iq A12412 http://www.worldbank.org/html/prddr/trans/WEB/trans.htm http://www.wdi.bus.um .edu r a THE NEWSLETTER ABOUT REFORMING ECONOMIES RANSITION Volume 10, Number 5 The World Bank in collaboration with The William Davidson Institute October 1999 New Corruption Indexes of Transparency International: Wide Range of Scores At the end of October, Transparency International (TI), the global anticorruption organization, released its first Bribe Payers Perceptions Index (BPI). TI also published the fifth annual Corruption Perceptions Index (CPI), which this year ranks a record 99 countries, up from 85 in 1998. The CPI is a "poll of polls," based this year on 17 surveys from 10 more independent organizations than before. T he "bribe index" ranks 19 leading while China (including Hong Kong) re- which they are perceived to be the homes exporting countries by the degree ceived a score of only 3.1. of bribe-takers-public officials who to which their corporations are per- abuse their office for personal gain. ceived to be paying bribes abroad to se- The 1999 TICP Index nior public officials. The survey was As in 1998, this year Denmark heads the undertaken by Gallup International in 14 The CPI and the BPI are two sides of the CPI ranking with an essentially corrupt-free emerging market economies, including same coin: CPI ranks the home countries score of 10.0 (see table). "We are seeing Hungary, Poland, and Russia. The survey of the payers of international bribes; BPI many very poor countries in the lowest po- involved detailed questions to more than ranks countries in terms of the degree to sitions on the CPI. We would caution that it 770 senior executives at major compa- nies, chartered accountancies, chambers Help save our Russian language edition! of commerce, major commercial banks, and law firms. Respondents included for- Our Russian edition has fallen victim to across the board budget cuts. We are short the eign nationals and executives at interna- $35,000 annual support that helped finance the Russian edition of Transition, which is tional firms. The questions concerned the nowttwo issues behind. Intensive effortsto find in-house solutions have been unsuccess- propensity of corporations to use bribes. ful. We are concerned thatour partnerin Kyiv, the Intemational Centre for Policy Studies, which provides matching funds to translate, print, and distribute Tranformatsia, won't The survey shows that companies from be able to meet the demands of the 3,000 readers of the Russian language edition (and many leading exporting nations are widely the many more trying unsuccessfully to access the Russian version on the Web). seen as using bribes to win business. This despite the fact that in February 34 coun- To keep this important information source and free discussion forum accessible to our tries, including all leading exporting coun- Russian speaking readers across the CIS, we are turning to our readers for help. Busi- tries, agreed to an EOED convention to makes, brery of forentof a nesses, foundations, and individuals: Consider co-sponsoring the Russian edition of our newsletter. Transition has wide distribution. Beside our recently launched criminal offence. Ranking 19 leading ex- porting countries according to the "bribe Chinese edition,our English edition has a circulation of 11,000 for the printed version index" (where, on a scale from 0 to 10,10 and 2,000 for the electronic version. We have had nearly 38,000 hits on our Web site as represents a corrupt-free exporting coun- of September, 1999. For details, contact Richard Hirschler (rhirschler@worldbank.org try), Sweden got the best score with 8.3, or 202-473-6982) or Jennifer Prochnow (prochnow@worldbank.org or 202-473-7466). Development Research Group The World Bank S The William Davidson Institute LIM ONE would be wrong to call these countries the ter Eigen, Chairman of TI. He added: "Gov- Many experts suggest using caution mostcorrupt in theworld. Our Indexcovers ernments of countries with low CPI scores when interpreting TI data and point out more countries than ever before, butwe just need to do far more to publicly acknowl- that composite corruption ratings are in- do not have sufficient credible data to in- edge the problems, to confront the issues, herently imprecise. Since the CPI is an clude over 80 other countries," warned Pe- to subject the corrupt companies and the average of various sources' perceptions corrupt officials to prosecution, and to earn about corruption, it hides the wide diver- 1999 Transparency International Cor- public confidence by their antibribery poli- sity of opinion among these sources for ruption Perceptions Index (CPI) cies. a given country. This point has been Maximum and Minimum scores widely emphasized by the Latin American chap- deviate. The 1999 CPI score relates to percep- ters of Transparency International. They CPI Max. Min tions of the degree of corruption as seen have published an alternative presenta- Rank Country Score Scorea Score" by business people, risk analysts, and the tion of the CPI data that shows the mini- general public, and ranges between 10 mum and maximum scores for each 2 Finland 9.8 10.3 8.8 (highly clean) and 0 (highly corrupt). country as a tool to highlight the diver- 15 Hong Kong (China) 7.7 8.8 2.4 25 Slovenia 6.0 6.3 4.1 Range of corruption perceptions 27 Estonia 5.7 8.0 4.4 enmk 31 Hungary 5.2 8.0 3.8 1 r 39 Czech R. 4.6 6.1 3.6 43 Mongolia 4.3 5.3 3.4 - 44 Poland 4.2 5.4 2.8 HongKong 50 Lithuania 3.8 4.4 3.2 sovenia] --7 53 Slovakia 3.7 6.1 1.4 E-onia 58 Belarus 3.4 6.1 2.3 HL . B China 3.4 4.4 2.4 f ..b Latvia 3.4 5.1 1.5 C 63 Bulgaria 3.3 6.1 1.1 Mongolia Macedonia 3.3 4.8 1.5 Poajd Romania 3.3 4.3 1.5 Lithunia e 74 Croatia 2.7 3.9 1.5 atovaRrepublic 75 Moldova 2.6 3.5 1.4 BarsB Ukraine 2.6 4.3 0.5 China Vietnam 2.6 3.5 2.1 Lti_B 80 Armenia 2.5 3.2 2.4 _ 82 Russia 2.4 4.2 0.6 Bulgaria 84 Albania 2.3 3.0 2.1 Georgia 2.3 3.4 1.8 Ronania Kazakhstan 2.3 4.3 0.9 Croatia 87 Kyrgyz R. 2.2 2.8 1.8 Mddova Yugoslavia 2.0 3.7 0.6 Ukraine = n Uzbekistan 1.8 2.4 1.5 V5et__ 96 Azerbaijan 1.7 2.4 1.1 Am-a Indonesia 1.7 3.3 0.4 Aia'n_ 98 Nigeria 1.6 2.6 0.6 RussiaI 99 Cameroon 1.5 2.4 1.3 Albania (a) indicates the maximum standardized value given Georgia to a country by a source; in some cases it can KaIh5tank I exceed 10. Kyrgy ReFu-bic Median (b) indicates the minimum value given to a country Yugoslavia Score by a source. Welcista _ 99countries ranked,14 morethan in 1998.0fthe newly Awbalan surveyed countries, 13 are transition economies: Al- bania, Armenia, Azerbaijan, Croatia, Georgia, 0 2 4 6 8 10 12 Kazakhstan, Kyrgyz Republic, Lithuania, Macedonia, I_I Moldava, Mongolia, Slovenia, Uzbekistan. Source: Transparency International. TRANSIION, October 1999 (C 1999 The World Bank/The William Davidson Institute sity of opinion regarding each country. The accompanying graph show the Development Dividend Of Good same presentation for the transition Gn economies as well as Denmark, Germany Governance and Japan. A simple way to see the diversity of opin- here is a growing consensus ment outcomes, existing governance indi- ion in these corruption surveys is to look among academics and practitio- cators are not very precise, and there is a at the range of scores reported by differ- I ners that good governance is a key need to focus on real reform and better etockRussia, ingredient for economic development. measures of governance. ent oures fr ech ounty. akeRecent research at the World Bank by for example, which receives a very low av- erage score of 2.4, placing it 82nd out of Daniel Kaufmann, Aart Kraay, and Pablo Good Governance Fosters Develop- 99 countries in the CPI. However, at least Zoido-Lobat6n provides new empirical ment one source rates Russia as high as 4.2, evidence on the causal impact of better which would place Russia in the middle of governance on better development out- An improvement in governance-such as the pack and comparable to Poland, comes-the "development dividend" of an improvement in rule of law from that in whereas another source rates it as low as good governance. Russia to that in the Czech Republic, or a reduction in corruption from that in Indo- 0.6, which would place Russia on the bot- tom of the list. Kaufmann, Kraay, and Zoido-Lobat6n de- nesia to that in the Republic of Korea- fine governance as the traditions and in- leads to a two- to four-fold improvement in stitutions by which authority in a country is per capita incomes, a comparable de- exercised for the common good. This in- crease in infant mortality, and about a 20 In this Issue cludes the process by which governments percent improvement in literacy. Figure 1 are selected and replaced, the capacity illustrates the "development dividend" of Reward for Good Governance 3 of the government to effectively formulate better govemance, using several measures The Art ofAttrctingFDIand implement sound policies, and the of governance and several development The Art of Attractng FDI 5 respect of citizens and the state for the in- outcomes. It is worth stressing that these tries 7 stitutions that govern economic and social results are not just simple correlations be- interactions among them. Using this defi- tween better governance and better devel- EU Accession: Growth Potential 9 nition as a guide, the authors: opment outcomes. Rather, theirtechniques * A Skeptical View 11 allow them to identify a causal effect from * The Enlargement Process 13 * Gathered several hundred indicators of better governance to better development * Report Card of the Ten Candidates 14 governance produced by 13 different orga- outcomes. * World Bank Helps Candidates 16 nizations, including commercial risk rating TheThinkTanksareRolling 17 agencies, think tanks and other NGOs, and Ranking and Precision multilateral organizations including the World Russia: Rise of a Dual Economy 20 Bank, covering more than 170 countries. While the composite governance indicators * Stable Ruble Needs Fiscal Support 23 0 Developed and implemented a new developed for this research are very useful William Davidson Institute methodology to combine related gover- for understanding the broad cross-country * Marketing in Transition Economies 24 nance measures from these many sources relationships between governance and * Banking Reform in China 28 into six composite governance indicators development, not being very precise, they * International Conference in Beijing 30 that measure fundamental aspects of gov- are less informative about the quality of gov- ernance, namely voice and accountabil- ernance in individual countries. Yet, a nov- Gains in China's Enterprise Reform 31 ity, political instability and violence, elty of their methodology for constructing World Bank/lMF Agenda 33 government effectiveness, regulatory bur- aggregate governance indicators is that it Milestones of Transition 34 den, rule of law, and corruption. produces statistically sound margins of er- Conference Diary 36 0 Provided new empirical evidence of a roraround the estimates of governancefor New Books and Working Papers 37 strong causal link from better governance individual countries. In other words, there The Economics of Transition-Book to better development outcomes is some precision about the inprecision of Review 42 the country estimate. This allows users of Bibliography of Selected Articles 43 Their research points to three broad con- the indices to be relatively certain about the clusions: governance matters for develop- substantial uncertainty associated with © 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 * estimates of governance for individual coun- Figure 1. Governance dividend tries. In light of these margins of error, it is 25000 - misleading to offer precise rankings of coun- tries according to their level of governance. Small differences in country rankings are , 20000 - unlikely to be statistically-let alone practi- a / cally-significant. = 15000 . , * * * c * / - E a Diagnosing Causes of Misgovernance 0 a *. and Focusing on Real Reform I10000 - (U Composite governance indicators O* N based on existing sources of gover- 0X 5000 - * a nance data are powerful tools for draw- * a . . * * ing attention to governance issues. They 0 - * are also indispensable for cross-coun- Government Effectiveness try research into the causes and con- sequences of misgovernance. But they 300 are a blunt tool for providing the basis a for policy advice: they only provide an M250 initial benchmark of where countries m c a) stand relative to each other on gover- a a nance issues. Most countries, for any of X 200 * x a the six previously mentioned gover- 0 a a a 0 nance indicators, could be placed into ~ a a . a a crisis, high risk, or low risk categories , a depending on the extent of systemic > * a \ * 100 a misgovernance risks. No further fine-tun- _\ ing in rankings is warranted. E a a To help countries improve their gover- N' * nance, much more needs to be known 0 _ a about the country-specific policy and in- Rule of Law stitutional failures that are reflected in perceptions of misgovernance in the 10,- a existing data. lndepth country gover- 90 , nance diagnostics are an essential tool to helping countries understand and de- 80- a a sign their own solutions to improve gov- 70 ernance. Monitoring progress should focus on real institutional reform and rig- a orous, indepth, country-specific, and lo- 50 cally owned diagnostics. U * aS 40 - This article is based on two recent 30: World Bank Policy Research Working < Papers of Daniel Kaufmann, Aart Kraay, 20 and Pablo Zoido-Lobaton: "Aggregat- 10- ing Governance Indicators" (no. 2195), and "Govemance Matters" (no. 2196). Voice and Accountability Both papers are available electronically atwww.worldbank.org/wbi/gac. Source: Kaufmann, Kraay and Zoido-Lobat6n (1999). a TRP-,SITION, October 1999 (C 1999 The WAorld Bank/The WVilliam Davidson Institute The Art of Attracting Foreign Direct Investment in Transition Economies by Jacqueline Coolidge B efore the fall of the Berlin Wall in associated with privatization (notably the Transition Economies' Comparative 1989, foreign direct investment Czech Republic, Estonia, and Hungary, all Advantages (FDI) in Central and Eastern Eu- strong performers in attracting FDI; see rope was limited to a handful of joint ven- table), followed by a fall as they ran out of In the eyes of foreign investors, the East- tures with state-owned enterprises. Early assets to sell to foreign investors. The key ern European region has three especially in the liberalization process, some of the issue of the post-privatization era is how to attractive features: most rapid reformers (such as Hungary attract FDI into greenfield ventures and into and Estonia) opened their doors to FDI, privately owned assets. While selling pre- * Low-cost but qualified labor. while others maintained restrictions for existing industrial and commercial assets is * Long-term market potential. many years. usually possible if the price is low enough, * Access to rich natural resources. foreign investorswho might make greenfield Many countries in the region have experi- investmentsaresensitivetothebusinessen- The labor force in Eastern Europe is enced a hump or spike in their FDI inflows vironment and to market potential. viewed as literate and skilled, but still rela- Foreign Direct Investment Inflows in Central and Eastern Europe and Central Asia (US$ millions) 1997 Population Country (millions) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Albania 3 17.0 20.0 58.0 53.0 70.0 90.1 47.5 45.0 Armenia 4 0.8 8.0 25.3 17.6 51.1 70.0 Azerbaijan 8 330.1 627.3 1,114.8 1,023.0 Belarus 10 7.0 17.6 10.5 14.7 72.6 200.0 120.0 Bulgaria 8 4.0 56.0 41.5 55.4 105.4 90.4 109.0 505.0 200.0 Croatia 4 13.0 96.3 113.1 101.2 533.3 388.3 854.0 Czech Republic 10 654.3 878.2 2,567.6 1,435.3 1,286.0 1,400.0 Czechoslovakia, former 15 257.3 207.1 599.9 1,102.6 Estonia 1.5 82.3 162.2 214.4 201.5 150.2 266.2 300.0 Georgia 5 8.0 6.0 40.0 50.0 50.0 Hungary 10 187.0 311.0 1,462.1 1,479.2 2,349.7 1,144.1 4,518.6 1,982.4 2,079.0 1,936.0 Kazakhstan 16 100.0 150.0 185.0 964.3 1,136.9 1,321.3 750.0 Kyrgyz Republic 5 10.0 38.2 96.1 47.2 83.8 55.0 Latvia 2.5 29.4 45.1 214.5 179.6 382.0 521.0 274.0 Lithuania 3.5 10.0 30.2 31.3 72.6 152.4 354.5 925.5 FYR Macedonia 2 24.0 25.0 11.2 15.7 18.0 Moldova 4 25.0 17.0 14.0 11.6 25.9 23.7 71.9 70.0 Poland 39 11.0 89.0 291.0 678.0 1,715.0 1,875.0 3,659.0 4,498.0 4,908.0 5,500.0 Romania 23 (18.0) 40.0 77.0 94.0 341.0 419.0 263.0 1,215.0 950.0 Russia 147 700.0 700.0 638.0 2,016.0 2,478.0 6,243.0 2,183.0 Slovak Republic 5 198.8 203.4 182.6 280.5 165.0 350.0 Slovenia 2 111.0 113.4 128.1 175.9 185.4 320.8 165.4 Tajikistan 6 10.0 15.0 16.0 20.0 18.0 Turkmenistan 5 108.1 85.0 130.0 Ukraine 50 170.0 50.0 159.0 267.0 521.0 623.0 640.0 Uzbekistan 24 40.0 30.0 50.0 115.0 55.0 285.0 200.0 Total 397.5 455.3 593.1 2,491.0 4,678.0 6,544.8 6,443.8 16,138.4 15,216.2 22,220.9 18,226.9 Source: FIAS (D 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 D tively low cost. There are, however, long- Nonetheless, restrictions continue in some expenses, business travel, inventory term fears about the "brain drain" of tech- areas. For instance, several countries losses, and bad debts. Loss carry forward nical professionals and the strong upward block foreign investors from acquiring full is usually very limited, and depreciation trend of real wages for skilled workers. ownership of land, especially in agricultural rates are unrealistically long. Progress is Labor costs also are pushed up by high areas, border areas, and other sites being made in this area, but it is slow and payroll taxes, needed to fund the high pen- deemed sensitive or strategic. Poland and requires extensive technical assistance sion bills of a demographically mature Slovenia have the most restrictive regimes and training for the tax administration. population. for foreign land ownership, which may have deterred foreign investments in agribusiness. Several countries are introducing or consid- Central European markets benefit from Othercountries, like Lithuania, are readyto ering more transparentand automaticforms their proximity to the mature EU market. allow foreigners to own land, butforeign in- of investment incentives, such as acceler- Many producers in the global economy find vestments are put off bythe uncertainties and ated depreciation, more generous loss it efficient to source some of their prod uc- lengthy delays involved in land acquisition. carry-forward, and investment tax credits or tion in high-skilled, low-wage Central Eu- These concems include the difficulties of res- investment tax allowances that operate au- ropean countries and to export to Western titution and land reform and the slow devel- tomatically through the tax code without need Europe. The Baltic countries are similarly opment of cadastral registries. for prior screening and approval. well placed for the Nordic market. Russia is a huge and lucrative potential market that Investment incentives are becorning more Another important aspect of the business excites many consumer-goods producers. sophisticated. In the early 1 990s, most environment is business regulation, includ- But the Russian business environment is Central and Eastern European countries ing investment procedures. While many still considered poor detering all but inves- (with the notable exception of the Czech countries have a sound legal framework tors who feel the Russian market is a Republic) offered tax holidays. In the mid- on paper, investors, in general, and foreign "must." 1990s, several countries dropped these investors, in particular, complain that imple- holidays, including Estonia and Hungary. mentation is inconsistent, unfair, rigid, or Natural resources have been Central Estonia maintained a flat income tax rate corrupt. For example, company registra- Asia's chief attraction for FDI, which has of 26 percent on most sources of income, tion can take place within three days in focused almost exclusively on the extrac- while Hungary introduced a lower corpo- Latvia, while it usually takes more than tive sectors. Azerbaijan and Kazakhstan rate tax of 18 percent. Both countries at- three months in Slovakia (that is, without a have attracted significant volumes of FDI tracted high FDI inflows. bribe). into oil and gas, while the bulk of FDI in the Kyrgyz Republic has gone into gold Some governments, including the Czech Customs procedures can varywidely from mining. The business environment in these Republic and Hungary, concerned with the one border post to another in Bulgaria. countries, however, is considered too poor winding down of privatization programs and Running the gauntlet of the construction to attract much manufacturing or service an expected dip in FDI inflows, introduced permit process takes about 18 months in investment. new tax holidays and other investment in- Latvia. Romania has been plagued by a centives. Some Baltic countries are now rapid proliferation of new fees and levies What Makes a Favorable Environ- flirtingwiththeideaofabolishingcorporate on producers-with accompanying regu- ment? income tax, although they would continue latory procedures-overthe past year. The taxing dividends distributed to sharehold- list of problems can appear endless and The Czech Republic, Estonia, Hungary, ers. Most tax experts advise against this often deters foreign investors, especially Poland, and Slovenia-countries se- approach; they find it distortionary and prominent multinational corporations that lected for the "first wave" of EU acces- more difficult to administer than it might cannot risk being seen bending the rules, sion-tend to have the most advantageous seem. Why? Because many employees even if such behavior is the norm. business environment and have attracted would try to turn themselves into companies the most FDI (per capita or relative to and contract their services back to their Several governments in Central and East- GNP). These countries place few restric- original employer-and almost all compa- ern Europe-Bulgaria, Latvia, Lithuania, tions on FDI, offer "national treatment," nies would disguise dividends. and Romania-have begun documenting have a relatively sound company law or investment procedures and business regu- commercial code, and impose no restric- Many Central and Eastern European coun- lations, soliciting feedback from the private tions on current account transactions and tries severely restrict deductions for ex- sector, and seeking advice on removing few restrictions on capital account trans- penses that are routinely allowed in the EU administrative barriers to investment. The actions. and North America, including advertising Latvian government, for instance, is devel- * TRANSITION, October 1999 © 1999 The WVorld Bank/The William Davidson Institute oping guidelines to improve the transpar- Linkages to Local Companies some of the most promising of the