the nexttwo to three years.
(in 1995 small businesses received 50   of 5.5 percent for 1996.
billion rubles from this source). Small                                     EBRD shareholders, at the institution's
businesses in Russia repeatedly com-   The Czech Republic recorded a trade   fifthannualmeetinginSofia,votedunani-
plain that high taxes and interest rates   deficit of 8.7 billion crowns ($322 mil-   mously in favor of doubling the bank's
make it difficult for them to survive.  lion) in February, bringing the total for   capital to $25.2 billion. It was agreed
the year so far to 15.3 billion crowns   thatthebankshouldgiveahigherprior-
According to Russian government sta-   ($562 million). Compared with the first  ity to the least-developed countries it
tistics, 33 percent of Russia's industrial   two months of 1995, imports rose 23.5   serves, including those of the former
enterprises operated at a loss in 1995,   percent to 112.2 billion crowns ($4.15    Soviet Union. EBRD President Jacques
while for agriculture the figure was 57   billion), while exports increased by 19.2   de Larosiere amnounced that the bank
percent.                              percent to 96.9 billion crowns ($3.59   would increase its focus onthe develop-
billion). Officials said February's fig-   ment ofthe private sector in Central and
The Russian government has scrapped   ures were positive, with exports of ma-   Eastern Europe. This replaces the em-
all export tariffs except those on oil and   chinery and motor vehicles rising sig-   phasis in the bank's early years on utili-
gas condensate, which will be phased   nificantly. Last year's trade deficittotaled   tiesandinfrastructureprojects.Thebank
out on July 1, About 140 of 680 voucher   a record 96.7 billion crowns ($3.58 bil-   will also focus on the modernization of
investment funds set up during Russia's  lion). CzechindustrialproductioninFeb-   capital markets in Eastern Europe. (In
firstwaveofprivatizationhavecollapsed,   ruary rose 14.1 percent over the same   its five years of operation, the EBRD
the State Property Committee he re-   month in 1995, while average wages in   has used 80 percent of its capital base to
ported. The remaining funds have as-  industry for the period rose 19.9 percent   approve 368 projects worth $10 billion.
sets of 2 trillion rubles and have paid   over February 1995.               De Larosiere called 1995 a "very good
average dividends of 70 percent to their                                    year" for the EBRD, with profits reach-
25 million shareholders.              The Slovak parliament in March ap-   ing $9.4 million, up from$1.2 million the
proved a law on the protection ofprivate   year before. The bank exceeded its 1995
Ukraine's budget deficit totaled 114.3   savings deposits based on compulsory   targets for both loan and investment
trillion karbovanets, or 6.9 percent of   contributions by financial institutions.   commitments, with 85 percent of the
GDP, in the first quarter of this year as   The law, which goes into effect on July   projects approved by its board going to
revenues reached only 17.7 percent of   1, 1996, is aimed at setting equal condi-   private sector undertakings. It approved
target. More than 40,000 Ukrainian en-   tions for the protection of private sav-   134 projects worth $3.6 billion, a 19
terprises have outstanding bills amount-  ings inthe whole banking sector. Institu-   percent increase over 1994.).
ingto $980 million. Thirty percent of all  tions will contribute a onetime I million
electricity consumption and fifty per-   crowns ($33,300) uponjoiningthe fund,   We appreciate the contributions of
cent of heating has been supplied with-   adding up to 0.3 percent of overall sav-   Open Media Research Institute's
out payment, according to Ukraine's  ings deposits annually. In addition, the   Daily Digest
Energy Minister Oleksii Shcheberstov.   National Bank of Slovakia will make a
Power has been cut to 7,000 factories   downpayment of 100 million crowns to
that have failed to pay their electricity   the fund.
Volume 7, Number 34                                                                                         27



The World Bank/PRDTE
World Bank/IMF Agenda
The G-7, Ready for a "New Partner-   projects, to avoid competition with the   poration (IFC), with 166 members.
ship?"                              private sector. If that happens, share-   BosniajoinedtheIMF onDecember 20,
holder nations in these organizations   1995.
The G-7 countries are planning to use   should provide additional resources, the
the June summit in Lyon as a launching   task force's report suggests, according   Donors Pledge Another $1.23 Bil-
pad for a "new partnership" with devel-  to Reuter.                     lion to Bosnia
oping countries, with the aim of building
political support for reform of the UN,   Donors Agree on IDA Replenish-   Donors on April 12-13 pledged $1.23
news agencies report. France's Presi-   ment                            billion in reconstruction aid for Bosnia
dent Chirac, chairman of the summit, is                                 and Herzegovina, bringingtotal aidfunds
inviting for the first time the leaders of   Representatives ofmorethanthirty donor   committed by the international commu-
the World Bank, IMF, and WTO to at-  countries have agreed on new funding   nity to Bosnia to $1.83 billion for 1996.
tend a special lunch session of the G-7   for the International Development As-   The pledges were made at a meeting in
heads of government, at which the fu-   sociation (IDA). A donors meeting in   Brussels chaired by the European Com-
ture of the UN's economic organiza-   Tokyo on March 19 endorsed a package   mission (EC) and the World Bank and
tions will be discussed. The goal is to  that will allow concessional lending of   attended by representatives from fifty
eliminate the overlap between global   $22 billion to poor countries over the   countries andthirty international organi-
organizations. UNCTAD and UNIDO    next three years. New contributions   zations. An earlier donors conference
are seen as immediate candidates for   from donor countries should total about  last December pledged $600 million in
reform. G-7 expects to unveil a plan for   $1 1 billion, with the rest coming mainly   aidaspartofathree-tofour-yearplanned
dealing with the debts owed by highly  from past donor contributions, repay-   reconstruction programthat will cost an
indebted poor countries to the World   ments of IDA credits, and contributions   estimated $5.1 billion. Adding to the
Bank and the IMF. Underthe plan, coun-   from the World Bank itself. The three-   $150 million it pledged at the December
tries that already qualify for bilateral   year package begins with a one-year   meeting, the World Bank approved a
debt reduction through the Paris Club   interim fund of about $3 billion running   further$160 millioninnew commitments
will also be given access to a scheme   from July 1996, with decisionmaking   for this year, bringing its total commit-
repaying debts to the World Bank and   and procurement limited to contributing   mentto $3 10 million. World Bank Presi-
the IMF.                            donors and developing countries. The   dent James Wolfensohn urged the cre-
United States will not contribute to the   ation of employment for the 300,000
Task Force Proposes Changes        interim fund; instead, it will pay $934   soldiers who will soon be demobilized.
million due to fulfill its commitment to
An intergovernmental task force has   IDA's tenth replenishment, which ends   Upgrading Social Services in
recommended modest changes in the   in June this year. IDA's beneficiaries   Russia
way the World Bank and regional devel-  are seventy-eight poor countries, which
oprnent banks do business. The propos-   have a total population of more than 3   TheWorld Bank on April 30 approved a
als, discussed in Washington during the   billion.                      $200million loanto Russiain support of
April Joint Meetings ofthe IMF and the                                  social services in the Novosibirsk and
World Bank Development Committee,   Bosnia Joins World Bank             Rostov oblasts. The Community Social
are designed to make the development                                    Infrastructure Project will finance the
banks more effective and accountable,   Bosnia and Herzegovina has joined the   rehabilitation of schools and hospitals
establishing common benchmarks to   World Bank Group, effective February   and the repair of water supply and sam-
measure their performance. These   25, 1993, the date membership of the   tation facilities. Earlier, on March 28,
banks should promote health and edu-   Socialist Federal Republic of Yugosla-   another $350 million was approved to
cation in transition economies and de-   via (SFRY) was terminated. This brings   help finance a four-year program of
veloping countries, and instead ofusing   the number of World Bank members to   urgently needed bridge works on fed-
syndicated loans, should expand multi-   180. Bosnia has also joined two Bank   eral roads in Moscow and five oblasts,
lateral insurance coverage to commer-  affiliates, the IDA, which has 159 mem-   to be procured under international com-
cial banks and others, through MIGA.   bers, and the International Finance Cor-  petitivebidding.
They need to focus on smaller, riskier
2 8                                                                                         March-April 1996



Transition
IMF Disburses Tranches of New    ment, power sector reform, and institu-   nounced after meeting in Tokyo in late
Russian Loan                        tional development.                  February. The fifth donors meeting.
cochaired by the Japanese government
The IMF decided in early May to go   IMF Standby to Ukraine              and the World Bank, and attended by
alhead with the second $340 million loan                                 delegates and observers from twenty-
payment to Russia, following the dis-   The IMF signed an accord with Ukraine   four countries and eight international
bursement of a similar amount in early   for a new standby credit worth $900   organizations, expressed concern over
April after Moscow acted to put its   million. The loan will support Ukraine's   persisting high levels of inflation and
economicreformprogramnbackontrack.   efforts to reducc both the government   urged further reforms of the banking
Some $4.1 billion will be disbursed to   budget deficit and inflation wlhilc step-   system  and the restructuring  of
Russia in the first year of thc program,   ping up the privatization of state enter-  state-owned enterprises.
with declining amounts thereafter. Thc   prises. Itwillbedisbursed in ninemonthly
new loan is being awarded under the   tranches of $1(00 million to allow close   Curing Bulgaria's Health Sector
same tenrs as the previous one-year.   monitoring of the authorities' perfor-
standby loan, that is, by means ofmonthly   mance. The aim of the reform program    The World Bank on April 9 approved a
tranches; the progress of Russian eco-   will beto haltthetdecline in GDP and cut   $26 million loan to infuse money into
nomicreformwillbecontinuouslymoni-  inflation. The budget deficit will be re-   Bulgaria's ailing health sector. The
tored by IMF officials. (The $10.1 bil-  duced to 3.5 percent of GDP this year,  projectwill shoreupthehealthministry's
lion, three-year Extended Fund Facility   from 5 percent in 1995 , and privatiza-   management and informationmactivities
loan to Russia was approved on March   tion will be speeded up.          and support primary health care, emer-
26. Russia already has $10.8 billion in                                  gency medical services, and the blood
outstanding IMF credits.)           IMF  Approves  Second  Annual  transfusion network. In Bulgaria life
ESAF Loan for Viet Nam              expectancyhas notincreased since 1970.
Mass of China Projects                                                   Infant mortality is on the rise, maternal
The International Monetary Fund (IMF)   mortality is twicethe level ofthe OECD
In March-April the following China   on March I approved the second annual   countries, and the abortion rate is one of
projects were approved by the 'World  loan for Viet Nam in an amount equiva-  the highest in the world. It is estimated
Bank:                               lentto about $178 million underthethree-  that by 2025 morethan 21 percent ofthe
- A $100 million IDA creditfortheThird   year enhanced structural adjustment   population will be older than 65 years.
Basic Education Project. The project  facility (ESAF). (A total of about $535
will affect nearly 5 million children and   million was approved on November 11,   New IMF Reporting Standards
willsupporttheprogramgoalofmaking    1994.) The loan will support the
primary education universal by 2000.    government's 1996 macroeconomic and   Finance ministers attending the spring
* A$250millionloanthatwillsupportthe   structural reform program and will be   meetings of the World Bank and IMF
Second Shanghai Sewerage Project.    disbursed in two equal semiamnual in-   approved tough new economic report-
* A $210 million loan for the Second   stallments, the first ofwhich is available  ing standards designed to avert future
Shanxi Provincial Highway Project (to  immediately. Viet Nam's Deputy Prime   Mexican-style financial problems. The
build about 259 km of high-grade high-   Minister Phan Van Khai, speaking to   new IMF standards, endorsed by the
ways andabout4,100 kmnofruralroads).  the National Assembly, said the budget  IMF's Interim Committee, are designed
* A $100 million IDA credit to combat   deficit was 4.3 percent of GDP last  to improve the quality and timeliness of
poverty in China's Shanxi province (to   year. He blamed the deficit on problems   financial statistics ranging frominflation
increase farm production, improve rural   with tax collection and evasion.  and unemployment to currency reserves
roads, and help poor and disadvantaged                                   and trade deficits.
women earn income). The project is   Donors Pledge $210 Million for
expected to benefit around 3 million ru-   Mongolia                      The Worsening Environment-A
ral people in the region.                                                New Report
*A$150nmillionloaninsupportofa$327   Donors have pledged at least $210 mil-
millionAnimalFeedProject,toincrease   lion in assistance to Mongolia for 1996,   The world population should jump 50
livestock production.               with the precise figure to be determined   percentto 8.3 billion by 2025, withtwo-
* A $440 million loan for the Henan   bybilateralnegotiationsnowinprogress,  thirds massed in congested cities, ac-
thermalpowerproject,includinginvest-  the Mongolia Assistance Group an-   cording to a report recently released by
Volume 7, Number 3-4                                                                                    29



The World Bank/PRDTE
the World Barnk, UNEP, UNDP, andthe   Conference  Diary
World Resources Institute The report,
"World Resources 1996-97: The Urban
Environment,"(Oxford UniversityPress,   Migration, Development, and     414-6869, E-mail: (jacksonl@css.
London/New York, 1996) forsees a   Politics                             bham.ac.uk  or  (n.j.lynn@bham.
more serious impact onthe environ,ment   May3 l-June 5, 1996, Mont Sainte Odile,  ac. uk).
than ever before, warning that intense   France
industrial growth will likely diminish ef-                              36th European Congress of Re-
forts to cut climate-changing gas emis-   Organized by the European Science   gional Science Association
sions, and that water shortages could   Foundation.                     August 26-30, 1996, Zurich, Switzer-
become critical in thirty years.   Information:  European   Science   land
Foundation, tel. (3388) 767-135, fax
Support to Algeria                  (3388) 366-987.                     Organized by the Regional Science
Association. Topics include: Federal-
The World Bank approved on April 25   Babson College and GEA College   ism; Subsidiarity and-regions; Regional
two loans to Algeria. A loan of $300   Fifth Annual Conference          dimension of environmental policies;
million will support the Algerian   June 3-8, 1996, Portoroz, Slovenia  Regional and national planning in the
government's goal of achieving an open,                                 new European context; European inte-
market-based economy through mac-   Organized by the Babson College and   gration and the future of border regions;
roeconomic stabilization and rational-   GEA College in association with the   Regional labor markets.
ization of public expenditures public   Ministry of Economic Affairs of  Information: Angelo Rossi, ERSA -
enterprise reform, and private sector   Slovenia. Topics include: Entrepreneur-   Congress 1996, ORL-Institute, ETH
development. Another $50 million will  ship for emerging economies; Trends in   Hoenggerberg,  CH-8093  Zurich,
financevaonew socialnprotection system.   entrepreneurship in Central and East-   Switzerland, (E-mail: ersa96@orl.
This safety net project includes a   ern Europe; Strategies for developing   arch.ethz.ch), (Internet: WWW page:
labor-intensive public works schemeto   and promoting entrepreneurial firms;   http://www. orl. arch. ethz. ch/FB
be carried out mainly by small private   Establishing entrepreneurial training   Oekonomie/congress).
enterprises,                        centers; Practicum for entrepreneur-
ship educators; Teaching entrepreneur-   Contribution of Management Edu-
Loans to Georgia                    ship (cases, research and writing).  cation towards the Development of
Information: Mrs. Tatjana Trebec,   Market Economy: The Case of
OnApril 25 the World Bank approved a   GEA College, Centre for Entrepre-   EURO-CIS Cooperation
$14 million IDA credit for Georgiathat   neurship Education, Dunajska 156,   September 2, 1996, Moscow, Russia
will help to reorient the health system    61113  Ljubljana, Slovenia,  tel.
toward cost-effectiveness, modernize   (38661) 66-475- 7008, fax (38661)   Organized by the European Foundation
the health financing system, rehabilitate   1688-213, (E-mail: viljem.psenicny   for Management Development, Acad-
selected facilities and equipment, and   @guest.arnes.si) or (ordan.berginc   emy of National Economy, Moscow.
develop human resources. Another $65   @guest.arnes.si).                Information: Anna Lysenko, Acad-
millionIDAcredit willsupportGeorgia's                                   emy of National Economy, Vernadsky
economic growth and its fight against   Transformation, Geography, and   Ave. 82, 117571 Moscow, Russia, tel.
poverty. The IMF approved a three-   Identities                         (7095) 434-0563, fax (7095) 420-
year loan totaling about $246 million   June 11, 1996, Birmingham, United  2065.
under the enhanced structural adjust-   Kingdom
ment facility (ESAF) in support of the                                  Sixth International Conference on
government's economic and structural   OrganizedbytheUniversityofBirming-   Applied and Business Demography
reformprogram during 1996-98.Within   ham, School ofGeography/Postsocialist   September 19-21,1996, Bowling Green,
this medium-term strategy, the program    Areas Research Network        Ohio, United States
for 1996 aims at an annual growth rate  Information: Louise Jackson or Nick
of 8 percent, an inflation rate of 20 to 25   Lynn, School of Geography, Univer-   Organized by the Bowling Green State
percent by year-end, and an external  sity of Birmingham, Edgbaston, B15   University. Topics include: Demographic
current account deficit of 77.1 percent of   2TT, United Kingdom, tel. (44121)   analysis of retirement plans; Spatial
GDP.
3 0                                                                                         March-April 1996



Transition
analysis; Emerging consumer markets;   nancial Centre, PO. Box 1373, Sofia   entry via capital investment; Acquisi-
Internet resources; GIS technology;   1000, Bulgaria, fax (3592) 6399-   tions as opposed to joint ventures in
Trainingneeds;Populationestimatesand   4689,    (Email:    mkoparanova   Eastern Europe; Cultural conflicts and/
projections; Demonstration ofsoftware.   @sf cit. bg).                    or harmony ofjoint ventures; Marketing
Merging traditional and nontraditional                                    strategies to reach Eastern European
data sources; Immigration (legal and   International Economic Outlook   consumers: Consumer behavior; Pro-
illegal); Health care reform and minor-   Conference                      motion/advertising; Distribution and lo-
ity health; Demographic studies and   October 28-31, Philadelphia, Pennsyl-   gistical strategies; Financial strategies
research in HBCUs; Aging populations;   vania, United States              for opening Eastern European markets;
Mortality, Morbidity issues; Demo-                                        Legal and tax issues; Eastern Europe's
graphic analysis for human resource   Organized by the WEFA Group.        role and its future in the EU; Case stud-
management; Demographics and credit  Information: Ginny Jones, tel. (610)  ies of Eastern European experiences
institutes.                          490-2550, fax (610) 490-2557.        by Western firms.
Information: K  V Rao, Conference                                         Information: Reiner Springer, Institzit
Director Department of Sociology,   4th Annual Conference on Market-   Betriebswirtschaftslehre und Aussen-
Bowling Green State University, Bowl-  ing Strategies for Central and East-   handel, Wirtschaftsuniversitaet Wien,
ing Green, Ohio 43403, United States,   ern Europe                        Althanstr. 51, A-1090 Vienna, Aus-
tel. (419) 372-7240, fax (419) 372-   December 4-6, 1996, Vienna, Austria   tria, tel. (431) 3133-64371, fax (431)
8306,  (Email:  adconj96fa,bgsu                                           3133-6751, (Email: springergisis.
vax.bgsu.edu).                       Organized  by  the Wirtschaftsuni   wu-wien.ac.at).
versitaetWien, DePaul University, Chi-
The Role of Business and Innova-   cago. Topics include: Comparative   We appreciate the contributions of
tion Centres as Catalysts for Re-   analysis of conditions of market entry in  the Cooperation Bureau for Economic
gional Development and Small and   Eastern European countries; Market   Research on Eastern Europe, (Email:
Medium Enterprise Promotion          entry through exports versus market   diw334trao)db0diwll.diw-berlin.de).
October 9-12, 1996, KierkznearPoznan,
Poland
Down-sizing
Organized by the Polish Business and
Innovation   Centres   Association
(PBICA). Topics include: Entrepreneur-
ship development in rural areas; Trans-
fer of technology in small businesses;
Problems facing small and medium firms.
Information: Polish Business and
Innovation Centres Association, ul.
Polanka 3, 61-131 Poznan, Poland.
tel. (4861) 771-751, ext. 43, f/ax
(4861) 771-751, ext. 43.
Restructuring Transitional Econo-
mies in the 90's: Enterprise Behav-
ior and Financial Intermediaries-
Adjustments in Emerging Markets
Environment
October 10-14, 1996, Sofia, Bulgaria
Organized by the East-West Economiic
and Financial Centre.
Information: Malinka Koparanova,
Director, East-West Economic and Fi-   From the Polish magazine Zycie Gospodiarcze
Volume 7, Number34                                                                                       3



The World Bank/PRDTE
New Books and Working Papers
The PRDTE unit of the World Bank regrets that it is uinable to
supply the publicationsL-hlsed
World Bank Publications              flows to developing countries. East Asia   (published for the World Bank), 1996,
attracted 59 percent of all private flows,   412 p.
To receive ordering and price infor-   while Latin America's share declined to
mation for publications of the World   20 percent.                         The book provides the latest social data
Bank, write: World Bank, P.O. Box                                          for 191 economies. It includes estimates
7247-8619, Philadelphia. PA 19170,   Official development assistance in   offertility, mortality, illiteracy, accessto
United States, tel. (202) 473-1155,   1995-$33 billion in grants (excluding   health care, and shares of GDP for
fax (202) 676-0581, or visit the World  technical cooperation) and $14 billion in   selected social expenditures. This edi-
Bank bookstores, in the United States,   concessional loans-was much the   tion has been organized to highlight sta-
701-18th Street, N. W, Washington,   same as in 1994. Sub-Saharan Africa   tistics on poverty. Priority Poverty Indi-
D.C. or in France, 66 avenue dI'ena,   continued to be the largest recipient of   cators (PPIs) are presented on the first
75116, Paris, (Email: books@world   concessional flows, with 36 percent of   page of each country table. Other indi-
bank.org) (Internet: http./Jwww.world  the total compared to 16 percent for   cators covering human resources, natu-
bank.org).                           Europe and Central Asia, and 13 per-  ral resources, and expenditures and in-
cent each for South Asia, East Asia, and   vestment in human capital are presented
World Debt Tables 1996: External  the Middle East and North Africa.        on the second page of each country
Finance for Developing Countries,                                         table. The PPIs are used for monitoring
(16th edition), volumes 1 and 2, March   Global Economic Prospects and the   levels ofpoverty and related trends and,
1996, 250 p. (Also available on   Developing Countries 1995, 1996,   with the other indicators, provide a
CD-ROM)                              lOOp.                                 framework for assessing human wel-
fare in low- and middle-income coun-
Volume I analyzes recent developments   This sixth annual study focuses on the   tries.
in debt and nondebt financial flows, and   effects of globalization on developing
summarizes statistical tables for selected   countries and the growing divide be-   Comparative data for countries are pre-
regional and analytical groups. Volume   tween fast- and slow-integrating econo-   sented forthreeperiods: 1970-75, 1980-
2 provides statistical tables for the 136   mies. The ratio of trade to GDP fell in   85, and the most recent estimates avail-
countries that report public and publicly   some 44 out of 93 developing countries   able, generally between 1989 and 1994.
guaranteed debt under the Bank's  in the past ten years. Two-thirds oftotal   The comprehensive individual country
Debtor Reporting System.             FDI went to just eight developing coun-   reviews are completed by a concise
tries; about 50 countries received little  table of selected indicators for quick
Foreign direct investment in developing   or none. The link between growth and   cross-national andregional comparisons.
countries in 1995 rose by 13 percent,  integration is clear. Openness to exter-
reaching $90 billion, to becomethe single   nal trade and investment is often the   Michael Bruno and Boris Pleskovic,
largest source of development financ-   necessary first step to solid, sustainable   Annual Bank Conference on De-
ing. In East Asia, China was by far the   economic development. The book con-   velopment Economics, 1995, 1996,
largest recipient of FDI in 1995, attract-   cludes that countries embarking ontrade   383 p.
ing $38 billion. In Eastern Europe and   liberalizationinthe currentenvironment
Central Asia, FDI increased by almost   are likely to be rewarded despite the   Dominique van de Walle, Infrastruc-
50 percent to $12 billion, while FDI in   adjustment costs involved. Commodity-   ture and Poverty in Viet Nam, Living
Sub-Saharan Africa, fell by one-third in   reliant countries should enhance pro-   Standards Measurement Survey Work-
19957to $2 billion. Thegrowthofprivate   ductivityanddevelop nontraditional com-   ing Paper no. 121, 1996, 64p.
capital flows continued to dominate to-   modity exports, while maintaining
tal net flows to developing countries at   economic stability.             Michael M. Cemea, Social Organiza-
$167 billion, or 72 percent oftotal flows.                                tion and Development Anthropol-
Some twelve mainly middle-income   Social Indicators of Development   ogy, Environmentally Sustainable De-
countries account for more than   1996, Johns Hopkins University Press   velopment Studies and Monographs no.
three-quarters of total private capital                                    6, 1996,46p.
3 2                                                                                            March-April 1996



Tr-ansition
The World Bank began incorporating   (202)522-1152, (Email: crollison@    clude that in the foreseeable future, fis-
anthropological and sociological knowl-   worldbank. org).              cal accounts will remain under pressure
edge into the design of some ofits devel-                               in most transition economies. The pri-
opment projects. The author argues   Witold M. Orlowski, Price Support at   vate sector should get involved in ratio-
against three biased development mod-   Any Price? Costs and Benefits of   nalizing and providing social services,
els-the "technocentric," "econo-cen-   Alternative Agricultural Policies for  the paper suggests. To order: Cielito
tric," and "commodo centric"-and ex-   Poland, WP no. 1584, March 1996,  Pelegrin, Room H11-123, tel. (202)
amines the academic origin of such   41 p.                              458-5057, fax  (202)  477-1642,
biases. Theorv and applied research can                                 (Email: cpelegrin@worldbank. org).
be linked by drawing on a social science   Rapid growth in Poland's nonagricul-
perspective in formulating development  tural sectors, combined with real appre-   Constantine Michalopoulos, Payments
policies and actual development pro-   ciation of domestic currency (caused   and Finance Problems in the Com-
grams, the study concludes.         either by large current account surplus   monwealth of Independent States,
orsignificantcapitalinflows),mayjeop-   WP no. 1587, April 1996, 49 p.
World Bank Participation Source   ardize farmers' relative income posi-
Book, 1996, 276 p.                 tion. ButPolandshouldavoidpricesup-   Payments problems still constrain inter-
ports until it joins the EU's Common   state trade among the CIS countries.
Andrew Sheng (ed.), Bank Restruc-   Agricultural Policy; rather, efficiency in   Effective stabilization measures could
turing: Lessons from  the 1980s,  agricultureshouldbeincreased,andfarm   improve the prospects of currency con-
1996, 192 p.                        employment reduced. Older farmers   vertibilityamongCIS countries, and solid
should be encouraged to retire, and non-  institutional arrangements would permit
Statistical Handbook 1995: States   agriculturaljobs inmrralareaspromoted.   payments and settlements through cor-
of the Former USSR [in Russian], no.   The paper proposes feasible scenarios   respondent bank accounts. Stronger
19, 1996, 627 p.                    forintegrating Polish agricultureintothe   commercial banks, liberalized foreign
European Union between 2005 and   exchange markets, extended use of let-
Misha V Belkindas and Olga V Ivanova   2010.                            ters of credit, and other mechanisms to
(eds.), Foreign Trade Statistics in   To order: WitoldOrlowski, Room HI]-   increase the security of trade transac-
the USSR and Successor States [in   093,  tel.  (202)  473-7270, fax   tions could definitely help.
Russian]. no. 18, 1996, 225 p.      (202)477-1692, (Email: worlowski@
worldbank. org).                    As considerable progress has beenmade
Policy Research Working Papers                                          toward convertibility, schemes for mul-
Luca Barbone and Hana Polackova,  tilateral clearing arrangements or a pay-
Marek Dabrowski, Different Strate-   Public Finances and Economic Tran-   ments union fade away. Trade deficits
gies of Transition to a Market   sition,WPno. 1585, March 1996,33p.   are likelyto persist in such countries as
Economy: How Do They Work in                                            Belarus and Ukraine. If surplus coun-
Practice?, WP no. 1579, March 1996,   The authors analyze general govern-  tries such as Russia and Turkmenistan
47 p.                               ment spending and revenues in twenty-   develop transparent means of trade fi-
six former socialist economies for the   nancing, recipient countries' ability to
Governments should not be afraid of   period 1989-94. Rather than uniformly   pay can be taken into account. To or-
aiming too high in embarking on a stabi-  convertingto aWesternEuropeannorm,   der: Maria Luisa de la Puente, Room
lization program or any other compo-  these reforming economies have fol-   H3-063, tel. (202) 473-1206, fax
nent  of  transformation.  Most  lowed a variety of patterns. Whether a   (202) 477-3274, (Email: mdelapuente
postcommunist governments do the op-   country drifts towardheavy government   @worldbank. org).
posite: dilute the program so much it  spending or is able to check fiscal ex-
becomes ineffective. Granting conces-   penditures will depend on its success at   Deborah Mabbett, Social Insurance
sions to, and bargaining with, various   general economic reform and especially  in the Transition to  a Market
pressure groups does not produce the   at dealing with the pressures for social   Economy: Theoretical Issues with
expected political results or increase   protection. After having investigated   Applicationto Moldova,WPno. 1588,
social acceptance of reform, warns the   spendingpatterns, and the sustainability   April 1996, 35 p. To order: Louis Biely,
author. To order: Chris Rollison, Room    of revenues required to cover current   Room H5-145, tel. (202) 473-6280,
N9-054, tel. (202) 458-4768, fax   govermment spending, the authors con-
Volume 7, Number 3-4                                                                                   33



The World Bank/PRDTE
fax   (202)  477-3378,  (Email:   Economic Incentives Really Help?,  the fragility of financial systems and
lbiely@worldbank. org).             TP no. 308, 1996, 67 p.             magnify the costs of bank restructuring
in coning years. Sustained capital in-
Cheryl W. Gray, In Search of Own-   Leila Webster, Randall Riopelle, and   flowscouldalsoboostthevolumeofbad
ers: Lessons of Experience with   Anne-Marie Chidzero, World Bank   loans, given the poor financial situation
Privatization and Corporate Gover-   Lending for Small Enterprises 1989-   and limited management capacity of
nance in Transition Economies, WP   1993, TP no. 311, 1996, 144 p.      mostbanksintheregionandweakbank
no. 1595. April 1996, 31 p.                                             supervision.
Philippe Benoit, Project Finance at
Experiments in privatization abound,  the World Bank: An Overview of   Jorge Roldos and Kenneth Kletzer, The
from extensive efforts at sales to strate-   Policies and Instruments, TP no. 312,   Role of Credit Markets in a Transi-
gic owners (as inEstoniaandHungary),   1996, 124 p.                     tion Economy with Incomplete Pub-
to programs based primarily on insider                                  lic Information, IMF WP no. 96/18,
buyouts (as in Russia and Slovenia), to   Michael S. Borish and Michel Noel,  1996.
innovative mass privatization programs   Private Sector Development dur-
involving the creation of large and pow-   ing Transition: The Visegrad Coun-   No one knows what enterprises or in-
erful new financial intermediaries (as in  tries, DP no. 318, 1996, 188 p.  dustries may be viable in the new mar-
the Czech and Slovak republics and                                      ket environment or what their returns
Poland). Each approach has inherent   Country Studies                   will be. Activities with negative value
advantages and risks. But if the objec-                                 may be kept alive until they prove to be
tives are to sever the links between the   Fiscal Management in Russia, World  losers, owing to an option value to shut-
state and the enterprise, to school the   Bank Country Study, April 1996, 198 p.  ting them down in the future. Further,
population in market basics, and to fos-                                some viable activities will be shut down
ter further ownership change, the initial   Russian Federation: Toward Me-   because of poor returns in an early trial
weight of evidence seems to favor sig-   dium-Term Viability, World Bank   period. These inefficiencies are due to
nificant reliance on voucher privatiza-   Country Study, April 1996, 150 p.  incomplete public infornation, and this
tion, especially given the difficulty most                              type of uncertainty distinguishes growth
countries have finding willing cash in-                                 in transition economies from that in
vestors. This is the period of "primitive                               market-oriented economies.
capital accumulation" inthe postsocialist  IMF Working Papers
world,asoneHungarianobservernoted.                                      Peter K. Cornelius and Beatrice S.
Formal programs may lay important   To order IMF publications: IMF   Weder, Economic Transformation
ground rules, but uncertainties of every   Publication Services, 700-19th Street,   and Income Distribution: Some
type overwhelm most formal efforts at   N. W, Washington, D.C. 20431,   Evidence from the Baltic Countries,
privatization. To order: Michael Geller,   United States, tel. (202) 623-7430,   IMFWP no. 96/14,.1996
Room N7-078, tel. (202) 473-1393,  fax (202) 623-7201..
fax (202) 522-0056, (Email: mgeller                                     Intheprereformperiod,theBalticstates
@worldbank. org).                   Alain Ize, Capital Inflows in the Bal-  enjoyed not only living standards higher
tic Countries, Russia, and Other   than those inthe countries ofthe former
Discussion Papers, Technical Papers   Countries of the Former Soviet   Soviet Union (FSU) but also the lowest
Union: Monetary and Prudential   degree of income inequality, relative to
Alexander S. Preker and Richard G. A.   Issues, IMF WP no. 96/22, 1996.  those countries. The present widening
Feachem, Market Mechanisms and                                          of income differentials is largely ex-
the Health Sector in CEE, TP no.   Some FSU countries faced significant   plained by a significant increase in the
293, 1995,48 p.                     capital inflows during the first half of   dispersion of earnings owing to more
1995. But most central banks were con-   pronounced wage differentials, in-
Seabron Adamson, Robin Bates, Rob-   cerned about the potential impact of   creased unemployment, and lower par-
ert Laslett, and Alberto Pototschnig,   exchange rate appreciation on competi-  ticipation rates. The redistributive ef-
Energy Use, Air Pollution, and En-   tiveness. The inflows thus had a signifi-  fects ofsocial assistance andtaxpolicies
vironmental Policy in Krakow: Can   cantinflationaryimpact. Largesustained   have been only marginal.
capital inflows, however, could increase
3 4                                                                                         March-April 1996



Transition
Mark De Broeck, Paula De Masi, and   Investment Guide for the Russian   Environmental Funds in Economies
Vincent Koen. Inflation Dynamics in   Federation, 1996 200 p.             in Transition, December 1995, 150 p.
Kazakstan, IMFWP no. 95/140,1995,
25 p.                                Geographical Distribution of Finan-   Agricultural Policies, Markets and
cial Flows to Aid Recipients: Dis-   Trade in the Central and Eastern
Some major characteristics of the price   bursements, Commitments, Coun-   European Countries, Selected New
liberalization and convergence process   try Indicators 1990-1994, 1996,  Independent States, Mongolia and
in Kazakstan:                        254 p.                               China, May 1995, 236 p.
*Decontrol of prices was piecemeal,
with an initial period of rapid progress   Trends and Policies in Privatisation   Promoting Cleaner and Safer Indus-
followed by phases of stagnation and   [atwice yearlypublication] vol.2, no.2,   trial Production in Central and East-
even reversal.                       special feature: Corporate Insolvency   ern Europe, September 1995, 148 p.
*Sporadic price liberalization and price   Procedures as a Tool for Priva-
convergence, which progressed only in   tisation and Restructuring [bilingual],   Review  of Agricultural Policies:
periods of tight fiscal and monetary   1996,314p.                         Czech Republic, November 1995,
policy and macroeconomic stabilization.                                   300 p.
*Incompletepriceliberalizationand con-   As to the privatization of small enter-
vergence. Prices of energy products   prises, 90 percent or more have been   Reviews of National Science and
and of many mainly energy-based ser-   privatized in Albania, the Czech Repub-   Technology Policy: Poland, Decem-
vices are still below the levels in compa-  lic, Estonia, Hungary, Lithuania, Poland,   ber 1995, 171 p.
rable market economies, notwithstand-   and the Slovak Republic; and more than
ing sharp increases in relative domestic   70 percent have been sold or leased in
terms.                               Latvia and Russia. The Czech Republic
has privatized or liquidated 81 percent   WIIW  Publications, Vienna
Jonas Cicinskas, Peter K. Cornelius,   of large state-owned enterprises; the
and Dalia Treigien, Trade Policies and   corresponding data for other transition   To order: The Vienna Institute for
Lithuania's Reintegration into the   economies are as follows: Hungary 75   Comparative  Economic  Studies
Global Economy, IMF WPno. 95/138,   percent, Estonia 74, Lithuania 57, Rus-   (WIIW), Oppolzergasse 6, A-1010
1995,46p.                           sia55,Latvia46,Slovakia44,Mongolia   Vienna, Austria, tel. (431) 533-6610,
41,Poland32,Moldova27,Romanial3,  fax (431) 533-6610 50.
Se-Jik Kim and Goohoon Kwon, A    Belarns 11, Bulgaria 10, and Georgia 2.
General Equilibrium  Approach to   The former East Germany has virtually   Gabor Hunya, Foreign Direct Invest-
Interenterprise Arrears in Transi-   completed its program of privatization   ment in Hungary: A Key Element of
tion Economies with Application to   or liquidation of inviable enterprises.  Economic Modernization, WIIW no.
Russia, IMF WP no. 95/145, 1995,                                          226, February 1996,38 p.
22 p.                                Sustainable Transport in Central and
Eastern European Cities, March   Strong foreign penetration of the Hun-
1996,429p.                          garianeconomybroughtaboutaserious
dichotomy between the foreign and the
OECD-CCET Publications, Paris    This volume is a collection of papers   domestic sectors. Foreign capital con-
presented at a workshop on Transport  centrates on specific industries, is lo-
To order: OECD/CCET 2, rue Andre-   and Environment in Central and Eastern   cated in a few privileged regions, and
Pascal, 75775 Paris Cedex  16,   European Cities, held in Bucharest in   attracts mainly the younger and more
France, tel. (331) 4524-9689, fax   June 1995. Policy suggestions include   educated part of the workforce. Areas
(331) 4524-9177, (Internet:http://  the need for closer integration between   withalongindustrialtraditionlocatedin
www. oecd. org/sge/ccet/pub_pres   land-use and transport policies so that  the west of the country benefit more
.htm).                               land-use development is compatible with  than eastern regions. Education policy
existing public transport systems. Con-   is focusing on training elites with foreign
Investment Guide for Estonia, 1996   sideration is also given to stable sources   language skills, while general public
166 p.                              of financing for cities facing severe   education suffers from organizational
budget constraints.                  and financial shortcomings. Therefore,
Volume 7, Number 34                                                                                      3 5



The World Bank/PRDTE
closer integration of the foreign sector   ku, Tokyo, 162, Japan, tel. (03) 3353-   To order: Center for Economic De-
into the domestic economy should re-   4231, fax (03) 3226-8475.         velopment, Bajkalska 25, 827 18
ceive priority in policymaking. The di-                                  Bratislava, Slovak Republic, tel./fax
chotomy will be overcome partly by   The Automotive Industry in Asia:   (427) 5233-487.
spillover effects in the wake of eco-   The Great Leap Forward?, October
nomic growth. In addition, infrastruc-   1995,38 p.                      Freight Transportation in the Slo-
ture investment and regional policy in-                                  vak Republic, Seminar Bulletin no. 6,
struments shouldbeimplemented. Labor   Dynamic Viet Nam, June 1995, 30 p.   1995,22p.
toward more affluent regions should be
encouraged. The budgetary means for   Investment Risk  in  Post-Deng   Bankruptcy Regulation in the Slo-
such expenditures, however, seem to be   China, March 1995, 42 p.        vak Republic, Seminar Bulletin no. 7,
neither adequate nor well-placed.                                        1995, 14p.
Czeslaw Bywalec, Einkommen und
Konsum    im    Prozess    der   Leuven Institute for Central and
Wirtschafts-Transformation   der   East European Studies Publications,   Goskomstat Rossii (Russian Statis-
Visegrad-Lander (mit besonderer   Leuven                                tical State Agency) Publications,
Berucksichtigung Polens), WIIW no.                                       Moscow
224, Januarv 1996,25 p.             To order: The Leuven Institute for
Central and East European Studies,   To order: Computing Center Goskom-
Kazimierz Laski and Leon Podkaminer,   Deberiotstraat 34, B-3000 Leuven,   stat Rossii, 39 Myasnitskaya Street,
Issues in Fiscal Policy, Inflation and   Belgium, tel. (0032) 1632-6583, fax   Moscow 103450, Russia, tel. (7095)
Public Debt, WIlW no. 223, Decem-   (0032) 1632-6599, (Email: valentijn.   207-4971, fax  (7095) 200-2288,
ber 1995,66 p.                      bilsen@econ.kuleuven.ac.be).         (Email: stat@,infocentermsk.sv).
Rumen Dobrinsky, Microeconomic   WouterBiesbrouckandValentijnBilsen,   Construction in Russia: Statistical
Adjustment in the Transition to   The Importance of Small and Me-   Handbook, 1995, 149p.
Market Economy: An Overview of   dium Sized Enterprises in Restruc-
Enterprise Behavior in Central and   turing, with an Application to Po-   Protection of Natural Resources in
Eastern Europe, WIIW no. 221, Au-   land, Working Paperno. 54,1996,30p.  the Russian Federation 1994, 1995,
gust 1995,33 p.                                                          197 p.
Stefan Bojnec and Jo Swinnen, The
Raimund Dietz, and Peter Havlik,   Pattern of Agricultural Protection   Russian Statistical Yearbook, 1995,
Auswirkungen der Eu-Ost-Integra-   in Central Europe, Working Paper   976 p.
tion auf den osterreichischen und   no. 55, 1996, 24p.
den EU-Osthandel, WIIW  no. 161,                                         The Social Sphere in Russia: Statis-
November 1995, 40 p.                Jozef Konings, Foreign Direct Invest-  tical Handbook, 1995, 236 p.
ment in Transition Economies,
ZdenekLukas,DieLandwirtschaftder   Working Paper no. 56, 1996,21 p.      Social-Economic Situation in Rus-
Oststaaten im Jahr 1994, WIIW no.                                        sia: 1995, 1995, 514 p.
160, August 1995, 12 p..            Salomeja Jasinskaite, Mortgage Model
in Transition Countries, Working   Sources of Income of the Popula-
Paper no. 57, 1996, 33 p.           tion of Russia: Based on Data from
the 1994 Population Microcensus,
Institute of Developing Economies                                        1995, 347p.
Publications, Tokyo
Center for Economic Development   Transport and Communications in
To order: Institute of Developing   Publications, Bratislava             Russia: Statistical Handbook, 1995,
Economies, IDE Spot Survey, 42                                           240 p.
Ichigaya-Hommura-cho, Shinjuku-
36                                                                                           March-April 1996



Transition
Interstate Statistical Committee of   Ltd.,  Houndsmills,  Basingstoke,   *Clearprocedurestodrawupandimple-
CIS Publications, Moscow            Hampshire RG21 2XS, United King-   ment legislation, with accountability to
dom.                                the public.
To order: Interstate Statistical Com-
mittee of the CIS, 39, Myasnitskaya   ZoranAnusic, ZelikoRohatinski, Velimir   Cuba in Transition, volume 3 of the
Street, Moscow 103450, Russia, tel.   Sonje, and others, A Road to Low In-   Proceedings of the Third Annual
(095) 207-4237, fax  (095) 207-   flation: Croatia 1993-1994, The   Meetings of the Association for the
45092, (Email: statpro@sovam.com).   Government of the Republic of   Study of the Cuban Economy, 1993,
Croatia, May 1995, 173 p. To order:   340 p. To order: Association for the
The CIS in 1994: Statistical Year-   National Bank of Croatia, Trg Burze   Study of the Cuban Economy (ASCE),
book, 1995, 551 p.                  3, 100000 Zagreb, Croatia, tel. (3851)   6321 Walhonding Road, Bethesda,
4564-652, fax (3851) 441-684.       Maryland 20816, United States, tel.
External Economic Activities of the                                     (301) 229-8921, fax (301) 229-8921.
CIS Countries in 1994: Statistical   C. Fred Bergsten, and II SaKong (eds.),
Handbook, 1995, 370 p.              Korea-United States Cooperation   Eduardas Vilkas, Institutions of Pub-
in the New World Order, Institute for  lic Finance in Lithuania, Institute of
Finance and Prices in the CIS States   International-Global Economics, Wash-   Economics, Vilnius, October 1995, 47p.
during 1994 and the First Half of  ington, D.C., February 1996, 123 p. To
1995: Statistical Handbook. 1995,    order: Institute for International Eco-   Natalija Kazlauskiene and William H.
94 p.                               nomics, 11 Dupont Circle, N. W,   Meyers, Trade and Trade Policy
Washington, D. C. 20036, United   Development in Lithuania, Baltic
States, tel. (202) 328-9000, fax (202)   Reportno. 95-BR21, October 1995, 15
328-0900.                           p. To order: Center for Agricultural
Other Publications                                                      and Rural Development, Iowa State
Iliana Zloch-Christy (ed.), Bulgaria in   University, 578 Heady Hall, Ames,
Jiri Havel, Changes in Governance   a Time of Change, Economic and   Iowa 500]1, United States, tel. (515)
Structure  of Czech Enterprises   PoliticalDimensions.,Vermont, 1996,221   294-1183, fax (515) 294-6336.
1989-1994, Reform Round Table WP   p. To order: Ashgate Publishing Com-
no. 20, December 1994, 12 p.        pany, Old Post Road, Brookfield,   Andrzej  Kondratowicz, Wojciech
Vermont 05036-9704, United States.   Maciejewski, and Leszek Morawski,
Zbynek Revenda. Reform of the Cen-                                      Polish SMEs 94: Empirical Re-
tral Bank of the Czech Republic,   The editor suggests the following policy   search 1993-1994, Adam Smith Re-
Reform Round Table WP no. 21. Febru-   measures in order to push the Bulgarian   search Centre, Warsaw. 1995, 142 p.
ary 1995, 15 p. Sponsored by Interna-   economy out of the present deadlock:
tional Center for Economic Growth-   *Boldsupportoftheprivatesector, along   Jan Winiecki, Foreign Investment in
ICEG.                               with the new legislative framework,   Eastern Europe, Adam Smith Re-
To  order:  Universitas  Carolina   aggressive privatization policy, encour-  search Centre, Warsaw, 1996, 14 p.
Pragensis, Institute of Economic Stud-   agement of foreign investment, control
ies, Faculty of Social sciences,   of external debt management, and pur-   To order: Adam Smith Research Cen-
Charles University Smetanovo nab.   suit of full membership in the European   tre, Bednarska St. 16, 00-321 War-
6, CZ-11001 Praha 1, tel. (422) 248-   Union.                           saw, Poland, tel. (4822) 621-4707,
10804, fax (422) 248-10987.        -Reversal of the bureaucratic inertia  fax (4822) 628-0614.
and elimination of corrupt bureaucratic
Jan Adam, Why Did the Socialist  structures. Enlargement of the private  Joseph C. Kun, In Search of Guaran-
System Collapse in Central and East  sector and broadening of the autonomy   tees, the Elusive NATO: Is Enlarge-
European Countries? The Case of   granted to state-owned firms, to create   ment in Sight? The Potomac Papers,
Poland, the former Czechoslovakia,   aself-perpetuating environmentinwhich   McLean, November 1995, 32 p. To or-
and Hungary, Macmillan, London, 1996,  the power of the old (communist-style)   der: The Potomac Foundation, 1311
245 p. To order: St. Martin's Press,   bureaucratic structures will be dimin-   Dolley Madison Boulevard, Suite 2-
175 Fifth Avenue, New York 10010,  ished.
United States, or The Macmillan Press
Volume 7, Number 34                                                                                    3 7



The World Bank/PRDTE
A. McLean. Virginia 22101. United   To order: Ashgate Publishing Lim-   news of the profession, opportunities
States, tel. (703) 506-1 790, fax (703)   ited, Gower House, Croft Road,   for employment, sources of support for
506-8085                            Aldershot, Hampshire, GU11 3HR,   research, and current scholarly work in
United Kingdom. tel. (44171) 1252-  the field. To order: NewsNet Editor
Lin Lean Lim, Gyrogy Sziraczki. and   331-551, fax (44171) 1252-317-446.   AAASS, 8 Story Street, Cambridge,
Zhang Xiaojian, Economic Perfor-                                        MA 02138, United States, tel. (617)
mance, Labor Surplus and Enter-                                         495-0679, fax  (617)  495-0680,
prise Responses: Results from the                                       (Email: aaass@hcs.harvard.edu).
China Enterprise Survey, Labor   Newsletters
Market Paper no. 13., 1995. 61 p. To                                    Press-Dajdzest, a monthly Russian-
order: International Labor Office, 4,   Croatian International Relations   language publicationthat gives abroad
Route  des  Morillons,  CH-1211   Review, a quarterly publication of the   overview of the Ukrainian papers' cov-
Geneva 22, Switzerland, tel. (22) 799-   Institute for Development and Intema-   erage of important issues.in JUkraine,
6111, fax (22) 798-8685.           tional Relations. To order: IRMO, Ul.   with a focus on politics, economic is-
Lj. Farkasa Vukotinovica 2, P0. Box   sues, foreign politics, parties and move-
Xiannuan Lin, China's Energy Strat-   303, Zagreb, Croatia, tel. (3851)   ments, regional problems, nationalities
egy: Economic Structure, Techno-   4554-522, fax  (3851)  444-059,   and human rights. To order: Ukrai-
logical Choices, and Energy Con-   (Email: ured@mairmo.irmo.hr).        nian Information Center, P0. Box
sumption,   Praeger   Publishers,                                       1282, 1200 BG Hilversum, Nether-
Connecticut. January 1996, 224 p. To   Monitor-Central European Health  lands, tel. (3135) 683-8727, fax
order: Greenwood Publishing Group   and Environment, a publication of the   (3135) 683-3646.
Inc., 88 Post Road West, PO. Box   Central EuropeanCenterforHealthand
i007, Westport, Connecticut 06881-  the Environment (CECHE), chairman   Russian and Euro-Asian Econom-
5007, United States, tel. (203) 226-   Sushma Palmer. [From the latest issue:  ics Bulletin, a monthly publication by
3571, fax (203) 222-1502.           Richard Peto, "The Smoking andHealth  the Centre for Russian and Euro-Asian
Tug of War: Death from Tobacco in   Studies, University of Melbourne. To
Jorge Martinez-Vazques and L.F.   Central Europe." Men in Central and   order:  CRE-AS,  University  of
Jameson Boex, An Overview of In-   Eastern Europe have the highest death   Melbourne, 135 Barry Street, Carlton
tergovernmental Fiscal Relations in  rates in the world from tobacco use.   VIC 3053, Australia, tel. (613) 9344-
the Baltic States, Policy Research   Tobacco-related death rates in women   5956, fax (613) 9344-5590, (Email:
Center Working Paper no. 56, Atlanta,   are also beginning to rise and within a   email%soviet@pc. unimelb. edu.au)
1996. To order: Policy Research Cen-   few decades will account for a substan-   (Internet: http.//www.arts.unimelb
ter Georgia State University College   tial proportion of deaths in middle-age   .edu. au/dept/russcent/welcome. htm).
of Business, 35 Broad Street, Suite   women. Of every ten men age 35 in
600, Atlanta, Georgia 30303, United   Central Europe, five will die before age   Russian Economic Developments,
States, tel. (404) 651-3990.        70, and 40 percent of these deaths will   a monthly overview published by the
be from tobacco. In contrast, in West-  Institute for the Economy in Transition,
Vladimir Mau, The Political History   em Europe, often men age 35, three will   Moscow, 1995, 8 p. To order: Institute
of Economic Reform  in Russia,   die before age 70, and a third of these  for the Economy in Transition (IET),
1985-1994, CRCE, United Kingdom,   deaths will be from tobacco.]        5 Gazetny Pereulok, Moscow 103918,
1996, 125 p. To order: Centrefor Re-   To order: Mauerstrabe 93. 10117   Russia, tel. (095) 229-5449, fax (095)
search into Communist Economies   Berlin, Germany, tel. (4930) 308-   203-8816.
(CRCE), 2 Lord North Street, London   53440, fax (4930) 308-53443, or in
SW1P3LB, UnitedKingdom, tel. (071)   the United States., 2311 M Street,   The McKenna Law Letter, a publi-
799-3745, fax (071) 233-1050.      N. W, Suite 301, Washington, D.C.   cation covering current developments
20036, tel. (202) 331-3330, fax (202)   in the law. To order: McKenna & Co.,
Zhen Quan Wang, Foreign Invest-   872-9084.                             Mitre House, 160 Aldersgate Street,
ment and Economic Development                                           London, EC1A 4DD, United King-
in Hungary and China, Centre for   NewsNet, a newsletter of the Ameri-  dom, tel. (44171) 606-9000, fax
Central and East European Studies,   can Association for the Advancement   (44171) 606-9100.
United Kingdom, October 1995, 371 p.   of Slavic Studies (AAASS), provides
38                                                                                          March-April 1996



Transition
Bibliography of Selected Articles
Postsocialist Economies             tors in Deciding to Invest. Develop-   Slovenia Introduces Value-Added
ment Business published by United   Tax as Part of System Reform. OECD
Barrett, C. B. Market Analysis Meth-   Nations (International) 19:1-3. Febru-   Transition Brief (France) 2:11, 1996.
ods: Are Our Enriched Toolkits   ary29, 1996.
Well-Suited to Enlivened Markets?                                        Slovenian   Economic   Monitor.
[forthcoming] American Journal of   Czech Finance and Investment: A    PlanEconReport(United States) 11(43-
Agricultural Economics,  (United   Financial Times Survey. Financial   44):1-27, December 1995,
States), August 1996, 14 p.         Times (UnitedKingdom), April 26,1996.
Szilagyi, Z. Hungary Seeks to
Beneria. L. Toward a Greater Inte-   Environmental Issues Affect For-   Strengthen  Bilateral  Relations.
gration of Gender in Economics.   eign Investment Decisions in East-   Open Media Research Institute Tran-
World Development (United Kingdom)   ern Europe. Environment Bulletin   sition (Czech Republic) 2(3):36-37,
23(11):1839-50,1995.                (United States), 1995, p. 7.         February 1996.
Holland, D. International: Taxation   Fisher, S. Turning  Away  from    Wood, B. Tatra Czech-Up. The Inter-
and Foreign Direct Investment-   Slovakia. Open Media Research In-   national Economy (United States)
The Experience of the Economies   stitute Transition (Czech Republic)   10(1):52-54, January-February 1996.
in Transition. Bulletin for Interna-   2(3):38-41, February 1996.
tional Fiscal Documentation (Neth-                                       CIS and the Baltics
erlands) 50:46-66, February 1996.   German Unification and Its After-
math: Integration Outcomes [spe-   Birol, F., and N. Guerer. Long-term
Kiguel, M., and S. A. O'Connell. Paral-   cial issue]. MOCT-MOST: Economic   Oil Outlook of Eight CIS Members.
lel Exchange Rates in Developing   Policy in Transitional Economies   Revue de l'Energie (France) 47:16-24,
Countries. World Bank Research   (Italy) 5(4):1-171, 1996.               January 1996.
Observer (United States) 10(1): 21-52,
February 1995.                      Gray, J. Why Privatization Just Might   Developments in the Re-insurance
Work [in Poland]. Institutional Inves-   Market for Russia. Russian Far East
Pautola, N. East-West Integration.   tor-International Edition  (United   Update (United States) 5(11): 7, No-
Review of Economies in Transition   States) 21:143-46, February 1996.    vember 1995.
(Finland) 9:5-36, December 1995.
The Improvement in the External   Epstein, G. Don't Believe All You
Postcommunism: A  Search  for   Position of Central and Eastern    Read  about Russia's Economy:
Meaning. Transition-OMRI (Czech   European  Countries.  European   They're Doing Better Than They
Republic) 2(6):6-41, 1996.          Economy (Germany) 2:1-16, February   Say. Barrons Weekly (United States),
1996.                               December 18, 1995.
Spechler, M. C. Privatization Is Not
the Key to Successful Transition.   Kalmi, P. Insider-led Privatization in   Korhonen, I. Equity Markets in Rus-
Challenge (United States) 39:48-51,   Poland, Russia, and Lithuania: A    sia. Review of Economies in Transi-
January-February 1996.              Comparison. Review of Economies   tion (Finland) 9:53-66, December 1995.
in Transition (Finland) 9:37-52. De-
Central and Eastern Europe          cember 1995.                         Markus U. A New Parliament, De-
spite the President. Open Media
Adam, J. Transition to a Market   Nell, J. Croatia Stabilizes the Kuna.   Research Institute Transition (Czech
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Volume7, Number 34                                                                                      39



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TRANSITIONV is a regular publication of the World Bank's Transition Economies Division, Policy Research Department. The
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