1672O~~~~1 j THE N EWSLETTER ABOUT REFORMING ECONOMIES 1RXNSITION Volume 8, Number 1 February 1997 The World Bank Streamlines ItsSnets Strategy for rransition Economies - Interview with Vice PresidentJohannes E Linn Qutt- uote. l9n SuT Wxpets Rssa tgi1Wsuine-. The Europe and Central Asia (ECA) growing economies for at least two R efor . - Region at the World Bank is in charge years. Slow, but stable growth has also - r Th E Pric R" of providing; loans, guarantees, characterized the Baltic states. These Cr . LSl.d .y technical advice, and other services to countries have managed to sharply ... the transition economies of Central and reduce their inflation rates and bring : B n 5oe 8 Eastern Europe and the former Soviet fiscal deficits under control. But, on the Union. It comprises four country less sunny side, the high tax burden in E:t icOsesg j-i: departments, dozens of divisions, and these economies still induces hundreds of employees. Vice President businesses to hide in the shadow .:-a .rir ---- ..-.-:. ..:. Johannes Linn manages this Bank unit, (underground) economy. Two countries, vW . P li- h. D PedT,, w ft:a which has thus far committed $20 Albania and Bulgaria, sank into deep TiReformsiV r 1 billion to the countries of the region. economic and political crisis. Of the L t Es 14 In an interview with Transition editor Commonwealth of Independent States Richard Hirschler, Linn explained major (CIS) countries, Armenia, Georgia, The-Stor ofyE inHljngsy: ACla.O . elements of the ECA Region's new Kazakstan, Kyrgyzstan, and Uzbek- ..lt MWr ..... approach, including fostering closer istan had positive GDP growth in 1996. h es,tW.e" : partnerships with borrowers, paying Inflation and fiscal deficits have been . ttiaP.rtnehpPro 20 more attention to poverty issues, and sharply reduced throughout the region. sending country managers from their CIS countries have made a strong . .. .... .. ....... Washington offices to the field. recovery in trade, which has been -i aVs:Whisa . es: reoriented toward the industrial ....o...W.k 22 - :: Q. What is your assessment of the countries. Others, including the two region's economic and social largesteconomies, Russiaand Ukraine, . ... ... performance? haven't turned the corner yet. Last year Russian GDP shrank by about 6 C . .fre1.Diar.2 . .f A. A number of countries in Central percent, and gross fixed investment : A and Eastern Europe, including the contracted by 15 percent. In Ukraine Czech Republic, Poland, Slovakia, and GDP might have fallen by as much as e Bok nd o Papers 34 Slovenia, have made sustained 10 percent. These potentially powerful 5cri t Form:4 economic turnarounds and enjoyed economies are restrained in part by Macroeconomics and Growth Division Policy Research Department The World Bank economy and the different valuation from 12 percent to 25 percent in under the totalitarian system. The 1992-94. And in Russia the past World Bank can help accelerate the practice of using inflation to finance transition by bringing to bearthe expe- subsidized credit to loss-making rience of other countries and by pro- enterprises hit the poor hardest. viding technical assistance, advice, and Sharp erosion of minimum pensions sizable financial support. and increasing layoffs in cities where a single dominant enterprise provides 0. Poverty is still on the rise in most most jobs call for a more targeted transition countries, and approach to public spending. income differences among regions have increased. These could 0. What are the major elements of destabilize the political situation and the World Bank's future strategy in endanger the reform course... the transition economies? A- First of all, governments should A. In the Central European countries support needy households, particularly and the Baltics a major issue will be their government's poor fiscal poorer pensioners, ratherthan transfer the accession to the European Union performance. While budget deficits subsidies to money-losing enterprises (EU). The applicant countries must shrank, arrears accumulated. Although to sustain output. Delaying reforms is adapt to EU standards in a number of tax rates have increased, the tax base notthe answer. While Ukraine delayed areas, such as agriculture, the isstilltoonarrow,andtaxrevenuesare its reform process the share of poor environment, industry, and social volatile. The continued ambivalent households in the population increased sectors. Once in the EU, countries like treatment of both domestic and foreign private businesses is also Economies in Transition: Growth of Real GDP, 1992-97 counterproductive. (annual percentage change a) Country 1992 1993 1994 1995 1996b 1997c 0. One would assume that in Rus- Economies in transition -12.0 -7.1 -9.0 -1.8 -1.3 1.5 sia the private sector has a much Central and Eastern Europe -3.0 0.2 4.0 5.8 3.9 4.3 better chance now because the Albania -6.0 11.0 7.4 6.0 6.5 6.0 government-many claim-is run by Bulgaria -5.7 -3.7 2.2 2.5 -4.0 0.0 influential groups of private bankers Former Czechoslovakia -6.4 and industrialists. Czech Republic -0.9 2.6 4.8 4.7 5.0 Slovakia -4.1 4.8 7.3 6.0 5.0 A- But the climate is not conducive to Hungary -3.0 -0.8 2.9 1.5 1.0 2.0 private investment and efficient business Poland 2.6 3.8 5.0 7.3 5.3 5.2 activities. Property rights are still not Romania -8.8 -3.0 4.0 6.9 4.5 4.0 established; the playing field is still not Baltic states -31.6 -14.4 1.5 1.3 1.7 2.0 even across activities. In the Russian Estonia -14.8 -7.8 4.0 3.0 3.3 3.0 Dumaattemptsto adopt laws on private Latvia -34.9 -14.9 0.6 -1.6 1.5 1.8 land ownership have been delayed. A Lithuania -35.0 -17.0 1.0 2.7 1.0 1.5 highdownegree of uncertainty su nds A Commonwealth of Independent -14.1 -9.6 -14.6 -5.7 -4.4 -0.3 high degree of uncertainty surrounds Sae private businesses. Annual foreign di- States -13.0 -12.9 -24.6 -8.9 0.7 1.5 rect investment is declining, although Russia -14.5 -8.7 -12.6 -4.0 -5.0 -1.0 the potential is tremendous in areas Ukraine -13.7 -14.2 -23.0 -11.8 -9.2 -2.3 such as the oil sector. Russia has a a. Country group aggregates are averages weighted by GDP in 1988 dollars; for long way to go if it wants to grow 5 to 7 methodology, see World Economic Survey, 1992 (United Nations publication, Sales percent per year, provide adequate so- No. E.92.1I.C.1 and corrigenda), annex, introductory text. cial services, and recover its initial GDP b. Partly estimated. position in 1990, even if one allows for c. Forecast, based in part on Project LINK. huge unrecorded activity in the shadow Sources: UN/DESIPA and ECE. * TRANSITION, February 1997 © 1997 The World Bank Lending Operations in Europe and Central Asia Q. How will structural changes (commitments in mfilions of US dollar by riscal year) within the Bank affect the loan op- Country 1991 1992 1993 1994 1995 1996 Total erations in the transition countries? ECA region (Turkey included) 3,837 2,111 3,849 3,756 4,533 4,376 22,462 Central Europe and the Baltics 2,937 1,777 1,790 1,480 891 1,222 1,097 A. The Bank will be able to focus Albania 41 44 47 67 73 273 better on individual countries because Bosnia 160 160 it will have ten to eleven country Bulgaria 17 250 178 148 125 121 839 departments (instead of the current Croatia 128 120 32 280 four) each handling six to seven Czech Republic 450 246 82 2 780 countries. Country directors will be Estonia 30 50 30 15 126 responsible for a minimum of one Hungary 550 200 413 129 38 1,330 country and a maximum of four Latvia 45 26 5 27 150 countries. The new design will enable Lithuania 60 26 32 42 161 the directors to focus more on the IFYR Macedonia 80 123 37 240 countries they are responsible for and Poland 1,440 390 900 146 240 181 3,297 develop clear, articulated strategies, in Romania 180 650 120 401 60 510 1,921 collaboration with governments, Slovak Republic 137 137 stakeholders and other partners. Slovenia 80 24 104 a Former Yugoslavia 300 300 Country directors will have budget Eastem Europe and the Caucasus 1,435 1,803 2,781 2,479 8,499 authority over the allocated funds to Armenia 12 28 117 92 249 financethe Bank's lending operations, Azerbaijan 82 83 165 and economic sector work in the Belarus 170 170 country they are responsible for. The Georgia 103 91 194 directors and their country teams will Moldova 26 60 90 55 231 work with six new sector management Russia 1,370 1,520 1,740 1,816 6,447 units operating in such areas as poverty Ukraine 27 25 648 343 1,043 reduction, human development, private Central Asia 60 373 611 363 1,407 and finance sector development, Kazakstan 274 283 260 817 infrastructure, energy, as well as rural Kyrgyz Republic 60 78 77 98 313 development and environment. Tajikistan 5 5 Turkmenistansta 25 25 A country director will assign clusters Uzbekistan 21 226 247 of tasks to a matching sector unit, in Source: Wold Bank. line with their agreed country strategy, and will fund the job from the respec- Poland, Hungary, and Slovenia will be for us. Our financial support will involve tive country budget, on a case-by-case entitled to substantial financial less adjustment lending and more basis. This new arrangement, based support from Brussels. (They already investment loans and guarantees. on direct motivation, will certainly im- receive loans from the European prove the quality of the Bank's advice Investment Bank and grants through The less-advanced transition and financial support, making it more the PHARE program.) But in the short economies have a tremendous need professional, more flexible, and more run there are plenty of opportunities for reconstruction after the collapse responsive. for World Bank involvement-in of their social safety nets and Initially, two to four country directors economic and sector work, lending, infrastructure systems. That need will will move from the World Bank's and providing guarantees, particularly not be fully met in the next ten years Washington headquarters to the in infrastructure. Helping preparethe through private sector inflows or resident office in the respective ground for access to the EU, (in close domestic resources. Therefore, the countries. Overtime, others will follow, collaboration with the Union and the Bank will have a role to play in and functions such as procurement and EBRD), dealing with continuing needs supporting their market-building disbursement can increasingly be for infrastructure and social sector efforts and access to foreign finance, carried out from the "field." This reform, and helping clean the until their economies can finally be decentralization will proceed carefully; environment are all major challenges propelled onto a growth path. otherwise, it could be quite costly. i 1997 The World Bank TRANSIIION, Febyuary 1997 X FSU Enterprises Keep on Providing Social Sem ces by Scott Thomas State enterprises provided a broad ar- heating and water and sewerage. The method of mass privatization in rayofsocialbenefitsforfreeorathighly . Assign municipal financing or fee- Russia and the other republics of the subsidized prices under communism, for-service delivery to such services as former Soviet Union has been domi- including health care, child care, edu- child care and sports facilities. nated by insider buyouts or giveaways. cation, housing, home heating, and But, frequently, the transfer of fiscal In the vast majority of cases in Russia, electrical, telephone, and water ser- authority to regional and local govem management and workers in effect be- vices. Huge enterprises granted exten- ments has been inadequaten Although came the controlling shareholders of the sive benefits not only to employees and in Russia, for example, responsibility 20,000 large enterprises that were di- theirfamilies, but also to the local com- for awide variety of social services has vested. These new owners-including munity. With privatization and the de- by presidential decree, been shifted to the management-continue to provide velopment of a market economy, this regional and local authoritiesh addif social services to both the employees residual from central planning has be- tional revenues to finance that burden and the surrounding communities. come a serious loss-making liability. have not been forthcoming; nor has the Needless to say, for the new employee- Nevertheless, following mass privati- authority to tax and spend. (A similar owners, reducing social services and zation, the divestiture of enterprises' situation prevails in other republics of subsidies in health care, housing, resi- social assets has been slow in the the former Soviet Union ote rCentral dential heating, and the like does not formerSovietUnion. and East European countries like go down well when the purchasing To give an idea of the magnitude of the Poland.) power of pensions and wages is fall- problem, consider that in 1992, at the ing; or worse, when wages are simply problem, consider that In 1992, at tne This situation does not explain why not paid for months at a time. OUtSet of the economic transformation, Russia's regional and local govern- mass-privatized enterprises, particularly in the former Soviet Union, have The author isa senior economist with ments werenresponsiblefor70percent remained impervious to market Louis Berger International, Inc. This dated national budget for health, edu- pressures to divest social assets. For article is excerpted from his contribu- cation, and othdersoial services.But example, most of Russian mass tion to M. Mandelbaum and E. catione and other social services But privatization was completed in 1993- Kapstein, eds., Social Policy and So- enterprisesannualnspending on socia 94. But by 1995, 12 percent of all cial Safety Nets in the Post-Commu- services accounted for half as much employees continued to work in jobs nist Economies, Council on Foreign aents Inat 1992 regionterpris l epenure considered "non-industrial," an Relations: M.E. Sharpe, 1997. ontsocIal1992 seriersa ted foperiditurs 1 accounting category closely associated on social services accounted for 17 with the provision of social services. percent of total enterprise revenues (on average across eighty-five oblasts), 4< flnn nZ o and, partly as a result of price liberal- l_ ization, this proportion rose substan- Tn tially in 1993. In addition, state subsi- dies, in the form of public credits and budget transfers, also contributed to enterprise financing of social benefits. To deal with the problem of social assets, - - ---- enterprises have been advised to: Eliminate production, delivey, and main- j tenance of services that are best left to the private sector, such as housing. Pass on to municipalities, autonomous "...Captain Kovacs, before joining, shouldn't we inform NATO that Public uti lities, r r ate mo- Hungary hasn't won a war in the last 500 years?" public utilities, or regulated private mo-_ nopolies such services as residential From the Hungarian Economy. i TRANSITION, February 1997 © 1997 The World Bank Quote-Unquote: "1996 was a year consuined ie5ss by policy than by politics and cardiLology) Larry Summers Prods; Russia to Restume Its Reform Agenda Since embarking on economic reform, less than $40 billion-roughly equal to Tihe Twe, lw fis Russia has shifted 70 percent of its en- the capitalization of Gillette or terprises to a private form of owner- Motorola. Two things in particular keep capital at ship; and laid to rest the risk of hyper- . A barrel of oil reserves in Russia is arms-length: the tax system and crime inflation. Last year Russian inflation capitalized at under 5 cents, versus andcorruption. dropped to 22 percent-below Mexico's about $2.50 anywhere else. eTax system. Despite some of the high- 27 percent, and near the 19 percent Russia imports half the food [that con- est tax rates in the world, Russia has recorded by Hungary and Poland. Yet sumers require] and pays for it with oil, one of the lowest rates of overall tax in applauding what Russia has timber, and aluminum. Russians buy collections. The high rates, complexity, achieved, we must also recognize that more consumer goods in Istanbul than and arbitrariness of the tax system lead 1996 was a year consumed less by they do in St. Petersburg. far too many investors-actual as well policy than by politics and cardiology, as potential-to throw up their hands What could Russia look like in the year in despair. Tax rates should be low and The Russian government drew and de- 2020 if it accomplished goals already applied to as wide a base as possible. fended a line on macroeconomic policy met by other emerging countries? Were And taxes should be paid by all. Only in 1996, but the rest of the economic Russia able to attain the same depth about 17 percent of firms pay taxes reform process stalled. Privatization of of capital markets as other emerging regularly and in full, while at least a large firms proceeded at a snail's pace economies, the capitalization of the third publish no accounts and make no amid serious questions about the fair- Russian stock market would grow to tax payments at all. With a federal tax ness of the process. Key structural thirty-five times what it is today-or system that now collects only 9 per- measures dropped off the reform over $1,000 billion-as a result of com- cent of GDP in taxes, Russia has room agenda. Other reforms slowed as well, bination of increased capital issuance to boost its revenues and still remain including efforts to audit and tax major and share appreciation. If Russian eco- one of the world's lowest tax environ- state enterprises, adjust pension fund nomic growth were to average 6 per- ments. benefits, and make "strategic custom- cent a year to the year 2020, per capita -Crime and corruption. By some esti- ers" pay for energy purchases.The Rus- income in dollars would be four times mates 80 percent of businesses make sian tax system was essentially miss- what it is now-or $14,000 (in real payments to criminal organizations to ing in action in 1996, at least for do- terms)-on a par with that of Spain. providea"roof' overtheirheads.Asuc- mestic firms, threatening macroeco- cessful campaign against crime and cor- nomic stability and even the minimal Sustained growth in Russia would lead ruption must begin with a commitment corefunctionsofthegovemment. to huge demand for consumer at the very top. The leadership of the Rlussia's Potential durables-automobiles, appliances, government must say flatly that there and electronic equipment-as it has is no longer impunity in Russia. And Whether Russia.ends up trapped in a already in Eastern Europe. If Russian that statement must be followed by cycle of instability and despair, or domestic demand reached current action-prosecutions and imprison- graduates to become a strong Spanish levels, this would mean 55 ment-demonstrating that the rule of economy, has tremendous implications million passenger cars on the roads as law will be applied evenly and univer- not only for Russia but for the world. In against 13 million today; and 60 mil- sally and that even prominent and pow- Russia today: lion telephone lines versus 25 million erful people will be called to account. * At current exchange rates, per capita today. The list of reforms Russia needs GNP is about $3,400, or only one-sixth to rediscover if it is to join the highly Capital market development is neces- of the EU average. successful market economies is exten- sary in order to channel funds from sav- * Only 25 companies' shares trade ac- sive and detailed. But if enacted, these ers to investors, discipline management tively in Russia, and the top 200 firms measures will improve Russia's hospi- to ensure good performance, meet in- (excluding Gazprom) are capitalized at tality to capital. dividual needs such as housing and CO 1997 The World Bank TRANSn ION, February 1997 m retirement finance, and provide citizens capital losses cannot be used to offset U.S.-Russia Capital Markets Forum, with a financial stake in the success of capital gains, and there is no allowance designed to marshal the expertise of Russian capitalism. Almost all former for inflation. As a result of the difficul- the U.S. private sector to help support communist countries have set up se- ties in settlement and the tax system, and guide the development of Russia's curities markets, but capital markets nine out of ten Russian securities trans- capital markets. Four working groups are much more than a stock exchange actions are settled offshore. One of the are working on capital markets infra- and a group of listings. The equity mar- sharpest paradoxes of Russian stock structure, investor protection, account- kets in Russia, the rest of the NIS, and trading is that, with more than fifty stock ing and tax issues, as well as mutual all of Eastern Europe raised less than exchanges and over 2,000 banks, vir- funds. (One area of great potential is $1 billion in new capital from 1991 to tually all stock trading is nonethe- the development of mutual funds in 1995. This is about equal to net inflows less done over-the-counter and Russia to tap the estimated $20-$30 into U.S. mutual funds per day in 1996. settled offshore. billion in mattress savings. Nine funds are now operating in Russia.) Although Capital Market Woes Yet another obstacle to fair and effi- foreign direct investment will play a vi- What is lacking is the basic infrastruc- cient markets is the absence of appro- tal role in supplying technology and ture for participation in the capital mar- priate mechanisms for corporate gov- managerial expertise, and in supple- ernance. Russian privatization resulted menting domestic capital, Russia will kets principally mechanisms that co in a concentration of ownership in the finance its investment needs largely firm, facilitate, and legitimize securities hn ownership and transactions. With eq- hands of company insiders In well over from Its own resources. uity shares in Russia largely paperless, half of privatized firms, insiders hold a ownership is recorded in the ledgers majority stake. Accurate and acces- DeputyUS. TreasurySecretaryLawrence of share registries. Hundreds of regis- sible information-through account- Summers spoke to a conference of U.S. tries exist in Russia, most of them out- ing standards of valueto investors, au- and Russian businessmen at the side of Moscow and most represent- diting, and rules on disclosure-drives Kennedy School of Governmentt at ingasingle company. if you buy shares the development of markets. Harvard University, Massachusetts, on J lanuary 9. The Russian delegation was in a Siberian company,your broker has Secretary Rubin and SEC Chairman led by Boris Berezovskii, Deputy Secre- toetravel thereatotransr the snreis an- Levitt have agreed to cochair the tary of the Security Council. verify that the registry entry is accu- rately made in your name. If the fact that companies often own the One head isn registrars of their shares makes you sus- responsible for the picious, it should. There have been cases others' where registry entries have been "erased" and shares assigned to someone else. In one notable case two years ago, Alinisters U.K.-based Transworld bought a 20 per- cent stake in Krasnoyarsk Aluminum - Smelter, only to find that the enterprise , .- had unilaterally decertified its holdings. - -- X Concepts of minority shareholders' rights have not yet taken hold, and both man- - agements and controlling shareholders regularly abuse the smaller holder. The Russian tax system is also an obstacle to development of smoothly functioning securities markets. Broker/ dealers pay taxes of 43 percent on their share-trading profits. Moreover, their From the Ukrainian magazine Ukrainian Finance. * TRANSITION, February 1997 © 1997 The World Bank rhe Prlce Tag of Russia's Organized Crime by Louise I. Shelley Organized crime has a devastating service revealed that duties are paid role is even greater. In other countries impact on Russia's economy. It dis- on only 35 of every 1,000 cars imported crime organizations also diversify from courages foreign investment, deprives into the country. Regional crime bosses the illicit sector to the legitimate the country of its tax base, dominates control customs warehouses in many economy. But in Russia, organized the banking sector and financial mar- parts of the country. Many customs of- crime groups are dominating both le- kets, and exacerbates the already ficials, who are on the payroll of crime gitimate and illegitimate economic sec- widespread problem of corruption. But groups, collude to divert customs du- tors simultaneously. The new owners, probably the most damaging aspect of ties to the crime organizations. often uninterested in making their enter- Russian organized crime activity is its prises function, drain the resources and contribution to large-scale capital flight. Russian organized crime has also infil- transfer the proceeds abroad, exacerbat- trated the domestic banking sector and ing the problems of both capital flight Why Is Russia's Organized Crime financial markets more deeply than have and nonpayment of wages. Special? their counterparts in other countries. Mil- lions of citizens have lost their limited sav- Fighting on the Ground Colombian drug traffickers repatriate ings in pyramid schemes and in bank- most of their profits. Italian authorities ing institutions that have collapsed. Hun- The cancer of organized crime cannot were able to freeze $3 billion of mafia dreds of banks are owned or controlled be addressed solely of the national level assets in the mid-1 990s because much by organized crime groups that are laun- or through officials in Moscow. There of the profits of Italian organized crime dering money (abroad by Russian orga- are significant geographic variations. For were invested domestically. In contrast, nized crime groups and within Russia by example, organized crime is based in Russian organized crime groups repa- foreign organized crime groups). Bank- the shipping industry in the Far East, triate little of their profits, instead de- ers who refuse to launder money cannot in the appropriation and export of natu- positing their proceeds in foreign coun- competewithbanksthatprovidesuchser- ral resources in the Urals, and in bank- tries, establishing banks in offshore vices. This criminalization of the bank- ing and real estate in Moscow. The havens. A specialist on capital flight ing sector and financial institutions has weakness of the central Russian state reported at a recent Ministry of Interior boosted capital flight. and the rise of regional power means conference in Moscow that $150 bil- that assistance programs must involve lion had been exported from Russia Russian organized crime groups se- a variety of individuals and groups apart since 1991. This figure may be high cured a massive transfer of state prop- from state institutions. A multipronged but conservative estimates are still erty because the privatization occurred strategy is called for: more than $50 billion. A minimum of rapidly, on a huge scale, without legal 40 percent of the estimated $2 billion safeguards, and without transparency. - Economic and legal assistance pro- in monthly capital flight is attributable These groups used force, if necessary, grams must be targeted to the most to organized crime groups. The prob- but relied mainly on their large finan- criminalized sectors of individual lem of capital flight dwarfs the la- cial assets and their close ties to the regions. mented absence of foreign investment former Communist Party elite, the mili- * Programs must seek to build civil so- (a figure estimated at approximately $6 tary, and the banking sector. (Colom- ciety and help secure citizens' prop- billion since 1991). bian, Italian, and Mexican organized erty rights. International programs to crime groups have also benefited from fight organized crime must work with Russian organized crime groups do the privatization of state resources, but groups like the Association of Russian more damage to their country's tax base on a much more modest scale.) Bankers, workers groups addressing is- than do their compatriots in other coun- Amassing privatized property even be- sues of illegal privatization, and con- tries. Apart from not paying taxes, or- fore the collapse of the Soviet state, sumers groups educating citizens on ganized crime groups, by usurping the the Russian mafia now controls more the risks of investing in the largely un- state's tax collection role, often de- than 40 percent of the total economy. regulated banking sector, commodity prive the state of needed resources. In some sectors, such as consumer markets, and stock exchanges. Recent research on the Russian customs markets, real estate, and banking, their . An integrated strategy of economic, OC 1997 The World Bank TRANSITION, February 1997 C social, civil, and criminal legal assistance is needed. Reform of the banking sector, New Currency Boards Come to assistance in privatization, and mainte- nance of a free press must be imple- the Balkans mented along with legal assistance to fight organized crime. Also required is coor- dinated legal reform in the criminal and by Steve H. Hanke civil areas, including enforcement mea- If all goes according to plan, the mon- boards is particularly important. It not sures; banking, tax, and regulatory re- etary authorities in Bosnia and Bulgaria only provides an element of stability but form; protection and education of jour- will soon have their hands firmly tied. also motivates liberal economic reforms. nalists; and the empowerment of citizens This Herculean task of hand-tying will to fight organized crime. probably be completed when they Why have Bosnia and Bulgaria finally ,lndividual countries and international dump their central banks and replace come to their respective monetary organizations assisting in the privatiza- them with currency board systems. senses? After all, we developed de- tion process, such as the World Bank These new systems will put a stop to tailed currency board blueprints for and the EU, must pay more attention to the monetary shenanigans that have each country back in 1990. (S. H. corruption. They must work to ensure characterized central banking in the Hanke and K. Schuler, Monetary Re- that citizens have more access to the Balkans. form and the Development of a property now being privatized and to Yugoslav Market Economy, London: legal assistance in this area. With an orthodox currency board sys- Center for Research into Communist .More attention must be paid to ensur- tem, base money-domestic notes and Economics, 1991; and S. H. Hanke and ing the openness of the privatization coins as well as any deposit liabili- K. Schuler, Teeth for the Bulgarian process. Citizens must have better ac- cis swl saydpstlaii .Shlr et o h ugra cess to information about the integrity ties-must be fully covered (usually at Lev: A Currency Board Solution, and viability of the institutions in which 100 percent to 115 percent) by foreign Washington, DC: International Free- they may invest, reserves denominated in a foreign an- dom Foundation, 1991.) In both cases, an Builing inancria in the banking sector chor currency, and the domestic cur- however, the national authorities, at the Building integrity irthe banking sector rency must trade, without restrictions, urging of the IMF, rejected our propos- an infnnilmret utb e at an absolutely fixed exchangle rate als. objective of any assistance program to a a combat Russian organized crime. Civil with the anchor currency. The system and criminal legal assistance must pro- runs on automatic pilot, with changes in How times have changed! Article VI I of ceed in tandem to ensure that new eco- the monetary base determined solely by the Dayton/Paris Treaty of 1996, which nomic institutions can be defended changes inthedemandfordomesticbase was drafted by the IMF, mandates that against further criminalization. money-the balance of payments. Bosnia establish and operate a currency board for at least six years. And the IMF To sum up, efforts to decriminalize the Consequently, a currency board sys- has told the Bulgarians, "No currency Russian economy must define the prob- tem cannot earn seigniorage (extra rev- board, no IMF credits."The IMF's insis- lem more broadly than simply as money enue from printing money) by creating tence on currency boards for Bosnia and laundering. Donor nations and institutions credit and inflation. Instead, it gener- Bulgaria is a far cry from the response must better coordinate their help in es- ates profits because its liabilities (notes to our 1990 proposals and the cool re- tablishing the regulation and enforcement and coins) pay no interest, while its ception the Fund gave to Argentina mechanisms for effective governing of assets (foreign reserves) earn interest. (1991), Estonia (1992), and Lithuania financial institutions and markets. Assis- Moreover, an orthodox currency board (1994), when those countries gave up tance programs must identify areas of cannot operate as a lender of last re- on central banking and established the economy that have managed to avoid sort. Thus, every financial institution is currency board-like systems. Indeed, massive criminalization. responsible for its own balance sheet, it represents a historic deviation from IMF even in a pinch. Since the fiscal authori- orthodoxy. The author is professor at the Ameri- ties and state-owned enterprises can- can University, Department of Justice, not obtain credit from the monetary Central banks have been the center- Law, and Society, Washington D.C. This authorities in countries with currency pieces of that orthodoxy. In the past, article is based on her forthcoma ng boards, discipline is imposed on gov- the IMF has asserted that central book" Stealing the Russian State. " ernments, too. This feature of currency banks, with their power to create credit, TRANSITION, February 1997 ( 1997 The World Bank were engines for economic develop- Balkans. The former Yugoslavia has The rule of law and clear property rights ment. Not surprisingly, whenever a suffered a history of unstable money. In are virtually nonexistent. Economic struc- newly independent state was formed, the period 1971-91, the average an- tures, to the extent they exist, are those the IMF applied its orthodoxy and man- nual inflation rate was 69 percent, with inherited from the communist era. Gov- dated the establishment of a central hyperinflation of more than 50 percent ernmental institutions are in their infancy bank. In turn, this required loads of per month in 1989 and again in and shaky. technical assistance from the IMF. 1991-92. According to many observ- With the new central banks creating a ers, hyperinflation was set off in 1991, Currency boards will satisfy two nec- lot of credit and inflation, the next step as Slobodan Milosevic on December essary, though not sufficient, conditions was a balance of payments crisis and 28, 1990, ordered the National Bank of for jump-starting the Bosnian and Bul- a currency devaluation. This never Yugoslavia to grant $1.8 billion in un- garian economies and clearing the road seemed to bother the "airy-fairy authorizedcreditstoSerbian-owneden- to reform: they will produce stable devaluationists" (as Sir Roy Harrod, terprises. By January 1994 the rump money and monetary stability in both leading figure in the development of Yugoslaviawassufferingfromamonthly countries, and they will unleash $1.8 Keynesian Economics and Dynamic inflation rate of 313 million percent, billion in foreign aid to Bosnia and a Theory, referred to them) at the IMF. breaking the wodd records set byWeimar still undisclosed amount of IMF credits They seemed to regard devaluation as Germany and post-World War II Hun- to Bulgaria. [In Bulgaria, under a cur- a certain and swift remedy for a gary. At present, the Yugoslav dinar is rency board system, the lev would be country's economic ills, one that would once again falling like a stone, and pegged to the dollar or deutsche mark, lead to a rapid, export-led recovery. Montenegro, Serbia's junior partner in the convertibility would be guaranteed, and rump Yugoslavia, is threatening to dis- the Bulgarian National Bank (BNB) The IMF orthodoxy became etched in tance itself from the plague of hyperin- would be prohibited from buying gov- stone in the 1950s and early 1960s, flation by issuing its own money. ernment securities or lending directly when many African states became in- to commercial banks. This would end dependent. At that time the IMF went Bulgaria's story is much the same as the BNB's practice of refinancing head-to-head with the Bank of England Bosnia's. Since the fall of communism troubled commercial banks and buying over the desirability of retaining cur- in 1989, Bulgaria has been racked by government securities- namely, print- rency boards in Africa. The IMF won bouts of high inflation and political un- ing money. In theory, this should force the battle, and instead of a "dash for rest. When we first proposed a currency loss-making enterprises to restructure growth," the African countries that em- board for Bulgaria, in 1990, its currency or close; any banks that persisted in braced central banking made a "dash was trading at 10 lev per dollar. Now it lending to loss-making enterprises would for inflation and instability." takes 2,600 lev to fetch a dollar, and an- be bankrupted. The successful imple- nual inflation is more than 300 percent mentation of a currency board might The battle between central banking and and rising. It's no wonder that the pro- thus cause a further-if temporary- currency boards was joined once again tests in Sofia have turned ugly. decline in output, following a fall in GDP after the fall of communism and the of an estimated 8 to 10 percent in 1996. establishment of newly independent The monetary history of the Balkans is The Editor.] states. At first the old orthodoxy held, important. Most people in Bosnia, Bul- as the IMF circled the wagons around garia, and the rumpYugoslaviadon'ttrust Will Bosnia and Bulgaria be able to central banking. But by late 1994 the central banking. They believe that the make their way down this reform road? IMF orthodoxy developed cracks, as central banks are instruments of strong Insbothcasesithebestthat wcan hope the Fund began to defend the new cur- sectoral and political interests, and that for is that some visionary leaders and rency board systems in Argentina, Es- the money produced by these banks technically capable administrators will tonia, and Lithuania. Then, in 1995, should be avoided. It is no surprise, then appear after discipline and stability have the IMF orthodoxy was shattered, when that the unit of account and the preferred been established. the Fund advocated a currency board currency in the Balkans is the German Steve H. Hanke is Professor of Ap- mandate for Bosnia. Its no-nonsense mark. Both Bosnia and Bulgaria are op- plied Economics at the Johns Hopkins advocacy in Bulgaria followed in 1996. erating at fractions of their 1989 economic University in Baltimore. He has served performance, with unemployment rates as an adviser in Yugoslavia (1990 - 91), The IMF's deviation from its old ortho- of about 50 percent in both countries. Lithuania (1994-96), and Argentina doxy is welcome, particularly in the Most banks and enterprises are insolvent. (1995-96). ( 1997 The World Bank TRANSITION, February 1997 -- ........I.... ..............I..... ---- .... ...........-......... I 1. I . ". - - ...'1.::;:,:,:;:::.:::::::: ::::::!::::;::;::;::--- .... 1-1 ..... .., _  , I-I II I''I.I'I',,,,,l''.,.,'.1'..'.,,1.1. - ._ .. ......_....... ............. __ ......... ..................................-..... 1. .. -  .......  1. 1. I------ - -- .. 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P, ..'..'........'.......'...... .1.-.,.,..1.-- 1.1.,,.,."..,...........,..,.. -  . - 2%. --.. 11 .. .. .. ... -- -- ...... ..-.... __-----1--11.1--.1.6 .1".".1-4.......- --. -1 . I." ... - I.. I.. I _   I - 1. - 1. ...  -.1-11.1 .. .. . ..... ...........-... .---- .... .. ..''....'_ . . ....", .-...,..,-_.. . I - 1 - I 1. I '-.  I 1, 1 I I, _ 1. "..., 1. .- 1.11,11 -I , , ........ . .. ............ _-1 ..... .. ...... I.., .... -- ----, ,f__ --I I The country's investment needs are ]Bosnia Priority List 199 7 huge, since the task is not only to re- construct an economy destroyed by Pushing ahead with Bosnia's reconstruc- Per capita GDP is estimated at $500 war (the World Bank has estimated war tion programs and setting up a market compared with the $1,900 seen in damage in Bosnia at between $20 and economy were crucial to reviving 1991. Economic revival so far has been $40 billion), but simultaneously to ef- Bosnia's economy, officials of the World limited: most of the country's industrial fect a transition from a communist to a Bank, the EU, and Bosnia's two entities capacity is still waiting to be brought market economy. There is hardly any agreed during their January meeting in back into operation, and adequate in- potential for generating investment lo- Brussels. Donors are interested in help- frastructure is still lacking. (Industry was cally: ing to sustain long-term recovery but not key to the country's prewar economic * A countrywide, coherent, well-defined in financing short-term aid projects, cau- structure, generating 38.8 percent of institutional and legal framework is still tioned an observer. GDP, employing 43.7 percent of the la- lacking. Four currencies are in use (the bor force, and accounting for 99.0 per- Bosnian dinar, the Croatian kuna, the Last year Bosnia's economy grew by cent of exports. Ten large industrial Yugoslav dinar, and the German 40 percent; industrial output recovered enterprises accounted for 50 percent deutsche mark), and different trade and to some 10 percent of its 1991 level; of both GDP and employment.) Physi- tariff regimes apply both between the real wages grew about threefold, to an cal destruction, the technological ob- two entities and within the Federation. average of DM270 ($170) per month; solescence of much of the equip- Obstacles to thefreeflow of goods and and the unemployment rate fell to some ment that survived, and the lack of persons remain. 50 to 60 percent of the labor force from working capital and adequate skills are * Enterprises face numerous financial its postwar high of 90 percent, as more the industrial sector's most serious problems in their operations, a situa- than 200,000 jobs were created through immediate problems. tion aggravated by a heavy tax burden. reconstruction assistance. Trains are In the area under Bosnian Muslim con- running on the rehabilitated Sarajevo- The lack of an industrial revival has also trol, the total taxes and contributions Ploce rail lines; the Sarajevo airport has meant continued high unemployment. paid by employers amount to 110 per- opened to commercial air traffic; and According to government estimates, cent of wages. district heat installations in 20,000 apart- around 850,000 people are looking for * Forty-two banks operate in the Fed- ments in Sarajevo have been fixed work in the country as a whole.Among eration, of which twenty-seven are in before the winter. Key bridges are be- job-seekers, there are some 290,000 private ownership; and seven banks op- ing repaired and rehabilitation of three skilled and 350,000 unskilled workers. erate in the Serb Republic. State-owned principal power plants and four main Due in part to the lack of adequate banks have inherited nonperforming as- transmission lines is proceeding. For- housing and job opportunities, refugee sets and foreign currency-denominated eign trade turnover has increased return has fallen far short of expecta- liabilities toward individuals and enter- severalfold. Prices have been stabi- tions. (Some 1.8 million displaced prises from before the war, and are in lized. The EU-World Bank donor con- Bosnians and refugees are in Western major need of restructurng. Private banks ferences in December 1995 and April Europe or in regions of the former Yu- are too small and lack the experience 1996 raised $1.8 billion. Of the total goslavia; several hundred-thousand of needed to become major creditors for de- pledged, 90 percent had been com- them were expected to return late last velopment projects. mitted to specific programs and year or early this year.) projects by the end of October 1996. Bosnia badly needs commercial legis- Close to $1.2 billion in civil works, ser- It is estimated that in Bosnia's Croat lation that clarifies company ownership, vices, and equipment contracts-as well territory, industrial output has recov- corporate governance, and financial as in orders of critical imports-are be- ered to 85 percent of its prewar level, markets if Bosnian companies are to ing implemented, and of this, $720 mil- while the average monthly wage is attract foreign capital. The central gov- lion has actually been disbursed. more than DM 350. The Serb Republic ernment has already established a risk has so far received only 2 percent of guarantee scheme in cooperation with But the country's GDP (adding up the donorsupport. Economic growth there the World Bank to promote foreign in- figures of the two entities, the Muslim- has been close to zero, wages are vestments. Analysts from USAID have Croat Federation and the Serb Republic) one-third of the level in the Federation, singled out the country's most promis- is still only one-third of its prewar level. and inflation is high. ing assets, which include the forestry © 1997 The World Bank TRANSITION, February 1997 I and wood products industry, metal in- risk insurance schemes, including in- and planners from NATO.) With an es- dustries, construction materials and vestor guarantees, venture capital funds; timated $2.5 billion needed in 1997-98, components sectors, electric products, technical assistance for privatization of the $1.4 billion would keep the four-year and mineral processing. So far, rela- stateenterprises;creditlinestorestruc- goal of $5.1 billion on track and allow tively few of the country's former for- tured and privatized banks). for some catch-up support for the Serb eign partners-mainly in textiles and the Republic. automobile industry-have expressed D Establishment of a social safety net an interest in returning and restarting (school and hospital repairs, rehabili- Earlyagreementwith the IMFonamac- their activities. However, this may tation of primary care facilities, supply roeconomic stabilization program change when privatization gets under of critical medicines). should pave the way for a substantial way. The two entities have adopted dif- debt reduction by the Paris and Lon- ferent privatization models: a privatiza- At the January joint World Bank-EU don Club creditors. This in turn, would tion law that is based on case-by-case meeting, it was decided that donors help Bosnia to achieve creditworthiness sales has been in operation in the Serb meeting in Brussels in early April would and access to private capital. The World Republic since August 1995; the be asked to pledge a total of $1.4 bil- Bankaloneplanstoapprovesome$160 Federation's privatization law, which en- lion to Bosnia for 1997. (Around sixty million in new low-cost loans. visions a mass program, is still in draft nations will attend the conference, form. which will also include the IMF, the Eu- Based on reports from news agencies, ropean Investment Bank, the Islamic OMRI's Daily Digest, and Oxford Reconstruction efforts are now focused Development Bank, the OECD, WHO, Analytica on pushing for economic reforms that would pave the way for long-term em -i7 ployment. Rory O'Sullivan, head of the S3METIMES I FEEL I' World Bank's Sarajevo office, has said 11 n.,l) r t I iB that Bosnia urgently needs to reform RATNERfl~ 5E [VLOUVW' . its steep payroll tax to encourage job growth. Bosnian authorities have pledged to get the central government functioning and to start serious economic reforms, in- cluding adopting laws on a single cen- tral bank (to operate as a currency board for at least six years) and a single currency; adapting foreign investment regulations unifying customs tariff rates and payments systems, and harmoniz- ing tax rates between entities. Other measures high on the agenda include: * Return of refugees * Infrastructure development (transport, l power, and telecommunications). e Community support (housing, district heat and gas, water and sewerage; landmine hazard reduction). Job creation through private sector and financial sector reforms (political From the World Press Review. M TRANSITION, February 1997 (© 1997 The World Bank 'Vox Populi-What Do People in Central and Eastern Europe ThinkLc of Their Reforms? byjiri Vecernik This article describes the level of satis- percent of Czechs (but only 40 per- women, by the young than the elderly, faction with and political support for the cent of Slovaks) saw capitalism as the by the higher-educated than the less- economic reforms in the Czech Repub- only altemative for the future. Since educated, and by the well-to-do than the lic, Hungary, Poland, and Slovakia, us- 1990, however, support for a market h a v e - n o t . H o w e v e r, t h e s e ing a combination of economic and po- economy has gradually slipped in the sociodemographic characteristics tell litical microindicators. Since a person's CEE countries, except in Poland. only part of the story; for example, risk- sense of "well-being" is largely a sub- Whereas in 1991, roughly 49 percent taking, entrepreneurial individuals are much more in favor of changes than those less endowed with these Table 1. Opinion of Current Regime characteristics. (as a percentage of male respondents) 1989-19 1992-95 In 1995, 60 percent of Polish house- Country Worse Same Better Total Worse Same Better Total holds and 47 percent of Hungarian CzechRep. 16 14 70 100 23 20 57 100 households admitted financial distress Hungary 39 30 31 100 52 26 22 100 as opposed to only 33 percent of Slo- Poland 23 26 51 100 38 19 43 100 vak and 24 percent of Czech house- Slovakia 25 22 53 100 50 17 33 100 holds (table 2). The perceived deterio- Source: "Dismantling of the Safety Net," SOCO survey 1995. ration during the transformation period 1989-95 is most pronounced in Hun- gary (60 percent of households declar- jective matter, opinion surveys have of men in the CEE countries (average ing they are worse off), in the middle been used, rather than a strict assess- not weighted by population size) saw ("so-so") range in Poland and Slovakia ment of incomes. This seemed par- the new regime as better and 28 per- (54 and 52 percent), and least notable ticularly appropriate in a period of cent as worse (compared with the old in the Czech Republic (35 percent). broad social and economic change. regime), the satisfaction rate dropped in 1995 to around 40 percent, and the The correlation between households' In 1990 an overwhelming majority of dissatisfaction rate increased to the ability to make ends meet and leftist the people in the four Central and East same, 40 percent level (table 1). preferences is significant only in the European countries welcomed profound Czech Republic (quite strong) and Po- economic reform: 78 percent of Poles Opinions vary between population cat- land (rather weak). This suggests that and 67 percent of Hungarians fiercely egories: the current regime is more in the Czech Republic more individu- supported fundamental changes; 60 positively evaluated by men than als are likely to join opposition parties in reaction to the declining living stan- Table 2. Ability of Households to Make Ends Meet dard and dissatisfaction with the re- (percent) gime. Indeed, leftist and rightist par- 19898 1995 ties are more visible in the Czech Re- Country Bad So-so Good Total Bad So-so Good Total public than in the other CEE countries. Czech Republic 13 38 49 100 24 40 36 100 The 1996 Czech elections signaled a Hungary 21 35 44 100 47 41 12 100 weakening of the public's previously Poland 25 43 32 100 60 27 13 100 strong commitment to the market, and Slovakia 7 39 54 100 33 44 23 100 as a result, Prime Minister Klaus's party a. Retrospective observation. lost its absolute majority in Parliament. Source: SOCO survey 1995. (In Hungary it fell to the ruling, Social- ist-dominated coalition government to # 1997 The WAbrld Bank TRANSITION, February 1997 * implement a belt-tightening austerity big corporations, and the expanding state early 1995, Social Costs of Economic program; in Slovakia, Prime Minister bureaucracy. Transformation (SOCO) and Institute for Meciar's party adheres to a populist-na- Human Sciences, Vienna. tionalist program.) Jiri Vecernik is Research Director at the Institute of Sociology, Academy of Sci- Adapted from the author's book, Mar- Citizens in all the CEE countries expect ences, Prague, the Czech Republic. kets and People: The Czech Re- their governments to focus more atten- form Experience in a Comparative tiononthesocial, ecological, and moral Surveys used: "Dismantling of the Perspective (Avebury Publisher, dimensions of reform and, specifically, Safety Net and Its Political Conse- Aldershot, United Kingdom, and to protect equality of opportunity, which quences"-October 1991, Institute of East Brookfield, Virginia, United States, is threatened by hidden monopolies West Security Studies, New York; "The 1996,294p.) and the excessive power of the banks, Social Consequences of Transition"- Lttexs to *ei E&tor Lessons from the Hungarian Energy Sector Sell-Out Our data on energy intensity in Central and Eastern Europe of the fast privatization, several national, social, and (CEE) are quite different from those shown in the chart environmental considerations were ignored. For instance, "Electricity Intensity of Output 1994" ("Rebuilding the government agreed to raise electricity tariffs to the Postsocialist Infrastructure," Transition, vol. 7, no. 11-12, p. level that would guarantee an (excessive) 8 percent profit 13). Your data severely underestimate energy intensity in margin for foreign investors. Achieving this level would some countries. For example, for Estonia, our figure is have required a 40 percent tariff increase in January 1997. 1,300 gigajoules while your chart shows 750. Despite Since this increase would have presented an intolerable earlier expectations, energy intensities are still on the rise social burden, tariffs were raised only an average of 24.9 in this region. percent. Understandably, foreign investors considered this shortfall to be an unacceptable deviation from the I agree that creating market conditions in the electricity government's commitments. As a consequence, tension sector will address several of the problems these economies levels rose in countries whose industries had a high stake face, such as energy waste, liquidity constraints, obsolete in the Hungarian energy sector, such as France and technologies, and the like. However, the large capital Germany. requirements in the electricity sector have been met mainly by foreign investors. Since selling off a significant share of Another undesirable consequence of the aggressive sell- the energy sector-an important base of the economy-to off has been the protection of foreign investors relative to foreign owners has never been done elsewhere, such sales local and government owners. For example, locally owned should proceed cautiously. utilities usually do not have an 8 percent profit margin written into their tariff formulas. As a result, the additional revenue To illustrate the potential dangers, consider several from the January tariff increases disproportionally benefits examples from Hungary, where citizens are already paying the foreign owners: only 15 percent of the extra revenue the price for fast and careless privatization of the energy goes to Hungarian owners. sector. By the end of 1996, following the accelerated sell- off of the energy sector in 1995, a significant portion (40 to Also, to accelerate capital inflows, lower efficiency standards 80 percent) of Hungarian utilities was in foreign hands. were set for foreign-owned utilities than for Hungarian-owned According to the State Auditing Agency, the accelerated utilities. Other national interests, including technical privatization went forward without any overall analysis of improvements, retrofitting investments, and pollution the Hungarian energy sector and without individual impact controls, were not regulated in the contracts. And since the assessments. The primary goal was to raise capital quickly investors have acquired full control and rights in their to reduce the public debt and improve foreign reserves. enterprises, almost no government influence can be exerted for the protection of national, social, and environmental Since this shortsighted political goal was the primary engine interests. t TRANSITION, February 1997 C) 1997 The World Bank Thus, the selling off of the energy sector, a sector that is so shortsighted political interests do not jeopardize decades important to the national economy and to of development. environmental and social well-being, is a risky business. International financial institutions, while promoting the Diana Vorsatz, establishment of market conditions in the energy sector, Professorof Energy Policy should also work to ensure that national, social, and Department of Environmental Sciences and Policy environmental interests are represented during the Central European University privatization process in transition economies and that Budapest. Increased Ownership of Consumer Durables Does Not Necessarily Indicate Higher Real Incomes Professor Jan Winiecki was one of the most perspicacious During 1993-94 in Poland and 1996-97 in Russia, incomes critics of (what he also termed) the Soviet-type economies. did not necessarily return to their pretransition levels, but He indeed retains some of his unique style in the recent relative prices changed massively, and, most important, rejoinder (Transition, vol. 7, no. 11 -12) to an article in Tran- the exchange rate was allowed to float freely. After a short, sition by Professors Kubaj and Kawalik (vol. 6, no. 7-8). and sharp devaluation that brought the official exchange Professor Winiecki's discussion deals with the social costs rate almost to the level of the parallel (market) rate, a sus- of transition, and, more specifically, with the extent to which tained period of real exchange rate appreciation followed. GDP and living standards have declined during the transi- tion. There are many arguments why GDP, and possibly The real exchange rate of the zloty is now higher than the population income, declines have been overstated. Some zloty's official exchange rate in 1988. In Russia between of them are eloquently exposed by Winiecki in his January1992andSeptember1996,followingthepriceand Transition piece and elsewhere. exchange rate liberalization, the cost of living increased 670 times, and the nominal ruble-dollar exchange rate in- This discussion is becoming somewhat irrelevant for coun- creased only twenty-six times; the real exchange rate of the tries like Poland, where incomes and GDP, according to ruble thus rose more than twenty times. As a result the real any reckoning, are back where they were before the tran- wage that was worth $7 in January 1992 is now worth $160. sition, and the economy is recording healthy, fast growth. But these issues are still relevant for other transition econo- In Poland the average wage is now $300 per month. Our mies-rmany of them, especially Russia and Ukraine, still worker needs only one month's salary to buy the VCR. Note mired in depression. the truly astonishing decline in wage-prices of imported con- sumer durables: the new wage-price is one-tenth of the As significantly more households own a greater amount of old. But the purchasing power of the worker's salary, in durable consumer goods (VCRs, cars, computers, dishwash- terms of domestic goods, has decreased, as statistics ers) than they did before the transition, Professor Winiecki show-the nominal wage is deflated by the cost of living and others see evidence of rising real incomes. Some crit- index. (Durable goods of course figure into the cost of liv- ics, while admitting that ownership of durable goods has ing index, but their weight is appropriately small.) Our worker increased, try to reconcile that increase with the real in- now purchases less food (in Poland in 1994, only 70 kilos come decline, contending that "only the rich were able to of pork) but more durables. buy the durable goods." But ownership of durables increased across the board: in Poland between 1989 and 1994 the To conclude, the increased consumption of durables is not share of households owning a VCR increased by almost necessarily indicative of an increase in real incomes. But twenty times-from about 2.5 percent to 48.0 percent. even if real incomes, measured in domestic goods, have declined, the ownership of durable consumer goods is cer- These arguments disregard a huge relative price change tainly a gain brought about by economic liberalization. that occurred in the transition economies. In 1988 a worker in Poland who earned the average $30 monthly wage (at Branko Milanovic the official exchange rate) had to earn ten times that amount World Bank to buy a simple VCR ($300) or some 100 kilos of pork. Washington, D.C. D 1997 The World Bank TRANSITION, February 1997 Foreign Investment Brings a Clash of Cultures -The Story of GE Lighting Tungsram by Paul Marer and Vincent Mabert General Electric, in 1990, acquired system, and followed management Regional-Global Approach majority share in one of Hungary's larg- practices that could at best be charac- est, oldest, and internationally most terized as lax. All of GE's light source research has prestigious firms, the light-source been done in Hungary since 1994. The manufacturerTungsram. In 1903 engi- The company thus needed substantial Budapest-based Brody Institute be- neers at the Hungarian company de- new investments and comprehensive came GEL's only global R&D Center veloped an incandescent lamp, using restructuring-things only a foreign of Excellence. Of the eight major re- for the first time tungsten filament.Their strategic investor was able to provide. search programs that GEL sponsors remarkable invention was patented in When the opportunity presented itself worldwide, four are at the headquar- 1904. (The word "Tungsram" is a com- in 1989, GE made a quick strategic de- ters at Nela Park and the other four bination of "tungsten" and the German cisionto acquire Tungsram, with an eye are located in Hungary (research on equivalent, "wolfram".) In 1994 GE fully to strengthening its own operations in tungsten, glass composition, and phos- bought out the company, which in 1996 Western Europe where, in 1985, its phorous synthesis and coating, as well was renamed GE Lighting Tungsram. market share was just about a third of as on high-temperature chemistry and Over the past six years GE has in- Tungsram's 5 to 6 percent.A large part discharge modeling). About half of vested $600 million in the venture and of GE's capital expenditures in the next GEL's approximately 750 professional thoroughly restructured every aspect of years went into capacity improvements, research and development personnel its operations. It is the largest U.S. upgrading of the physical infrastructure, reside in Hungary. GEL now spends 5 manufacturing investment in Central acquisition of hardware for a new sys- to 6 percent of its revenues on research and Eastern Europe to date. tem of telecommunications and a new and development, more than the indus- management information system, and try standard. Whereas in 1989 the Sale of the Century installation of equipment to improve average product development cycle at environment and safety. Capital outlays Tungsram was three years, by 1994 it Even under the communist system, during 1990-94 represented about 10 was reduced to less than a year. Tungsram was able to sell its lighting percent of sales, as compared with an products in more than 100 countries, average of 1 to 2 percent during the By 1995 some 90 percent of GEL Eu- maintaining a 5 to 6 percent market 1980s. ropean production was located in Hun- share in Western Europe and 2 to 3 gary, as several newly acquired West percent globally. The company's other Following the sale, Tungsram came European facilities were closed down main assets included its traditionally under the management of General andtheirmachinerywastransferredto strong scientific and technology capa- Electric Lighting (GEL), one of GE's Tungsram. The Nagykanizsa factory bility and a skilled and relatively low- twelve major business units and a gi- has become the world's largest and cost labor force. Nonetheless, it had a ant global corporation in itself, with an- most outstanding producer of light weak financial position, a mixed prod- nual sales of $3 billion. Choosing a "re- sources. Several Tungsram facilities uct structure, many run-down physical gional-global" approach, GE decided to have been designated as Centers of facilities, technology that was not uni- make a substantial integration along Manufacturing Excellence (in other formly state of the art, and a breakage functional lines. In 1992 General Elec- words, they have become the sole sup- and wastage (toss and throw) rate that tric Lighting Europe (GELE) was estab- pliers of certain GE product families). was several times above industry stan- lished, headquartered in London. Cor- dards in the West. Tungsram had prob- porate strategy, research and develop- General Electric Lighting Tungsram in- lems with accumulated hazardous ment, manufacturing technology, fi- creased its turnover by 10 percent in waste and other weaknesses in its en- nance and accounting, and many as- 1996, to $35 million, primarily as a re- vironmental performance, struggled pects of marketing and distribution be- sult of expanding its exports. The same with an antiquated internal communi- came regionally or globally managed. year, the company invested $40 mil- cation and management information lion. Investment has been funneled M TRANSITION, February 1997 i) 1997 The World Bank into manufacturing new products and senting every layer and type of em- incremental ones; make things happen building productivity. In 1996 a special ployee of the unit-brainstorm to come quickly because speed is a competitive compact lamp production line was in- up with recommendations for improv- advantage. Under Welch's leadership stalled in the Vac-based factory, while ing operations. They receive on-the-spot GE has made massive layoffs at many automation and factory capacity were responses and pledges that what is of its units and has quickly sold both enhanced. GE Lighting Tungsram agreed upon will be implemented businesses that do not perform up to currently manufactures all of GE's en- quickly. expectations. There is no long-term job ergy-saving lighting sources. GE Light- guarantee at GE. ing, with a 16 to 17 percent share of Jack Welch also pioneered the best- the West European lighting market, practices program. Its objective is to The corporate culture of GE embodies ranks a close third after Philips and seek from outside GE practical ideas such typical American traits as individu- Osram. GE LightingTungsram also has for improving operations-to break with alism, universalism, and self-confi- a 16 to 17 percent share of the East the "not invented here and therefore dence. GE offers scope and rewards European market, ranking as market not considered" syndrome that for individual initiatives, making perfor- leader among international mance evaluations and of- companies. The company - . .. . fering incentives that are hopes to raise its average orat C more individual-than team- market share in Europe to based. American culture more than 20 percent over Culture re W h f e lu d t generally, and GE's corpo- the next few years. a groupf p -uh as an th . group - nt a rate culture specifically, are ... o.fporation, or some other organizatiorv .. pofe ~-j~ istrongly universalist: rules GE Brings Good Things hooraspiestod y d are more important than to Life? frO&6the. S by t c.w i r v era relationships, "what is good problems, uch sthose thata... om .... rth. an rightcan be defined GE's efforts to bind to- ome . te and ..... and always applies." AGE gether separate national ..th tt. Gr publication, "Integrity: Code and corporate cultures have ..i. .cal c tura traits that an b idetified by observn of Conduct at the Work- resembled the practices of ...t-.t.i.f b.hvos and hpredonant tedenies .P., 9 place," is issued to all com- many multinationals in pr. M o gnr pany employees in the some respects: providing - .al1 it. I ti d r rn... that . :eon cal language and workers extensive training in lan- g..u.r. ar .....r. must pledge to observe its guage and business skills wuld b t .i- . i attitd ar . covenants. The fifty-page and offering opportunities .r z. -expres.se.in ...a bun ai b s for talented younger em- emploees ewr - Vabeled try to eliminate corruption. ployees to rotate to diff er- hwli.. br .. Ult- hwe...... ployees t rotate o differ orrtcutr.Thclte.fn aizin $:It instructs that one must ent businesses and geo- sap. deal fairly with one's co graphic locations. But GE's k regardless of na- corporate culture also incor- f there ison ar th naur of t attionality, sex, or creed. It porates the views of its requires absolute fairness in dominant leader, Welch, dealing with competitors CEO since the early 1980s. Jack Welch permeates many large organizations. and suppliers. It insists on integrity in has made it standard company prac- GE's corporate culture also includes all aspects of conduct involving the tice that every business unit conduct empowerment: delegating down the workplace. In the family, at school, and continuous campaigns to become the chain of command as many decisions through the media, Americans are lowest-cost producer in its area. One as possible and encouraging individual taught to approach tasks with confi- approach to reducing costs and improv- initiative. Employees are encouraged dence and to seek the most practical ing productivity is work-outs, which are to communicate and to act across solutions to problems. They believe that multi-day retreats. After the boss and hierarchies. GE's culture sets ambitious it is up to each individual to succeed, outside consultants lay out the unit's targets for continuous improvement, that nature can be subdued and other achievements, problems, and business consistent with Welch's notions of outside constraints overcome if only environment, the participants-repre- stretch: achieve large results, not small, one tries hard enough. © 1997 The World Bank TRANSITION, Februaiy 1997 Hungarian society in general, and Hungarian pride and ingenuity eventu- and financed by Tungsram. Their chil- Tungsram workers in particular, are in- ally do find a way to solve it. Hungar- dren went to Tungsram kindergartens dividualistic in certain respects, such ian culture is strongly particularist: "cir- and schools. They vacationed in as preferring to attack problems alone cumstances and particular relationships Tungsram's vacation facilities. On rather than in teams; and community- influence how I act." Hungarian employ- weekends they rooted for Tungsram oriented in others, such as being less ees have been socialized-by the many sports teams. They played soccer or ten- willing to accept individual responsibil- vestiges of the old feudal system and nis or basketball inTungsram's sport fa- ity. Community orientation is partly aby the hierarchy of central planning- cilities. The only way to get a job was legacy of the previous economic sys- to act only in their areas of authority, to be recommended by a current tem, when neither ownership nor con- and they are reluctant to step beyond Tungsram employee. Many families had trol over the means of production was those boundaries. three or four generations of Tungsram clearly defined. There is a tendency to employees. This community-oriented blame others for problems. 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L L L L L , . . .L, L..L,..L.....'.. ., .., 'LL.I-.-".'r.. ..... ..... L%L.' .. ..r..: :.:::: of the Independent Union of Tungsram sional sports teams, the Hungarian pub- through restructuring. Thus, Tungs- Workers made the following statement: lic has been equally disturbed by re- ram's privatization under GE-besides "GE's corporate strategy is to make ev- ports of substantial downsizing of the being an excellent strategic investment eryone insecure. The owner assesses workforce, decline of real wages even for the multinational-was, on balance, us from the United States, where the though productivity has improved in Hungary's national interest, too. structure of the economy and indus- strongly, and depreciation of the well- trial relations are different. GE tries to known Tungsram name. But the fact is Paul Marer is Professor, Intemational employ here overseas methods, which that Tungsram-a large, state-owned Business, Indiana University. causes conflicts." enterprise in a small country, manufac- turing a standard product for export- Vincent Mabert is Professor, Opera- American business culture emphasizes could survive only through being inter- tions Management, School of Busi- that the prime duty of management is nationally competitive. GE has made ness, Indiana University. to serve the stockholders' interest. GE impressive strides toward that goal under Jack Welch has prided itself on continuously increased profits and the stellar performance of GE shares on the stock market. European and Japa- nese business cultures lean more to- ___ ward the view that employee interests should be on or near par with owner interests. Such cultural differences can .2 give rise to conflicts and misunder- - standings in particular situations. For example, GE at Tungsram has fol- lowed its universal practice of estab- 4 lishing a confidential telephone line for reports of ethics violations by its em- ployees. Reports of any kind can be made and the caller need not give a name; all charges are investigated. For many Tungsram employees this prac- tice recalls the hated political "snitching" that Hungarians were compelled (and later, encouraged) to do in the postwar decades. The confidential phone line was introduced over the strenuous ob- 2 jections of the union and the work coun- cils, and it remains in place. Another example: In 1995 GE announced that it will end a seventy-five-year-old cor- porate tradition of financial support for the Tungsram Sports Club, which spon- sored Hungary's leading professional teams in men's and women's basket- ball, volleyball, and water polo. Thus the title of one Hungarian editorial: "GE Brings a Good Thing to an End." In addition to regretting the withdrawn GE sponsorship of Tungsram's profes- From the Hungarian Economy. C) 1997 The World Bank TRANSITION, February 1997 E The World ank's Iult'ilayer Partnership ogm President Wolfensohn on New Relationship with Aid Donors, NGOs, Businesses, and Member Countries A first level of partnership is with the structural adjustment. This relationship A fourth, and the most significant other bilateral and international or- with NGOs is part of the Bank's new, more level of partnership is the Bank's re- ganizations. The regional banks, the broadly based approach to social struc- lationships with the governments World Trade Organization, the European ture and poverty assessment. and the peoples of our member coun- Union-all constitute a major force in tries. At present almost two-thirds of terms of development. The UN institu- A third level of partnership is with these nations function under some form tions, for example, are active in many of the private sector. Over the past of democracy, as against 41 percent five the same areas as the Bank, from health years there has been a dramatic years ago. Five billion people now live in to education to conflict resolution. change in the pattem of investment flow. market economies, whereas seven years Ten years ago private sector invest- ago the number was just 1 billion. And Earlier we did not have a systematic ments in the developing world came to moves toward decentralization are part relationship with regional banks such about half the amount of the World of this trend, with more regional and lo- as the Inter-American Development Bank's and other partners' official trans- cal governments entrusted with finan- Bank and the African Development fers. This year the private sector will cial resources and responsibilities. Bank. We have successfully initiated invest about $250 billion in developing regular regional bank summits, and countries, that is, five times the amount We at the World Bank are looking at just had the third such meeting in Lon- of official assistance. Though it is true ways we can develop into a knowl- don, under the chairmanship of Euro- that 80 percent of that will go to just edge bank, to take advantage of the pean Bank for Reconstruction and De- twelve countries, and Sub-Saharan Af- experience that we have gained over velopment (EBRD) President Jacques rica, will get less than 2 percent. fifty years. Can you imagine putting de Larosiere. The atmosphere has online all the experience we have had changed from one of sensitivity and For power and electricity, for water and in preschool education, to allow an edu- competition to one of cooperation. We toll roads, for ports and communica- cation minister or a researcher in a dis- are continuously building our links with tions-to achieve development in these tant country to have direct access to the European Union, too, and have crucial areas, the Bank must work in the Bank, without waiting for various established an office in Brussels. partnership with the private sector: that documents? Or just think: through our is where money is most vigorously and satellite system, interactive, thirty-per- A second level of partnership is with readily available. son classrooms around the world can NGOs and civil society. With freedom participate in direct teaching. Bank of- and greater democratization comes a We need to assist those countries that fices can provide classes and discus- greater voice for civil society. And so are not yet ready to absorb develop- sions with developing countries we have seen an explosion of nongov- ment investment, that need help with throughout the world, in whatever lan- ernmental organizations around the their judicial systems and regulations, guage necessary. This is not science world, in support of both special and with education, with communications, fiction; this is today. So we will take more general issues and interests-be with their tax systems, and with their fi- advantage of technology, and we will they women's issues, environmental is- nancial and banking sectors-all the take advantage of the new opportuni- sues, educational issues, or health is- things that will create a favorable envi- ties we are finding. sues; be they the interests of a village, ronment for investment. The new pri- a region, or a country. These voices vate sector bureaus are linking the ac- Excerpted from Mr. Wolfenson's are real, and they are central to the de- tivities of the Bank, the International Fi- speech at his meeting with senior man- velopment process. nance Corporation (IFC), and the Multi- agers in December 1996, and his key- lateral Investment Guarantee Agency note address at the International De- We are making efforts to engage NGOs (MIGA). We are beginning to develop velopment Conference in Washington in substantive studies and work on criti- a centralized information base on ten- on January 13, 1997. cal issues, whether it be environment or dering or procurement to do business. TINNSITION, February 1997 C) 1997 The World Bank Milestones of Transition Albania the Soviet Union collapsed in 1991, First easing political situation. The govern- Deputy Prime Minister Piotr ment lost income last year because of President Sali Berisha promised Alba- Prakapovich announced on January poor economic management, espe- nian citizens that the government will 20. The opposition Belarusian Popular cially ineffective tax collection, admit- seek to repay "quickly and fairly" the Front issued a report the same day ted Finance Minister Keat Cheon. The money that has been "stolen" from claiming that the economy had actu- unchecked harvesting of trees, which them. Hundreds of thousands of Alba- ally shrunk by 4 to 5 percent and that since 1970 has stripped Cambodia of nians have lost their savings in the re- about 1.5 million people, one-third of half its forest cover has increased over cent collapse of pyramid schemes, the workforce, are unemployed. the past few years, with proceeds used which was followed by nationwide dem- Prakapovich acknowledged that the largely to finance both the government onstrations and riots.At least five lead- country's foreign trade deficit in 1996 and the Khmer Rouge, the insurgency ing pyramid schemes have collapsed was $1.4 billion and that industrial it is fighting, according to a New York since last fall. Others are still operating goods worth $633 million are languish- Times report. The international finan- and paying out interest but are not re- ing in warehouses. cial institutions that support half the turning capital. Zef Preci, director of the government's annual budget, about Albania Center for Economic Re- The National Assembly passed the $650million,arewarningthatillegallog- search, estimates that the 25.5 billion draft state budget for 1997 on January ging could jeopardize continued financ- leks ($255 million) seized from two 11. The budget sets expenditures at ing. Last May, the IMF suspended a $20 schemes would cover only one-third of 43.3 trillion Belarusian rubles (BR) and million installment of a $120 million total investments. World Bank repre- revenues at BR 35.8 trillion. The deficit three-year loan. At a July meeting in sentative Carlos Elbirt said that any is equivalent to 3.3 percent of GDP. Tokyo with the World Bank and other further surge in prices could be ruin- Most of the deficit will be covered by international donors, the Cambodian ous forAlbania's economy. The budget issues of government securities, priva- leaders pledged again to implement deficit in the first eleven months of 1996 tization of state property, and foreign measures to halt illegal logging. These reached $260 million, or 11 percent of loans. The rest will be covered with new measures include closing GDP,whilethecentralbankhasforeign loans from the National Bank of Cambodia's borders to logging ex- exchange reserves totaling just $270 Belarus. The budget was described by ports; calling on neighbors Thailand, million. Moreover, much of the assets deputies as "socially oriented," with 55 Laos, and Viet Nam to help stop illegal seized from the two schemes are held percent of expenditures going to the exports; empowering the ministry of ag- in the form of Albanian treasury bills. social and cultural spheres. Eight per- riculture to take necessary enforce- cent of the budget will be used to deal ment measures; and removing private Albanian Prime Minister Aleksander with the ongoing consequences of the security forces hired by logging com- Meksi said that the government would Chernobyl disaster. The agricultural panies. try to increase revenues in 1997 by sector will receive the lion's share- launching a major drive against tax more than half of "social" expenditures. China evasion. The latest central bank figures, The draft 1997 budget predicts GDP from October, showed that the deficit and industrial output will grow by 5 per- China's GDP grew by 9.7 percent in was equivalent to 10 percent of GDR cent and 6 percent, respectively, and 1996 compared with 10.2 percent in Meksi also said the government was in projects a 10 percent growth in invest- 1995, the State Statistical Bureau re- theprocessofconcludinganagreement ment. The budget also forecasts ported on December 30. The con- with the International Monetary Fund and monthly inflation of less than 2 percent. sumer price index was up 8.3 percent would strive for an association agreement during the same period. The Institute with the European Union (EU). Cambodia of Economy, a research body under the State Planning Commission, fore- Belarus Cambodia's National Assembly ap- casts that China's economy will grow proved the 1997 budget, which cuts de- 10.5 percent in 1997, with inflation held The Belarusian economy grew by 2.6 fense spending by 5 percent from the to less than 6 percent. China has percent in 1996, the first increase since previous year, reflecting the country's continued on page 24 ©D 1997 The World Bank TRANSITION, February 1997 E Domestic Consumption Drives Economic Growth in Poland Poland remains the fastest-growing of GDP has fallen from 13 percent to 8 per- 25 percent in real terms, with the bulk of any major European economy, even if cent. But farm employment still repre- this coming from the private sector. growth has slowed somewhat in com- sents one-quarter of total employment, Wages and earnings also increased fast. parison with 1995 performance, when reflecting low productivity. Other sectors Over the first three quarters of 1996, the GDP rose 7 percent. The Polish whereadjustmentsstillhavealongway average real increase in monthly economy grew by at least 6 percent in to go include heavy industry, particularly take-home pay was 6.2 percent greater 1996 largely owing to a 9 to 10 percent coal mining, the report points out. than in the same 1995 period. Another growth in consumption and 18 to 19 per- demand-supporting feature of 1996 was cent growth in investment spending. Observers note that Poland has man- an explosion in consumer borrowing: aged a "soft landing" from its reliance over the first ten months of the year, According to a recent OECD report, on exports as the primary growth factor growth in household credit amounted to Poland's real GDP now far exceeds its in 1994 and into 1995 to a reliance on 78.6 percent. Unemployment has edged pretransition peak. The structure of domesticdemandto sustain GDP growth slightly downward in 1996, falling from P oland's economy has changed con- in 1996. Exports in 1996 have felt the 14.9 percent of the civilian labor force in siderably over the past seven years. impact of the 1995 real zloty apprecia- December 1995 to 13.5 percent in Sep- The share of services in the economy tion (see box). But domestic economic tember 1996. hzas risen from 35 percent to 53 per- developments have helped in 1996 to cent, while that of industry and con- compensate for the shortfall in export Prospects forcontinued economic growth struction has shrunk from 52 percent to demand. Investment in the first eight in 1997 appear good: 39 percent.Agriculture's contribution to months of the year increased by around * Most observers expect the EU The eadahes anaing olan's Echa RaePlc . TAdamto Febr tary 1 d X)19.h WrdBn no weakening of Western business in- terest. Furthermore, consumption _______________________________ egrowth is unlikely to slow substantially in an election year. Other officials, primarily from the Na- tional Bank of Poland (NBP) and the Central Statistical Office (GUS), warn however, of the danger of overheating _______*____ the economy. National Bank President Hanna Gronkiewicz-Waltz views D E J.U R t F ;1 a, s o Poland's ballooning trade deficit ($6.4 billion in November) as a sign that the consumption boom is unsustainable, -! s *1, F not least because household indebted- ness has doubled. She has said that From Serb magazine Nin. the bank might raise interest rates this year. (See also Professor Winiecki's economies to grow at a faster rate in @Domesticinvestmentandconsumption study on the institutional barriers to 1997. Moreover, although world trade will continue to grow rapidly in 1977. The Poland's development, page 38). growth is projected to slow, it will former will be sustained in part by for- remain buoyant relative to global output eign inflows: foreign direct investment ac- Based on news agency reports, and growth, as further liberalization occurs. celerated in 1996, and Poland's growth analysis of OxfordAnalytica, the U.K- This will be supportive of Polish record, OECD membership, and EU ac- based research group. exports. cession prospects are likely to ensure .. ....... ...X;;t ...potfoioandisued,. on la, its. - ia i ... .a r : : , ,::, . : - ., - , . - .............. ::,, : : : - : -:: ................... , : . i. * ~~~~~~~~~~~~~...... ...... expanding 39 percent in 1995), bui exports-in the face of pect of further trade iberizaneasurese in 1 5 ........7 teonidrberaapritonfth zlt-iresd under Polads EU, OECtD an eta urpa :e 1995). The trade balance closed with a $6.6 billion deficit, increase stllIdu.tea fth ntcu colshw -ompared with $18 bli lon 1995. However, these data a -eficit f bout $3 ion the zlotysreax- denot tke int acon th supu fror the unficil or ch- g rat rean stbl thi mer acidn o crss .border trade, which over the first nine months of-- ate. a i w l rrta e:td ee- thenationali bank. The unofficial trade surplus was recog- and revitalize exports..It.is clear t"at'e'c.an d --t. :~~ ~~~~~~~~~~~~~~~~~~~~~ ip~e 'enrg an i~ : :: : :: nized-f~r he first tM d-n h curren:t, accounte cacuatn poic-hih ucesfly lo. thegrwt of - $2.1 bllion as cutto a mre $0. billin in I996. Te enedth cura n baccut balance-wid hbve tohevr c:pital account .urp:us amounte. to $4.' :.:hlon, of w:ich : lb n I97 Zltyappreciation..,,wa succssfu ini -anti-inflatio' terms. - ''e ator 's sist' P'f at the' UiferIty o. Howve.s,'a .'.,sul,.t-o.f ,itsimpc p'on 'exports, cnern aros,e -'----'asav that aprecition ad goe toofar. ver te firth nie onh " ' - '~ ~~~~~~~~~: e'g' '~c -r . ..... t ee" P, '' "' .':-- ':' "'' :''--..'.,' "d-. ''"' -'":.'' :': '''''' : "''-'': ''- ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. . .a t:wp.r of 1997 The orald valuk oTRtheSITotON,osFebyroulyyround73 © 1997 The World Bank TRANSITIO_N, February 1997:anV o continued from page 21 billion. Taxes on corporate income, reformist country in which living stan- emerged as the world's eighth largest alcohol, tobacco, and gasoline should dards dropped last year. Quoting inter- provider of capital, committing about provide the rest. Social support and edu- national and national statistics, the pa- $18 billion in officially approved direct cation will receive most of the budget: per said real wages in Hungary contin- and portfolio investment abroad be- 4.3 billion kroons. The budget also in- ued to drop by 4 to 5 percent because tween 1989 and 1995. cludes expenditures to cover prepara- of the government's austerity measures, tions for Estonia's entry into the EU. following a 12 percent nose-dive in 1995. Czech Republic The paper reported that Slovenia and Georgia the Czech Republic posted the highest In the Czech Republic annual inflation living standards in the region, register- is likely to remain around 9 percent for The government has raised electricity ing annual per capita GDP figures of all of 1997-higher than the 8.8 per- rates as of January 1. The move was $10,606 in Slovenia and $9,547 in the cent in 1996. Last year household con- prompted by an IMF request that power Czech Republic, as compared with sumption grew by 5.5 percent, and in- prices be brought closer to production $7,486 in Slovakia, $6,639 in Hungary, vestment by almost 18 percent. In re- costs. To compensateforthe higherbills, and $5,532 in Poland.Asforaverage life sponse to the rise in domestic demand, the govemment increased salaries by an expectancy, citizens of Slovenia and the imports grew by an estimated 11 per- average of 15 percent. Georgia will start Czech Republic have the highest at 70 cent. With exports of goods and ser- privatizing its power plants in April, an- years. This figure drops to 68.5 years in vices growing by only 5 percent, slower other move recommended by the IMF. Slovakia, 68 years in Poland, and 65 than in 1995, the trade deficit rose to years in Hungary. The purchasing power 150 billion crowns ($5.5 billion) in 1996. Hungary of wages is highest in Slovenia and the The government confirmed that it will Czech Republic. The newspaper said that not devalue the crown in response to The ongoing investigation into last the average monthly salary in the Czech the rapidly growing trade deficit. Rather, year's privatization scandal provides Republic buys 30 percent more products it plans to implement measures to boost evidence that some of the controver- than the salaries in Hungary or Poland. exports, including tax breaks for export- sial payment by the state privatization ers. In 1997 the government expects agency to an outside consultant was The Budapest Stock Exchange (BSE) recovery in the major export markets transferred to companies linked to the ranked third in the world for increase in along with strong domestic demand to coalition parties, Magyar Hirlap re- value in 1996, behind the Russian and fuel growth, which could reach 4.5 to ported on January 20. The paper cites Venezuelan exchanges, Morgan 5.0 percent. The unemployment rate is a letter from the prosecutor-general Stanley Capital International reports. likely to increase slightly from the cur- saying that Laszlo Boldvai, the Social- The BSE posted revenue profits of rent 3.4 percent to 3.5 to 4.0 percent. ist Party's treasurer and a deputy in 104.2 percent, compared with the 151.2 Real wages will continue to grow at 8 Parliament, and Gyorgy Budai, an en- percent and 127.9 percent achieved by percent, whereas labor productivity will trepreneur with links to the junior coali- the Russian and Venezuelan bourses. grow by only 3 percent. The trade defi- tion party, the Alliance of Free Demo- The BSE's 1996 trading volume ex- cit is expected to ease slightly in 1997, crats, told consultant MartaTocsik last ceeded the total for the preceding five owing to increased exports. The cur- May that she could keep her $5.1 mil- years. The share market volume grew rent account is set to remain in deficit lion commission from the privatization fivefold from the 1995 figure. The BUX in 1997, by at least $2 billion. (Sources: agency only if she transferred 25 per- Index rose from 1,557.91 at the begin- OECD Report, Oxford Analityca.) cent of that amount to two companies. ning of the year to close at 4,100 on According to the newspaper the pros- December 31. The volume of trading Estonia ecutor-general has evidence of a se- on the futures market increased ries of money transfers betweenTocsik fifteenfold. Estonia's 1997 state budget of 12.5 bil- and the two companies, and requested lion kroons ($1 billion) has been ap- that Parliament waive Budai's immu- Most of Hungary's GDP is produced proved by Parliament. The largest nity from prosecution. by private ventures, with capital move- source of revenues is the value added ments expected to be fully liberalized tax, which should bring in 5.8 billion The Prague-based newspaper Mlada in 2000, a recent government report kroons, and a 44 percent personal in- Fronta said in its weekend edition that indicates. The report, based on an EU come tax, with a revenue target of 2.3 Hungary is the only East European questionnaire, observes that domestic * TRANSITION, Febraary 1997 C) 1997 The World Bank private businesses contributed 52 per- I.J. Singh of the formerTransition Divi- Polish Securities Commission, which centof GDP, privateforeign firms 12 per- sion). The new finance minister suc- is now reviewing the funds' prospec- cent, and public firms 36 percent in 1995. ceeds Grzegorz Kolodko, who resigned tuses, the Wall Street Journaireported. The GDP share of collective property on February 4 after leading the In mid-December prospectuses for the sank to less than 30 percent in 1996. EU country's economy through three years fifteen funds, which are managed by a membership will make differences in the of high growth and failing inflation. Mr. consortium of Polish and international level of development between Hungary Belka said transforming Poland's financiers and consultants, were ap- and most of the single-market countries bloated Communist-era social security proved by the treasury ministry and more palpable, and the full capital trans- system and fighting inflation would be passed along to the securities commis- action liberalization may worsen the bal- his top priorities. Inflation in 1996 stood sion. In the year ending November 22, ance of payments temporarily. The gotr- at 18.5 percent, down from 21.6 per- more than 25 million Poles claimed ernmentwill rely on the EU to help handle cent in 1995, but still among the high- privatization vouchers offered by the these problems. est in Central Europe. government. The independent Financial Research Poland's 1997 budget foresees 5.7 Romania Institute (Penzugykutato Rt) forecasts percent growth in GDP, compared with a Hungarian trade deficit of $2.7-$2.9 6 percent in 1996, and 13 percent in- Prime Minister Victor Ciorbea said in- billion in 1997 as a result of 8 percent flation (18.5 percent last year). It also flation was about three times higher increases in both exports and imports. expects a 2.8 percent budget deficit and the budget deficit five to six times Last year's trade deficit reached an and a 5.5 percent increase in real public higher than the figures agreed on with estimated $2.2-$2.4 billion, with 10 per- sectorwages. Prime Minister Wlodzimierz the IMF in 1996 as a performance cri- cent growth in exports and 3 percent Cimoszewicz said that with this budget, terion for the country to receive further growth in imports. Despite the expected Poland will remain one of the fastest-de- disbursements from a standby loan. deterioration of the trade balance, velopingcountriesintheworld, Ciorbea said the country was far be- Hungary's current account deficit can hind in economic and social reforms be financed from direct foreign capital The cabinet has accepted a document and had to catch up if it did not want to investment in 1997. Infrastructure invest- outlining the principles for integration miss the opportunity to join NATO and ment and consumer spending are ex- into the EU. The "National Integration the EU. He blamed the previous gov- pected to grow in 1997. Capital invest- Strategy" provides for the gradual elimi- ernent for delaying for electoral pur- ment in plants and machinery is fore- nation of trade barriers and protection- poses the implementation of unpopu- cast to increase by 7 percent in 1997, ism. Poland expects negotiations on its lar reforms, but said Romania had re- compared with only 2 percent in 1996. admission to the EU to start in early stored its international credibility. ( Ro- As a result of higher domestic demand, 1998. Deputy Prime Minister Miroslaw manian Minister of Finance Mircea Penzugykutato forecasts 4 to 5 percent Pietrewicz of the Polish Peasant Party Ciumara has urged shock therapy be- growth in industrial production and a 1 (PSL) was the only cabinet member to cause agriculture, the railways, and the to 2 percent increase in the output of vote against the document. Other PSL oil industry have amassed huge debts, the construction sector in 1997. ministers had been expected to de- and the banking system is almost bank- mand more protection for Polish agri- rupt. The current account deficit has Poland cultural producti, but they refrained reached $1.9 billion, or 5.6 percent of from doing so. The document must now G Marek Belka, a free-market economist be approved by the Sejm. The Standing Bureau of the Chamber who has served as President of Deputies decided to dismiss from Aleksander Kwasniewski's economic Although the plan to privatize 512 state the State Property Fund three mem- adviser for the past year, was named enterprises was launched in July 1995, bers of Parliament appointed by the Poland's new finance minister, an ap- all of the companies and the fifteen previous legislature and to replace them pointment widely seen as ensuring funds set up to manage them are still with members representingthenewgov- continuity in Polish reform policies. (Mr. owned by the government. The funds erning coalition. The fund has been ac- Belka particiapted as Polish project and their companies will become pri- cused of slowing privatization, misman- director in the World Bank's research vate only when they enter the Warsaw aging its assets, and selling undervalued project Economic Reform and Enter- Stock Exchange. This milestone is set state property to cronies, proteges, and prise Adjustment in CEE, managed by to occur "in spring," according to the supporters of the former govemment. © 1997 The World Bank TRANSITION, Februaiy 1997 * Russia 4,200-kilometer gas pipeline stretching In 1996 Russia's GDP and industrial from the Yamal Peninsula to Western production fell by 6 percent and 5 per- The Russian central bank announced Europe. The total cost of the project is cent, respectively, over the previous on January 30 that it has eased rules estimated at $24 billion. year, Goskomstat reported . The larg- for Russians wishing to take foreign est declines were recorded in light in- currency across the country's borders. The inflow of foreign investments to dustry (28 percent), construction ma- Vladimir Smirnov, head of the central Russia's economy is modest, Minister terials (25 percent), and the chemical bank's department for foreign currency of Economics Yevgeny Yasin com- and petrochemical industry (11 per- supervision, said individuals are no plained in his presentation at the ses- cent). Oil production dropped 2 per- longer required to have a special for- sion of the Russian government's Ad- centto 293 million metric tons, and coal eign-currency bank account or to ob- visory Committee for Foreign Invest- output fell 4 percent to 243 million tons. tain special permission to carry out ments. In l993atotal of $2.8 billion was The production of natural gas rose 1 crossborder cash transfers for noncom- invested in the Russian economy, percent to 575 billion cubic meters. The mercial purposes. Russians can trans- which is "far below its potentialities." volume of investment totaled 370 trillion fer up to $2,000 a day provided that Yasin pointed out that China received rubles, down 18 percent since 1995. they present either a foreign exchange $38.0 billion worth of foreign investment, Housing construction shrank 10 per- transaction receipt or a customs dec- Indonesia $4.5 billion, and Mexico $4.1 cent to 37 million square meters. laration. Additional documentation is still billion. In 1996 the inflow of foreign in- required for larger transfers. vestments was approximated at $6 bil- In late December 1996, 9.3 percent of lion, with half invested in government Russia's workforce was unemployed, The Russian population fell by nearly securities,theproceedsofwhichareused up from 8.8 percent in early 1996, half a million last year and stood at 147.5 to cover Russia's budget deficit, not chan- Goskomstat reported in mid-January. million on January 1, continuing a pre- neled into domestic production. The figures were calculated on the ba- cipitous drop accelerated by plummet- sis of household survey data. About ing living standards and life expectancy. The State Duma passed the 1997 bud- 2.5 million people, or 3.4 percent of the Statisticians say the 1996 decline of get on January 24. Budgetary spend- workforce, were registered as unem- 475,000 was the sharpest in the past ing is now set at 529.8 trillion rubles ployed with the Federal Employment five years and hit hardest in economi- ($94.3 billion) and revenue at 434.4 tril- Service. The wage debt to Russian cally struggling central regions where lion, leaving the budget deficit at 3.5 workers totaled 47.1 trillion rubles on ethnic Russians are predominant. percent of GDP. Tax receipts are ex- December 23, up from 46.6 trillion on Across the country there were 1.6 times pected to reach 374.7 trillion rubles, up November 25. About one-fifth of total as many deaths as births. The popula- 25 percentfrom 1996-an estimate con- arrears-9.3trllion-were in organizations tion grew in ten regions, most of them sidered unrealistic by many observers. funded by the federal or local budgets. Caucasus Mountain areas with large Muslim populations and Siberian dis- Real monthly wages grew 5 percent in By the end of 1997 foreigners will be tricts with many indigenous people. 1996 although real income levels re- given full access to the government About 97,500 people emigrated to na- mained stable, Goskomstat (the State bond market on the same terms as tions outside the former Soviet Union, Statistics Committee) reported. The Russian buyers, Central Bank First mostly to Germany, Israel and the average monthly wage in November Deputy Chairman Sergei Aleksa- United States. That number is 15,000 was 835,000 rubles plus an average of shenko told Reuters on January 17. fewer than in 1995, but still many times 29,800 rubles in social payments (ap- more than the 2,500 people coming into proximately $150). These figures do not Slovakia Russia. take into account delays in the payment of wages and benefits.) Goskomstat An IMF report warns Slovakia's Russia's gas giant Gazprom is set to estimated the average December economy is in danger of overheating receive a $2.5 billion commercial credit pension at 320,700 rubles, up from and urges the introduction of stricter from a consortium of major Western 246,700 at the beginning of 1996. The financial policies to curb domestic con- banks led by Dresdner Bank of Germany. average subsistence minimum in De- sumption. The report, made public on The eight-year loan will not be guaran- cember was 379,000 rubles a month; January 21, grew out of an IMF mis- teed by the Russian government. The 22 percent of the population is living sion to Slovakia in October 1996, in money will finance the construction of a below the poverty line. which it was found that "after three M TRANSITION, February 1997 © 1997 The World Bank years of fast economic growth and de- economic reform and pledged to invest a more positive note, he added that creasing inflation the Slovak economy more than 2 trillion manats (about $400 Ukraine has paid off all its accumulated shows signs of overheating." One such million) in social programs. gas debts to Russia and Turkmenistan. sign is the significant deterioration of the current account (essentially the for- The oil ministers of Turkmenistan, Tur- Parliamentary Chairman Oleksander eign trade balance), which ran a $1.5 key, and Iran met in the Iranian capi- Moroz has expressed displeasure at the billion deficit in 1996 aftera$648.8 mil- tal, Tehran, on December 29 and "new anti-Parliament campaign" over lion surplus in 1995. "A further signal agreed to bring Turkmen and Iranian the passage of the 1 997 budget, of overheating is the fast growth of real gas to Europe through Turkey. The first Ukrainian TV reported on January 16. wages, which increased by 12 percent gas transfer between Iran to Turkey is Moroz complained that the government over the past 12 months and to a high expected to flow in 1998. has ignored the legislature's December degree surpassed the growth of pro- 19 resolution instructing the executive ductivity," the report added. Ukraine to revise the 1997 budget draft within two weeks, adding that legislators Tajikistan Ukraine's budget deficit in 1996 totaled would not approve half-finished 8.6 billion hryvnyas ($4.57 billion)- documents. But the Parliament has not According to Tajikistan's National double the figure forecast when the yet passed the tax reform package Custom's Committee and Statistics budget was drawn up. Prime Minister necessary for the government to revise Services, the country had a foreign Pavio Lazarenko said that GDP fell for the budget draft. U.S. economist Jeffrey trade volume of $1.4 billion in 1996. Ex- the fifth consecutive year and that, ac- Sachs, following a meeting with ports amounted to $768 million and im- cording to the most optimistic forecasts, President Leonid Kuchma on January ports to $657 million-for a surplus of it is not expected to reach the 1990 level 13, said the Parliament's repeated $111 million. Prime Minister Yakhye for another eleven years. Lazarenko delays over adopting tax reform Azimov, in an interview in the January said wage arrears have not been paid legislation were "dangerous," Ukraina 31 edition of Nezavisimaya Gazeta, because of "other commitments." On Moloda reported on January 15. The claimed the country had not yet reached even half its economic poten- Working Class tial. Azimov said that "internal conflict" had held the country back, but he also noted successes in the privatization of agriculture and small businesses. The prime minister said the establishment of peace following an agreement signed between the government and United Tajik Opposition in December would hopefully create the stability needed to attract foreign investment and raise wages, currently among the X 11fl j lowest in the CIS. Turkmenistan Turkmenistan's 1997 budget envisages a deficit of 1 percent of GDP. In his New Year's Day address, Turkmen President Saparmurad Niyazov said living standards were starting to improve although the country's agricultural output I Ž was below the desired level (the cotton and grain harvests were disastrous in 1996). Niyazov vowed to press on with From the Hungarian magazine Hdcipo. C) 1997 The World Bank TRANSITION, February 1997 parliamentary budget commission said and Performance in Public Organiza- a second reading of the draft will take onference tions (Sherwin Rosen and Dilip place in late February or early March. , Mookherjee); Poverty and Environment Dsiazy (Karl Goran-Maler and Ramon Lopes); Energy MinisterYurii Bochkarov made and Leaders in Growth: Can Others a special appeal to the Ukrainian pub- Justice and Solidarity in Post-Com- Follow? (AlbertoAlesina,Takatoshi Ito). lic on January 13, Ukrainian Radio re- munist Societies of Central and East- Participation by non-Bank and non-IMF ported. He warned that energy sup- ern Europe staff is by invitation only. plies are at a critical level and called April 11-13,1997, Bremen, Germany Information: Boris Pleskovic or Gre- on everyone to lower their consump- gory Ingram, Research Advisory Staff, tion of energy by 20 percent. The en- World Bank, 1818 H Street, N. W., ergy production potential of the ter for European Legal Policy, Room N7-031, Washington, D.C., Dnipropetrovsh hydroelectric station, Vor Fopean 20433, tel.202-473-1062, fax202- 522- which supplies water to one-third of Information Armin Hoeland, Zentrum 0304. Ukraine's territory, has been almost fuer Europareische Rechtspolitik, completely exhausted. Bochakov said Universitaet Bremen Universitaet- International Symposium on Eco- one of the biggest problems has been sallee, GW1, 28203nomic Informatics the indebtedness of consumers. Ukrai- many tel 49-0421-218-2247 fax 49 May 7-10,1997, Bucharest, Romania nians owe 2.5-2.7 billion hryvnyas 0421-218-3403, E-mail: arminius2 ($1.4 billion) for energy, and Bochakov 0421.218-3403, Organizer: the Academy of Economic warned that those who do not pay will zerp.uni-bremen.de Studies, Department of Economic not receive energy supplies. The Monetization of the Economies Informatics. Information: Academy of Economic of Eastern EuropoeStde,DprmnofEnmi Ukraine has abandoned its plan to raise April 17 19, 1997 Wittenberg/Elbe atics, Department of Economic natural gas and electricity prices in Germany Informatics, Piata Romana, nr. 6, Sec- 1997, Prime Minister Pavlo Lazarenko tor 1, Bucharest, Romania, tel. 401- said. The government plans to take Organizer: the GermanAssociation for 311-2066, E-mail: velicanu@ infocib@ steps to overhaul its energy sector. Eastern European Studies. infocib.ase.ro Residential customers pay only 80 per- Topics include economic transforma- cent of energy costs. tion, increasing importance of money, The Importance of the Unofficial financial categories, and monetary Economy in Economic Transition Ifzbekistan processes. May 16-17,1997, Zagreb, Croatia Information: Thomas Bremer, Uzbekistan's 1997 budget setsadeficit Deutsche Gesellschaft fuer Organizer: the Institute of Public Fi- of 26.8 billion som ($515 million), Osteuropakunde, Schaperstr. 30 nance and the Ministry of Finance of or 3 percent of GDR Revenue will be 10719 Belin, German tel. 49-30-478- the Republic of Croatia, Ministry of Sci- 124 billion som and expenditures 150 412, fax 49-30-478-314. ence of the Republic of Croatia, Open billion. Uzbek President Islam Karimov Society Institute, British Know How claims annual inflation will drop from Ninth Annual Bank Conference on Fund, Friedrich Ebert Stiftung, USIS, 60 percent in 1996 to less than 27 per- Development Economics (ABCDE) and USAID. This international work- cent in 1997. Karimov observed that in- April 30-May 1, 1997, Washington, shop will include 20-25 participants dustrial output had risen by 6 percent, D.C., United States from Croatia, the West, and the econo- while foreign trade turnover was $8.3 mies in transition. The purpose will be D. Wlfenohn,to exchange ideas and prompt discus- billion, an increase of 40 percent from Inaugurated by James Ds Wolfensohn i on among participants regarding the 1995. (See also "Agenda.") President of the World Bank, and spon- sl sored by Joseph E. Stiglitz, Chief project "The Unofficial Economy in We appreciate the contributions from Economist and Senior Vice President, Croatia." the Open Media Research Institutes Development Economics. Conference Deadlines: Papers must be submitted Daily Digest has sessions on Corruption: Catalysts no later than June 15,1997. and Constraints (Michael Johnston and Information: E-mail: natalija @ijfhr Susan Rose-Ackerman), Incentives M TRANSITION, February 1997 ( 1997 The World Bank The Enlargement of the European Information: Nik Dholskia, College of Whiteknights, PO Box 218, Reading Union to the East Business Administration, University of RG6 6AA, United Kingdom, tel. 44118- June 13-15,1997, Luebeck, Germany Rhode Island, 7Lippitt Road, Bal 209C, 931-6637, fax 44118-975-5442. Kingston, Rhode Island, 02881-0802, Organizer: Ostsee-Akademie United States, tel. 401-874-4172, fax Cuba in Transition: The Seventh An- Travemuende (Baltic SeaAcademy). 401-874-4312, E-mail: nikhil@uriacc. nual Meeting of the Association for Deadlines: Registration four to five uri.edu the Study of the Cuban Economy weeks before conference. August 7-9, 1997, Knight Center, Information: Ostsee-Akademie, Sasakawa Forum: Transition in Cen- University of Miami, Miami, Florida Travemuende, Europaweg 3, 23570 tral and Eastern Europe Luebeck, Germany, tel. 49-4502-803- July 1-5,1997, Belgrade, Serbia Organizer: Association for the Study of 2031205, fax 49-4502-803-200, E-mail: the Cuban Economy (ASCE). ostseeakademie@t-online.de Organizer: the Yugoslav Association Topics include: macroecononomics, of Sasakawa Fellows (YASF) in coop- banking and finance, fiscal policy, ag- Central and Eastern Europe in a Glo- eration with the Rectorate of the Uni- riculture and sugar industry, social and bal Context versity of Belgrade, the Balkan Center political aspects of economic develop- June 24-25, 1997, Birmingham, for Public Policy Research, and the ment, education and health, environ- England Ryoichi Sasakawa Young Leaders Fel- mental policy, law and legal institutions, lowship Fund (Tokyo). The Forum will and international relations. Organizer: the Buckinghamshire Busi- evaluate transition results, including Deadline: Abstracts due May 1, 1997. ness School. political, legal, economic, and cultural Information: Persons interested in Topics include integration of Central issues. presenting papers or being discus- and East European countries into the Information: Mihajlo D. Rabrenovic, Ex- sants should contact Jorge Perez- European-global economy, foreign di- ecutive Vice-President and Secretary- Lopez, 5881 6th Street, Falls Church, rect investment, alternative models of General, Yugoslav Association of Virginia 22041, United States, tel. 703- transformation and their relevance Sasakawa Fellows, Ul. Susedgradska 379-8812, E-mail: perezlopOerols. to countries of Central and Eastern 4-a/6 YU-1 1090, Belgrade, Serbia. com. For conference information con- Europe. tact Juan Carlos Espinosa, tel. 305- Deadlines: Papers forconference pro- International Conference on the 284-4303, E-mail: csaum@umiami.ir. ceedings by May 19, 1997. Economies of Greater China miami.edu Information: Conference Support In- July 7-8, 1997, Perth, Australia temational Limited, The Old Granary, Fourth International Congress of the 27-29 Chester Road, Castle Bromwich, Information: CESAA Conference International Society for Inter- Birmingham, B36 9DA, United King- Covenor, Department of Economics, communication of New Ideas (ISINI) dom, tel. 44121-776-7799, fax 44121- University of Western Australia, August 21-23, 1997, Maastricht, the 776-7447. Nedlands, WA 6907,Australia, tel. 619- Netherlands 380-3964, fax 619-380-1016, E-mail: Marketing Challenges in Transition ywu@eceLuwa.edu.au Organizer: ISINI, a society composed Economies of scholars from more than sixty coun- July 1-4,1997, Mangalia, Romania Central Banking in Post-Soviet tries, with expertise in economics, fi- Economies nance, and the social sciences. Organizer: the Black Sea University. July 10-11, 1997, Reading, United Topics include new approaches to Topics include the changing markets of Kingdom economic research, policy analysis, East European countries, the former and implementation; issues in transi- Soviet republics, and other developing Organizer: the Centre for Post-Soviet tion economies. nations; government policy and legis- Studies, Reading University, in asso- Deadlines: Proposals for sessions lation; technology in marketing and de- ciation with the Centre for Central and papers must be received by Janu- velopment; sectoral and regional strat- Banking Studies, Bank of England. ary 31, 1997. egies; foreign direct investment. Information: Dr. Yelena Kalyuzhnova, Information: Gerrit Meijer, Department Deadlines: Registration by April 1, Coordinator, Centre for Post-Soviet of General Economics, University of 1997. Studies, University of Reading Maastricht, Tongersestraat 53, P.O. ( 1997 The World Bank TRANSITION, February 1997 * Box 616, 6200 MD Maastricht, the Kardeljeva ploscad 17, 1000 W' >or1d Bank Netherlands, tel. 3143-388-3649, fax Ljubljana, Slovenia, tel. 38661-345- 3143-325-8440, E-mail: g.meijer@ 787, fax 38661-342-760, E-mail: F A algec.rulimburg.nl, Intemet: http:// stropnikn@i er.si IM F Agen a serpiente.dgsca. unam.mx/siini Entrepreneurship in Central and Romania Seeks World Bank, IMF Fifty-third Congress of the lnterna- Eastern Europe Funds tional Institute of Public Finance November 6-7, 1997, New York, August 25-28, 1997, Kyoto, Japan United States The new government of Romania has Organizer: the International Institute Organized by the Institute for begun talks on terms and conditions for of Public Finance. EastWest Studies and the Berkley sunort would constitute onl a third of Topics include public finance and in- Center for Entrepreneurial Studies at stimated con st is try- vestment in transition economies. the Stern School of Business, New ing to generate in 1997 from a pool of Deadlines: Abstracts should be sub- York University. sourcerani is hopin toorcev mitted by the end of January 1997. Information: call for papers: Profes- between $400 and $500 million of new Information: Professor Bruno S. sor Paul Wachtel, Institute for IMFstandby credits plus a further $500 Sergi, Strada Statale 106-km 27, EastWest Studies, 700 Broadway, milliondfrom thedWorld Bank. Romania's 89060 Saline Joniche, Reggio New York, NY 10003, United States, President Constantinescu metwith World Calabria, Italy, tel. 39965-787-066, fax tel 212-998-0874, fax 212-995-4218, Bank President James Wolfensohn in 39965-487-798. E-mail: pwachteIstern.nyu.edu. Davos. In an interview Wolfensohn said thatos the Bankok fotrward tolesh woring 1997 European Conference of the Bosnia: Road to Recovery? that the Bank looks forward to working European Urban and Regional Re- March 1-2, 1998, Amherst College, wortive wan. Prime Minister Victor search Network: Regional Frontiers Amherst, Massachusetts, United yorteay.Prime MinitrVior September 20-23, 1997, Frankfurt- States Ciorbea is pufting together a tight reform Oder, Germany package drafted with help from IMF and Organizer: Friends of Bosnia, the World Bank experts. Organizer: the Regional Studies As- Amherst College Political Science De- Caio Koch-Weser: We Could sociation. partment, and the Five-College Pro- Lend Russia More Deadlines: Abstracts must be sub- gram in Peace and World Security mitted by the end of April 1997. Studies. A national grassroots con- The World Bank is prepared to make Information: Sally Hardy, Director, ference for activists, scholars, human new loans to Russia to support eco- Regional Studies Association, 15 rights and aid professionals, journal- nomic reform and social protection, but Micawber Street, London Ni 7TB, ists, students, and others concerned more must be done to implement ex- United Kingdom, tel. 44171-490-1128, about the future of Bosnia and isting programs, Managing Director fax44171-253-0095, E-mail: rsa@mail Herzegovina. Caio Koch-Weser said in Moscow. The box. ulcc.ac.uk Information: Friends of Bosnia, 47 Bank is willing to expand its activities, East Street, Hadley, Massachusetts through lending and other services, to Social and Economic Aspects of Ag- 01035, United States, tel 413-586- areasosuch as the social sector, agri- ing Societies: An Important Social 6450, fax 413-586-2415, E-mail: culture, and the environment. The Bank Development Issue fob@crocker. com, Internet: http:// has commitments of $6.4 billion in Rus- September 25-28, 1997, Ljubljana, www.crocker.com/-fob sia and has paid out $2.2 billion. Imple- Slovenia Weappreciatethecontributionsofthe mentation of programs lagged seri- Organizer: the Institute for Economic Cooperation Bureau for Economic ously earlier in 1996, but it has improved Research. Research on Eastern Europe, and disbursement is now running at $70 Deadlines: Abstracts (1 to 2 pages) Koenigin-Luise-Str. 5, D 14195, Ber- million a month, instead of the $25 mil- must be submitted by the end of Feb- lin, Germany, tel. 4930-897708-68, fax lion a month in 1996. The Bank can help ruary 1997. 4930-897708-99, E-mail: tribakova reinforce Russia's social safety net. Information: Nada Stropnik, Ph.D., @diw-berlin.de, or dbowen@diw- And it can make structural adjustment Institute for Economic Research, berlin.de. loans for sectors such as agriculture B TRANSITION, February 1997 © 1997 The WVorld Bank (similar, for example, to a $500 million ment include federal wage and pension build a stretch of highway linking the credit it has agreed to provide to help arrears and interest on government country north and south. The project is restructure the coal industry). borrowing in federal-deficit calcula- the second in a series of four national tions, Segodnya reported on Decem- highway projects aimed at improving Coal Loan Tranche Released ber 28. That will make it more difficult China's highway system-a network of for the government to keep the deficit aging roads that lacks the capacity and The World Bank in late December ap- within the agreed 3.85 percent limit, strength to support the traffic demand proved the release of a second and fi- since those two items will widen the gap fueled by economic growth. As part of naltranche(equivalentto$250million) by an estimated 18 trillion (federal the Beijing-Zhuhai Expressway of the $525 million Coal Sector Adjust- wage) and 87 trillion rubles (pension (JingZhu), connecting northern and ment Loan to Russia. Earlier, the arrears) in 1997. southern China, the new construction Bank's verification missions' sent to will link the inland province of Hunan three major coal basins-Kuzbass, WorldI Bank Lends China $3 and its capital city, Changsha, with Rostov, and Tula-reported that not all Billion in FY 7 Guangdong's capital, Guangzhou, and the funds trickled down through the its fast-growing Pearl River Delta, as bureaucracy to reach the intended re- The World Bank will extend about $3 well as with Hong Kong. cipients, housing and public utilities of billion in loans to China in the 1997 fi- the coal communities. Subsequently, nancial year, which started last July, Burgeoning Demand for Infrastruc- the Russian government announced China's Economic Daily reported. The ture in China plans to transfer the management of paper cited Pieter Bottelier of the more than one-quarter of the troubled Bank's Beijing office as saying that the There is an urgent need for a new part- coal industry into private hands. The loans would be used to support China's nership between the Chinese govern- decision followed prolonged strikes by market-oriented economic reforms, in- ment and the private investors who will unpaid coal miners. frastructure projects, and agriculture, be expected to contribute the bulk of adding that poverty relief work would the $600 billion required to fund infra- IMF-Rus$a Loan Talks also be a focus of the Bank's activities structure projects in China, World Bank in China. Senior Operations Adviser Harinder International Monetary Fund (IMF) First Kohli said at a recent Hong Kong infra- Deputy Managing Director Stanley Tarimi Basin Project Goes Ahead structure conference. Other speakers Fischer told an investment meeting at the conference, organized by the hosted by Harvard's John F. Kennedy The World Bank has approved a $150 Hong Kong Trade Development Coun- School of Government that Russia million loan for the second phase of a cil and the Massachusetts Institute of made substantial progress in cutting controversial agricultural project in the Technology, also warned that new strat- inflation and achieving stabilization in northwest region of Xinjiang, the Chi- egies need to be devised to cope with 1996. But he added that progress was nese news agency Xinhua reported. the burgeoning Chinese demand for slow in meeting an ambitious structural The World Bank launched an inquiry infrastructure. Kohli said that govern- agenda, and that the IMF and the au- into the first phase of the project in late ments must look at these projects more thorities agreed that further structural 1995 after human rights activist Harry as a "business" than as just a set of change was critical for sustained, Wu charged that tens of thousands of services (such as transport or commu- healthy growth. Fischer also cited set- prison laborers were working on an irri- nications) to be provided to the public. backs in Russia's program to reduce gation schemethat made up mostof the Investors are looking for "bankable" state ownership of industry. He said a project. After a six-week probe, the Bank projects that will provide them with a lack of transparency in the privatiza- said it had found no evidence to back up return on their investment and where tion of large enterprises had tainted the Wu's claims, adding that activities of the investment rules are clear. reform process, and that the remain- prison camps in the region were sepa- ing businesses should either be di- rate from the Tarim Basin project. IFC Breakthrough in China's Finan- vested, closed, rehabilitated, or re- cial Services structured in a manner seen to be fair. $400 Million for Chi na's Highways The World Bank's International Finance The IMF has informed Russian officials The World Bank agreed in mid-Decem- Corporation (IFC) announced in mid- that for 1997 it will insist that the govern- ber 1996 to lend China $400 million to January a pathbreaking cooperative C) 1997 The World Bank TRANSITION, February 1997 project between international and EU,J World Bank Strengthen economic stabilization program overthe non-State Chinese financial institutions. Relationship next three years. The funds would be The deal-submitted to the IFC's Board used to build on improvements imple- of Executive Directors for approval-in- The European Union (EU) and the mented in 1995-96 by reforming the volves a $30 million IFC loan to be re- World Bank agreed to bolster coopera- banking system, promoting privatiza- lent to non-State companies through tion on a wide range of issues, includ- tion, and ending government involve- Orient Finance Co., one of the first ingaidtotheformerYugoslaviaandthe ment in production and trade. The non-State finance houses in China. emerging economies of Central and medium-term strategy was designed Eastern Europe. After a meeting be- to prepare the country for a prospec- New Role Urged for World Bank tween World Bank President James tive oil boom, as oil production was pro- Wolfensohn and European Commis- jected to double by 2000 and to qua- The World Bank should abandon its role sion President Jacques Santer in Brus- druple shortly thereafter. The govern- asalenderofdevelopmentfundstorela- sels, the two institutions said the rap- ment is scheduled to hold its first tively rich countries in Latin America and idly increasing scale of private capital voucher privatization auction by Asia, and allow resources to be shifted flows had made closer links necessary. end-March, selling medium and to those countries too poor to tap the For the Bosnia reconstruction, there large-scale enterprises. On January 16 free market, Professor Christopher Gil- was agreement to prepare for the next the World Bank approved a $14.7 mil- bertof London University's Queen Mary meeting of international donors, lion International Development Asso- & Westfield College explained during a planned for April 1997. Together, the ciation (IDA) credit toAzerbaijan to help lunchtime meeting organized by the Bank and the Commission have pre- finance a farm privatization project. Center for Economic Policy Research pared a three- to four-year, $5.1 billion on January 23. The World Bank has reconstruction program as a frame- U.S. Pays Asian Development evolved over its fifty years of operation work for donor support. For Central and Bank Arrears to Avoid Procuramient so that it simultaneously exercises a Eastern Europe, further help was Sanctions number of different functions: it com- pledged in easing the transition toward bines the functions of bank, develop- market-based economies. Japan has agreed to push for the re- ment agency, credit-ranking agency, and moval of procurement sanctions against development research institution. In its IMF Commitments Drop the United States relating to a $7.7 bil- role of a development agency, the World lion World Bank IDA fund. In return, Bank provides finance for development The IMF's financial commitments in the United States has agreed to boost purposes, often on concessional terms 1996 fell sharply compared with the its offer for the replenishment of the purposes, often on concessional terms 1996 fell sharply comparedwiththeADB's Asian Development Fund from and combined with conditionality. Con- previous year because no large loans $340 million to its full share of $400 ditionality gives it a comparative advan- like those to Mexico and Russia in 1995 million, the Australian Financial Review tage over private sector banks both in were approved in the past year. Credit reports. The United States faced sanc- enforcement of debt service and in its commitments fell to near 6 billion SDRs tions because, instead of paying its full ability to insist on policy reforms before compared with 18.3 billion in 1995. (At three-year share of the World Bank's offering financial assistance. Thus, pri- the present rate, about 1.4 SDRs equal IDA-11 fund, it had only made a contri- vate sector banks benefit from World a dollar.) The Fund's concessional bution for the second and third years. Bank conditionality. This externality jus- ESAF (enhanced structural adjustment World Bank rules triggered sanctions tifies the existence of a strong multilat- facility) commitments dropped to 708 that would have excluded U.S. consult- eral institution, and would be lost if the million SDRs from 1.4 billion the year ants and companies from participating Bank were privatized. Gilbert and his before. But the ESAF could be revived in procurement tenders for IDA-11 in colleagues argue for a shift from lend in the conte of , United States at the forthcoming Paris ing to guaranteeing, and for diverting debt initiative for the world's poorest meeting on World Bank development resources to support the institution's pri- countries because it represents the assistance. vate sector role. He recommends Fund's contribution to the program. switching IBRD funds to the Bank's Life Saving Loans to Ukraine Multilateral Investment Guarantee I.MF's A+ to Azerbaijan Agency (MIGA) and inviting private Donor countries and international orga- banks to become shareholders in the The IMF approved two credits worth nizations meeting at the IMF in mid-De- IFC. $219 million, in support of Azerbaijan's cember pledged $3.5 billion in balance TRkNSITION, February 1997 ©) 1997 The World Bank of payments support to back Ukraine's Exchange rates for the sum (the local Latvia: A $60 million loan was approved economic program in 1997. The pack- currency) in the interbank auction, ex- on December 19 to refinance the age includes a loan of $1.1 billion from change bureaus, and the curb market country's high debt service payments the IMF, $1 billion from the World Bank, have diverged widely. Further loan pay- (due in 1997) and to support the gov- and the remainder from other multina- ments have been conditioned on a "very ernment as it reduces and reforms the tional organizations and donor countries. Ukraine will reform its tax and pension tight financial policy.. -combined with a public sector and expands the private systems, improve its social safety net full liberalization of access to foreign sector. strengthen its banking sector and mon- exchange." Viet Narm: A $37.8 million IDA credit etary policy, and further liberalize its was approved on December 23 to pur- economy. In a statement after the meet- chase vehicles, equipment, and mate- ing donors noted that the components of World Bank Loans in a Nutshell rials to maintain and improve roads and the program were interdependent and Kazakstan: A $7 million loan was ap- bridges in fifteen provinces. The credit that the program would not succeed if proved on December 23 to purchase will also provide consultant services implemented piecemeal. They therefore goods and materials needed to rebuild and training for provincial government urged Ukraine to carry out the adjust- the Aralsk-Sarbulak pipeline near the officials and finance a study on demand ment program in its entirety as soon as Aral Sea disaster zone and to support and investment in the rural transport possible. related consultant services. sector. The World Bank in December 1996 approved a $300 million loan to Ukraine for its coal sector reforms. The loan, to . be dispersed in two equal tranches, has a seventeen-year maturity and a five- year grace period. Ukraine's coal sec- tor reform program spans eight years. The IMF, meanwhile, approved the re- lease of about $200 million in credits for Ukraine, made available under an $867 million standby loan agreement reached in 1996. IMF Postpones Disbursements to Uzbekistan The IMF in mid-December postponed disbursements of a $185 million standby loan to Uzbekistan, IMF Resi- dent Representative Mark O'Brien an- nounced in Tashkent. O'Brien told a news conference that Uzbekistan's ex- ternal trade account was hit in 1996 by lower international prices for cotton exports and a poorer-than-expected grain harvest. The government had re- sponded by increasing credits to agri- culture. Inflationary pressures had then intensified-inflation is estimated to have exceeded 40 percent in 1996. An- other factor in the loan delay was Uzbekistan's introduction of draconian foreign exchange controls in October. From the Hungarian daily Nepszava. (© 1997 The World Bank TRANSITION, February 1997 eiv Books and Fernando Montes-Negret and Luca Jeni G. Klugman and George Schieber, New Books and Papi, The Polish Experience with A Survey of Health Reform in Cen- Papers Bank and Enterprise Restructuring, tral Asia,World BankTechnical Paper Workung Pajers Policy Research Working Paper 1705, 344, January 1997, 68 p. January 1997, 43 p. The Macroeconomics and Growth Di- To order: Tomoko Ishibe, Room G8- The paper presents and analyzes data vision regrets that it is unable to pro- 136, tel. 202-473-8968, fax 202-522- on health status, delivery of services, vide the publications listed. Please see 3199, E-mail: fmontesnegret@world and financing in each of the former So- the ordering information listed with bankorg viet states of Central Asia. It examines each publication. health care reform from the perspec- Martha de Melo and Cevdet Denizer, tives of macroeconomic constraints, World Bank Publications Monetary Policy during Transition: An demographic and epidemiological tran- Overview, Policy Research Working Pa- sitions, the underlying structure and fi- To receive ordering and price informa- per 1706, January 1997, 75 p. nancing of health care systems, and tion for World Bank publications, write: the systems inherited from the former Wordd Bank, PO. Box 7247-8619, Phila- The authors examine monetary policy Soviet Union. delphia, PA 19170, United States, tel in twenty-six transition countries in 202-473-1155, fax 202- 676-0581; or Europe and Central Asia from 1989 Gnanaraj Chellaraj, Olusoji Adeyi, visit the World Bank bookstores, in the to 1995. They classify these countries Alexander S. Preker, and Ellen United States, 701 18th Street, N. W, by the extent of market orientation in Goldstein, Trends in Health Status, W/ashington, D.C., orin France, 66av- terms of use of monetary policy in- Services, and Finance: The Transi- enue d'lena, 75116 Paris, E-mail- struments, by indicators of policy tion in Central and Eastern Europa enue rd'bena, 75116 Interis, Email: stance, and by broad measures of ef- Volume II, Statistical Annex, World books/ worldbank.org, Interet: htp:! fectiveness. They evaluate these Bank Technical Paper 348, January three dimensions by cross-country 1997, 152 p. Working Papers comparisons over the transition pe- riod and at the time of stabilization. This is the second of a two-volume re- Susmita Dasgupta and David Wheeler, The use of credit ceilings was helpful port on trends in health and health care Citizen Complaints as Environmental during stabilization, especially in the in Central and Eastern Europe. This Indicators: Evidence from China, Central and Eastern European coun- volume is a statistical annex to the first Policy Research Working Paper 1704, tries. volume, which carried the main report, January 1997, 24 p. (see Transition, Vol. 7, no. 11-12, No- January 1997,24 p. Subsidies and central bank support of vember-December,1996, page 35). China's environmental regulators re- public enterprises to help maintain em- The annex contains comprehensive spond to more than 100,000 citizen ployment and output are ultimately fi- charts and tables of epidemiological, complaints a year. Analyzing provincial nanced by creating money, thereby re- demographic, and health financing in- data for 1987-93, the authors find that ducing the options for market-based dicators for 1987-95. relying on complaints alone would re- monetary policy regardless of how mar- sult in few inspection resources being ket-oriented the monetary system is. Discussion Papers allocated to the less-educated, rela- To order: Cynthia Bemardo, Room N10- tively "silent" regions. Citizens' incom- 049, tel 202-473-7699, fax 202- 522- Stephen Stares and Zhi Liu, China's plete information creates the biggest 1154,E-mail:prdpe@worldbank.org Urban Transport Development Strat- problem for regulators who rely on cor- egy: Proceedings of a Symposium plaints for guidance. Theorely, agen- Technical Papers in Beijing, November 8-10,1995, World plit fo giac. Thrfoe agn Bank Discussion Paper 352, January cies should invest in public environmen- BankKDiscussdonyPaperg352,9January tal education and explore targeted out- Syed Kirmani and Guy Le Moigne, 1997,530p reach programs. Fostering Triparian Cooperation Toorder: EvelynderCastro,RoomN- in International River Basins: The Topics of the symposium include 019, tel. 202-458-9121, fax 202-522- World Bank at Its Best in Develop- motor vehicle pollution, urban 3230, E-mail: edecastroLworld ment Diplomacy, World BankTechni- transport management and planning, bank3org cal Paper 335, January 1997, 32 p. bicycles in cities, mass rapid transit, M TRANSITION, February 1997 ( 1997 The World Bank public transit reform, and the role of IMF Publications Policy implications of the analysis in- the private sector. clude: To order: IMF Publication Services, 700 Klaus Schmidt-Hebbel and Luis Serven, 19th Street, N.W., Washington, D.C. . Present purchasing power parity in Saving across the World: Puzzles and 20431, United States, tel 202-623- transformation economies is not an ap- Policies, World Bank Discussion Paper 7430, fax202-623-7201. propriate benchmark against which to 354, January 1997,176 p. Workmg Papers measure exchange rate policies. Real appreciation is the sign of a successful High savings rates enable high GNP PaoloMauro, The EffectsofCorruption transition: transition will be complete growth.This study surveys broad sav- on Growth, Investment, and Govern- once the real appreciation stops. By ing trends worldwide, summarizes cur- ment IExpenditure, Working Paper 96/ then, price and wage levels in Central rent knowledge about saving and con- 98, September 1996,27 p. and Eastern Europe will have con- sumption, and outlines the major verged to levels not too different from policy questions to be researched. The Dieter B6s, Privatization and Restruc- those in Western Europe. paper includes a case study from turing: An Incomplete-Contract Ap- China. proach,Working Paper 96/101, Septem- * If the exchange rate is pegged to a ber 1996, 15 p. Western currency (the dollar, deutsch Other Publications mark, European Currency Unit, or any David K. H. Begg, Monetary Policy in basket of currencies), the real appre- Michael Bruno and Boris Pleskovic, Central and Eastern Europe: Lessons ciation will come through inflation that eds., Annual World Bank Conference after Half a Decade of Transition, is higher than that in the country to on Development Economrics 1996. Working Paper 96/108, September whose currency the peg is established. 1996,91 p. If the nominal exchange rate is allowed The articles in this volume were initially to float and appreciate, inflation can presented as papers at the Eighth An- John R. Dodsworth, Ajai Chopra, Chi be brought down. nual World Bank Conference on Devel- D. Pham, and Hisanobu Shishido, Mac- opment Economics, held in Washing- roeconomic Experiences of the Tran- 'The choice of an exchange rate policy ton, D.C., April 25-26, 1996. The ar- sition Economies in Indochina,Work- is linked to the desired level of infla- ticles focus on banking reform, poverty ing Paper 96/112, October 1996, 28 p. tion. Some argue that countries should reduction, legal systems, and labor and aim for moderate inflation in the early environmental standards in interna- This paper examines stabilization poli- years of transition because an "infla- tional trade. The authors include Jo- cies in Cambodia, and Laos, and Viet tion tax" (seigniorage) could be useful seph Stiglitz, Frederic S. Mishkin, Nam, since the late 1980s. The until a broad and fair tax base is cre- Gerard Caprio Jr., and Daniela Indochinese countries moved quickly ated through tax reform; nominal ex- Klingebiel. Stock no. 13786. to strong GDP growth and low inflation. change rate appreciation can be risky, Each adopted a similar mix of policies given the uncertainty over the desired Kathy Megyery and Frank Sader, Facili- centered on flexible exchange rates, rate and the volatility of flexible rates; tating Foreign Participation in Priva- high real interest rates, fiscal adjust- moderate inflation allows for relative tization, Foreign Investment Advisory ment through expenditure cuts, and the price changes without actually forcing Service Occasional Paper 8, January imposition of hard budget constraints some wages and prices to decline; and 1997, 50 p. on public enterprises. An exchange continuous appreciation of a currency rate anchor was not considered fea- with respect to strong currencies such This paper presents best practices in sible in any of the countries, and de- as the deutsche mark could hit snags. successfully structuring and managing spite evident instability in the demand privatization with foreign investment, for money, money-supply-based stabi- Mark A. Horton, Health and Educa- describing the full cycle from the de- lization proved effective. tion Expenditures in Russia, the Bal- velopment of a general policy framework LaszI6 Halpern and Charles Wylosz tic States, and the Other Countries to the actual divestiture procedure. The Equilibrium Exchange Rates in Tran- Pape Former Soviet mnion, Working study analyzes the privatization pro- sition Economies, Working PaperTran Paper 96/126, November 1996, 25 p. grans of Hungary and Poland, among 125, November 1996, 39 p. others. ©) 1997 The World Bank TRANSITION, Febrmary 1997 Russia, the Baltic states, and the other Worker compensation in the Russian and Monetary Union in the European countries of the former Soviet Union in- Federation has traditionally included a Union, no. 96/6, November 1996,29 p. herited health and education systems that large package of social benefits. But were in need of substantial structural and these are decreasing, even if they con- JanuszMaciaszek, KatarzynaMikolajczyk, financial reform. In spite of a sharp de- tinue to be important in certain indus- and Barbara M. Roberts,Unprofitability cline in real resources, this reform has tries and regions. This book looks at in the Polish Enterprise Sector, 1988- barely begun. Health and education have the restructuring of the ownership, man- 93, no. 96/5, Oct. 1996,33 p. not suffered disproportionate cuts and agement, and function of enterprise- employment has been maintained, but based social assets and how employer- American Conference Institute real wages have been sharply com- provided services are granted in light Publications pressed, purchases of materials have of potentially desirable changes in the been reduced, and energy-related spend- social protection system in the Russian To order: American Conference Insti- ing takes a greater share of resources in Federation. tute, 175 FifthAvenue, Suite 2182, New many countries. Structural and financial York, NY, 10010, United States, tel. reform would include reducing staffing OECD Economic Surveys: Poland 416-927-7936, fax 416-927-1441, E- and physical capacity, while increasing 1997, ISBN 92-64-15359-4, November mail: books@cicomm.com expenditures for materials and wages for 1996,179 p. the more highly qualified. Beyond Cuba, ISBN 1-55183-284-4, Regional Integration and Transition June 1996, 557 p. V. Sundararajan, The Role of Pruden- Economies: The Case of the Baltic tial Supervision and Financial Restruc- Rim, ISBN 92-64-14929-5, November Doing Business in China and Hong turing of Banks during Transition to 1996, 209 p. Kong, ISBN 1-55183-231-3, May 1996, Indirect Instruments of Monetary Con- 557 p. trol, Working Paper 96/128, November Trends and Policies in Privatization- 1996,30p. Performance of Privatized Enter- Collegium Budapest, Institute for prises: Corporate Governance, Re- Advanced Study Publications Ales Bulir, Business Cycle in structuring, and Profitability, ISBN Czechoslovakia under Central Plan- 92-64-04856-1, vol. 3, no. 1, October To order: Collegium Budapest, Institute ning: Were Credit Shocks Causing 1996, 202 p. for Advanced Study, Szentharomsag It? Working Paper 96/129, November utca 2, Budapest, HungaryH-1014, teL 1996, 19 p. This publication provides biannual re- 361-156-1244, fax 361-175-9539. views of recent developments in priva- Adriaan M. Bloem, Paul Cotterell, and tization and a comparative analysis of Janos Komai,The Citizen and the State: Terry Gigantes, National Accounts in experiences in transition economies. It Reform of the Welfare System, Discus- Transition Countries: Distortions and is designed to alert decisionmakers to sion Papers 32,August 1996,22 p. Biases, Working Paper 96/130, Novem- policy alternatives and inform them of ber 1996,43 p. analytical foundations, as well as les- Janos Kornai,Adjustment without Re- sons of implementation. cession: A Case Study of the Hun- OECD Publications garian Stabilization, Discussion Pa- The Centre for European Economic pers 33, August 1996, 48 p. To order: OECD, Head of Publications, Studies (CEES) Publications OECD, 2, rue Andre-Pascal, 75775 OtherPublications Paris Cedex 16, France;orin the United To order: Faculty of Social Sciences, States, OECD Washington Center, Centre for European Economic Stud- Kevin F. F. Quigley, For Democracy's 2001 L Street, N. W., Suite 650, Wash- ies (CEES), Department of Econom- Sake: Foundations and Democracy ington, D.C. 20036-4922,teL 202-822- ics, University of Leicester, United King- Assistance in Central Europe, 3865, fax 202-785-0350, Intemet http./ dom, LE1 7RH, tel. 0533-522892, fax Woodrow Wilson Center Press, Wash- woecdwash.org 0533-522908. ington, D.C., February 1997. The Changing Social Benefits in Rus- sian Enterprises, ISBN 92-64-15282-2, RobertAckrill and Dean Garratt, Politi- Promoting democracy has become a September 1996,148 p. cal Business Cycles and Economic major concern of the international M TRANsmoN, February 1997 0 1997 The World Bank community since the end of the cold free and competitive markets bring value of a work of art can be judged by war. Private actors-foundations and supply and demand into equilibrium and the price it fetches. People deserve re- other nongovernmental organizations- thereby ensure the best allocation of spect and admiration because they are are playing a growing role in these resources. This is widely accepted as rich. What used to be a medium of ex- efforts, rivaling that of governments an eternal verity, and in a sense it is change has usurped the place of funda- and international institutions. This study one. As originally formulated, the theory mental values, reversing the relationship examines the democracy assistance of perfect competition-of the natural postulated by economic theory. What programs of foundations in Central equilibrium of supply and demand- used to be professions have turned into Europe during the years immediately assumed perfect knowledge, businesses. The cult of success has re- following the fall of the Berlin Wall. homogeneous and easily divisible placed a belief in principles. Society has products, and a large enough number lost its anchor. The author backs up his findings with of market participants that no single extensive field research, recounting a participant could influence the market Social Darwinism. Bytaking the condi- series of workshops in which Central price. The assumption of perfect tionsofsupplyanddemandasgivenand Europeans knowledgeable about de- knowledge proved unsustainable. declaring government intervention the mocracy efforts participated, and with ultimate evil, laissez-faire ideology has his own experience as a foundation ex- Buyers and sellers in financial markets effectively banished income or wealth ecutive. The book includes chapters on seek to discount a future that depends redistribution. The laissez-faire argument foundations' efforts in the Czech Re- on their own decisions. Instead of tend- against income redistribution invokes the public, Hungary, Poland, and Slovakia; ing toward equilibrium, prices continue doctrine of the survival of the fittest. This on regional initiatives; and on the phi- to fluctuate relative to the expectations social Darwinism is based on an out- lanthropy of George Soros. of buyers and sellers. There are pro- moded theory of evolution, just as the To order: The Johns Hopkins Univer- longed periods when prices are mov- equilibrium theory in economics is tak- sity Press, Hampden Station, Ba/ti- ing away from any theoretical equilib- ing its cue from Newtonian physics. The more, Maryland 21211, United States, rium. Yet the concept of equilibrium principle that guides the evolution of tel. 1-800-537-5487. endures. It is easy to see why: without species is mutation, and mutation works it, economics could not say how prices in a much more sophisticated way. Spe- George Soros, The Capitalist Threat in are determined. In the absence of equi- cies and their environment are interac- The Atlantic Monthly (United States), librium, the contention that free mar- tive, and one species serves as part of February 1997,279(2): 45-58. kets lead to the optimum allocation of the environment for the others. resources loses its justification. The as- The main enemy of the open society is sertion of perfect knowledge stands in International relations. States have no no longer the communist but the capi- contradiction to the concept of the open principles, only interests, geopoliticians talist threat. Too much competition and society (which recognizes that our un- argue, and those interests are deter- too little cooperation can cause intol- derstanding of our situation is inherently mined by geographic location and other erable inequities and instability. Inso- imperfect). Laissez-faire ideas can fundamentals. This deterministic ap- far as there is a dominant belief in our pose a threat to the open society: proach is rooted in an outdated society today, it is a belief in the magic nineteenth-century view of scientific of the marketplace. The doctrine of Economicstability. History has shown method, and it suffers from at least two laissez-faire capitalism holds that the that financial markets do break down, glaring defects: it treats the state as the common good is best served by the causing economic depression and so- indivisible unit of analysis, just as eco- uninhibited pursuit of self-interest. Un- cial unrest. The breakdowns have led nomics treats the individual; and it does less it is tempered by the recognition to the evolution of central banking and not recognize a common interest be- of a common interest that ought to take other forms of regulation. Instability ex- yond the national interest. As things precedence over particular interests, tends well beyond financial markets: it stand, it does not take very much imagi- our present system-which, however affects the values that guide people in nation to realize that the global open imperfect, qualifies as an open soci- their actions. Advertising, marketing, society that prevails at present is likely ety-is liable to break down. even packaging aim at shaping people's to prove a temporary phenomenon. preferences. People increasingly rely on The main scientific underpinning of the money as the criterion of value. What is Jan Winiecki, ed., Institutional Barri- laissez-faire ideology is the theory that more expensive is considered better. The ers to Economic Development: © 1997 The World Bank TRANSITION, February 1997 X Poland's Incomplete Transition, exclusively through increases in Research, 25-28 Old Burlington Street, Adam Smith Research Centre, Poland, budgetary subsidies.Average pensions London WIX 1LB, United Kingdom, tel. June 1996, 97 p. in Poland are much higher than those 44171-878-2900, E-mail: cepr@cepr. in other countries: 70 percent of average org In Poland, with privatization proceeding wages and salaries (rather than 40 to slowly, the stock market has remained 50 percent, as in most European China's Economic fuwFf a: E a little more than a marginal institution with countries). Hidden social assistance is lenges to U.S. Poilcy, ISBN 0-16- a few dozen quoted companies. The given to farmers under the guise of the 053566-2, Study Papers for the Joint uniqueness of Poland's transition, in com- pension system-farmers' contributions Economic Committee, Congress of the parison with that of other Central and amount to barely 5 percent of total United States, Washington, D.C., Au- East European countries, lies in the fact expenditures. gust 1996, 530 p. that political change has come through the Solidarity movement, which has been There has been a general rise in the John P. Hardt and Robert N. Mottice, largely utopian socialist and syndicalist level of tariff protection since 1991. in stitutiona Dza Don-Ezta 3$lf in nature.The Polish political spectrum Agriculture is in the lead with high of Market-Friendl)y hns'Tution s a n@ is strongly anticapitalist at both ends, nontariff and tariff barriers, though the Legal Framework. with an excommunist alliance (SLD) and whole range of consumer products- its anachronistic peasant ally (PSL) at from cars and electronics to food-is The legal and regulatory framework of one end, and a strongly anticommunist, being affected by import impediments. a market system requires replacing the but utopian Christian-socialist Solidarity About one-fourth of Polish imports are rule of the party bureaucracy (the rule at the other. The imbalance between the now subject to nontariff barriers, such of people) with the rule of law, neces- power of labor and capital, to the dis- as quotas, exceptions from quotas, sary for the efficient and equitable op- tinct disadvantage of capital, is a fixed concessions, and so on. All the coal eration of a democratic market system. point of the political economy of Polish trusts, sugar trusts, encouragement of In China an agenda of institutional transition. various holdings, and "consolidation" of change may include: state banks have two aims: * An independent central bank or cur- Polish wages are extremely sticky * To shield the inefficient state enter- rency board with an efficient private downward, and the willingness to ac- prise sector from the efficiency de- commercial banking system to ensure cept wage cuts for higher employment mands of the market, thereby earning a solid monetary environment. A stable is almost nonexistent. The result is high the gratitude of its employees. currency free from political influence is unemployment, underpinned by the rigid * To retain the state sector as an im- critical. labor market, characterized by low oc- portant spoils area for the old aA federative, modern tax code, mod- cupational and territorial mobility. Also, nomenklatura from both parties of the eled in rate and structure after the Hong the unemployed maintain a high reser- communist ancien regime. Kong system. Local and federal man- vation wage, approaching 95 percent of dates and revenue-raising capabilities their previous wage (even after two Budding economic activity of the ge- should be better correlated. years of unemployment). The high eco- neric private sector, registered and un- -A workable civil code to establish mar- nomic growth rate during 1 993-95 registered alike, has put Poland in the ket rules and accountability. barely dented the unemployment rate. forefront of transition. But without suf- e Regulatory agencies to set market ficient, well-proven institutional under- rules in both the state and private The share of pensions in Polish GDP pinnings, success can run out of sectors. Securities and exchange, has been about 15 percent in the past steam. consumer protection, and environmental two to three years. The share of the To order: Adam Smith Research Centre, protection are all rule-driven activities next closest Eastern or Central Universityof Warsaw, Bednarska St. 16, that affect the quality of life and act European country, Hungary, is 11.0 to Warsaw, Poland 00321. against crime, corruption, and inequality. 11.5 percent of GDP (still substantially 9 Judicial review of rule of law in eco- higher than the average share for Willem H. Buiter, Ricardo Lago, and nomic crime and civil actions to ensure countries of the European Union: 8.7 Nicholas Stern, Promoting an Effective that markets function effectively. Some percent in 1992). And the growth of Market Economy in a Changing World, degree of parliamentary oversight is pensions' share during the transition CEPR 1468, October 1996,55 p. also essential. period has been financed almost To order: Centre for Economic Policy To order: U.S. Government Printing TRANSITION, February 1997 C) 1997 The World Bank Office, Superintendent of Documents, To order: Emilian Dobrescu, Str. Uru- Studies, Hungary, 27 p. Congressional Sales Office, guay Nr. 2, BI. 8, Ap. 2, 71266 To order: Property Foundation, Institute Washington, D.C. 20402, United Bucharest, sector 1, Romania, tel. for Privatization Studies, PO. Box 44, States. 0040-1617-6784, fax 0040-1212-2624. 18 Gyori ut, 1123 Budapest, Hungary H-1387, tel. 361-202-5175, fax 361- Competition Act of Hungary, Office Peter Havilk and Vladimir Vertlib, Die 202-1093, E-mail:property@odin.net of Economic Competition, Hungary, wirtschaftliche Lage der 1996, 46 p. zentralasiatischen Nachfolge-staaten Yanrui Wu,Trends and Opportunities der UdSSR, WIIW Working Paper 165, in China's Health Care Sector, Policy Die Lage der WeltwirtschIft und der October 1996, 239 p. Paper 18, ISBN 0-86905-507-0, Sep- Deutschen Wirtschaft, Working Paper To order: The Vienna Institute for Com- tember 1996, 48 p. 14,1996, 42p. parative Economic Studies, To order: Asia Research Centre, To order: Wirtschaft im Wandel, Oppolzergasse 6, A-1010 Vienna,Aus- Murdoch University, WesternAustralia, Delitzscher Strasse 118, 06116 Halle, tria, tel. 431-533-6610, fax 431-533- tel. (619) 360-2846, fax (619) 310- Germany, tel. 0345-7753 701, fax 6610-50, Intemet:http://www.wsr.ac.at/ 4944. 0345-7753 820. wiiw-html/ Milford Bateman, ed., Business Cul- Emilian Dobrescu, Macrornodels of David Lane,The Rise and Fall of State tures in Central and Eastern Europe, the Romanian Transition Economy, Socialiism: Industrial Society and the University of Wolverhampton, United The National Institute of Economic Socialist State, ISBN 0-7456-0742-X, Kingdom, January1997. Research, Romania, October 1996, Polity Press, United Kingdom, 1996, 159 p. 233 p. To order: Local Economic Develop- To order: Editorial Office, Polity Press, ment in Transition Economies Unit, From an institutional point of view the 65 Bridge Street, Cambridge, CB2 SLES, University of Wolverhampton, Romanian economy is weakly struc- 1 UR, United Kingdom; or in the United Stafford Street, Wolverhampton, United tured: ownership rights are poorly de- States, Blackwell Publishers Inc., 238 Kingdom, fax 44-1902-322739, E-mail: fined, new market mechanisms have Main Street, Cambridge, Massachu- le 1914 @ wlv.ac.uk only limited effectiveness, informal in- setts 02142. stitutions play a significant role, eco- nomic agents behave unpredictably, and Erik Mathijs and Johan F. M. Swinnen, political factors exert great influence over The Economics of Agricultural resourceallocation. Economic resources Decollectivization in Central and are wasted as a consequence of the Eastern Europe, Working Paper no.3/ fuzzy ownership structure, uncertainty, 1, Department of Agricultural Econom- and high transaction costs. Only a thor- ics, K. U. Leuven, 1996, 27 p. ough restructuring would enable the country to begin sustainable, long-term Negoslav P. Ostojic and Norman Scott, economic growth. Inflation must be kept eds.,Privatization in the Economies under control through judicious mon- in Transition, European Center for etary policy, the share of budget ex- Peace and Development (ECPD), Yu- penditures in GDP must be lowered, goslavia, 1996, 418 p. and a prudent fiscal policy must be pro- To order: European Center for Peace moted. and Development (ECPD), United Na- tions University for Peace, 11000 A new ownership structure would in- Beograd, Knez Mihailova 7/Il, Yugosla- clude a developed capital market, a via, fax 0 11-623-169. drastic cut in inefficient activities sub- sidized by the state, improved corpo- Maria Vanicsek,Ownership and Op- rate governance, and the progressive erational Developments in the Hun- integration of Romania into the Euro- garian Private Sector, Property pean and the world economy. Foundation, Institute for Privatization © 1997 The World Bank TRANSITION, February 1997 * Subscribe to TRANSITION Today . ... ............... 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