local ency and accountability of the various suppliers, helping to improve quality con- government inspectorates that enforce Some CEE countries that have already at- trol, reliability, and responsiveness. Do- regulations in the workplace (for example, tracted many multinational corporations to mestic firms that are competitive enough fire, safety, sanitation, and language in- their shores are now keen to enhance the to supply multinationals are also the most spection) and to remove opportunities for links between multinationals and local sup- likely to break into global markets on their corruption by active input from the private pliers. In fact, a strong supplier base is own. sector-including foreign investors. considered desirable by those foreign in- vestors with globalized production bases. Jacqueline Coolidge is program man- Corporate governance has proven to be ager for Europe and Central Asia at the a significant factor in FDI flows associ- Multinationals often are willing to devote Bank Group's Foreign Investment Advi- ated with mergers and acquisitions. Most time, effort, and resources to work with sory Service (FIAS). Central and Eastern European countries are still relatively weak in protecting mi- nority shareholders. In the Czech Repub- F r inD r c n e t e t e lic and Slovakia, severe backlogs in Foreign Direct Investment: New bankruptcy proceedings are keeping oth- TriCo n ie erwise interested foreign investors from rends Tn Transition Countries acquiring and restructuring industrial and commercial assets that will get them n 1998 the flow of foreign direct invest- agency estimates the total at $11 billion. back into production. ment (FDI) into Central and Eastern Despite the differing numbers, there is little Europe reached $23.7 billion, 5.9 per- dispute that Poland leads the region in The New Frontier: Infrastructure cent higher than the previous year. Portfo- absolute numbers. Several other trends lio investments in the region declined after can also be seen: As private participation in infrastructure theAsian financial crisis-and declined fur- becomes more commonplace, there are ther still after the Russian and Brazilian 0 The inflow of FDI to the 10 Eastern Eu- manynewopportunitiesforFDl.Thecoun- crises. However, flows of FDI capital, rope countries that have applied for EU try benefits from imported new technology which tend to aim for longer-term opportu- membership was $16.5 billion, $5 billion and management techniques, in addition nities and make more careful distinctions higherthan in 1997. to the basic inflow of capital. However, between regions and countries, increased many governments find themselves at a in Central Europe and Ukraine in 1998, 0 FDI inflows increased significantly over disadvantage in negotiating with foreign declining only in Russia and Belarus. As the previous year. investors. These governments are new to the Report of the Economic Intelli- the game, while foreign investors are very gence Unit (EIU) points out, the region's * Hungary is making the region's first suc- knowledgeable and experienced. This share of global FDI fell from 4 percent to cessful shift to post-privatization FDI; 94 difference in experience points to a con- 2.7 percent; the lion's share of last year's percent of investment went into greenfield tinuing need for advisory assistance. rise was absorbed by the United States projects last year, against 34 percent in and the EU. FDI to Asia's developing 1995. Such investments support restruc- Some governments that rushed to priva- economies fell by 11.5 percent, toAfrican turing and economic growth more directly tization, agreeing to many years of broad countries by 12 percent. than takeovers. monopoly protection, are now being re- quired by the World Trade Organization or General Trends * The region's prospects are becoming the EU to renegotiate the deals and allow increasingly dependent on the longer-term more competition. Even countries not re- Keeping track of FDI is no simple matter. development of demand in Western Eu- quired to renegotiate often feel a desire The latest analysis from UNCTAD differs rope, primarily Germany. The motivation todo so in orderto bring down excessively considerablyfrom otherassessments, in- for new FDI in Hungary has shifted from high tariff rates that are pricing communi- cluding that of FIAS (see table page 5). local-market activity to export-oriented cations-intensive service industries out of For Poland, for example, UNCTAD calcu- ventures. In Poland, too-although the the market. Countries like Slovenia are de- lates that FDI last year was a mere $5.1 large and expanding domestic market at- veloping a sound legal framework for pri- billion, whereas the EIU puts the total at tracts an increasing amount of invest- vate participation in infrastructure before $8 billion and Oxford Analytica puts it at ments-many new projects aim to export moving ahead with privatization deals. $7 billion. Poland's own foreign investment to the European Union. C) 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 C * Southeast Asia is not a serious com- projects in Bulgaria and Croatia were de- vestment. Countries bordering the EU are petitor of Eastern Europe in attracting FDI. layed in May and June. However, a recov- more attractive, owing to their stronger While the main foreign marketfor Eastern ery of foreign investment activity in the economies and faster transformation, as Europe is Western Europe, multinationals Balkans might be expected in connection well as their geographic and cultural prox- settled in SoutheastAsia concentrate their with increasing political stability since June imity. In the more stable Central European export activities on the U.S. and Japanese and the progress of reconstruction plans. region, the choice of privatization method markets. Competition between European If Western European economies recover and speed of privatization sales have also and Asian production sites is confined to in the second half of this year, FDI in East- been important. Fast sales of state-owned Europe-oriented activities. However, this ern Europe may surpass the level of 1998. enterprises to the highest bidder allowed competition has intensified with the emer- foreign investors to take a controlling posi- gence of some Eastern European produc- FDI Stocks tion over most of the Hungarian manufac- ers as viable alternatives to Asian firms-in turing, financial, and retail sectors. Sales to the electronics industry, for instance. As a result of an inflow of new capital, meth- foreigners were more selective in other odological changes, and exchange rate countries, where voucher methods and le- The highest per capita inflow of FDI was fluctuations, the stock of FDI in the region veraged sales to management dominated. registered in Estonia ($401) followed by increased by 33 percent in 1998. Method- the Czech Republic and Lithuania (around ological differences make stock data less FDI Sources $250). Croatia, Hungary, and Poland came comparable across countries and years next with sums below $200 per capita. In than flow data. FDI stocks in countries of Germany is the largest investor in Central Bulgaria, Romania, and Slovakia per Eastern Europe and the former Soviet Europe, followed by the United States. The capita FDI was below $100, and in Rus- Union reached $104.4 billion, $14.8 billion stronger European capital-exporting coun- sia and Ukraine that number remained at of it invested in Russia and $72.1 billion in tries-such as France, Italy, the Netherlands, around $15. the 10 EU-associated countries. Poland Switzerland, and the United Kingdom-have has the highest amount of FDI: $24.8 bil- a significant presence in almost all Eastern 1999 Trends lion, if the estimation forthe 1998 inflow of Europe states. Japan shows weak interest $7 billion proves to be correct. Hungary in the region.Like the Republic of KoreaJa- Investmentvolumes in thefirst half of 1999 comes second with $18.3 billion. For the pan is involved in a small number of large were generally higher than a year earlier, Czech Republic, revised data include not projects us investorspreferlargerthana although this may reflect significant one- only equity capital but reinvested profits and erage-size investments, with Poland the num- off privatization deals rather than a con- inter-company loans, leading to a jump in ber one target Austna has a prominent role tinuous trend. FDI stocks to $13.5 billion. in this region, with its proximity compensat- ing forthe country's small size. In tiny Slovenia, * First-quarter Czech data show a boom The size of the FDI stock relative to GDP is for instance, Austrian investors rank number in FDI with $608 million-almost three generally used to assess the comparative Austria alsso plays a maj Grol in Slovki. times more than in the first quarter of 1998. attractiveness of countries to foreign inves- Neighborlytiesto Bulgariajand Romania lead tors. In this respect, Hungary, with FDI stocks thighblevels o support fRomaTurkead * The Polish balance of payments regis- at 38.5 percent of GDP, and Estoniia, at 35.0 Greece. Russia is notasignificantdirect in- tered an inflow of $1.14 billion in the first percent of GDP, are far ahead of other East- vestor in the region, except in Poland. quarter, 13 percent more than last year. ern European countries. Indeed, they are among the leading FDI recipients worldwide. FDI in manufacturing is concentrated in car * In Hungary $853 million was invested in The Czech Republic and Latvia hiave more production, electronics, and construction the first six months, 23 percent more than than theworld average of 15 percent of GDP, materials. In countries where telecommuni- in the same period of 1998. while Lithuania and Slovenia are near the cations or banking privatization lags behind, world average. In the western Balkans the manufacturing accounts for more than 50 * In Slovenia five-month data show a dou- stock of FDI is about 5-6 percent of GDP percent of FDI. Only in Hungary is the manu- bling of FDI to $45 million. facturing sector less than a 40 percent share, These data broadly reflect the progress of owing to the progress of privatization in all * Bulgaria reported some decrease and each country in terms of transformation, sectors of the economy, including utilities. Romania an increase of FDI in the first four pace of economic development, and months of 1999, although these figures do progress of privatization. The lack of basic Information for this article was excerpted not reflect the negative impact of the economic stability in most of the western from Oxford Analytica, the Oxford (UK)- Yugoslav crisis. Several investment Balkans has been a major obstacle to in- based International Research Group. * TRkNSI1-ON, October 1999 (D 1999 The -World Bank/The WNilliam Davidson Institute The Hidden Growth Potential of EU Candidates by Tsuneo Morita Central European countries have every opportunity to enjoy large-scale and steady economic growth in the first decades of the 21st century, assuming their economic integration with the European Union and a steady flow of foreign direct investment (FDI). Once the process of growth begins, continued growth and currency appreciation can be expected for at least 10 years, much like the experience of Spain and Portugal afterjoining the European Union. Miscalculating Convergence There are some common defects in these high because the currency of both coun- calculations (tables 1 and 2): tries was highly undervalued at the time. Economists who focus on EU enlargement * Post-socialist countries were hit by the are intensely debating when and how the 0 Central and Eastern European countries transformation recession during the early per capita GDP of the highest income can- often are treated as one homogenous 1990s, making it meaningless to discuss didate countries (primarily the Czech Re- group, although some countries are con- convergence based on data of that period. public, Hungary, Poland, and Slovenia) will verging while others are diverging. * The applied growth models consider reach the lowest income membership 0 GDP, calculated as purchasing power growth determinants such as the school countries in the European Union-Greece, parity (PPP), can lead to misplaced con- enrollment rate, the population growth rate, Portugal, and Spain. According to some clusions. (PPP means that the same and the rate of public investment com- economists, there will be no convergence goods sell for the same price in different pared to annual GDP. These rates are at all; what's more, the income gap is pre- countries if measured in a common cur- more or less similar in all European coun- dicted to widen over time. Others believe rency-such as in dollars). For example, tries, including Central and Eastern Eu- it will take at least a generation for the East based on PPP, the 1995 GDP of the Czech rope. But if the traditional growth models to catch up to the West. Republic and Slovakia seemed extremely for convergence calculations ignore spe- cific regional characteristics and factors that might accelerate economic growth during the transformation process, the re- Table 1. Calculations Based on Barro and Levine-Renelt Models sult can be misleading. Barro model Levine-Renelt model government consumption investment Revalued Economy and Currency = 10 percent = 30 percent (in percent of GDP) (in percent of GDP) System transformation-if carried out Number of Number of correctly-mobilizes the huge economic Per Capita years to years to potential of the people that couldnot sur- income in Projected converge to Projected converge to face under the political oppression of old US$ per captia low-income per capita low-income regimes. Transformation brings about Country (PPP based) growth (9%o) EU levels growth (%) EU levels qualitative changes to economic activi- ties and induces gradual appreciation of Bulgaria 5,132 4.92 29 5.01 28 production factors-land, labor, and capital. Once the labor force is properly Croatia 4,142 5.38 32 5.48 31 combined with capital, technologies, and Czech Rep. 8,173 5.44 11 4.40 15 business opportunities, production Estonia 7,203 5.23 16 4.93 17 surges. The inflow of FDI plays an im- Hungary 6,211 5.28 20 5.02 22 portant role in revaluing production fac- Latvia 5,002 5.50 25 5.79 23 tors in transition economies. In the long Lithuania 3,035 6.10 34 6.22 33 run, FDI helps to close the income gap Macedonia, FYR 1,628 6.08 50 5.96 52 between transition economies and Poland 6,364 5.42 18 4.75 23 Western economies. Traditional ap- Romania 3,542 5.47 36 5.64 34 proaches to convergence usually neglect Slovakia 6,671 5.86 15 5.00 19 the appreciation component, although it Slovenia 6,342 5.31 19 4.58 24 is one of the major sources of high eco- Average 4,922 5.62 28 5.31 31 nomic growth in transition economies. © 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 Table 2. Convergence calculation The discrepancy between the two growth year-would be accomplished around based on neoclassical growth model rates-real GDP and dollar-denominated 2010-2015, assuming that the growth rate GDP-can be explained bythe continuous of these countries outperforms that of appreciation of currencies in real terms. Greece, Portugal, and Spain ("low West") Countries to converge PerCapitaGDicunres to c e This, in turn, reflects the steady revaluation by 7 percent every year. That seems an of production factors in Central and East- ambitious target. But convergence can be Market rate ern Europe. The high GDP growth rate in examined in anotherway: GDP, on the pro- 1992-1995 24 - dollar terms rapidly reduces the GDP gap duction side, consists of compensation to 1992-1997 19 73 between the relatively low income EU coun- employees, operating surpluses, net indi- 1993-1997 24 - tries and the relatively high-income Central rect taxes, and depreciation. For simplifi- 1993-1997 19 69 and Eastern European countries. This ten- cation, we assume that GDP consists of PPP rate dencywill accelerate once the candidates wages and profits and that wages in- join the European Union. Thus the conver- crease in proportion to profits. 1993-1997 24 gence period may be much shorter than 1993-1997 19 44 suggested bytraditional calculations. Subsequently, we can consider conver- gence in terms of the number of years Another potential growth factor ignored by Table 2 shows that convergence for the necessary to close the wage difference traditionalconvergencecalculationsisthe Czech Republic, Hungary, and Poland between the "high East" and the "low possible future revaluation of postsocialist ("high East")-with 1998 as the start off West" countries. Even if wages rise 10 currencies. Since the communist era most of those currencies-never ex- Table 2A. Convergence time to the GDP level of Spain posed to a market valuation system- (per capita GDP of 1998=US$13,950) have remained undervalued. Almost all post-socialist countries have recorded Per two- or even three-digit inflation rates Capita GDP Gap in GDP growth rate during the past 10 years of transforma- in 1998 3% 4% 5% 6% 7% 8% 9% 10% tion; accordingly, they have continuously US$ years years years years years years years years devaluedtheircurrencies. Hungary 4710 38 28 23 19 17 15 13 12 Czech Rep. 5260 34 26 21 17 15 13 12 11 Thus devaluation in nominal terms and ap- Poland 4075 43 32 26 22 19 16 15 13 preciation in real terms were typical in Cen- tral and Eastern European countries in the Table 2B. Convergence time to the GDP level of Portugal past decade. The rate of devaluation usu- (per capita GDP of 1998=US$11,174) ally lagged behind the inflation rate so the Per real exchange rate appreciated in dollar Capita GDP Gap in GDP growth rate terms-but most transition currencies re- in 1998 3% 4% 5% 6% 7% 8% 9% 10% mained undervalued. It seems certain that US$ years years years years years years years years during the ongoing integration process, Hungary 4710 30 23 18 15 13 12 10 9 Central and Eastern European currencies Czech Rep. 5260 26 20 16 13 11 10 9 8 willgraduallyfurtherappreciate. Poland 4075 35 26 21 18 15 13 12 11 Compared to other emerging markets, real Table 2C. Convergence time to the GDP level of Greece GDP growth rates of Central and Eastern European countries proved modest overthe (p o $ 75) first 10 years of transformation. However, Per growth rates in dollar terms at market ex- Capita GDP Gap in GDP growth rate change rates (domestic currency converted in 1998 3% 4% 5% 6% 7% 8% 9% 10% into dollars at market exchange rates) show US$ years years years years years years years years an entirely different picture. These growth Hungary 4710 31 23 19 16 14 12 11 1.0 rates have been surprisingly high in almost Czech Rep. 5260 27 20 16 14 12 10 9 8 everyyearof thetransformation period. Poland 4075 36 27 22 18 16 14 12 11 TRANSITION October 1999 ©) 1999 The World Bank/The William Davidson Institute percent a yearfaster in the "high East" than If History Repeats Itself ... nual economic growth, measured in dol- in the "low West," it would take the three lars at market rates, for at least 10 years Central European countries about 15 How has convergence progressed for after entry into the EU. If these assump- years to catch up with the Western wage the current "low West" countries once tions are correct, the annual growth dif- level. Thus the "low West" countries can they joined the European Union in the ferential between the "low West" and the maintain their competitive edge over this mid-1970s? A decade of slow growth "high East" could be more than 7 per- period, assuming a steady flow of FDI. pre-accession was followed by a de- cent, leading to rapid income conver- cade of dynamic GDP growth in dollar gence. FDI Stimulates Growth terms at market exchange rates. This change can be attributed to the real ap- Tsuneo Morita is research adviser at Data in most countries show that per preciation of their currencies, which ac- Nomura Research Institute, Budapest. His capita GDP growth is closely related to per counted for almost 80 percent of the email address is t-morita@hungarynet. capita cumulative FDI. Hungary was once GDP increase. This article is based on his earlier pub- an exception. Until recently, Hungary re- lished paper "On the Income Conver- ceived the most FDI among post-socialist If history repeats itself, the emerging gence of Central European Countries," countries (only lately has Poland overtaken Central and Eastern European econo- Nomura Research Institute Discussion it), but its GDP growth rate has hardly re- mies can look forward to 10 percent an- Paper, May 30, 1999. flected the large FDI inflow. And despite the large inflow, the Hungarian forint barely appreciated in real terms. Several factors A Vie explain this unusual trend: Convergence? A Skeptical View * Hungary inherited a heavy burden of from the East external debt, and repayment of that debt has absorbed a large amount of external by Joze Mencinger capital without causing appreciation of the currency. j hen everybody is enthusiastic, is 7.5 times higher. This asymmetry extends * FDI has targeted privatized state com- ViV when only benefits are seen to the benefit side. The costs and benefits panies, and so far much foreign capital has and costs overlooked, and of expansion differ drastically for incum- flown into infrastructure activities-such as when doubts become annoying, econo- bents and potential newcomers. For new- banking and utilities-that have not yet mists should become concerned. They comers,theEUmarketisjustabouttheonly contributed to expansion of production and should be particularly concerned if they market they have and therefore one they increased value added. come from Central and Eastern Europe, cannotafford to lose. Theyexpectthis mar- * The level of capital accumulation is still where illusions nurtured over decades con- ket to bring them capital, well-paid jobs, and low in Hungary. The domestic market is tinue durng transition with the added expec- fiscal transfers. For incumbents, the poten- relatively small (with a population of 10 tation that a capitalist market mechanism tial benefits of expansion are meager and million people), and demand is limited due can instantly deliver welfare while political the costs could exceed the benefits for to the low income level (the wage level has change can straightaway bring countries some time. Trade with Central and East- not increased for 7-8 years in dollar terms, "back to Europe." In fact, transition has been ern Europe represents only 3 percent of EU and the monthly average gross wage re- slow and painful, with many setbacks. The trade. Entry into the EU would not transform mains within the $300-350 range). FDI aspirations of Central and Eastern Euro- those small markets into large ones. EU has contributed little to a deepening of the pean countries to join the European Union countries can already reap the benefits of domestic market, which would boost the have encountered some reluctance on the cheaper labor in Central and Eastern Eu- GDP growth rate. part of EU members, who can easily visual- rope under existing arrangements. ize a future without them. These are the main reasons for the small real Expansion would enlarge the EU budget, appreciation of the forint despite the large in- Both the enthusiasm on one side and the so shouldn't present benefactors be willing flowof FDI. Thesesamefactorssuggestthat reluctance on the otherare well founded. to pay more or at least agree on sharing Hungary will experience a large takeoff in These emotions reflect an enormous existing subsidieswith the newcomers?The terms of real appreciation and GDP growth asymmetry: the GDP of EU members is economic moral appears to be clear: EU oncethe burden of external debtlessens and 40 times that of the 10 Central and East- expansion toward what the Central and the leveling of the wage rate starts. ern European applicants; GDP per capita Eastern European countries proclaim "a (C 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 C State of Central and Eastern European Economies in 1997 sets to foreigners. The usefulness of for- Unemploy- eign assistance in form of loans, acquisi- Current General Foreign direct ment Exports of tions, or portfolio or direct investments by account Inflation gov't investment rate, goods and which a country might finance its current GDP balance as rate balance as inflows as ILO servi'ces as account deficit and development is thus Country growth % of GDP in % % of GDP % of GDP definition % of GDP ntdsusda l,wiemtoooia not discussed at all, while methodological Bulgaria -6.9 4.1 1084.0 -2.6 4.8 15.0 61.3 problems related to double counting are Czech Rep. 1.0 -6.1 8.4 -2.2 2.5 4.7 57.6 neglected. Estonia 11.4 -12.0 11.2 2.1 2.7 10.5 77.2 Hungary 4.4 -2.2 18.3 -4.8 4.6 8.1 46.4 Latvia 6.5 -6.3 8.4 1.8 6.3 14.4 56.2 The performance of the 10 Central and Lithuania 5.7 -10.3 8.8 -0.5 3.4 14.1 54.6 Eastern European applicant countries in Poland 6.9 -3.2 15.0 -3.1 2.2 11.2 22.8 1997 indicates that high growth was ac- Rumania -6.6 -6.7 155.0 -3.6 3.5 6.0 28.3 Slovak Rep. 6.5 -6.9 6.1 - 0.3 11.6 56.4 companied by enormous current account Slovenia 3.8 0.2 8.4 -1.1 1.8 7.1 54.3 deficits or a large share of foreign direct Source: Compiled by the author. investments in GDP, particularly in the three Baltic countries (see table). Budget defi- political necessity and a historic opportunity" Eastern European countries have the cits were mhorex t Hungar d will most likely be overdue, and decisions proper institutional structures. twer coweries in angarymand will be based on political grounds only. two larger countries (Poland and Romania) with modest shares of foreign trade in GDP. Whether Central and Eastern European This brings us back to economic issues. countries can fulfill the requirements is less Gradual convergence of Central and East- In 1993, which marked the end of Kornai's relevant than whether the EU can afford the ern European countries with EU members "transformational depression four cou n- expansion. To preserve a facade created by is assumed-or pretended. Can conver- tries had a combination of GDP decline promises, the EU could shift the blame to gence be confirmed by actual develop- and current account deficit, two had de- applicants and slowthe entry process by in- ment? It appears that the initial positive dine and surplus, two had growth and defi- venting new hurdles until expansion be- effects of institutional changes on the eco- cit and two had growth and surplus. In comes affordable or until current members nomic performance of Central and East- 1994 f tri bind th ith can reorient subsidies and make changes ern European countries have been waning surplus, while in 1997 only Slovenia had in their own existing arrangements. rapidly and that catch-up effects might end growth without current account deficit. soon. The gap between EU and Central Since 1995 applicant countries have re- The institutional and administrative ability and Eastern European countries might lied more and more on foreign savings to of the countries not only to formally accept expand rather than shrink. finance their current account deficits. the acquis communautaires of the EU but also to apply them in reality might be the The economic performance of the former Thus the rather modest growth of GDP in real hurdle for accession. Formally, the in- socialist countries is typically rneasured applicant countries that followed the recov- stitutions and know-how of a market using changes in inflation rates and inter- ery from transformational depression has economy can be reestablished by de- est rates, exchange rate regimes, exist- been accompanied bya constant worsen- crees, and most Central and Eastern Eu- ence of financial institutions ancl financial ing of the current account since 1995; in- ropean countries have been more than deepening, liberalization of capital flows, trinsic or inherent growth turned into decline willing to copy them from the West. How- and the state of privatization. That the use by 1996. This might be a warning that the ever, the gap in social behavior created of these criteria has been at least ques- vitality of Central and Eastern European by 40 years of socialism cannot be simply tionable was most dramatically shown by countries-specifically their ability to grow willed away. It is unlikely that market insti- events in Russia. Perhaps these criteria without reliance on foreign savings-is tutions borrowed from the West would ac- should be replaced by sustainability of weak and fading. It also casts doubts on tually operate in the East as they do in the growth indicators linked to the current and the assumption of convergence. In fact, the West, where their creation was a gradual capital account. This might be called the gap between EU and Central and Eastern process over centuries of interactions be- criterion of intrinsic or inherent economic European countries could grow rather than tween economic development, politics, growth, defined as growth of GDP com- diminish, making delayed accession even and institutions of civil society. The "com- bined with share of current account surplus more difficult than "premature" accession. ing back" to a "normal" market economy in GDP. This is growth that is attained by can therefore only be a slow process; it an economy without reliance on foreign as- Joze Mencinger is president of the Uni- may take decades before all Central and sistance, foreign loans, or the sale of as- versity of Ljubjana, Slovenia. * TRANSITION, October 1999 © 1999 The WVorld Bank/The William Davidson Institute EU Enlargement Process Keeps Rolling T ~ he European Commission has ter the Commission has judged a particu- * The EU's PHARE aid program will fo- proposed two major changes in the lar country's preparations to be sufficient. cus on institution building and investment accession process for approval by This new approach essentially means that in regulatory infrastructure, at 1.5 billion the European Council, which will convene Bulgaria and Romania might join the ne- euros ($1.6 billion) a year. Further aid will in Helsinki in December: gotiating process without actually negoti- come on-line from 2000 through two new ating for several years. Moreover, the instruments: ISPA(co-financing for invest- 1. All 10 Central and Eastern European Commission proposes reopening chap- ment in environmental and transport infra- candidates-Bulgaria, the Czech Repub- ters that have been provisionally closed to structure, of I billion euros a year) and lic, Estonia, Hungary, Latvia, Lithuania, include newly adopted legislation, sug- SAPARD (support for agriculture and ru- Poland, Romania, the Slovak Republic, gesting that the conditions will be a per- ral development, of 500 million euros a and Slovenia-as well as Cyprus and petually moving target. Applicants will need year). Malta should be included in negotiations. to continue moving to align with an ever- In 1997 the European Union opened ne- growing body of EU law. For the countries of the former Yugoslavia gotiations with only five countries-the (except Slovenia, which is already in ne- Czech Republic, Estonia, Hungary, Po- The EU has set additional conditions for gotiations) and Albania, a new Strategy for land, and Slovenia. starting negotiations with applicants that Neighboring Countries offers the prospect are behind in meeting accession require- of membership, but only under very strict 2. The EU should set 2002 as the dead- ments. Bulgaria has to close down the conditions. In addition to the Copenhagen line for completing internal preparations for Kozludoi nuclear power plant, while Roma- criteria, these countries would need to at- expansion. Such a scenario would require nia has to reform its state childcare institu- tain mutual recognition of borders, settle- resolution of several complex and sensi- tions. Both countries are also required to ment of minority issues, and a regional tive issues within the EU, including: implement specific economic measures. framework for economic integration. The prospect of such a membership is not v Agreement on major internal reforms by Review of Accession Strategy open to Russia, Ukraine, the Caucasus, the end of 2000, including the introduction and the Maghreb countries of North Africa, of qualified majority voting in the European The original key criteria for membership but the Commission proposes developing Council, giving more power to the Euro- to the EU, as defined at the Copenhagen new cooperation initiatives that go beyond pean Parliament, and reassessment of the summit of 1993, were: the trade and assistance programs so far relative weight of member states' votes. on offer. 0 Stability of institutions guaranteeing de- * Agreement on a further restructuring of mocracy, the rule of law, human rights, and The Commission's assessment of can- the EU budget. respect for minorities. didates' progress is divided into sections on the political and economic conditions * Acceptance that even front-runner ap- 0 The existence of a functioning market and other obligations of membership- plicants must be allowed more than the economy with the ability to compete within taking on EU legislation and preparing to minimal transitional period in expensive the single market. join EU structures such as the European areas such as the environment, energy, Monetary Union and the Schengen agree- and infrastructure. * The ability to take on the obligations of ment (which stipulated the free movement membership, including support for the of persons and goods within the Union). Accession Negotiations aims of the European Monetary Union. There are two broad groups of Central and Eastern European candidates: the The latest of the Commission's regular Several new elements in the accession front-runners and new candidates (see progress reports envisages an overall ac- strategywill be activated overthe nextyear, details of the "report card" on the next celeration in the expansion process, with including: two pages). the first occurring by 2004. Each country will move at a very different speed of ne- 0 Revised Accession Partnerships, the Information for this article was excerpted gotiation. No longer will all candidates ne- documents that set out the EU's detailed from reports of Oxford Analytica, the Ox- gotiate on the same chapters at the same short and medium-term priorities for each ford (UK)-based international research time, but chapters will be opened only af- applicant, will be finalized. group. ©) 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 U EU expansion: European Commission assessments Budgaria CDOh R.pubU. Estonis liwiglly Latvia Reati with EU tahes 506% of EU pos e2.4bn surplus Exports to EU were 7036 EU posts E2.2bn trade sur- Exports to EU were the EU Bulgaria's exports. and in '98: EU accounts for of total in '98, imports p1w in '98. 56.6% of total in '98, provides 49% of its 60% of Czech trade. from EU, 74.3%. Europe Agreement func- imports from EU, 55.3%. impots (ising to 60.3% Evope Agreement iple- Europe Agreemrt func- tioning smoothJy. Some hitches in relations, and 49.3%. respectively, mernaton 'uteven. tining corecty and Concemions to israet will including Latvian duties in ft.rt quarter of '99). though problems sohed smootly, no tade prob- be dropped upon acces- on pork and restrictiom Implermentation of byjoint bodies. Czechs bms. EU anti-dumping sion, EU) anti-dumping hit on FDI in media, and EU Europe Agreement is cr- tae ant- ping steps proedure against tard- polypropylene twine and anti-dumping against rect and smwoth. aganst EU baby food. board was dosed. some steel products. hardboard exports Sabty of fuilils Copenhagen poli- Fulfils Copenhagen po&ti Futrlis Copenhagen fulfil Copenhagen politi- Fulfils Copenhagen politi- intkuonn cal crrteria, but efforts cal cernea but further political criteria, but cal criteria, but faces crit- cal criteria, progress made paaraa_se.ing needed to strengthen efforts needed to feform needs to amend lan- icsm for failing to end integrating non-citizens, do .owaY, rute of law and protect jdiciary and inprove sit- guage law to integrate discrimination against but needs to ensure that nre of low, human and minority uation of Roma, combat non-Estornan speakers 600,000-strong Roma language lea respects hwran rgts rights, particularly Romna. discriinatory attitudes. into political and eco- mrinority. Corruption worsd standards. Work s&d resp.et for fighting corruption and Needs effective policy nonic ife. Fight against needs more attention. needed onjudiciary, cm- ad protaetin improving judIcial system against white-collar corruption also needs Governnant role in pub- rupton and Latvian ian- of manorit rmerit special attention. crime and corruption. greater attention. lic media criticised. guege instruction. AdOjptkoS of Praised, along with Ranked at bottom with Steady but siow align- Praised, along with Pressed, along with the &aeq#j Hungary and L,atvia, for Poland owin to'"slug- merit with single market Bulgaria end Latvia, for Bularia and Hungary, ror abillity to take 'determnined efforts" and gish pace ofv,work, legislaion Progress steady rhythm of legal steady rhythmn of legal an the steady rhlythmd of lega Legislatie change stalld good in intelletal prop approximation, Progress approxImnation. Progress obigreesu of approximation. Progress by power-sharing agre- erty and data protection, in most sectors, espectialy notedl in free movement .vennibeship on putlAic procuremient, ment, Uneven progress. free movement of goods in publir- procurement of goods and service, standardisation, piracy, Advances in standards and state aid monitoring, and inteldectual property, cormpetition and state adhiuens to audiovwisa legislation and certifiaton, liieali- Further work needed on self-employment, stan- aids. Steady improvemient the aims of and libieralisation of tale- salon of capita markets, state akids, certification dard and certification, in taxation, energy and poaiwl ~coms, New VAT and and customs and borders, and standardisation, and and stat aids. Pace of rail trantsport, as well as sceawnijeand excise laws close to But other key internal custorms code, tariffs and alignrmen in agriculture is environment, Work stil nmoetary alignment. Particular moarkte areas, such as staffirng, Institutiona slow. More effort needed needed in intellectual Urnion problems with state aids, intellectual property, pub- sttrutures and human in border mantagemient property dat protection enforcemren in agrbcou- itc prcreet,at resources insufriciert to and health and safety at end company law, Major ture, slow lan resntis- protetien, Innsance, impleentr and enorce wvork., No progess 4incus- effort required in tele- lion. Need so set ants-tust, state aids and thie acq-,t particularly in toms Hungary is onl coms, agriculture, fish- timetable for dlosing VAT/excise, reflect BEtle or environmnent, agiculture, applkicat credited with eres regiona policy and K(ozloduy nuclear plant. nio mcovemnent, Ris5k of fisheies and regional 'Ia reasonably consistent financial Ontrol Delays Shortage of people and piecemeal apprach developmen. 'Capacity track record- in building in public administration funds hanmps adminis- Unsatisactory recordl in buildintg' should be a inKvstuton to implement reform weaken enforce- tatZe enforcemnt, men short-term goats. budgetay prioriy, and enforce EU laws, mane caaity, B Business Eastemn Europe 0stobrr 26th 1909 0 The Economist Inteitgence Unit ',wiited 1995 Reprinted with permission of Business Eastern Europe, a publication of the Economist Intelligence Unit, Ltd. * TRANSITION, October 1999 id 1999 The World Bank/The William Davidson Institute EU expansion: European Commission assessments Lithuania Poland Romo1ia Sowak&l SloRna Relation with EU pOss t5lbn trade sur- EU posts el2bn trade EU posts El1.3bn trade EU posts t310m trade EU posts E1.Sbn trade ehs EU plus in *98, with exports surplus in '98. surplus in v8. surpus in '98. surpius in '9. to EU at 37.4% of total, Poland nreeds to remove Euroe Agreement fun- Europe Agreemrent func- Europe Agreernent funr- imports from EUV 46.2%. rmaaret access barriers bonng corcy and coning smoothly. SovAk tboning smootny. No Europe Agreremnt func- tiuikly. Poland raised smoot. Import sur- import surcge anti-rkmping measures in tioning smoothly. EU ani- farm tafs witout con- charge imposed in Oct imposed in Jun '99 in line force, though complant dumpting hits urea, sn EU. EU anti-dump- '98 was reduced from 6% with obigatons. EU anti- against stakiness s amrno nitrate and ing aganst hardboard3 to 4% in Jan 99 and wil dumping against urea heavy plates was cathode.rr y TV tubes. twine and steel wir be ifted by end-.OGl. and amnionium nitrate. latuned and withdrawn. Stablity of Fulfils Copenhagen Fulfils Copenhagen cre- Fulfds Copenhagen crite- Thanks to changes since Fuifils the Copenhagen institeatkaw political criteria, though rn. Judiciary is indepen- ia. but failure to act on Sep '98. Slvakia fufils political criteria. Two gu r 9ase g work still needed in fight dent, but crourt cases stil needs of 100,000 institu- Copenhagen criteria, areas still needing atten- d_aty, against corruption and taKe too long. Need for tionalised chdiren could *aised for significant tion are twe streamlining nr of law, reform of judiciary, better fight against cor- prompt downgrade. progress, but de nicto and speeding up of the hmrnan right. ruption, in part by reduc- Independence ofjudiciary independernce of judlciay judicial and parliamnen- a,d respec for ing bureaucratic controls. needs butbessing, corruf- needs to be made dejure. tary processes. artprotetion Civil service law needs to tton antd arti-lnam preju- Corruption and Romn of nsrltnie guarntee open nature. dice need addressing. need more attention. pa$" Adoptin of Progres noted in most Ranked at bottom with Alignment with inta Important progress rrmade Significant acceleration in the aequs areas of inranal ettet Czech Repubkic owing to mrket laws only partial on internma mrwket align- legal adaptation and blty to take parttcularly public pro- hsluggl" patce in tram Some progress on public mnent, pairy in pub- 'imprssive progress" in on the cirement intellectual posirg legisltion and procurement banking lie procurement, most areas of acqrs, obliatilon of property, conformity "sketchy progress in and standards but overall standards and certifca- includng standards and nfbtl*_ , assessment, free move- areas covered by aags. framework egislation is tion, comopetiton. and certirfation, data protec- ilach daig rment of capital and ser- Good alignmrent in free ladking. Bar*xuptcy rules state atis. Transparency tion, capitai hberalsation. adhtrene to vices, and anti-trust law, movement of capital and still out o syr ornania and sharehokler protec- VAT and anti-rust New the dln of But enforcement reeds services and finanrial con- gives low priority to the tion improved in banking, company law has politica, strengthening. particu- trol, but tagging on adop- evironrment, and serious Social dafogue enhanced. emoved rewctions on econonmis, and iarty in fihting piracy. tion of key internal proberns in air, water Praise for pledge to close foreign participaton. m tary hMior effort needed on market lgislation (indis- anrd waste need urgent Bohunice nuclear reactor. Alicgrment in social affairs Union audbovisuat law and taxs- trl and intellectual prop- politicat attention. Lack of But much needs doing, is already high. But state tion. Progress in environ- erty, data protection, funds and wek adunins- especially in environrent, aids and free movemnent rnent, though level of conformity assessment. trative capacity irnpede regional poly. and of people. capital end sfr- compliance is uneven. and certfation), tree enforcement Public health and safety at work, vices need attention, par- Praise for decision to close movemrent of people and admnistration reform has to rnake up for past iner- ticuarty insurance. froper ignpaina nudeer pomwr state aids. 'Inerti' and not yet started in eamest, tia. CiW service reform is adinistrative structures plant. Much work awaits short-term measures in Independence of regui- crucia. and regulatory ready for establishment; in customs, regional pal- agriculture wil hinder tory bodeies induding bodies need guatanteed Stovenia needs to guaran- icy and financial control, adaptation to CAP. central bak, not assuwd. independence. tee them sufficient Noxds. e The Econoreut tIntesigence uni t reted 1999 Business Eastern Europe Octoter 25th 199 7 Reprinted with permission of Business Eastern Europe, a publication of the Economist Intelligence Unit, Ltd. ©) 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 World Bank Facilitates Candidates' EU Entry T hrough financial and technical as ences-to derive lessons for all acceding area will focus on best practices and is- sistance and advisory services, the countries and support their European net- sues of fiscal and budgetary management World Bank is helping to ease the works. of structural funds in sub-national units. accession of the 10 transition economy can- This study will draw on the experiences of didates-all members of the Bank. Some Research by the World Bank's EU Acces- Ireland, Spain, and Portugal, and it will look examples of the Bank's efforts include: sion Team focuses primarily on macro- at developing practice in Bulgaria, Hun- economics and growth issues, public gary, and Poland. * Financing projects that help the acces- expenditure management, and social is- sion countries meet EU norms and re- sues. The team closely collaborates with Wider Measures of Real Convergence. quirements. Examples include renewable the European Commission and intends This study will analyze real convergence energy projects in Hungary, Lithuania, Po- to analyze accession experiences of cur- in recent EU members and the 10 candi- land, and Slovenia; a solid waste manage- rent EU members, in particular Ireland, date countries using a wider set of indica- ment project in Latvia; new roads and road Portugal, and Spain. The team is work- tors than just per capita income. It would safety projects in Poland and Romania; ing on the following areas: analyze the extent to which wider sets of and railway restructuring and construction indicators suggest similar development in Lithuania and Romania. Studies performance, both in terms of levels and deltasbefore and after EU accession. v Providing budgetary support to accel- Macroeconomic Management of Struc- erate reforms, including privatization of en- tural Funds. The candidate countries may Safety Nets and Competition. Both do- terprises and banks and restructuring of receive significant financial assistance (in mestic and external liberalization of prod- the agriculture in Bulgaria and Romania. the order of 2 to 3 percent of GDP) from uct markets have increased competition the EU. Together with a probable surge in dramatically in Eastern Europe, in particu- * Assisting the public sector to more effi- private capital inflows, absorbing these lar as imports from the EU are being elimi- ciently use its resources and improve the fundswhile avoiding overheating (by infla- nated. Theworkprogram in this areawould fiscal balance in the long term. There are tion, increases in the current account analyze whether existing systems provide pension reform initiatives in the Czech deficit, or both), and a decline in com- adequate safety nets to displaced work- Republic, Hungary, Latvia, Lithuania, Po- petitiveness will be a challenge. While a ers, and will also discuss how the systems land, and Slovenia, public expenditures large body of literature on capital flows ex- could be improved. and civil service reforms in Hungary, ists, the team study would analyze if and Lithuania, and Poland, and tax reform and how the process of EU integration changes Prague 2000. This is an important report tax administration capacity building in the standard policy recommendations in of the Prague 2000 series. The transition Latvia and Poland. dealing with surges in capital inflows. Com- in Eastern Europe has been largely suc- paring the experiences of three current EU cessful, and the report will demonstrate * Proposing solutions for minimizing po- countries, as well as several more advanced how proximity to Europe (in the wide sense tential costs of adopting EU regulations candidate countries (such as Hungary) will of the term) has helped the transition to a and policies. This includes helping Poland provide useful policy lessons. market economy. While adopting the introduce EU environmental standards "acquis" is largely beneficial to the candi- with least possible cost. Growth Impact of Structural Funds. date countries, the report will also discuss Structural funds have been important how implementation needs to be carefully * Providing detailed economic analysis in means of financial assistance of the EU sequenced and complemented with ac- individual countries, focusing on the acces- to its poorer member states and regions. tions in structural areas mostly outside this sion to the European Union. Country Eco- This team study would analyze the growth acquis (especially in the social areas) to nomic Memorandum have been completed impact of structural funds on both national maximize the benefits of EU accession. for the Czech Republic, Estonia, Hungary, and sub-national units in current member Lithuania, Poland, Slovakia, and Slovenia. states such as Ireland, Portugal, and Spain. Conferences, Seminars, and Workshops * Organizing cross-country programs-in- Public Expenditure Management and Workshop on Public Finance Priorities cluding studies, workshops and confer- Structural Funds. The work area in this for EU Accession. The objectives of this M TRANSITION, October 1999 ( 1999 The World Bank/The William Davidson Institute workshop are to assist our clients in build- n d n Thi k Ta k R On ing public administration capacities to iden- Independent i anks o n tify and implement public finance priorities, . to share the experiences of EU member in Transition Economies countries in enhancing efficiency and pru- Interview with Raymond J. Struyk dence in public finance decisions, and to promote the role of civic society in the EU A new book, Reconstructive Critics, Think Tanks in Post-Soviet Bloc Democra- accession process so as to strengthen pub- licnances instituiones. The seminaris to bten p cies, by Raymond J. Struyk of the Urban Institute, evaluates the efforts of private, inde- eld finaHesinktituions.ollaboraion wi th e pendent, policy-oriented research institutes-in other words, think tanks-in transition countries. Struyk sutveyed 37 institutes in Armenia, Bulgaria, Hungary, and Russia. government of Finland and the European Because think tanks identify and analyze policy options and make their findings widely Commission In spring 2000. available to the public, they can play an important role in strengthening democracy in Labor Markets Conference on "La- transition economies. The author a senior fellow at the Urban Institute and senior ana- lyst in the fields of housing policy, housing finance, and community development, has brorcMaketss anding therspeU caement had a major role in the establishment of the Institute for Urban Economics in Moscow Process-Changing Perspectives and Policy Options." This workshop on la- The following is a recent interview with the author by Transitfon editor Richard Hirschler. bor market issues will disseminate Q.Whatistherealsignificanceofthink (21). About 40 percent of the think tanks cross-country policy papers and papers cross-country partsolicyopaers acondoe tanks in transition economies? identified were already in existence in 1991, prepared as parts of country economic including some National Academy of Sci- memoarandums oland Czec Rlovepbic T A. Without doubt, democratic government ences institutes and some reconstituted Hungary, Poland, and Slovenia. The seminar is to be held in Vienna in Feb- and economic performance are closely in- former state organizations. Only about a terrelated. Astrong economy improves the quarter of those included were created af- Kruarky 2000uinacollaboratiopn with t decisionmaking environment simply by pro- ter 1993. And most are small operations. ris For. moting political stability. Representative government is likely to restrain large invest- Q. In your book you categorize think The Fourth European Borrowers Net- ments in low-return prestige projects. De- tanks according to their different work (EBN) Seminar focusing on 69 mocracies are associated with higher levels stages of development. What are the Development of Government Securi- of education and better health among their criteria? ties Markets and EU Accession." The populations, which in turn brings about Fourth EBN seminar focuses on another higher growth. Think tanks-private public A. First-stage think tanks are in the start- EU accession topic, the development of policy research institutes-can strengthen up phase (which may last indefinitely) and a country's democratic institutions, improve are characterized by a permanent re- goenment securwites mres.oned the decisionmaking process, provide policy search staff of one or two, a small ad- gthe semna wi sponsord by advice and alternative solutions, and en- ministrative staff, basic financial and the European Commission and will take.. gage citizens-either directly in policy de- administrative systems, and significant in- bates or through the dissemination of stability in the level of operations. This information-to take responsibility for the group has been the focus of most of the Joint World Bank-Bertelsmann Foun- conditions in their country. In short, think training of the donor community, often re- dation workshops on EU Integration. tanks also help develop civil society. ceiving the same help as other NGOs. The objective of this partnership is to es- tablish both a physical and electronic net- Q. How many think tanks are operating Second-stage institutes are at the point work of economic and political research in the countries of Central and Eastern where they move to a higher level of activ- institutes in the EU accession countries for Europe and the former Soviet Union? ity-larger staff, more projects, more op- the promotion of cross-borderdialogue on portunities in the policy process and for key political, social, and economic issues A. The 1997 tally of Freedom House in educating the public on current policy is- that are pertinent for EU accession. Two Budapest suggested that 106 think tanks sues. A permanent research staff of 8 to or three workshops are to be organized in were operating in 11 transition economies 10 is an important indicator of attaining this fiscal year 2000. The dates, locations, and of Central and Eastern Europe. The small- status. Perhaps one-quarter to one-third topics of these seminars have yet to be est number was reported for Macedonia of the think tanks in the Eastern Europe- determined. (3) and the largest number for Hungary CIS region are in this group. C 1999 The Norld Bank/The William Davidson Institute TRANSITION, October 1999 Those in the third phase of development Q. The role of Western governments, tions. Will they survive a waning of are established think tanks in the West foundations, and other institutions Western interest and financial sup- such as the Brookings Institution and the has clearly been critical in supporting port? Urban Institute in the United States and the the formation of many of these institu- Institute fur Wirtschaftsforschung in Ger- A. Survival will definitely be a challenge for many. many of them. Nevertheless, a principal finding of my book is that a few think tanks Q. So what is the real impact of think are engaged in strategic planning for a fu- tanks in these countries? ture with sharply less Western funding. Oth- ers are positioning themselves for the A. There is no question that thinktanks influ- withdrawal of Western funding by making ence the policy development process. But alliances with political parties and busi- when one asks a group of senior policymakers ness associations. And a few more, really where they obtain information for their deci- the best, are engaged in active programs sions, generally think tanks are not promi- of client and topic diversification. The In- nently mentioned. Actually, only about 25 stitute for Urban Economics in Moscow, percent of policymakers interviewed reported for example, set up the country's first credit working regularly with think tanks. rating agency as a for-profit subsidiary. The Urban Institute: A U.S. Think Tank in Eastern Europe The InternationalActivities Center at the Urban Institute (Ul) has ment of several demonstration projects in Russia, beginning in provided technical assistance to help solve social and economic 1993 with a project that introduced competitive, private main- problems in more than 40 countries since 1983. Based in Wash- tenance for municipal housing in Moscow. Initially, three private ington, the Ul is a nonprofit, nonpartisan, public policy research firms took over management of 7,000 rental units following a organization. The Institute's involvement in Central and East- competitive procurement process. Maintenance improved at ern Europe and the former Soviet Union is focused mainly on no additional cost and, in 1998, the program expanded to cover creating new systems of local governance grounded in market nearly I million units. and democratic principles. With policymaking and service de- livery responsibilities shifting from central govemments to local Asecond major demonstration project in Moscow, based on simu- governments and the private sector, the Ul has focused on de- lations conducted by a Ul team, enacted a program of significant veloping efficient and sustainable local capabilities. rent increases combined with the introduction of housing allow- ances. The largest component of the Ul's technical cooperation Building Credit Markets. Ul experts have offered support to program in Russia has been the establishment of long-term mort- local governments seeking to finance infrastructure develop- gage lending. On a pilot basis, the Ul team prepared one of ment and public service delivery-water supply, waste removal, Russia's largest banks to make financially responsible mortgage roads, and mass transport-by building stronger credit mar- loans. By the summer of 1996 the Ul had worked with an addi- kets. Beginning in 1996 the Ul worked with the Czech Ministry tional 30 banks to help them begin orexpand mortgage lending. of Finance and commercial banks to create the Municipal In- Housing privatization and housing financing projects are also frastructure Finance Program, a financial intermediary designed being conducted in, Slovakia, Hungary, and Poland. to reduce municipalities' reliance on central government for in- frastructure financing. By making capital funds available to Support for Policy Analysis. The Ul considers the building of municipalities through commercial banks, the program has in- local capacity for policy analysis as important as the direct techni- creased competition among banks, lowered municipal interest cal assistance it provides in Eastem Europe. The Ul was instru- costs, and lengthened terms for commercial bank loans. The mental in the foundation of the Institute of Urban Economics in Ul has examined similar municipal finance and credit issues in Moscow, which provides analysis and guidance to policymakers Albania, Croatia, Poland, and Romania. on a range of public policy issues. More recently, the UI has helped support the formation of the Transition Policy Network, an alliance Assisting Housing Finance. The Ul has been deeply involved of independentthink tanks thatwork on public policy issues across in easing the difficult shift to private housing markets in the re- the region. So far, the Network extends toAlbania, Armenia, Bul- gion. The Ul has provided technical assistance in the develop- garia, Hungary, Poland, Romania, Russia, and Slovakia. TRANSITION, October 1999 ©D 1999 The World Bank/The William Davidson Institute Think Tank Archetypes In Europe think tanks are often more closely aligned with politi- external contracting is preferred because of staff limits and to cal parties, business associations, labor unions, and ministries ensure objectively in the analysis and better guarantee the qual- that do high-quality work to develop or support the policy posi- ity of the work. In the United States the Rand Corporation and tions of the institutions to which they belong. In the United States the Urban Institute are among the most prominent contract re- think tanks generally operate with more institutional indepen- search organizations. dence. According to their activities, there are three major types of think tanks. Advocacy tanks. These institutions combine a strong policy, partisan, or ideological bent with aggressive salesmanship and Universities without students. These privately funded insti- an effort to influence current policy debates. Advocacy tanks tutions do high quality technical research, competing in quality seldom conduct sophisticated research themselves. Rather, with university faculties. They distinguish themselves from uni- they repackage and summarize work done by others to sup- versities in the policy orientation of their research. They ana- port their position. They work hard at presenting information in lyze the ultimate implications of broad policy choices, such as crisp, brief, and readily understood formats. What advocacy changes in the tax regime, not with current legislative propos- tanks lack in scholarship and objectivity they make up for in als. Their output is oriented to the policy community. In the United access to senior policymakers in both the legislature and gov- States, think tanks in this group, such as the Brookings Institu- ernment agencies. In the United States the best known of the tion and the National Bureau of Economic Research, are the advocacy think tanks is the conservative Heritage Foundation. oldest and most venerable. Because the U.S. model was introduced to Central and East- Contract research organizations. The primary source of fund- ern European and CIS countries by U.S. foundations, which ing for institutions in this group is government contracting. The were active in the early days of the transition, most think tanks primary products are technical papers and reports for govern- in the region have adhered to the U.S. model. But as U.S. foun- ment agencies, but these are often converted into journal ar- dations are leaving the scene, more and more think tank ad- ticles or harder-hitting policy briefs. The contract work may be here to the European model. In the transition economies support balanced and complemented by funds from foundations to un- for "universities without students" has come more from abroad dertake research on other topics, extend research funded by than locally. Governments appear to have done relatively less government agencies, and disseminate the results of agency- contracting for policy research than their Westem counterparts. funded research for other audiences. While much of the re- Advocacy think tanks, however, are relatively more numerous search undertaken could, in principle, be done by agency staff, than in the West. agency, since affiliated with Standard and This sequencing means thatthinktankswill are engaged actively with the media in Poor's, is doing well and helping support have some time to adjust, and the survival educating the public on current policy is- the Institute's main research activities. rate may be higher than one at first might sues, in fact, more often think tank direc- Similarly, the Center for the Study of De- think. tors are delivering their personal view mocracy in Sofia uses its independent rather than speaking on behalf of the survey research center to take commer- Q. After extensively studying these in- institute's research team. Think tanks need cial contracts as well as to conduct the stitutions what are your proposals to to take a step back and determine how scientific surveys needed by the Center. increase their effectiveness? best to exploit their advantage in the news These revenues support the main opera- arena as research organizations. tions. These are exciting examples, but are A. I would advise institutes at any stage of exceptional. development to improve their policy rec- Q. Any suggestions for stage-one ommendations. Policymakers in the four think tanks? Western support is likely to be withdrawn study countries complained that recom- in stages. Many Western foundations will mendations were often too general, too A. Several do not have a prestigious board probably be the first to exit, followed by the long, not based squarely on the analysis, of trustees or do not publish an annual re- bilateral donors. The World Bank and IFC seemed to be politically motivated, and port-some do neither. The lack of a board will stay longer. And the European Union frequently didn't address the demanding denies the think tank the advice of experi- programs will remain active even longer budgetary and administrative issues. The enced individuals and the marketing advan- than others, particularly in countries with other issue is the media strategy. Although tage of the board members' association prospects for early accession to the EU. the general perception is that think tanks with the think tank. Similarly, the lack of an © 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 * annual report limits the think tank's record R * * of D I E of accomplishment and reduces its visibil- ussia: Rise o a Dual Economy ity to the donor community and other po- by Pekka Sutela tential sponsors. ussia has changed profoundly in introduction of transport costs, absent un- Q. How can stage-two think tanks im- the past 15 years. It is no longer der Soviet planning, induced great relative prove their performance? I governed by a single socialist priceshiftsinthegeographicallyenormous party that imposes its official ideology on Russia. The dissolution of the Soviet sys- A. First, theycan put theirfinancial manage- the citizenship. Russian society has tem exposed the absence of several criti- ment in order. They should establish indirect opened itself up to the rest of the world and cal institutions in Russia. billing rates and have a clear strategy for to a new pluralism of views and ways of external audits. Most think tanks have not life. All of this was unthinkable during the The listof Russia's handicaps is even longer established an indirect rate or an overhead many years of closed Soviet socialism. than this one. But the scales can be coun- rate that includes cost items that are difficult terweighted, perhaps, by three factors: to assign and bill directly to each project. The Russian economy has also changed. 0 Russia could count on foreign assis- Thustheyoftenarenotabletorequestfund- It is transforming itself from a centrally tance because of its size and history of ing for these items. Audits are key elements managed to a market economy-but a military and political importance. to establishing credibility with sponsors, par- very peculiar market economy. The eco- * Because natural resources were under- ticularly for large projects. The question is nomic stagnation that began a quarter of priced relative to manufactures during the how much should be invested in an audit, a century ago has become a steep pro- Soviet era, Russia could expect to gain which in turn depends on the institute's vi- duction decline. Inequality has also in- from a huge price shift relative to manu- sion of the nature of its future opportunities. creased, and mass poverty has become factures. a fact of life. Russia's economic decline * Abundant natural and other resources, ieofd, sthrategipannst c engeissto-al is unprecedented in recent economic his- such as education and technology, might ing. One of the greatest challenges to all but the largest and most established think tory. Most surprising, the decline has taken become a bonus for growth. tanks is to modify the research and policy place in a country well-endowed with natu- ral resources, a relatively well-educated But how positive are these factors? The agenda and its sources of support in con- cert with the shifting prInc-labor force, and rich industrial and tech- relative ease with which Russia has re- cert with the shifting principal policy ques-X tions facing the country and the interests of nological traditions. For Russia the abnor- ceived foreign assistance-witness the its supporters. In fact, veryfewthinktanks mal seems to be entirely normal. The repeated easing of IMF conditionality- have a conscious strategy forthefuture. Nor question to ask is what surprises does the may well have been a burden in disguise, do they have consultative processes that future also have in store? as Russia has been able to substitute as- lend themselves to developing one. sistance for reforms. As for natural re- A Coming Boom? source endowments, while it is true that Third, the personnel strategies of think Russia gained handsomely as a higher tanks should include adopting the part time Whatever happened to the coming Rus- share of energy exports have been priced rather than the full time staffing model and sian boom," the one prophesied by Layard at world market levels, this windfall may provide staff with feedback on their per- and Parker just a couple years ago? havecontributedtothefurtherconcentra- formance. Finally, it is surprising how little Russia's initial conditions were always tion of Russian exports on basic commodi- attention many think tanks pay to monitor- understood as worse than those in Cen- ties. Experience also advises caution: ing or controlling the quality of their prod- tral Europe: its distance from a market worldwide it is clear that bountiful natural uct. Some think tanks, for example, are not economy was greater, its socialist period resources are more often a handicap than using dissemination techniques designed lasted longer, its structural deformations a source for growth and prosperity. with busy policymakers in mind-their re- (such as the share of military and civilian ports are too long and too academic. So heavy industries) were greater, its social- Four Features of the Russian improvements are needed. ist economic reforms were negligible, its Economy economy and society were more closed, Raymond J. Struyk'sbookis available from and the share of the private sector in its In assessing the potential of the Russian the Urban Institute Publications Office. Ad- economy was almost nil. Russia also economy, four specific features of the dress: 2100 M Street, NW, Washington, lacked such forces of civil society as the economy demand special attention: dual- DC, 20037, tel: 877-847-7377, email: CatholicChurch (as in Poland) or an inde- ity, distribution of property rights, nonmon- pubs@ui.urban.org, web: www.urban.org. pendent intelligentsia (as in Hungary). The etary aspects, and regional influences. * TRANSITION, October 1999 (C 1999 The World Bank/The William Davidson Institute Dual Economy basis of the economy, recent Russian poli- tion on their economic impact must be ten- cies have contributed to the creation of this tative. But theoretically and in recent prac- Russia has the markings of a dual dualeconomy.lfthistrendcontinues,Rus- ticesuchinsideowners: economy. It has a dynamic export sector sia can remain Europe-oriented in her for- consisting of oil, gas, raw materials, and eign economic policies, but it will be a * Have little, if any, resources for invest- some basic processed goods like chemi- one-sided integration with the world mar- ment other than the cash-flow generated. cals. And while these exports generate kets, because domestic jobs need protec- * Tend to see their position more in terms about one-fourth of Russian GDP (this is tion. Domestically, a crucial question would of power than as economic agents. no longer a closed economy), they pro- be the willingness and ability of the central * Tend to concentrate more on job and vide only a small number of jobs. Most authorities to tax some of the revenue re- social benefit provision than efficiency and jobs are in the domestic branches of the ceived by the exporters to use for infrastruc- structural change, undertaking more defen- economy. So, while many raw and basic ture maintenance and redistribution. This sive than aggressive restructuring. processed materials are exported, Rus- tax revenue would also need to be shared 0 Often see their companies as personal sian industry and services mainly produce across regions, whose exports earning fiefdoms to be exploited for private ben- goods that are competitive only in home potential is very unevenly distributed. efit. Insider ownership thus might be good markets-resulting in undervaluation of for jobs but it is bad for efficiency, com- the ruble and low real wages. Property Rights petitiveness, welfare, and growth. A dual economy is sustainable and may Russia's distribution of property rights is Nonmonetary Exchange System generate growth-particularly when com- unique. As a consequence of the mass modity prices are high. That fact has been privatization path chosen, company insid- Russia may be a market economy but it is demonstrated by many commodity pro- ers own most Russian industry, agriculture, not really a monetary economy. Ordinary ducers in developing countries. But a dual and services. Employees are quite often market economies and transition econo- economy also provides little welfare for majority owners, but managers are always mies usually have a M2 (the wide money most of the population and tends to gen- the active owners. The position of insid- stock, consisting of cash and deposits) to erate wide income differentials. A dual ers was strengthened by the 1998 crisis, GDP ratio of 60 percent or higher, depend- economy, therefore, has an authoritarian as their potential challengers-domestic ing on characteristics of the financial sys- tendency. and foreign outside investors-lost the tem. In Russia the ratio of ruble M2 to GDP ability or appetite to invest in Russian was never close to 20 percent and is now Although Russian officials talk about main- firms. Because there is no previous expe- below 10 percent. In addition to rubles, taining and developing the technological rience with property rights, any specula- Russians hold and an unknown but pre- Russian Upturn-Helped by Devaluation A closer look gives some insight into the problematic character commodities. Overall, January-April exports were down by 10 of the recent industrial upturn in Russia. Industrial production percent, showing that the actual problem continues to be real, has surged since October 1998 so that in January-May 1999 it not price, competitiveness. was up 1.5 percent from a year earlier. Year-to-year growth in May was 6.1 percent. But this growth should be seen against Russia simply seems unable to produce manufactures that the backdrop of ruble devaluation. During the first half of 1999 foreigners might wish to buy-even at post-devaluation the ruble real exchange rate was still some 40 percent lower prices. A trade account surplus of some $20-25 billion is than the previous year. The price competitiveness of Russian expected for 1999, but that is a consequence of imports that producers has thus improved hugely. This fact is reflected in declined even more than exports. The downside of a weaker January-April imports that were an astonishing 47 percent lower real exchange rate is that statistical real wages are still 25- than in January-April 1998. Russian companies have gained 30 percent lower than the previous year. May retail trade turn- market shares in domestic markets, and there has been im- over was 16 percent lower than in 1998, and light industry provement in traditional export branches. During the first quar- output collapsed by 17 percent during the first quarter. As ter the best performing branches were wood and paper, investment also continues to drop (by 11 percent during the chemical and petrochemical, construction materials, and non- first quarter), surging industrial production was unable to ferrous metals. Still, in spite of such improved price competi- translate into GDP growth. In the first quarter GDP was still 4 tiveness, Russia has been unable to introduce new export percent lower than in 1998. © 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 sumably large amount of dollars abroad, investment is still declining fast, and why, and a weight in the world economy that is as a store of value. Also, a variety of quasi- as a result, the prospects of investment- smaller than, for instance, Sweden's. All monies-usually lOUs issued by the au- based growth are slim. official expenditure commitments should thorities, banks, and companies-are be reassessed with this in mind, and only used. Finally, about half the industrial pro- Regional Decisionmaking commitments that can be financed from duction is based on barter. available resources should be maintained. Russia, once a unitary state, is undergo- While the ingenuity of complicated multi- ing long overdue regionalization, but with Second, Russian authorities should also lateral barter arrangements is admirable, little design and consistency. Russia's re- work to abolish the nonmonetary economy a nonmonetary exchange-based economy gions, with an average population of 1.9 by declining to accept anything but money has several handicaps: million, are too small to become true eco- as tax revenue. nomic agents on their own. A single large * Barter arrangements are costly and cum- industrial enterprise is usually depended Third, the authorities should help new pri- bersome. on for jobs, social services, and tax in- vate economic activities. Public sector * The acceptance of quasi-monies and come and is often a hotbed of cronyism, barriers-licensing, taxation, inspections, offsets as tax revenue reduces revenue li- insider deals, and corruption. In principle, and legislation and its implementation- quidity, to the detriment of fiscal policy ef- regional decisionmaking is close to the must change if Russia is ever to become fectiveness. population and easier to monitor than cen- a wealthy and stable society. But reach- * The use of regionally based quasi- traldecisionmaking. In practice, however, ing that goal demandsthatthe country be monies tends to destroy the unity of regionaleconomicpoliciesareoftenworse rebuilt: state, institutions, the economy, Russia's economic space. than those that the center wants to pursue. capital stock, infrastructure, the civil so- * The wide use of nonmonies lowers en- But there is also a silver lining: some good ciety, and the values of the people-al- terprise cash flow and contributes to tax practices have spread from one region to most everything. and wage arrears. another-a solid argument for the compe- Pekka Sutela is head of the Bank of Fin- * An economy with several exchange sys- tition of foreign and domestic investment. la Sute for omie Bankton land Institute for Economies in Thansition tems is unstable and difficult to regulate (BOFIT). Address: PO 160, 00101, by economic policies; with little money in Can Something Be Done? Helsinki, Finland; Tel: 358 9 1832297; use the possibilities of generating savings Fax: 358 9 1832294; Email: pekka. to be channeled into investment finance Russian authorities should adopt three sutela@bof.fi. This article is based on the are modest at best. Therefore, these pe- priorities. First, Russia should recognize author's paper entitled "Russia: The State culiarities of the Russian economic sys- that as a European economy it is medium- and Future of the Economy, presented tem go a long way toward explaining why size at most, with a $370 billion GDP in at the Second Suomenlinna Seminar in the economy continues to contract, why 1998-about 2.5 times that of Finland- Helsinki, June, 1999. Showing the Way From the Hungarian magazine H6cipo M TANSITION, October 1999 O 1999 The World Bank/The William Davidson Institute Stable Ruble Needs Sound Fiscal Policy by Tuomas Komulainen A fter the high inflation of 1992-94, This notion is not new. In 1981 Sargent and ment. By August 1998 debt service ex- the Central Bank of Russia em- Wallace, in an article in the Quarterly Re- penditures corresponded to 50 percent barked on a policy of stabilization. viewof the Federal Reserve Bank of Minne- of federal budget revenues. The aim was low inflation and a stable cur- apolis, observed that when the fiscal rency. Indeed, the ruble was stabilized and authority independently sets the budget, the By the winter of 1998 calculations showed annual inflation was brought down to single monetary authority is unable to control infla- that Russia would need a GDP growth rate digits. However, this stabilization success tion. Even so, most price determination theo- of more than 4 percent or crucial primary sur- was not permanent. Following the events ries overemphasize the role of monetary pluses to keep the debt-to-GDP ratio under of August 17,1998, the ruble depreciated policy, neglecting the role of fiscal policy. 100 percent in the future. Russia's fiscal nearly 70 percent against the dollar in just policy was not sufficiently in balance with the two months. By August 1999 consumer If the exchange rate is fixed, the situation be- present-value budget constraint to hold. prices had risen 121 percent. What went comes even more difficult. If fiscal policy is wrong with Russia's stabilization policy, still an exogenous political process not satis- Defining Targets and what kind of monetary and exchange fying the present-value budgetary constraint, rate policy should Russian authorities aim the exchange peg has to break. The domes- The new theory of price determination and for in the future? tic currencywill devalue and priceswill jump the Russian experience indicate that the inorderforthepresent-valuebudgetarycon- Central Bank and Ministry of Finance Playing Chicken straintto hold. In otherwords, acountrycan- should decide together what fiscal policy not have low inflation and a stable currency if and inflation rate to target. A poor public Most of the early macroeconomic litera- fiscal policy is not sufficiently disciplined. sector places certain restrictions on tax ture emphasizes the monetary determi- collection and budget discipline. If Russia nants of inflation. A fixed exchange rate is The High Price of Indebtedness wants to have a money-based economy used as a nominal anchor, and the central where investments and growth are present bank-with its money supply-determines Annual inflation in Russia fell from 224 it needs a predictable monetary policy and inflation. The money supply needs to be in percent in 1994 to 11 percent in 1997. stable currency. The government and the harmony with the exchange rate goal. This Using a crawling peg regime, the Central Central Bank must address this link be- stabilization strategy-with its good and Bank of Russia reduced the yearly nomi- tween fiscal policy and stable currency. bad results-has been widely used in tran- nal depreciation rate of the ruble from 30 sition countries and elsewhere. percent in 1995 to 7 percent in 1997. Di- Inthefirstseven monthsof 1999 thefederal rect transfers from the Central Bank to the budget showed a primary budget surplus of The recent literature, by Woodford, Sims, government ceased. 1.6 percent of GDP-a glimmer of hope that and Canzoneri, challenges these earlier Russia is moving toward a more balanced assumptions by emphasizing the role of The federal budget deficits were 5-8 per- fiscal policy. If this more disciplined fiscal fiscal policy in price determination. Nota- cent of GDP during 1995-98. The govem- policy continues, a stabilization program bly, the public sector's present-value bud- ment short-term debt (GKO) market was might be realized-and this time, in afloat- get constraint should be seen as an created in 1995. By August 1998 the ingexchangerateregime.lfthisoccurs,there equilibrium condition. Thus the real value amount of ruble-denominated GKO debt will be a need for a clear, credible declara- of the nominal liabilities (debt and mon- had grown to 300 billion rubles ($49.2 bil- tion by the Central Bank of Russia of its in- etary base) issued by the public sector lion), or 15 percent of GDP The federal flation or monetary policy target. equals the expected present value of cur- debt to GDP ratio increased from 30 per- Tuomas Komulainen is an economist at rent and future primary surpluses and cen- cent in 1995 to more than 55 percent be- the Institute for Economics in Transition, tral bank transfers. If fiscal policy does not fore the August 1998 crisis. Under a Bank of Finland. The article is based on ensure this budget constraint, the price crawling peg regime, the Central Bank the author's paper "Currency Crisis Theo- level has to jump and diminish liabilities in was still able to use higher interest rates ries-Some Explanations for the Rus- real terms. Thus a game of chicken occurs: to keep the exchange rate target and sian Case," Discussion paper no. 1, eitherthe central bank orthe fiscal author- control inflation, but only at the cost of 1999, published byBOFIT Internet: http:/ ity has to abandon its goal. increased debt payments by the govern- Awwwbof.fi/bofit. © 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 THE WILLIAM DAVIDSON INSTITUTE AT THE UNIVERSITY OF MICHIGAN BUSINESS SCHOOL Latest from the Davidson Institute's Publication Profiles Marketing Issues in Transitional Economies Edited by Rajeev Batra, William Davidson Institute and University of Michigan Business School A volume in the William Davidson Institute Series on Transitional and Emerging Economies, KluwerAcademic Publishers, 1999. Used with permission. This book examines issues facing marketing managers and scholars as the markets in transitional economies become more deregulated and open. The issues examined include changes in consumer behavior, challenges to making firms in these countries more "market-oriented," issues in creating and managing distribution channels, and issues in competitive strategy and tactics, including market entry and brand-building. Excerpts from two chapters out of the sixteen in the volume follow The first, by Russell Belk, draws on research in China, Romania, and Russia to help us understand why the presumably poor consumers of transition economies seem to place such a high value on luxury and status goods. The second, by Ronald Savitt, reports field data from the Czech Republic to conclude that the firm-level restructunng to date has been mostly "shallow" and that deeper changes are still necessary Leaping Luxuries and Transitional Consumers by Russell W. Belk, University of Utah According to Abraham Maslow's (1954) well-known hierarchy of needs. Ger (1997) argues that the desire for the beautiful is, in needs, as humans we satisfy our lower-order bodily needs for fact, a basic human need. food, shelter, clothing, and some measure of safety before we become concerned with the more symbolic social and psycho- I will attempt to demonstrate and explain how this long-standing logical needs for love, esteem, and self actualization. Although lure of luxuries has become even stronger in our contemporary Nevis (1983) has suggested that a somewhat different hierarchy and increasingly global society, especially among consumers in applies in the East, it still shares with Maslow's a hierarchical transitional economies. Besides attempting to explicate and un- prioritizing of lower order needs over higher order needs. This derstand this phenomenon, I wish to assess whether the leap to logic would suggest that the least likely place to find luxuries in luxuries is laudable or lamentable. Based on this assessment, I the world is in a society where the majority of people must struggle will then considerwhat, if anything, responsible global marketers to meet basic needs and where extravagance in consumption is and their local counterparts in transitional economies should do likely to reduce the thin accumulations that allow any margin of about this luxury-loving contradiction of Maslow's hierarchy. security in providing for the health and well being of family mem- bers. Yet this logical premise is countered by early human pro- Luxuries in the Least Likely Places pensities for making art, assembling collections, and burying our dead with ornaments, armaments, and floral bouquets (Belk My interest was initially drawn to this anomaly from an historical 1995). Cave paintings, sculptures, and grave goods can be contentanalysisofU.S.magazineadvertisinginwhichRickPollay traced back at least 30,000 years, while collections of curious and I found that status appeals curiously peaked during the heart pebbles have been found in caves inhabited 80,000 years ago. of the 1930s Great Depression (Belk and Pollay 1985). In addi- Such objects seem clearly to be luxuries appealing to "higher tion, motion picture depictions of luxurious living were especially order" needs rather than necessities that address "lower order" common at this time, which also seems curious in light of high M TRANSITION, October 1999 0 1999 The World BankWThe William Davidson Institute unemployment levels and other forms of impoverishment during who pursue luxuries, even at the expense of necessities, better off the 1930s. As an initial result of noticing this anomaly, I investi- because of it? How does this differ between rich and poor con- gated the seemingly inexplicable presence of luxuries in the Third sumers? How is this phenomenon different in affluent and transi- World (Belk 1988), finding ironic consumption practices such as tional economies? Why does it occur at all? people putting up unconnected television antennas on huts lack- ing both electricity and televisions, and families forgoing needed In [his chapter's] analysis I more thoroughly consider the popu- food in order to afford a refrigeratorwhich subsequently remained larity of luxuries in transitional economies. I begin by exploring empty. Ger (1992) cites the example of selling nutritious cow's what constitutes a luxury and then briefly consider the history of milk in order to buy candy for Turkish children who have seen it luxuries and attitudes toward luxuries, primarily in China and advertised on television. But the presence of luxuries in transi- Russia. Historical analysis helps to frame the current fascination tional economies was driven home for me during a sabbatical with luxuries in these countries and raises the very basic ques- year in Romania during 1991-92. After a decade of severe con- tions of whether luxuries are good or bad for individuals and so- sumer deprivations during which the best food, clothing, shoes, cieties as well as why luxuries are especially appealing to tools, beverages, and other consumer goods were shipped consumers in transitional economies. I draw upon diverse evi- abroad to repay a massive foreign debt, retail availability began dences to help enlighten the role of luxury in transitional econo- to change suddenly. Goods that were long absent from store mies today and discuss how this may be impacted by yesterday's shelves as well as never before seen consumption items had patterns of consumption in these same countries. rapidly begun to enter the Romanian market. The trigger for this avalanche of consumer goods was the execution of the An Evaluation and Conclusion Ceaucescus during the 1989 Christmas season revolution. But the goods that most quickly and prominently appeared in new Why do consumers in transitional economies so improbably want retail kiosks, established state stores, and in the streets and extravagant luxury goods? The answer differs somewhat depend- markets, were not the desperately needed and still rationed goods ing on the culture, but part of the explanation seems to be the such as sugar, petrol, meat, flour, and bread. Instead they were increasing visibility of consumer lifestyles elsewhere in the world. such luxury items as imported candies, liquors, perfumes, ciga- The propaganda of the kitchen debate and theAmerican exhibi- rettes, televisions, VCRs, cameras, cosmetics, and high-end tion in Moscow in the late 1950s has now been replaced by glo- automobiles such as Mercedes and BMW, which had quickly bal television, films, travel, multinational corporations, foreign established Romanian franchises. Even during the revolution it- tourists, the Internet, and other windows on a shrinking world. self, one of the first broadcasts by the revolutionaries who cap- Some would argue that the consumption of luxuries in transitional tured the state television network was not a political message or economies is only a factor among the fortunate few who have news of the revolution, but a showing of a copy of theAmerican managed to quickly become rich. But as the examples above film, "E.T. The Extraterrestrial." suggest, the demand for luxuries among consumers in transi- tional economies is considerably broader than this. The desire These impressions of rampant desire for luxury in Romania were for luxuries is also exacerbated by feelings of deservingness due confirmed by some quantitative results obtained measuring ma- to prior deprivations, as was the case with the Cultural Revolu- terialism in a dozen countries (Ger and Belk 1996a). These data tion in China and the Ceaucescu's decade-long consumer aus- confirmed that Romanians were the most materialistic of these terity program to repay Romanian foreign debt at the expense of consumers and that Ukrainians were fourth and reunified Germans Romanian consumers (Belk 1997). In small scale Third World fifth (the United States and New Zealand were numbers two and cultures there are barriers to status seeking through consump- three, respectively, while India, the United Kingdom, France, and tion, often couched in the fear of provoking the envy of others Sweden were the least materialistic nations). We had also mea- (Belk 1988). All are known to all in such societies, and fears such sured Germans before reunification and found their former level of as that of the evil eye tend to keep luxury consumption in check materialism to be much lower, like that of the other Westem Euro- (Gell 1986). But in formerly Communist societies where suspi- pean nations in the sample. The high levels of materialism (de- cions of even family members were built up over periods of "cul- fined as the belief that material possessions are the greatest source tural purification," such barriers are more negligible. Fear of envy of happiness and unhappiness in life) in Eastern and Central Eu- may persist longer in rural villages than in more anonymous cit- rope provide further suggestive evidence of the important role of ies, but the world is shrinking in this respect also; what comes to luxuries for consumers in transitional economies. But these data the city comes to the village, often sooner rather than later. do not explain why this should be the case. There are implications of pursuing status, prestige, material achievement, and aesthetic Then too, there is the national equivalent of the nouveau riche desires that seem quite different from those of pursuing desires desire to suddenly join what are perceived to be a finer class of for adequate nutrition, comfort, and safety (Ger 1992). Are those people, even though the luxuries consumed in this pursuit may © 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 3 lack what these "betters" take to be taste and sophistication. That and that what is once fervently wanted loses its appeal soon af- is, on the world stage, newly wealthy nations may lack the subtlety ter it is acquired (Belk, Ger, and Askegaard 1997). This sug- of consumption that has been gained by nations that are heirs to gests that the strong desire for luxury goods among consumers old wealth. And like the rags to riches millionaire entrepreneur, in transitional economies may quickly pass. While there is some these nations may well echo a Queen song lyric that was popular evidence of this already, the social comparison to those in more in Romania in the early 1 990s: "I want it all! I want it now!" But affluent countries continues to provide an engine for further con- perhaps the most basic explanation for the desire for luxuries by sumption aspirations among transitional consumers. Further- consumers in transitional economies is the desire that Karl Marx more, as Russia leamed under Communism, democratized luxury showed with his overcoat: a desire for respectability. is oxymoronic. When everyone has something it is no longer a luxury. Under these circumstances new luxuries must be created As Wilson (1972) notes, "Respectability at its material level, at as the old ones fall from this category. This becomes part of the its level of signification, is a show of luxury. It is a grand, well- motor for consumer culture. And as the histories of China, Rus- furnished home, well equipped with modern appliances, fine fur- sia, and prehistoric communities all suggest, the desire for luxury niture, china and linens, good stylish clothes, an expensive has long been with us and will likely persist into the indefinite education, manners, and deportment. These signifiers are also future. Dignity through more luxurious consumption appears to the foci of ambition for the population as a whole" (p. 226). be a strong panhuman motivation. Seen in this way, the pursuit of luxuries is a basic and innocent Finally, we should try to avoid reestablishing the same situation human right. It also helps make some sense of the "wish lists" that led to the collapse of Communism. It might be argued that to that my Romanian informants provided, including both large luxu- attempt to impose Maslow's need hierarchy by giving people ries like cars, houses, and computers, and things that would be what we believe they need rather than what they want, harks back considered necessities in much of the world, like soap, deodor- to Meng's (1995) parody about the purity of water during the ant, heat, and clean water. Chinese Cultural Revolution. These days in China, people want Perrier, Yibao [a local Chinese brand], and other expensive Of course many objections might be raised about a conclusion bottled waters (Belk and Groves forthcoming; Li 1998; Wong and that luxury consumption in transitional economies is good, hu- Ahuvia 1997). And why should they not have it? Regardless of mane, and desirable. Have we not learned that the materialistic whether the product is water or cellular phones, the proliferation pursuit of happiness is generally illusory? Mightn't the sacrifices of the desire for luxury is nothing new. It is only its pace and geo- made on behalf of luxuryconsumption be atthe expense of health, graphic place that have leaped traditional boundaries in our nutrition, education, childcare, and other "higher" and more hu- postmodern world. mane goals like those suggested by Maslow? Isn't the growing prospect of a billion Chinese consumers driving cars an invita- tion to environmental disaster? And can't a drive for material luxury Corruption in Court overwhelm concern for others and cultivate a passive depen- dency on novel trinkets (Ger 1997)? Yes. But at the same time, following a "Do as I say, not as I do" philosophy is as hypocritical _ . as it is ineffective. Long-standing critiques of luxury as enervat- ing, dissipating, and frivolous have never been very successful for very long (Berry 1994). And if a key role of desire for luxuries is to provide hope and the motivation for achieving a better life, it would be small, paternalistic, and wrong-headed to attempt to curb these desires. There will always be a socially constructed E- line between outrageous decadent luxury and morally justified = k: ' decencies. But as long as this line is not crossed, marketing luxu- ries in the least likely of places is no more problematic, and ar- guably less so, than marketing them in the most likely of places. After all, by far the greatest resource depletion and environmen- tal threat comes from the consumption of the more economically "In case of a favorable sentence, my client is ready to add developed world. If someone is to be targeted on these grounds, a substantial sum to the salary of the prosecution team." those in transitional economies are far down on the list of logical candidates. It also seems apparent that there is a cycle of desire From the Hungarian daily Nepszabdsag. d TRANSITION, October 1999 (D 1999 The World Bank/The William Davidson Institute The Prospects of Becoming Market Oriented: Evidence from the Czech Republic by Ronald Savitt, University of Vermont Dramatic changes have taken place in the industrial structure of The absence of market coordination led to what became known the Czech Republic as a result of the economic transformation as "the shortage economy" in which there was forced consump- of the last seven years. However, while macro economic studies tion (Kornai 1992, pp. 229-234). Ultimate consumers and inter- and business reports have discussed changes in companies such mediate buyers learned how "to make do" within the system. They as reductions in labor and changes to product lines (e.g., Myant were exceedingly skilled negotiators around the gathering, hoard- 1997, p.146), what marketing programs they have implemented ing, and allocation of materials (Newman and Nollen 1996, pp. and how far they have gone in becoming market oriented has 118-119). Enterprises had no need to deal with marketing activi- not been established. All we have is scattered evidence about ties because responding to demand was not a critical element what Czech firms are doing in adapting to the market. for managers in the individual organization. Even in those cases in which state enterprises exported to non-socialist markets, they This chapter explores the hypothesis that neither marketing nor were able to use the service of state operated export agencies. market orientation programs are really well understood by man- Customer satisfaction was not an issue. agers in the recently restructured "old state enterprises." We ar- gue that, in spite of the major restructuring activities, these firms Marketing in the Restructuring Process are moving at a relatively slow pace in changing their previous structures and behaviors toward anything that is similar to the An important element of organizational restructuring is market- practice of marketing in firms in developed market economies. ing. The challenges for accomplishing this objective were sig- While there have been major changes in the structure and op- nificant because of the widely held attitudes about marketing, erations of these firms, most of it has focused on financial and limited resources, and a lack of understanding about what mar- ownership issues, with less emphasis on what in Czech transfor- keting should be in the organization, and how it operates. Basi- mation activities is referred to as "commercial planning." cally, two approaches were taken. The first has been to establish a separate marketing department to undertake and direct mar- Such a situation is not hard to understand. One of the greatest keting activities for the entire organization or for specific units. challenges in the area of organizational restructuring that Czech This often took the form of integrating what managers thought firms are going through is recognizing the importance of the were marketing functions in a single department structure. Pack- market and buyers. In the past, what was produced had little rel- aging, distribution, and sales were often merged to become evance to what buyers wanted. Enterprises were driven by pro- the marketing department. In other cases, old functions such duction goals set by central plans that showed little concern for as data collection were brought into marketing. In still other market demand. Central planning provided production quotas cases activities including market research, new product devel- and hence managers did not have to understand the needs of opment, and promotion were combined (Hitchens, Birne, intermediate and final user. These enterprises were shaped to Hamar,Wagner, and Zeinplinerova 1995, p.101). Notonlywere take advantage of economies of scale and as a result were very there the internal difficulties of how to organize a marketing de- large and "the small number of enterprises and the high degree partment, there were other issues. Most important of these was of vertical integration have implied rather strong ties between how the new marketing department should relate to the tradi- suppliers and customers" (Elster, et. al., 1988, p. 159). For ex- tional departments in the enterprise. In theory all should have ample, the average number of workers in each firm in Czecho- equal footing, however, that was not to be achieved. Produc- slovakia in 1989 was 3,000 compared to approximately 300 in tion remained and remains fairly dominant. There has been only the West (Estrin and Takla 1993, p. 46). Creating new relation- limited movement toward the integration of marketing with other ships was going to be difficult in so far as it meant that most of management functions. the past relationship had to be abandoned. This often meant breaking social and political ties as well as economic ones. It is The second approach has been to combine what management a process that requires new thinking and the willingness to change views as marketing within the traditional organizational divisions. and it results in replacing the comfortable and familiar previous In this case, something like "marketing" or more correctly, selling social and institutional bases of authority (Clark and Soulsby became part of the historical production divisions. People who 1996). Most confounding about the process is that there are no were once "technical representatives" now became the market- instructions or maps. ing representatives for individual lines of insulation, resins, and © 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 m steel products. In such cases, the goal was to build better rela- structure, managers had great difficulties in understanding a tionships with consumers (Edwards and Lawrence 1994, p. 64). concept that transcends the organization. Managers were "well- qualified to make short-run adjustments to the production pro- In an extensive study of the transformation of an East German cess, for example by closing particular product lines, changing pharmaceutical company, researches concluded "There ap- the product mix toward more saleable goods ..and reorganizing peared to be a problem within the company with understanding production toward cheaper or higher quality inputs" (Estrin, Gelb the role of marketing (rather than sales). This was compounded and Singh 1995, p. 142). However, they have had difficulty with by the cost of marketing activities and the internal lack of experi- developing "the strategic direction for a business that plays a ence" (Edwards and Lawrence 1994, pp. 75-76). What often critical role in achieving a business's long-run objectives with re- prevailed in this process was an attempt to be seen as moving spect to growth, financial performance, and market position" (Best toward marketing. Adapting western concepts and words, print- 1997, p. 267). ing business cards in English, and producing slick promotional materials represent some of the artifacts that are easily found. There are only a few examples of old state enterprises that have More than once this has been described as moving from "the been able to make significant changes without extensive foreign Marxian dialectic to the marketing dialectic." investment. The most interesting case is from Poland where a ship- yard, not yet privatized though fully restructured, carried out a so- What is missing is some overall strategic view of what the orga- phisticated market-oriented program. It came as the result of the nization should look like and how it should behave. Whether the insights of a single individual who had both the insights and the western model is the most appropriate or not, what the trans- authority to make major changes in the enterprise. He was able to forming enterprises did not have was a clear idea of what they move it quickly from a traditional state-owned shipyard building should become. The past was clear; however, the future was not ships for local use or building ships for hard currency without re- and the broadly defined elements of market orientation were gard for efficiency or profits to one that successfully competed in understandably beyond their grasp. "In short, it has proven im- world markets. The strategy concentrated on understanding mar- possible to erase forty years of state socialism, ideology, institu- ket conditions and then adapting production to demand. "The cre- tions, and behavioral patterns, and simply inscribe the new values, ation of a focused marketing and product strategy was driven by a structures, and appropriate conduct of market capitalism" (Clark careful assessment of the fit between the market conditions and and Soulsby 1995, p. 216). the shipyard's relative advantage vis-a-vis worldwide competition" (Johnson, Kotchen, and Loveman 1996, p. 40). Some Czech firms have indeed been moving toward some market-oriented practices, but they do not have a clear idea of In summary, given the challenges in getting marketing established what they are and more importantly how to implement and man- and operating, it is little wonder that the more complex concept age them. "Quality, customer orientation, and competitiveness of market orientation has been difficult to develop. became the mantras of top management in 1992," for example, however, they were not a part of a comprehensive strategy for This chapter goes on to describe interview and survey data com- managing the enterprise (Newman and Nollen 1996, p. 129). As piled to understand how Czech enterprises are changing their a result of the socialist culture and highly vertical organizational business and marketing practices. Tests of Financial Intermediation and Banking Reform in China by Albert Park and Kaj a Sehrt China implemented a series of widely publicized financial re- As economies grow, financial institutions play an increasingly im- forms in the mid-1 990s designed to improve bank performance. portant role in directing financial resources to their most produc- However, descriptive and estimation results suggest that the tive use. Through their greater size and scope, they are better importance of state bank policy lending (to support state-owned able than informal institutions to safeguard deposits, diversify enterprises and finance agricultural procurement) has not fallen, portfolio risk, provide liquidity to borrowers and depositors, and and may even have increased, during the recent period, and that achieve economies of scale in evaluating projects and providing lending does not respond to economic fundamentals. Only the financial services. The depth of financial intermediation (loans group of smaller, less-regulated financial institutions appear com- as a share of GDP) has been shown to be positively associated mercially oriented. Despite reforms, significant barriers to effi- with both the level of development (GDP per capita) and the rate cient inter-regional financial intermediation remain. of economic growth. * TRANSITION, October 1999 C) 1999 The World Bank/The William Davidson Institute Economic literature's emphasis on the size of the financial sec- To be able to provide initial empirical evidence on the effect of tor overlooks differences in how well available resources are al- these reforms on loan allocation decisions, we examine the per- located. The recentAsian financial crisis and the experience of formance of different Chinese financial institutions before and banks in transition economies, as well as historically poor bank after the reforms, including all state banks (including specialized performance in Latin America and Africa, highlight the difficulty and policy banks); the Agricultural Bank of China (ABC), a spe- of establishing successful commercial banking systems that al- cialized bank that later spun off China's largest policy bank, the locate financial resources efficiently. Policy lending, barriers to Agricultural Development Bank of China (ADBC); rural credit co- inter-regional lending, distorted pricing, poor managerial incen- operatives, the largestfinancial institution otherthan state banks, tives, and lack of prudential financial regulation all can under- with a branch structure reaching to villages; and other financial mine financial performance. institutions, including urban cooperatives and urban cooperative banks, national and regional commercial banks, and national trust As a new approach to assess the effectiveness of financial inter- and investment companies-a small but dynamic part of the fi- mediation by national banking systems, we develop a set of tests, nancial sector. derived from a model of bank profit maximization, which exploit regional financial and economic data. The tests are based on the The results suggest that financial intermediation in China is far expectation that in efficient systems, financial intermediation should from efficient and that financial reforms in the mid-1 990s have not be overly influenced by policy variables, should be greaterwhere not reversed a worsening trend. The responsiveness of lending projects are more profitable and require greater financing-typi- to policy concerns such as state enterprise output and profitabil- cally in faster growing, richer, and more industrial areas, and should ity and grain production is significant and has increased, if any- direct funds to the best projects regardless of where deposits origi- thing, in the recent period. Economic fundamentals have had little nate. We then apply these tests to the case of China. effect on total lending. However, there is evidence that for the specific case of the ABC and ADBC, separation of policy and TheAsian financial crisis has heightened scrutiny of China's state commercial lending has allowed the ABC to become more com- banking system, whose fragility stems from the continued use of mercially oriented, even though it still responds to policy vari- the financial system to support urban-based state-owned enter- ables as well. Such separation does not improve overall prises. Recent estimates suggest that more than one quarter of performance, with the ADBC incurring increasing losses from the loans of China's four major state-owned banks are policylending.Amongotherfinancialinstitutions, ruralcreditco- nonperforming, and that technically these banks are insolvent. operatives seem poorly integrated into financial markets, sug- 1997 provincial data reveals a striking inverse relationship be- gesting potentially large gains once rural credit cooperatives are tween financial intermediation and GDP per capita that is at odds integrated into the national banking system. The small but rap- with the empirical regularity of positive correlation found in cross- idly growing group of other financial institutions (urban coopera- country studies. This pattern suggests that the allocation of fi- tives and cooperative banks, national and regional commercial nancial resources across provinces may be highly inefficient, with banks, and national trust and investment companies) are most richer provinces being taxed relative to poor provinces. commercial in their orientation and likely have filled important credit demand niches. In recent years the Chinese leadership has recognized the im- portance of improving financial intermediation and has made fi- These results do not necessarily mean that reforms have been nancial reforms a top policy priority. The most sweeping changes ineffective or unnecessary. Poor performance may reflect contin- were implemented in the mid-1990s, and include: ued difficulty in dealing with the huge portfolio problems facing Chinese banks, so that despite stronger incentives to improve al- * Relaxation of binding credit plans following the 1993 anti- location of new loans, the sharply deteriorating performance of inflation campaign. state-owned enterprises and the portfolio of older loans are over- * Centralization of the People's Bank of China's (PBC) re-lending whelming these efforts. to reduce excessive local influence on central bank financing of loans. * A shift to ratio management of loans, giving more autonomy to Financial sector reform was further extended after 1997. In state banks to reallocate funds among provincial branch offices. 1998 provincial PBC branches were abolished in favor of multi- * Adoption of a new Commercial Bank Law to improve mana- province regional branches and the government announced that gerial incentives and prudential financial regulation. the national credit plan would be eliminated in 1999. Banks have * Establishment of policy banks to separate policy from com- been allowed to adjust their branch structures based on com- mercial lending. mercial considerations rather than having a branch at each ad- * Establishment of a national, unified interbank market. ministrative level. Each specialized bank has established an © 1999 The World Bank/The William Davidson Institute TPANSITION, October 1999 A asset management company to salvage as much value as pos- tion of financial management, and continued difficulty resolv- sible from nonperforming loans. All of these changes will con- ing the state enterprise problem continue to be major impedi- tinue to move China toward a more commercial banking ments to efficient inter-regional resource flows. system. However, while growth of alternative financial institu- tions and continued reform of specialized banks holds prom- This article is based on William Davidson Institute Working Pa- ise for future performance, the limited and highly regulated per 270, by Albert Park, University of Michigan and Kaja Sehrt, interbank market, government-set interest rates, centraliza- Dartmouth College. Fourth Annual International Conference ion Transition Economics The Fourth Annual International Confer- Governor, People's Bank of China), Lou Most of the papers presented at the con- ence on Transition Economics was held Jiwei (Deputy Minister of Finance), Wang ference are online at the Davidson in Beijing, China from July 23-25, 1999, Xuebing (President, Bank of China), Wu Institute's website wwwwdi.bus.umich.edu to commemorate the 20th anniversary of Xiaoling (President, Shanghai Branch, following the Working Papers links. Plans the initiation of China's transition toward People's Bank of China), and Zhou are underway for the Fifth Annual Con- a market economy. The William Davidson Xiaochuan (President, China Construc- ference on Transition Economics and will Institute at the University of Michigan tion Bank). Policymakers from Central be announced in the Transition News- Business School sponsored and orga- and Eastern Europe included Mitja letter ata later date. nized the conference with London's Cen- Gaspari (Minister of Finance, Slovenia), treforEconomicPolicyResearchandthe Victor Geraschenko (Governor, Central 10th Asian Business Conference, National Center for Economic Research Bank of Russia), Miroslav Hrncir (Deputy University of Michigan Business at Tsinghua University, in cooperation with Governor, Central Bank of the Czech Re- School the Ford Foundation and the World Bank. public), Krzysztof Ners (First Deputy Min- January 20-21, 2000 ister of Finance, Poland), Cristian Popa More than 120 Davidson Institute and (Deputy Governor, National Bank of Ro- Thisconferencewill bring togetherabout CEPR Research Fellows and other dis- mania), and Marko Skreb (Governor, 30 senior business executives and high- tinguished economists from Asia, Eu- Croatian National Bank). Topics included level governmentofficialsfrom around the rope, and North America attended and transition experiences in retrospect, next world to discuss current trends and is- presented papers at the conference. steps to take toward a successful transi- sues affecting firms doing business in or Drawing from the experiences of many tion, new sources of growth, the restruc- withAsia. The program will feature panel transition economies, the conference cov- turing of state enterprises, tax and fiscal sessions on general business activities ered a wide range of topics, including the reform, and financial system reform. in China, India, Japan, the Republic of role of government in transition, market Korea, and Southeast Asia, along with liberalization, entry and exit of enterprises, Joseph Stiglitz (Chief Economist and Se- several functional and industry panels on money and banking, labor and human nior Vice President, Development Eco- topics such as corporate restructuring, resources, corporate governance, finan- nomics, World Bank), Nicholas Stern consumer marketing, privatization, high- cial crisis, international trade and foreign (Chief Economist, European Bank for Re- tech and telecommunications, and infra- investment, and alternative paths of tran- construction and Development), Jan structure development. sition. Svejnar (Executive Director, Davidson In- stitute), and Gerard Roland (Co-Director, Organized by students from the busi- In addition, more than 15 leading Transition Programme at CEPR) moder- ness school and various otheracademic policymakers from transition economies ated the policy sessions and provided units at the university, the annualAsian (mostly governors and deputy governors comments. Business Conference is the longest run- of central banks and deputy ministers of ning event of its kind in North America. finance) presented their assessment of the The Annual Conference on Transition past performances of and prospects for Economics is a forum held every sum- For additional details, including reg- their countries. Several top policymakers mer in a different location, bringing to- istration information, please visit the came from China, including Li Jiange gether scholars of transition economics conference website: www.umich.edu/ (Vice Minister, Office of System Reform and key policy leaders from major finan- -asiabus. State Council), Liu Mingkang (Deputy cial institutions and transition countries. I_I * TRANSITION, October 1999 (C 1999 The World Bank/The William Davidson Institute China's State-Owned Enterprises Did Their Job Now They Can Go by Gary H. Jefferson U | ntil the early 1 990s China's state- historically remain relatively flat even as in the past few years-from earlier rates owned industrial enterprises pro productivity moves upward. This phenom- of 2-3 percent to near zero now. The re- vided approximately 45 million enon occurs in all market economies be- cent drop in growth may support the view urban jobs and more than half of the cause as industrial productivity and that without fundamental ownership re- country's industrial output, tax revenues, purchasing power rise, new firms enter the form, China's state industry has exhausted and exports. It is unimaginable that living market and existing firms expand to cre- the potential for further productivity gains. standards and overall economic growth ate newcapacity. Thus gains in profits tend Most striking was state industry's continu- could have risen as robustly as they did to be eaten up by expanding investment ing decline in capital productivity. during the first 15 years of China's eco- and increasing competition. nomic reform had productivity not been ris- Tragedy of the Commons ing in state industry. Consistent with our While numerous hypotheses have been earlier studies and most others in the lit- proposed to explain this apparent para- Garrett Hardin in his 1968 article "Tragedy erature, my colleagues Thomas G Rawski, dox of rising state industry productivity and of the Commons" postulated an agrarian Zheng Yuxin, and Wang Li recently con- falling profitability-new business forma- community where all citizens graze their cluded that during 1980-93, total factor pro- tion, the failure of managers to pursue prof- livestock on a commonlyowned field. The ductivity (TFP) in state industry rose at an its among them-my colleagues and I find field can only support a limited number of average annual rate of about 2.5 percent. that state enterprise profitability is driven animals before it is denuded and ruined. by differential productivity performance. The cost-benefit analysis performed by an While modest in relation to some other Either a fall in state enterprise productivity individual townsperson using the commons sectors, productivity gains in state indus- or a rise in TFP outside the state sector will always lead to the conclusion that the try averted the collapse of state-owned en- depresses state industry profitability. Al- immediate benefit of adding another ani- terprises during the 1980s and into the though state enterprise productivity gen- mal,faroutweighstheremoter, lessvisible 1990s. Had productivity in the urban sec- erally rose during 1980-93, its growth harm of degradation of the commons. tor remained stagnant, the likely result lagged behind that of the non-state sec- Whatsmore,thebenettfromtheadditional would have been either persistent macro- tor. The relative fall in state enterprise prof- animal belongs to the townsperson alone, economic instability and a slower open- itability, therefore, arises from the relative while the harm to the commons is shared ing to the world economy or the collapse decline in state enterprise productivity. proportionally across all its users. of state industry and the uncertainty asso- ciated with disintegration of the country's Interestingly, the same research suggests What explains this chronicweakness? I be- enterprise-based social welfare system. In that once we control for productivity differ- lieve that the best explanation is that many short, the partial restructuring of state in- entials between state and non-state indus- of China's state-owned enterprises exhibit dustry created a gradual reform option for try, new business formation outside the the features of a commons. State-owned China's leadership. The point of this ob- state sector did not depress productivity enterprises are the fisheries of China's en- servation is not to argue that China's cho- in state industry, rather, it enhanced state terprise system from which stakeholders sen reform scenario has been better or industry profitability. This result may reflect extract more than they contribute. The state worse than the alternatives. It is only to the ability of new firms to serve comple- enterprise commons is abused by workers point out that the process of gradual re- mentary roles as suppliers and subcon- shirking, managers stripping assets, and form in China was predicated on the ris- tractors, thereby alleviating the excessive officials siphoning profits. But state-owned ing productivity in state industry. vertical integration of China's plan system. enterprises are also overtaxed to finance China's social welfare system and resource Rising Productivity, Falling Profits How to Avert "The Tragedy of the Com- transfers to the collective sector, including mons" technology, equipment, and material inputs. If productivity has risen in China's state State-owned enterprises bear a dispropor- industry, then why has its financial perfor- Our current research confirms that produc- tionately large tax burden. In 1995 state in- mance fared so poorly? Returns to capital tivity growth in the state sector has slowed dustry contributed 47 percent to total C) 1999 The World Bank/The William Davidson Institute TRANSIT[ON, October 1999 m manufacturing output but paid 71 percent of resources creates the moral hazard asso- 1997-98-from about 110,000 in 1997 to alltax revenues. ciated with overconsumption. Chronic over- 64,700 in 1998. Moreover, many of these consumption gives rise to the externalities state enterprises, possibly more than In the oft-invoked theory of 'the tragedy described above and to banking crises 11,000, are not state-owned enterprises of the commons," the cause of public when these externalities are no longersus- by the conventional measure-they are overexploitation is an ambiguous assign- tainable. The basic problem arises from the enterprises in which the state retains a ment of property rights. Similarly, in inabilityofthesocialiststatetoassign prop- "controlling share." During 1997-98 the China's state-owned enterprises, indi- erty rights effectively. Property rights moti- number of foreign-invested enterprises viduals or entities without the clear right vate businesses-whether industrial rose by 19,000 and the number of private to use and receive a return from state- enterprises or financial institutions-to and state enterprise-collectively owned owned assets lack both the authority and monitor their resources responsibly. enterprise joint ventures rose by 8,500, incentive to monitor these assets. Under increases that probably reflect the influx of such circumstances, the commons nor- The work of the 1991 Nobel Laureate in converted state-owned enterprises. There- mally would be exploited to exhaustion. Economics, Ronald Coase, specifically the fore, we see that in terms of the number of Like the overexploited fishery, why does logic of the "Coase Theorem," suggests a firms that are distributed across ownership the state enterprise commons not simply remedy for China's state-owned enterprises. types, the policy of "release the small and shrivel up and disappear? To prevent the siphoning off of natural re- retain the large" (juada-fang xiao) has sources and to ensure their efficient use, the begun to take effect. The reason is that the tier of economic in- Coase Theorem requires the following: stitutions that lies above the enterprise sec- * Clearly specified property rights, includ- Continued weak monitoring within the finan- tor-the fiscal and banking systems-also ing the right to monitor, receive the return cial system and clogged channels for liqui- assumes the function of a commons in from, and sell the asset. dating poorly performing enterprises are China's economy. The banking system, 0 Low transaction costs so that the entre- sustaining ubiquitous excess capacity. In largely comprised of state-owned enter- preneur who can employ the asset most this environment, all sectors have exhibited prises that are also weakly monitored, efficiently will purchase its control. declines in productivity, particularly in returns serves as a kind of unsupervised hatchery to capital. No sector has demonstrated a for the depleted fisheries. It is the ability of In China, the U.S., or any other industrial greater productivity decline than China's the state enterprise system to replenish,it- market economy these conditions-clearly new shareholding enterprises, most of self by capturing eggs-such as unsecured specified property rights and low transaction which were converted from state-ownership loans-from the banking system that allows costs-are essential for a property-rights status. Thus effective enterprise reform in state-owned enterprises to exhibit the prop- market. By forcing the governments and China is not simply a matter of relabeling erties of public goods. Their resources are, agencies that currently own China's state- ownership or shuffling boards of directors. to a significantdegree, both non-excludable owned enterprises to face the opportunity Effective enterprise reform requires further and non-diminishable or non-rivalrous. Like cost of public ownership and by enabling the progress in establishing a property rights unmonitored public goods, the state-owned sale and restructuring of assets, an increas- market in which both of Coase's require- enterprise system creates negative exter- inglyactive property-rights market is needed ments are progressively satisfied-in- nalities. What are these? to resolve China's state enterprise problem. creasingly well-specified property rights reform and lower transaction costs of bank- Non-performing loans of the banking sys- Recent Gains in Enterprise Reform ruptcy and market-mediated restructuring tem may be financed by one or a combi- with access to competitive capital markets nation of three sources. The first is by Currently China's leadership is juggling nu- and professional accounting, auditing, and printing money, which results in inflation merous, conflicting policygoals. Thesegoals legal services. These are the elements of and macroeconomic instability. Bad loans include employment stability along with state an effective property rights market, which can also be financed by debt, which crowds enterprise reform, and enterprise reform must lead the way during the next stage of out private economic activity through along withastableexchange rate. The press China's enterprise reform. higher rates or higher taxes. Finally, non- often gives the impression that reform is performing loans can be sustained through slowing, butthe numberssuggestotherwise. Gary H. Jefferson is Professorof lnterna- financial repression, in which saving op- tional Trade and Finance at the Gradu- tions are restricted to bank deposits. After remaining relatively stable (in the ate School of International Economics range of 100,000 during the past 10 years and Finance at Brandeis University. At The inability of the enterprise and finan- or so), the number of state-owned indus- present, he is Research Fellow at the Wil- cial systems to effectively monitor their trial enterprises fell precipitously during liam Davidson Institute. * TRANSimioN, October 1999 © 1999 The World BankfThe William Davidson Institute World Bank/IMF Agenda Kosovo to Get World Bank Grant for both budgetary support and humanitar- lives and livelihoods of 4,000 Tibetan and ian aid in time for the onset of the Balkan Mongolian ethnic peoples. In early October the World Bank an- winter. In addition, mindful of the need to nounced plans-outlined in a Transition protect both domestic revenues and ex- Blood Transfusion to Croatia's Ailing Support Strategy Paper-to spend $50 ternal donor support from corruption or Health System to $60 million during the next 18 months to misappropriation, the Group also wel- support Kosovo's reconstruction and eco- comed the setting up of strict financial and On October 5 the World Bank approved nomic recovery efforts. Following the re- auditing controls to ensure that all trans- a $29 million loan for a Health System cent decision by the Board, the first $25 actions involving the Kosovo budget are Project in Croatia that will contribute to million tranche of this support will be made transparent and fully accountable. a more effective, efficient, and financially available from the World Bank's net in- sustainable health system. The total come and will be provided to Kosovo on President Wolfensohn Reappointed to amount of the project is $39.9 million, in- grant terms. The Transition Support Second Term cluding $10.9 million from the govern- Strategy Paper describes three priority ment. The loan has a maturity of 15 activities for the World Bank in the overall Executive directors of the World Bank in years, including a five-year grace period reconstruction and recovery program for September unanimously endorsed the re- at the standard interest rate for LIBOR- Kosovo: nomination of President Wolfensohn for a based, single currency loans in dollars. further term of five years, beginning June Since Croatia joined the World Bank in * Aid coordination. In collaboration with 1, 2000. 1993, commitments to the country total the European Commission the Bank is fi- about $783.42 million for 18 projects. nalizing the development of the Recon- Inspection Panel Returns from China struction and Recovery Program for World Bank Investigation Launched Kosovo and has begun planning, prepar- The World Bank's Independent Inspection into Acts of Russian Ex-Official ing, and cohosting intemational donor con- Panel returned on October 28 from a three- ferences to mobilize financial support. week visit to China, which included an ex- The World Bank announced on October 22 * Policy and technical advice. The tended visit to the proposed site of the that it has hired the law firm of Venable, Bank is providing economic policy advice China Western Poverty Reduction Project Baetjer, Hower, and Civiletti to investigate to the United Nations Mission in Kosovo in Qinghai. "The team came back to Wash- the alleged misconduct of Leonid Grigoriev. (UNMIK) during its interim governing of the ington with a vast amount of facts and infor- Grigoriev worked as a senior official in the province and laterto local Kosovarauthori- mation which it must now assess," the World Bank's Washington headquarters ties, over time. Panel's chairman, Jim MacNeill of Canada, between 1992 and 1997, first as alternate * Limited financial support. This sup- said. The panel will undertake further inter- executive director for Russia, then as ad- port would be provided on a highly selec- views with Bank officials in Washington in- visor to Russia's executive director. The tive basis; however, the Bank will seek to volved in the design of the project. Wall Street Journal reported that maximize the impact of its limited re- Grigoriev was suspected of having pro- sources by leveraging donor funds. On June 24 the Board approved the China vided "insider" investment advise-tips on Western Poverty Reduction Project, subject debt-market investments-to the Moscow- Challenges Remain in Rebuilding to the results of an investigation by the In- based Inkombank (one of Russia's larg- Kosovo spection Panel. On September 9 the Board est, until it lost its license last year) while formally requested that the Panel undertake carrying out his duties at the World Bank. During its second meeting in Washington, an investigation into whether Bank man- If true, World Bank officials point out, D.C., in late September the High Level agement had observed its policies on, Grigoriev's actions would have constituted Steering Group for Southeast Europe, un- among others, involuntary resettlement, in- violations of World Bank conflict of inter- der the joint chairmanship of European digenous peoples, and environmental as- est rules. Commissionerfor Economic and Monetary sessment. Earlier the Panel had received Affairs, Pedro Solbes Mira, and World a Request for Inspection claiming that the Currently, Grigoriev heads a Moscow- Bank President, James D. Wolfensohn, proposed migration of 60,000 poor people based economic policy analysis institute, called on international donors to disburse from regions in eastern Qinghai Province the Bureau of Economic Analysis (BEA), the money that had previously been pledged to Dulan County would adversely affect the which is supported through a World Bank © 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 m loan. At the request of the Russian gov- crime control, and a project on reclama- Milestones of ernment, the board of BEA has placed tion of swamps and marshes along the Grigoriev on administrative leave pending Danube River. So said Andrew Vorkink . the results of the investigation. The Rus- World Bank Country Director for Bulgaria Tiransition sian government and the World Bank have and Romania, at the Southeast Europe agreed that, in addition to earlier audits, Economic Forum in Sofia in mid-October. they will review the transactions and ac- Vorkink stated that the World Bank has From 1997 to January 2000 the European counts of the BEA. contacted the Paris Club on behalf of Bul- Investment Bank (EIB) will lend up to 7 bil- garia to propose the idea of ex(changing lion euros to the 10 Central and East Eu- World Bank Backs Bulgaria's Debt- this country's debt to the Club for invest- ropean applicant countries-Bulgaria, the for-Shares Plan ments in priority projects. Bulgaria owes Czech Republic, Estonia, Hungary, Latvia, the Paris Club some $900 million; to- Lithuania, Poland, the Slovak Republic, The World Bank has been considering gether with Albania and Macedonia, they Slovenia, and Romania. The EIB recently new loans for Bulgaria in support of the had offered the swap for consideration has lent 40 million euros for developing a reform in education and administration, earlier this year. mobile telecommunications (GSM) net- work in Slovenia. With the latest loan, total EIB financing in Slovenia increases to 550 IMF Forecasts for Nations in Transition million euros. Another EIB loan of 21 mil- lion euros to Lithuania's government will finance environment projects by local gov- The International Monetary Fund's annual World Economic Outlook report, released t y. in September, contains the following forecasts for economic growth in 1999 and 2000 e for each of the countries in transition. It also includes inflation forecasts. wNww.Financial-Conferences.com. The Annual growth rate forecast Annual inflation rate [CPU first online database of finance courses (percent) (percent) and conferences has been launched on 1999 2000 1999 2000 November 3 by Global Investor, a UK- Albania 8.0 8.0 7.0 6.0 based distributor of financial products and Armenia 3.5 5.0 3.0 8.0 services. On this site it is possible to list Azerbaijan 3.8 2.8 -5.0 4.0 all of the financial courses and conferences Belarus -2.0 0.0 320.0 250.0 for a particular week on a specific subject. Bosnia 8.0 14.0 5.0 3.0 Users can automatically be notified of new Bulgaria 1.5 4.0 -1.0 4.0 Croatia -2.0 2.5 4.0 3.0 events in their interest area through Email Czech Republic 0.0 1.5 3.0 5.0 Alert. The website carries course and con- Estonia 0.5 5.0 4.0 3.0 ference details on more than 2,000 events Georgia 2.0 5.0 22.0 5.0 from 180 organizations worldwide. Users Hungary 3.7 4.5 9.0 8.0 can search the database with keywords Kazakhstan -1.5 3.0 7.0 11.0 Kyrgyz Republic 2.7 3.5 32.0 16.0 or browse by category, location, or date. Latvia 2.0 4.0 2.0 3.0 Lithuania 0.5 4.0 2.0 3.0 Information: Philip Jenks, Director, Glo- Macedonia 4.0 3.0 2.0 2.0 bal Investor; tel: 44 1730233 870; email: Moldova -5.0 1.0 28.0 6.0 . .' Mongolia 3.5 4.0 9.0 6.0 plenks@flnancial-conferences. cor; Poland 3.7 5.0 7.0 5.0 Intemet: http://vvwwglobal-investor.com. Romania -3.5 2.5 40.0 17.0 Russia 0.0 2.0 88.0 23.0 Russia Slovak Republic 0.7 4.9 9.0 7.0 Slovenia 3.0 3.8 5.0 5.0 Productivity of Russian industry de- Tajikistan 5.5 6.0 15.0 7.0 Turkmenistan* 18.5 -1.0 27.0 54.0 clining. According to a new study by Ukraine -2.5 0.0 26.0 15.0 McKinsey and company, reported in the Uzbekistan 2.1 2.0 28.0 22.0 Wall Street Journal, Russian industry is *The IMF staff was queried on the Turkmenistan figures, which seem out of line with the rest only half as productive as it was in 1992. of the region, but there was no immediate explanation. (Robert Lyle, RFE/RL) The study scrutinized 10 sectors of the M TRANSITION, October 1g99 C) 1999 The World Bank/The William Davidson Institute economy, from oil to software, to exam- with 1.45 million tons of imported meat, will ter rose to 1.5 billion litas ($378.8 million), ine why Russia's GDP has declined 40 be insufficient to meet the country's current a rise of 29.6 percent from the same pe- percent since 1992 while economic per- meat demand of 5.5 million tons. riod last year. The deficit was estimated formance has surged in formerly commu- at 14.0 to 15.0 percent of GDP, up from nist countries such as Hungary and "Living standards of 57 percent of the 9.6 percent in the first quarter. The cen- Poland. The findings lend new weight to population of Russia are below the mini- tral bank blamed the increase on a rise the theory that privatization and other eco- mum subsistence level, the unemployment in the consolidated fiscal deficit, owing to nomic reforms have often aggravated rate has reached 14.2 percent, and the government payouts under a compensa- rather than solved problems inherited average life expectancy does not exceed tion scheme for citizens who lost ruble- fromtheSovietUnion.Unfaircompetition 61.7 years," Duma Speaker Gennady denominated savings in the Soviet and widespread corruption have de- Seleznyov declared, commenting on an Vneshekonombank. creased the incentive to invest in and appeal to join the worldwide movement boost productivity of Russian industry, against poverty launched under the UN Romania despite a privatization program that has auspices. According to Labor Minister put most state-owned enterprises in pri- Sergei Kalashnikov, "only" 29 percent of In late September the government ap- vate hands. Normal evolutionary pro- Russia's population is living below the proved the revised 1999 budget draft fol- cesses that reward productive companies minimum subsistence level. lowing months of dispute both within the and push unproductive ones out of busi- coalition and between the cabinet and the ness don't exist. However, Russia's core Central and Eastern Europe IMF. The consolidated budget deficit is now industrial assets are actually quite good, targeted at 4.1 percent of GDP, against and each investment is needed to spark Hungary the initial aim of 2.5 percent. The impact huge gains in productivity. of the Kosovo crisis on exports has set the Growth over three years predicted. economy back considerably since budget Population expected to fall drasti- Ecostat predicts Hungary's economic discussions began. The economy is ex- cally. A U.S. expert on Russian social growth to be4 percentthis year, withacur- pectedtocontractby4.8 percent over last trends predicts that falling birth rates rent account deficit of $2.7 billion. Accord- year, compared with an initial estimate of coupled with an alarming rise in diseases ing to the report, annual economic growth 2.0 percent. The government estimates like tuberculosis and AIDS could cut could average 4 to 5 percent overthe next year-end losses of more than $900 million Russia's population by more than a third three years, in the absence of any extemal as a result of the Kosovo crisis, which has by 2050. Murray Feshbach, research pro- shocks. Rates of growth for both imports affected industrial output, inward invest- fessor at Washington's Georgetown Uni- and exports are forecasted at 9 to 10 per- ment, and trade. Although most forecasts versity and a top specialist on Russian cent, meaning the trade deficit could reach predict slight recovery in the year 2000, social and environmental trends, predicts $4 billion by 2002. Tourism and EU trans- the debt burden remains high and parlia- that Russia's population could fall from the fers should prevent deterioration of the cur- mentary elections next year may introduce current 146 million to as low as 80 to 100 rent account deficit. Ecostat puts the public new political instability. Recent opinion million. Such a fall would have large eco- finance deficit for 2002 at 3.6 percent of polls give the opposition a majority, reports nomic and social consequences that GDP. The cumulative public sector deficit Oxford Analytica. could undermine Russian stability. fell in Octoberand isnowbelowthefull-year Feshbach based his projections on Rus- target. The Septembercurrentaccount defi- Asia sian statistics as well as data from non- cit was $93 million, less than half the level governmental organizations and inter- expected by the markets. Industrial output China national institutions. for the month rose 10.7 percent year-on- year in September, suggesting sustainable Growth to exceed predictions. There is Russia to experience grain and meat growth built on rising exports. The govern- no pressure to devalue the yuan due to a shortfall. The U.S. Department of Agricul- ment target of 4 percent GDP growth now rebound in exports and a rise in foreign ture is predicting that Russia will face a appears within reach. currency reserves, Premier Zhu Rongji shortfall of grain totaling 7.5 to 9.5 million said in an interview published in Novem- tons in 2000, Interfax reported. They also Lithuania ber by German daily Handelsblatt. Zhu concluded that there will be a meat short- also predicted that economic growth in fall, noting that the meat supply of 3.8 mil- A rise in current account deficit. The China will likely exceed the forecasted 7 lion tons of domestic production, combined current accountdeficitforthe second quar- percent increase. (Official figures show © 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 * that China's GDP expanded by 7.4 per- Co f D cent in the first three quarters, after a 7.8 onference D ary percent rise in 1998). While foreign di- eret rinestmen in Cha fellte firsteight d Special Announcement! CEES, Copenhagen Business School, rect investment in China fell in the first eight' . . ~~~~~~~~~~Dalgas Have 15, DK- 2000 Fredenksberg, months of 1999, it has picked up again in D September, Zhu said. Official statistics EACES Award 2000-The best doctoral Denmark; tel: (45) 3815 3033; fax: (45) 3815 show that actual foreign direct investment dissertation in comparative economic 3037; email: km.cees@cbsdk fell 6.9 percent to $29.2 billion in the first systems and economics of transition nine months of 1999. Solvency of China's Forthcoming Conferences four largest government-owned banks has The European Association for Compara- considerably improved, the Premier tive Economic Studies (EACES) invites Third Meeting of the ECPD Interna- noted. China recently set up four bad debt proposals for EACES Award 2000-the tional Permanent Study Group on clearing agencies for the four state-run best doctoral dissertation in the fields of Transition and Privatization commercial banks. The asset manage- comparative economic systems and eco- November 26-27, 1999, Ohrid, Republic nomics of transition. of Macedonia ment companies are favoring debt-for- equity swaps as the vehicle for taking over equity swaps as thevehiclefortakingove The award is endowed with 700 euro forthe Organizer: The European Center for aililng state firms and forcing them to re- ailigstr tue. firms and forcing them tore-winner, who will be given the opportunity to Peace and Development (ECPD) of the present his or herwork at a plenary session University for Peace established by the Lao PDR of the 6th EACES conference in Barcelona, United Nations in cooperation with the Spain, on September 7-9, 2000. EACES government of the Republic of Macedonia. Lao PDR sinks deeper into socio- will furthermore provide assistance to enable Topics: Recent lessons from transition economic morass. International donors the winner to publish the dissertation. and privatization-problems of institu- tions and corporate governance and the esa thatiLaon PDR, olingdeef Asinoa'spoo- The prize will be awarded to the work that, place of privatization in the economic re- est nations, is sliding deeper into a so- cioeconomic mess that can only worsen in the opinion of the jury, has the greatest habilitation of the region of South East unless urgent government action is taken potential to impact the field of compara- Europe, as well as the most appropriate tive economic studies in the future. Both policies and methods of privatization in teminflathe tide, Rioeuter repotsn Hr- theoretical and empirical contributions are circumstances of post-conflict economic perinflation and a violently fluctuating cur- rency have combined with some of the appropriate. The topics may cover any disruption. worst social indicators in the East Asian area of research sponsored by EACES Information: Gordana Hofmann, Euro- region . Buffeted by the Asian financial including comparative analysis of different pean Center for Peace and Develop- economics systems, evolution of economic ment (ECPD) of the University for crisis, a weak macroeconomic manage- systems and institutions, and the transition Peace established by the United Na- ment, and a lack of decisive and speedy from central plan to market economy. tions; tel: (381 11) 3246-041, 3246-042, decisionmaking on the part of the gov- 3246-043, 3246-044, 3246-045; fax: ernment are contributing to the decline, Inquiries and Submissions (381 11) 3240-673, 3234-082; email: says the story. Some donors like the ecpd@EUnet.yu World Bank have cut development as- To be eligible for the EACES Award 2000, sistance and tied aid increases to deci- the doctoral dissertation must have been HEERO 1999: Heads of East Euro- sive action. With the financial sector in a acceptedforthedegree of Ph.D. (orequiva- pean Regional Operations Roundtable precarious state and half the population lent in continental Europe) between January November 23-24, 1999, Vienna, Austria living below the poverty line, donors say 1998 and December 1999. Further inquir- authorities must quickly launch strong ies may be addressed to the contact below. Information: Katrin Klausecker, The stabilization measures to curb inflation, The deadline forsubmissions is January31, Economist Conferences, Schwarzen- stabilize the kip (the Laotian currency), 2000. Proposals, accompanied by one copy bergplatz 8/7, A-1030 Vienna, Austria; tel.: and restore a growing loss of local and of the dissertation and five copiesof an ab- (431) 712-416141; fax (431) 712-4165; foreign confidence in the economy and stract in English of no more than 15 pages email: katrinklausecker@eiu.com currency. (1.5-spaced, normal fonts, and including exhibits) should be sent to: E-commerce in Central and Eastern We appreciate the contributions from Ra- European Association for Comparative Eco- Europe dio Free Europe/Radio Liberty. nomic Studies (EACES), c/o Dr. Klaus Meyer, January 27-28, 2000, Warsaw, Poland * TRANSITION, October 1999 ©D 1999 The World Bank/The William Davidson Institute Information: Katrin Klausecker, The Econo- mist Conferences, Schwarzenbergplatz8/ New Books and Working Papers 7, A-1030 Vienna, Austria; tel: (431) 712- 416141; fax (431) 712-4165; email: TheMacroeconomicsandGrowthGroupregretsthatitisunabletoprovidethepub katrinklausecker@eiu.com /ications listed. Third Roundtable with the Govern- World Bank Publications China's unique combination of emissions ment of Hungary charges and pollution abatement subsi- February 21-23, 2000, Budapest, To receive ordering and price information dies has given its most heavily-polluting Hungary for World Bank publications, contact the industrial firms incentive to invest in pollu- World Bank, PO. Box 7247-8619, Phila- tion abatement. Information: The Economist Confer- delphia, PA19170,UnitedStates,tel: 202- To order: Hua Wang, Room MC2-626, ences, Schwarzenbergplatz 8/7;A-1030 473-1155, fax: 202-676-058, email: tel.: 202-473-3255, fax: 202-522-3230, Vienna, Austria, tel: 431-712-41 61/0, books@worldbank.org, Internet: http:// email: hwang1@worldbank.org. fax: 431- 712- 4165, Internet: http:// www.world bank.org or http.//www.world www. eu. com/catalogue/conferences/cal- bank. org/html/dec/Publications/Work pa- Jean-Jacques Dethier, Hafez Ghanem, endar/cal_East.html pers/tranecon.htm, or visit the World Bank and Edda Zoli, Does Democracy Facili- bookstore in the United States, at 701 18th tate the Economic Transition? An Em- 26th Annual Conference Street, NW, Washington, D.C., orFrance, pirical Study of Central and Eastern March 24-26, 2000, Washington, D.C., at 66 avenue d'lena, 75116 Paris. Europe and the Former Soviet Union, United States WPS 2194, October 1999, 30 pp. Working Papers Organizer: The Eastern EconomicAsso- Empirical analysis shows that democracy ciation. http://wbIn0018.worldbank.org/researchl has facilitated economic liberalization in Information: Dr. Mary Lesser, Executive workpapers.nsf/policyresearch 25 post-communist countries of Central Director, EEA, tel.: 914-633-2088, fax 914- and Eastern Europe and the former So- 633-2549, Email: mlesser@iona.edu, Michael M. Lokshin, Household Child- vietUnion.Theexistenceofavibrantcivil Internet: http.//www.iona.edu/academic/ care Choices and Women's Work Be- society at the start of the transition has the arts scilorgs/eea/eea.htm havior in Russia, WPS 2206, October most explanatory power in this team's re- 1999, 35 pp. gressions. Ten Years of Transition: Prospects and To order: Hafez Ghanem, Room H4-201, Challenges of the Future for Public Replacing family allowances with child- tel.: 202-458-5557, email: hghanem Administration care subsidies in Russia might strongly @worldbankorg. The other authors may April 13-15, 2000, Budapest, Hungary influence women's participation in the la- be contacted at jdethier@worldbank.org bor force and thus could be effective in orezoli@worldbank.org. Information: NISPAcee, Hanulova 5/B, reducing poverty. Lokshin models mothers' 840 02, Bratislava 42, Slovak Republic. participation in the labor force, their work- Constantine Michalopoulos, The Integra- tel.:/fax: 4217- 642-85-557, 4217- 642-85 ing hours, and household demand for tion of Transition Economies into the 357; email: Viera@nispa.sk; Intemet: http./ childcare in Russia. The model estimates World Trading System, WPS 2182, Sep- /ww.nispa.sk/ the effects of the price of childcare, moth- tember 1999, 38 pp. ers' wages, and household income on Sixth EACES Conference: Globaliza- household behavior and well being. With few exceptions, economies in Cen- tion and European Integration To order: Patricia Sader, Room MC3-632, tral and Eastern Europe, including the September 7-9, 2000, University of tel: 202-473-3902, fax:202-522-1153, email: Baltics, have been well integrated into the Barcelona, Spain psader@worldbankorg. The authormaybe multilateral trading system. One of the contacted at mlokshin@worldbank org. main challenges they face is integration Information: Department Politica Econo- into the European Union. Armenia, Geor- mica, Universidad. Avda. Diagonal, 640, Hua Wang and Ming Che, How the Chi- gia, the Kyrgyz Republic, and Moldova 08034 Barcelona, Spain; tel.: 3493- nese System of Charges and Subsi- have adopted relatively liberal trade re- 4021949; fax: 3493-402-4573; email: dies Affects Pollution Control Efforts gimes and are either already members of gate2000@eco.ub.es by China's Top Industrial Polluters, the WTO or close to it. But to facilitate trade WPS 2198, October 1999, 28 pp. they need to strengthen customs, the finan- ©D 1999 The NWorld Bank/The William Davidson Institute TRANSITION, October 1999 M cial sector, and institutions. Trade regimes economy introduces should foster more The volume covers more than 202 re- of Kazakhstan, Russia, and Ukraine are efficient production, better use of re- search projects initiated, underway, or not especially restrictive, but weak institu- sources, and increased community input. completed in fiscal 1999 at the World tional capacities inhibit their effective in- The advanced reformers of the Central Bank, grouped under nine major headings, tegration into the world trading system and and Eastern European countries proved including transition economies. accession to the WTO. The remaining this to be the case. They improved energy countries in Central Asia, as well as efficiency and reduced the emissions in- Albert Nyberg and Scott Rozelle, Accel- Belarus, have a long way to go to be inte- tensity of pollutants. erating China's Rural Transformation, grated in international trade. 1999, 152 pp. The slower-reforming countries of the WTO members, especially the United Newly Independent States (NIS) also ex- IMF Publications States and the European Union, need to perienced reduced pollution. This down- review their policies toward nonmarket turn, however, coincided with an economic To order, contact IMF Publication Ser- economies on antidumping practices and decline, one which shut down many major vices, 700 19th Street, NW, Washington, on safeguards. Countries where market polluters. This report looks at air and wa- D. C., 20431, United States, tel.: 202-623- decisions prevail should not be subjected ter pollution and health indicators, analyz- 7430, fax: 202-623-7201, email: publica- to nontransparent and arbitrary proce- ing the environmental effects of transition tions @imf org, Intemet: http.//www.imf org dures. In particular, countries that have with a view to identifying priority areas for been judged to be "market" economies in investment and policy initiatives. Zuzana Brixiova, Wenli Li, Tarik Yousef, the process of gaining access to the WTO Skill Acquisition and Firm Creation should be excluded from procedures ap- Other World Bank Publications in Transition Economies, WPI99/130, plied for antidumping and safeguard mea- 31 pp. sures in nonmarket economies. Czech Republic: Toward EU Acces- To order: Lili Tabada, Room MC3-333, sion-Main Report, World Bank Coun- