53827 SOCIALIST ECONOMIES UNIT · COUNTRY ECONOMICS DEPARTMENT · THE WORLD BANK Conference on Privatization and Ownership in Eastern and Central Europe n June 1:(-14 a conference on Indicative of the wide range of op sides by advocating particular options, O privatization and ownership changes in Eastern and Cen tral Europe took place in Washington, tions discussed was the paper pre pared by two World Bank economists Farid Dhanji ofEM4CO and Branko Milanovic of CECSE. They offered but rather pointed out the reasons behind the positions. The essence of their paper is provided below. organized by thE: European Depart ment of the World Bank and funded an exploration of the environment The plethora of divestiture options by the Research Committee of the for divestiture in Eastern and Central does not simplify choice. From an Bank. Those attending included Europe and examined the advan individual perspective the choice of a prominent academics and tagesJdisadval!tages of the many preferred model will vary depending policymakers from each Eastern and "models" of ownership change under on the weight given to possible objec Central Europelln country, partici discussion. The authors did not take tives and the appreciation {or dis- pants from othey' countries and from the GECD and E]~C Commission. The agenda consisted ofar. overview of the conceptual issue~:, ofpdvatization and What's inside... a review of possible ,trategies. This was followed by cDuntl"ypresentations The Road to a Free Economy The Bank'. Eastern and Central from Hun !;ary , Pola'ld, Yugoslavia, European Program Czechoslovakia and Bulgaria. The Professor Janos Komai's new book second day's agenda began with pre provides his vision of the road to a free The World Bank's ECEP is an initia sentations on the exp'!riences of Chile economy in Hungary. For him this is a tive originally designed to deepen un· and Mexico, where wlde-ranging significant departure; although he is derstanding of the problems confront. privatization p1'ograms have been one of the most eminent writers on ing economies in transition from cen· socialist economies, this is the first tral planning to market institutions carried out. Discussion included time in 33 years that he has put forth analysis of worker Sf If-management (page 7). a comprehensive economic policy pro in Yugoslavia and the impact ofprofit posal (page 3). Quotation of the month (page 8). sharing scheme~; in a number of in dustrial countries. Legal and man Algeria: Sequencing Liberalization On the World BankJIMF Agenda agement issues and the practice of (page 9) privatization were also covered in The Algerian economy suffers from panel discussion~,. inefficient resource allocation and a Book and Working Paper Brier. distorted incentive structure, legacies (page 10) Two lunch;~on sessioLs offered an op of over 20 years of rigid central plan ning. The government's medium term Letters to the Editor (page 11) portunity to he:~r "f:'om the inside" objective is to raise economic perfor about the Italian and Kew Zealand mance by sustained progress towards experience, witn presentations by BibUography or Selected Article. a market-oriented economy (page 5). (page 12) Professor R Prodi, fermer President of IRI, and Roger Douglas, former Minister of Finance dNew Zealand. Volume 1. NumbE1r 3 June 1990 Socialist Economies in Transition The World Bank/CECSE missal) of practical difficulties in objectives of reform programs will be less the strategies for financial sector implementation. In this respect there considerably diluted if the new mar development and privatization are is no "correct" answer about how to ket economy is based on an extensive coordinated, weaknesses in the former privatize. From a group perspective, network of special privileges or other may reflect ad hoc and perhaps hap all decisions are highly political, me defenses against efficiency. Moreover, hazard responses in the latter. The diated through still-emerging pro experience elsewhere testifies to the activities of Privatization Offices cesses, invoking strong interests and difficulty of removing concessions once should, in this regard, be subordi lobbies, and with a genuine possibil given. It is imperative, therefore, not nated to this wider perspective. ity of popular backlash in societies only that the privatization process be traditionally sensitive to wide diver transparent and absolutely above Finally, governments will continue gences of wealth. reproach, but that the rules of the to need to pay attention to the major "market" game are also clearly ity of state enterprises that will take Insofar as privatization strategies enunciated and adhered to in divesti a long time to be privatized or are emerge from this process, certain tures. otherwise left as government wards. questions deserve continuing reflec Encouraging a market orientation tion. Should the process be fast or Divestiture will be an integral aspect and fostering responsiveness to eco slow? Does the state need the rev of the development of financial sec nomic signals in these enterprises enues from privatization? Should en tors. The continuing evolution of will present a major challenge. The terprises be demonopolized before banking systems, pension funds, in wide variety of incentive devices being privatized? Should enterprises surance companies, securities mar management contracts, leases, bo be financially and technically re kets, etc., will depend on the decisions nuses tied to performance-should structured before being privatized, or concerning the depth, scale, speed be explored in this context. Equally can this be left to the new owners? and mechanisms of privatization. as important, governments will need How can ownership arrangements be There is great benefit in considering to insure that there is no discrimina instituted where the new owners take the two together. In particular, a tion in favor of state enterprises (credit an interest in performance? pure "case by case" approach to allocation, state orders, looser finan privatization may well overlook sub cial discipline), as against the rules These questions invite multi-dimen stantial opportunities to strengthen applied to the developing private sec sional, not simple, answers. and construct a modern and sophisti tor. · Divestiture models are not exclusive. cated financial system. Indeed, un- It may be perfectly possible, in fact, to give workers and managers a stake in their firms, give away a proportion of Milestones of Transition enterprise equity to the general popu · North and South Yemen declared The ruling council of the General lation (either directly or through in their unification into one state on May Agreement on Tariffs and Trade agreed stitutions), and obtain revenue for 22. Institutionalizing the union is well to Soviet observer status after Wash the state through general sales. These under way: on May 26, the two parlia ington and Tokyo dropped its objec "combination" options are beginning ments were merged into a single 301 tions. However, the Soviet delegation to surface in the privatization de member assembly; the central banks at GAIT is not allowed to take part in bates and deserve considerably more are in the process of merging; the riyal the Uruguay Round negotiations. elaboration and defense than they and the dinar are now legal tender ata The Soviet Union is interested in be have thus far achieved. YR26=SYDl rate; ajointcurrency will coming a full member of GAIT. be introduced by the end of the year; and the first joint budget is being pre · The Supreme Soviet, the standing Whether the privatization process is pared. A multiparty system of govern parliament of the Soviet Union gave fast or slow is really only relative. ment is envisaged, with elections in 30 President Gorbachev a mandate on Even in the best scenario, it is unlikely months. In the meantime, a loose fed June 13 to speed the introduction of a that the most state assets can be eral system will enable the North and more market-oriented economic sys divested in less than a few years. The South to smooth differences in laws tem. Gorbachev may use his power of near complete unpreparedness of the and regulations. Yemeni unification, presidential decree - overriding both legal, financial and fiscal environ with amarketofl2 million people, win the parliament and the government ments underpin this expectation. improve the climate for foreign invest to de-nationalize state property, draft ment: market-opening moves in the anti-monopol y controls, establish joint During this period when firms are South, as illustrated by the new in stock companies and a stock exchange, vestment law in March, will be con reform the banking system, and pro readied for divestiture, it may be ex solidated. vide new legal status for small busi pected that governments will be be nesses and entrepreneurs. Gorbachev sieged by requests for exemptions, · The Soviet Union, stepping up its will likely go ahead in July with a concessions, protection etc., from firms drive to integrate into the world series of presidential decrees on insti about to be privatized or from new economy, took a seat as an observE'r at tutional reforms, and by autumn the owners. It will be extremely impor GAIT in May for the first time s:ince government is expected to produce a tant to resist these pressures. The the 96-country trade forum was con legislative package to supplement improvemen t in overall economic vened more than four decades ago. these decrees. performance that is one of the major June 1990 2 Volume 1· Number 3 Socialist Economies in Transition The World Bank/CECSE The Road to a Free Economy rofessor ;Janos Komai's short P over for a couple of weeks from, say, Schumpeter mold) endowed with the book published recently ("The the World Bank, may fall under the technical and managerial know-how . Road to a Free Economy spell of such simulations"). "Market involves complex cultural and insti Shifting from a Socialist System: The socialism", therefore, is an impossible tutional changes (Komai calls the Example of Hungary, W.W. Norton & goal for him; not because social sector process "embourgeouisement") that Company, New York/London, 1990, managers are corrupt or incompetent, cannot be accelerated beyond a cer 224 p.) provides Kornai's vision ofthe but because the culture within which tain pace. The reason is that such an road to a free economy in Hungary. they operate has not prepared them entrepreneurial class has to grow "or For him this is a significant departure; - nor can it ever prepare them - to ganically," and that "mere imitation although he is one of the most eminent behave as entrepreneurs. of the most refined legal and business writers in this generation on socialist forms of the leading capitalist coun economies, this is the first time in 33 This leaves only three options for tries is not sufficient to ensure their years that he has put forth a compre improving efficiency: general application" and may indeed hensive economic policy proposal. It · unrestricted entry of new pri amount to "give the 'big leflp' yet was published first In Hungary before vate firms; another try." the free electi(lns, when its potential · priatization of existing social influence was at :its height. As an sector firms; Another constraint on the speed of indication of the exhortative tone of · abandonment of fruitless at conversion is financial. First, Komai the book (very different from his other tempts to turn social sector managers maintains that the state cannot afford writings), it was published in Hun into entrepreneurs and search instead to "squander" social property (both garian with the th.le "A Passionate for a second-best approach for con productive assets and housing stock) Pamphlet in the Cause of Economic trol. by giving it away or by selling it. below Transformatie,n" . "realistic prices" (replacement value). For Kornai, these are not alternatives. In addition, he wants to transfer own The discussion is organized under The system would be transformed into ership to entrepreneurs who are will three broad headings - ownership, a "dual economy" initially still domi ing and able to assume financial risks stabilization and political economy. nated by tightly-controlled social sec from the outset. Since the Cre.Eltion of In all cases, Kornai brings the reader tor firms, with a gradual transition to tangible wealth takes time, frle pro firmly back to basic economic prin privatization until at some point the cess of privatization is de term; ned by ciples. private sector dominates and sets the ground rules. Ownership and privatization On the issue of ownership, he calls for Kornai starts from the proposition full liberalization of private sector that, with few exception, trying to activities (entry and exit, pricing, make the social (st.ate-owned) sector contracts, employment, currency ex efficient would be a hopeless task, for change) combined with strict finan a number of systE~mic reasons. For cial limits on public enterprises. Al in stancE~, sinct; managers are part ofa though he favors privatization, he unified network of senior managers argues that the process sh()uld be and government administrators, both careful and that all transactions decentralization and effective hard should be strictly at market prices. ening of the budget constraint of the In-between solutions to the owner firm are unalLtainable. As for any ship problem - such as holding administrator operating in a hierar companies, "cross-ownership" be chical environment, the size of the tween public companies, or labor operation under his control and the managed firms - are greeted with satisfaction of his constituency (su skepticism. pervisors and subordinates) will al ways be the primary motive for ac To arrive at an efficient private tion. Kornai is "fed up" with the ownership system, an entrepreneur "practice of simulation" of capitalist ial class has to emerge. This currently institutions grafted upon a social does not exist outside the small-scale "", ...JI sector, such as "simulated price for service and crafts sector, and is rare mation, capital markets or stock ex changes." ("Only westerners who hop within this sector. The emergence of a vibrant entrepreneurial class (in the i From the Soviet magazine KrokodU "Jk. Volume 1. Number 3 3 June 1990 Socialist Economies in Transition The World Bank/CECSE the speed with which potential "tan sector like the civil service until the public en terprises, a unified exchange gible investors" (Kornai's term) can private sector is strong enough to rate with currency convertibility, and build up the necessary financial as dictate the rules. He suggests that liberalized foreign trade. But Kornai sets. Implicit in this consideration is social sector operations be made fully includes some fairly unconventional another proposition: portfolio inves "transparent" and that firms be made proposals in the area of taxation, ar . tors (investment funds, insurance accountable to and controlled by the guing against a personal income tax funds, pension funds etc.) may have parliament, not by other branches of (because of its intrusiveness) and a supportive role, but they should not the government administration. against anyprogressivity in tax rates. be the primary agents cf privatization. Managers should be appointed, their As to the latter, he continually ex Kornai explicitly rejects the notion mandate and powers carefully cir horts Hungarians to change their that society should distribute credits cumscribed, and their performance thinking-to understand that it is to "impersonal private ownership" or reviewed and rewarded as for any good for society ifa person works hard through the "intangible stock market." other senior civil servant. and makes a lot of money. His pre Instead, only "hard loans" to stake ferred tax system would include a holders willing to offer their personal Surgery for stabilization single-rate VAT with universal cov property as collateral. erage, a linear payroll tax, a flat-rate Kornai distinguishes between an profits tax, and a uniform tariff. Because of these constraints, Kornai initial "package" for "stabilization" rejects the notion that privatization "surgery" in his term - (to be eom The following elements make up the "should be governed by the guiding pleted within one to two years) and a core ofKornai's longer-term transition principle of speed," which he calls framework for longer·term develop· strategy in pragmatic combination: "irresponsible." In the final analysis, ment. He argues that the execution of · run social sector firms by largely Kornai suggests that an "organic some required tasks should not be relying on principles of efficient ad transformation" may take over two prolonged and that they cannot be ministration of public agencies; decades or more. Until such time, a accomplished by small steps. Instead, · I=arry out privatization of social "dual economy" would prevail. these measures must be taken in "one sector firms at a pace at which the stroke". private sector can acquire them, given On the basis of the premise that the its growth of managerial know-how social sector firms really "belong to The "treatment" advocated for stabi· and risk capital. The goal is ultimately the sphere ofgovernment" and "should lization is quite traditional: lower to dispose of all those social assets the be treated accordingly," he sketches a inflation, a balanced budget, credit private sector would use more effi· second-best approach: run the social restraint, strict wage disciplin1e in ciently. · carry out privatization of social sector housing stock ata pace at which private households can acquire it. The Economic Transformation in Hungary and Po/and goal is to privatize eventually the whole existing stock. The lat.est issue of European Economy (March microeconomic implications by A.L. Hillman 1990, Number 43) is dedicated to the topic of · Tax reform, trade liberalization and indus · invite in foreign investors (for economic transformation in Hungary and Poland. trial 1'Catrw::turing in Hungary by D.M. Newbery new ven tures and acquisition ofshares (The quarterly i8 published by the Commission of · The elementoS of policy for rapidly redretl8 in existing firms). the European Communities, Directorate-Ceneral ing the Hungarian balance of paymentoS by 1. · switch from emergency mea for Economic and Financial AlTairs). The issue Szalksi sures for social stabilization to a com· focWlcs on a selection of studies by a group of · The reform of the Hungarian financial independent expertll who convened at the initia system by I. Szekely prehensive social security system. tive of the Directorate-General for Economic and · if possible, draw trade unions Financial AlTairs as part of PHARE (Poland and Papers on Poland into a pattern of "constructive coop Hungary Aid foR Economic reconstruction) task · Reform and budgetary policics in Poland, eration of the trade unions with the force. 1989-90 by S. Comulks · ProspectoS for privatization in Poland by 1. state and the private sector." The work of the independent expertll was coordi· Cl'OSfeld nated by Richard Portes, Director of the Centre · Energy policy and the environment in Po· The final section of the book on politi. for Economic Policy Research, London. Four land by C. Hughcs cal economy admits that the transi meetinga in Bruasels (the latcst convened in · Internal and international aspects ofmon tion process will be long and hard, February 1990) allowed the participantoS to com· etary disequilibrium in Poland by D.M Nud ment on early dralls of their respective papen · State-owned enterpriscs in Poland: taxa and Kornai tries to identify potential and exchange views On current developmcntoS in lion, subsidization and competition policies by supporters and antagonists. Many Poland and Hungary. The papers sclected for M.E. Schaffer groups have much to gain; the biggest publication in the March issue of European sources of potential opposition are Economy are: Paper common to both countrle. · Policy issues in the design of banking and employees in the state sector, the poor, Papers on Hungary financial systems for industrial finance by J. and the newly unemployed. As he · Subsidy reduction in the Hungarian Corbett puts it in his personal postscript: "I economy by I. Abel know the tremendous forces working · Reformofenterprise regulation in Hungary The introduction to the isaue was written by against the realization of these pro from tutelage to market by P.C. Hare Hichard Poncs. · Macroeconomic policy in Hungary aod itoS posals. But still, the proposal has a chance." · June 1990 4 Volume 1· Number 3 Socialist Economies in Transition The World Bank/CEeSE Algeria: Sequencing Liberalization lgeria faces tough challenges eluding formulation of precise fiscal reductions in treasury capital subsi A in the years ahead. The economy suffers from ineffi cient resource allocation and a dis and monetary targets. While refonn is far from complete, progress to date, together with firmer oil prices, has dies and by the creation of a body to oversee foreign borrowing. An ongo ing program of financial restructur torted incentive stmcture, legacies of significantly improved recent ing will help ensure the viability of over 20 years of rigid central plan macroeconomic performance. autonomous enterprises. Under a ning. The result has been inflated law passed recently, the central bank resource requirements to sustain Institutional reform has concentrated has been given a clear mandate to growth _. throllgh the 1970s and early on developing a legal framework to manage monetary policy. To assure 1980s, for example, investmentofover support decentralized decision-mak independence, the central bank gov 40% of GDP produced only about 6% ing. Public enterprises and banks ernor is now appointed for a sil(-year average annual growth. Against the have been granted autonomy and their term and can be removed only with background of high population ownership concentrated in eight great difficulty in the interim. Finally, growth,job creation has been insuffi holding companies. Financial disci agricultural reform has extended the cient to stave off high under- and pline has been tightened by sharp private sector's role by breaking up unemployment. High resource re quirements ha">'e caused public sector deficits, necessitating large transfers from the private sector. Over time, Les Fonds de Participation· persistence of this flow imbalance under pervasive price controls has Holding companies have been widely state's fiduciary agent, each holding created a stock imbalance in the form discussed in the context of transition in company has a mandate to oversee the of a "money overhang." While high oil Eastern and Central European coun financial health and strategic direction prices previously masked growing tries. Yet Algeria has moved further of those public firms within its portfo economic inefficiency, the 1986 col along this road by transferring state lio. Fonds representati ves sit on share ownership to profit-oriented holding holder councils (Assemblee Generale lapse of world petroleum prices pro des Actionnaries), which approve 'busi companies. Undertheirreform program duced large external deficits for the the Algerian authorities have distrib ness and financing plans drawn up by first time, worsening .creditworthi uted the shares of newly autonomous firm staff. In the past, these plans were ness. The consequent import com banks and firms among eight newly drafted by line ministry officials and pression precipitated a domestic cri established holding companies or Fonds approved by the now defunct Ministry sis - characterized by stagnating de Participation. Initially, each com of Planning. The Assemblee can also output, falling per capita consump pany is specialized in a particular sec decide to issue stock, distribute divi tion, and risinl; unemployment - all tor. For those enterprises within its dends, and restructure, or even dis of wh ich highlighted the sector, each Fonds has been given the solve, the enterprise. The Assemblee macroeconomic weakness of the largest portion ofshares, al though not a elects a majority of the firm's board (Le country. majority. While the Fonds remain pub Conseil d'administration), which lic, they have been given a mandate to chooses the managing dirE!ctor maximize their financial rate ofreturn, (Directeur General). While the ho:.ding Recent reform initiatives and compensation to holding company companies exercise oversight through managers is tied to the performance of the council and board, they are exp.!(ted In response to t.he onset ofthe crisis in their share portfolio. To establish to leave day-to-day firm manage:nent 1986, the authorities initiated major market val ues, enterprise shares can be to the Directeur General and his :~taff. institutional reform, accompanied traded among holding companies. To more recently by policy and incentive prevent one Fonds from dominating a While it is too early to evaluate their reforms. Institutional reforms, aimed particular firm, however, trading is impact, the Fonds represent a key a!!pect at decentralizing economic decision subject to a ceiling of 40% ownership by of the authorities' determined effort to any single company. With an eye to raise public enterprise efficiency. To making, began with passage of legis complement the autonomy process, broadening the capital market, banks lation in the agricultural, financial and firms can also hold shares. Treasury finance for new enterprise and industria:1 sectors in mid-1986. investment, traditionally available al Despite economic hardship and the The authorities expect the Fonds to most automatically, has been elimi social unrest tb.at f,)llowed, the drive isolate enterprises from the direct in nated. Public firms will be forced te) line for economic refonn accelerated. In nuence ofsectoral ministry bureaucrats up credit from the, now autonomous, 1989, the government embarked on a who have traditionally exercised sub banking sector. program of macroeconomic policy ad stantial administrative control. As the justment and incentive reform, in- Volume I, Number 3 5 June 1990 Socialist Economies in Transition The World Bank/CECSE all 3,400 state farms into 80-hectare close to zero. Under a new law, the however, would require a large dose cooperatives. prices of some 30% of output have of external resources, unlikely in the been freed, but the majority of prices Algerian case. Moreover, the country Political liberalization, following the are still subject to controls. has maintained a good external credit establishment of a new constitution record that could be endangered by a in 1989, has accompanied institu Future directions rapid increase in foreign borrowing. tional reform. Independent trade Political constraints also weigh unions have been sanctioned and the The government's medium-term ob heavily in Algeria; the authorities may right to strike formally recognized. jective is to raise economic perfor have viewed the current political cli Political parties have been legalized mance by sustained progress towards mate as ill-suited to a "big-bang" ap and elections planned, beginning with a market-oriented economy. Com proach. municipal elections. In the June 1990 petitive market pricing will convey municipal elections the ruling Front the proper scarcity signals upon which Phased liberalization de Liberation Nationale was defeated decentralized decisions can be bused. by the Islamic Salvation Front. These To reach this goal, additional insti Despite prudence dictated by eco changes have etTectively ended the tutional and incentive reforms are nomic and political realities, the need 25-year political monopoly ofthe rul necessary, along with continued policy for tangible progress requires imme ing party. adjustment. diate action in priority areas. While the authorities are still formulating a Accelerating economic reform efforts, On the institutional side, public en liberalization sequence, the main the authorities have improved the terprise restructuring and financial structural feature of Algeria's macroeconomic policy framework, sector reform stand out as near-term economy, its access to substantial with the goal of restoring internal priorities. The World Bank is cooper hydrocarbon rents, could be used to and external balance. Compared with ating with the authorities in these underpin a phased liberalization. If the recent past, macroeconomic per areas with recently approved Techni backed by tight fiscal and monetary formance improved considerably in cal Assistance and Pilot Industry policies, this strategy could reduce 1989, under the influence of higher oil Restructuring Loans. Moreover, a the risk of excessive inflation and prices and the reform program. Led financial sector reform loan and a develop private competition to public by a rebound in agricultural output, cement industry restructuring project enterprises. GDP grew by a modest 2.8%. The are in preparation. budget deficit fell to under2% ofGDP The central idea is the rapid introduc and the current account deficit was While decentralization is well ad tion of competitive foreign exchange cut almost in halfin dollar terms. Per vanced, the money overhang and lack sales to public enterprises. Under capita consumption grew for the first of competition among public enter tight fiscal policy, hydrocarbon rents time since 1985. prises complicate the sequencing of accruing to the Treasury from the price liberalization. At one extreme, ensuing real devaluation could gen In 1989, the policy dialogue with the a one-shot liberalization of all prices erate budget surpluses, reversing the World Bank and IMF intensified, could produce immediate efficiency historical private sector resource culminating in Algeria's first-ever gains; but this is likely to cause sig drain and absorbing liquidity. Against IMF purchases and World Bank ad nificant short-term pain in terms of a background of private enterprise justment loan. Establishing strict enterprise bankruptcy, lost output, development and reduced liquidity, fiscal and monetary targets helped and increased unemployment. On gradual removal of remaining domes restore budgetary balance and slow the other hand, very gradual price tic price controls would carry a smaller growth of money and credit. Recent decontrol, while likely to entail lower risk of monopolistic public enterprise etTorts have focused on strengthening transition costs, would de lay efficiency pricing and runaway inflation. monetary policy instruments and gains and would lack credibility. developing an external debt man Whatever economic liberalization agement strategy. Transition costs and credibility aside, strategy will be chosen, maintaining several key features of Algeria's supportive policies will be necessary Within the policy framework, price economy help explain the authorities' throughout the transition to harden liberalization and adjustment have apparen t preference to not liberalize the public enterprise sector's budget begun. There have been recent too quickly or too slowly. Given the constraint and ensure reversal of ex movements in the exchange rate, in potentially large money overhang, ternal and internal imbalance. The terest rates, and the prices of goods rapid price liberalization could gen government's ongoing public invest and services. Despite substantial real erate excessive inflation. Even if in ment review and planned domestic devaluation over the past three years, flation were controlled, the present tax reform should help sustain tight however, the persistently large gap monopoly power of many public en macroeconomic policy by rationalizing between official and parallel market terprises implies that many freely public investment and reducing the rates implies that the dinar remains set prices would still be inefficient. treasury's dependence on petroleum considerably overvalued. While real Reducing trade barriers represents a tax revenues. interest rates are no longer highly partial solution to the competition negative, they remain controlled and problem. A large increase in imports, James Parks, EM2CO June 1990 6 Volume 1· Number 3 Socialist Economies in Transition The World Bank/CECSE The Bank's Eastern and Central European Program he World Bank's Eastern and doing. Repeated urgings at G-24 strong supply response at the enter T Cen tral European Program (ECEP) is an initiative origi nally designed to deepen understand meetings to avoid duplicating efforts while dispensing reasonably consis tent policy advice underscore this prise level, however, reform programs will flounder. · Priuatization and ownership ing of the problems confronting preoccupation. issues are likely to be proceed slowly. economies in transition from central In a broad sense governments will planning to market institutions. The In its first year of operation, after need to manage and "regulate" not Bank launched the ECEP in Febru convening an "expert group" of only their "natural" monopolies but ary 1989 with the specific objective of policymakers from Eastern Europe, also firms that will be privatized. enriching the analytical dimension of distinguished academics, and IMF While considerable knowledge exists policy advice and, more generally, and Bank staff, the ECEP has con on the regulation of natural monopo strengthening the quality of the as centrated on three main areas: lies, little work has been done on sistance programs. The following ap · Macroeconomic management mechanisms for managing othernrms proaches were endorsed: during the transition to a more mar as central controls fall away. ket-oriented economy, particularly the · Reform ofthe CMEA is another · First, intensify work on critical associated questions of how to aban area of concern. CMEA trade will be aspects ofecononic reform where little don central control of prices while conducted principally at international is known, or where solutions to policy avoiding excessive inflation, and how prices and settled in convertible cur problems are nct evident. to sequence policy changes to mini rencies by early 1991. Because the · Second, widen the Bank's con mize economic costs. most substantive proportion of this tacts with outside researchers and · Enterprise behavior and reform, trade is the exchange of Soviet oil, institutes engag'ed in work on East including issues of monopolies, re natural gas and primary commodi ern and Centra: Europe. structuring, and privatization. ties for inferior manufactures from · Third, increase the Bank's ca · Safety nets to deal with the East and Central Europe, the smaller pacity to advise governments on ap social costs of adjustment, including CMEA countries will likely e) peri propriate policy reforms. severance and unemployment com ence substantial terms oftrade losses. pensation, pension reform, and hous The Soviet Union may well need to The Chief Economist of the Europe, ing. finance the ensuing balance of pay :.1iddle East, a1d North Africa Re ments deficits to smooth adjustment gion has formed a steering group to Much has been accomplished in these over a few years. In the process, help design and guide the program. areas, both in developing analyses as however, countries will become more Members represent the Bank's re well as through disseminating infor heavily indebted, raising new hsues search compleJ:, including the So mation through conferences and for the continuing flow of Western cialist Econonies Reform Unit workshops (e.g., the Privatization commercial bank credits. (CECSE), EDI, Strategic Planning, Conference, reported on the first page · The role of the state in all the the Sector Policy Department, and of this issue of our newsletter). reforming countries of Eastern and the China. Depa rtment. Central Europe can be expected to Analytical priorities undergo major changes as govern In the wake ofllst year's revolutions ments withdraw from numerous ac and the trj!mencous interest and work Over the next year the ECEP intends tivities. This will be reflectec, in a in Eastern and Cen era I Europe, the to focus on the following work: major reorganization and reorien ECEP hal; now taken on a more for · The most urgent analytical and tation of fiscal systems as bot:) the mal role. As paii, of the ongoing reor research priority is enterprise reform. content and composition of expendi ganization of the World Bank's Euro The responsiveness of micro-units to tures change, and as revenue sources pean department, a full-time position the changing economic environment are shifted from turnover taxe:; and for ECEP adrr.inistrator has been in reforming socialist economies is archaic company and payroll ta:er 3 11 Jun.:;) 1990 Socialist Economies in Transition The World Bank/CECSE I I Bibliography of Selected Articles i Socialist Economies BRADA, JOSEF C. and DOBOZI, ISTVA..'Il, eds. ' SCHUMACHER, DIETER and MOBIUS, L'TA. Money, incentives and emclency in the Hun Trade relations between the GDR and the BERGSTEN, GORDON S. and BOVA, RL"SSELL. garian economic reform, pari II. Eastern Euro· European Community. Economic Bulktitt, Worker power under Communism: the In· pean Economics (U.S.)2S:95-187, Winter 1989-90. Deutsches Institut fur Wirtschafl.sfOl'8chung terplay of exit and voice. Comparative Eesiiy come to constitute a major BUTTERFIELD, JIM. Devolution in anti-capiJ.a1ist force in years to come. CORNELSEN, DORIS. Ea8t German econe.my at the start of 1990. Economic Bu/klln, Det.tBches declsion.maklng and orpnlzationalchange I nstitut fur Wirtschaft.sfore.:hung(Germany Fed. Rep.) in Soviet agricultur... Comparativ. Economic SIMONOVlTS, ANDRAS. Hidden Inve8tment Studies (U.S.) 32:29·64, Summer 1990. cycles In sociali8t eeonomiea. Scandinavian 27:1-3, April 1990. Joul'1llJl 0{ Economics (Sweden) 3:583-97, 1989. COOK, EDWARD C. Reforming Soviet agri. DIENES, LESLIE. Pere8troika and the Slavic regions. Soviet Economy (U.S.) 5:251·75, July-Sep culture: problems with farm finances and Eastern Europe tember 1989. equity considcratiol18. Comparntive Economic Examines the errecls and significanCli of geographic Studies (U.S.) 32:65-84, Summer 1990. ANTON, ION. Relntegrarea economlel positiott, cumutotive advantages and disadvantages romaneat! In economia mondlala. ofpast development, presentinueatment cuts, political EBERHARDT, ALFRED. Comparison of ncw [Rclntegration ofthe Romanian economy In factors and links, and two recent decnes Oil enter economie methods in USSR environmental the world economyI. Tribuna Economica (R<> prise., ngwnalBelf-manOl/ement, and the devolution policy with Western approaches. Environ mania) No. 9:13-14, May2, 1990. ofauthority in s.l.ected Sltwic ngions. mental Management (U.S.) 14:151-60, March. April 1990. BARSONY, JENO. A tulajdonreCorm HUHNE, CHRISTOPHER. Letter from Europe; programja [Program of the property Ea8tern Europe and Latin America: obvious EKMAN, HARALD and KANFW, PETER. reform).Tarsadalomtudomanyi Kozl.menyek advantages, dublou8 analogies. International Perestroika In action:> A ncoinstltutlonal (Hungary) 19:293·309.311989. Economy (U.S.) 4:10,12, April·May 1990. analysis of Soviet state enterprise·· Studies in Internatwnal Economics QIId Geogrnphy. Re· BEREND, I,T. Cri818 of the Hungarian re MANZ, GUNTER. "Schattenwlrisehaft" in der search Reports (Sweden) No. 6:1-61,1989. form in the 1970... Acta Oeconomica (Hungary) DDR. ["Shadow economy' in Ea8t Germany.] 40: 138-49, 1-2 1989. WirtBchaftswisBenBchaft (Germany, Oem. Rep.) Asia 38;219-29, February 1990. Engliahawnmary, p.317. BONIME-BLANC, AND REA_ Ea8tern Europe: FAN, Q IMA 10. Compendium ofliterature on shaping up thelreol18tltutlol18.lnternatwnal NEMETI, LASZLO. Hatekonyaag ea re1rorm a price and price reform In China. London FinanciaILawReview(U.K)9:28-31, March 1990. mezogazdasagban [Emclency and reform in School of Economic8 and Political Sclenae, Devel· Views the constitutional and legal dimensions of agriculture]. Ga:tdalkodas (Hungary) 34:1-12. 31 opment Economics Research Programme. China economic change in Eastern Europe. 1990. Programme (U.K.) No.2: 1-89. Agricultun is a sector of great impor/anCli in the BOOKMAN, MILICA ZARKOVIC. Economic Hungarian economy. However, as the lax burden SHAN, FANG. Urbanization in Mainland basl8 of regional autarehy In Yugoslavia. increased signi[r.cantly while subsidies and PI"O(it de China. Issues and Studies; a Journal o{China Slwid Studies (U .K) 42:93-109. January 1990. cliMd during the last year, development 0{ /he sector Studies and International Affair. (Taiwan) stopped. 26:118-33, February 1990. BOYD, MICHAEL L. Organizational reform and agricultural performance: the case or East Germany; Intra·German paymen'tB: an TE-SHENG, CHEN. Interaction between Bulgarian agriculture, 1960-1985. Journal of analysis of the mechani8m. Internaticmal Cur economic and polltleal rcform in Mainland Comparntive Economics (U.S.) 14:70-87, March rency Review (U.K) 20:37.44, 3/1990. China, 1978-89.18.ue. QIId Studies;AJoumolof 1990. ChinaStudiesandlnternatwnaIAfTairs(Taiwan) 26: 13·34, February 1990. SOCIALIST ECONOMIES IN TRANSITION is a regular publication for internal use of the World Bank's Socialist Economies Unit (CECSE) in the Bank's Policy, Research and External Relations complex. The findings, views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations. Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent. Matyas Vince is the editor and production manager. For copies, send name and address to Matyas Vince, Room N-6027, The World Bank, 1818 H Street NW, Washington DC 20433 or call (202) 473-6982. Infonnation on conferences on socialist economies, matelnal on subjectsofspccial interest to ourreaders,letters to the editor, or other contributions are welcome. June 1990 12 Volume 1. Number :3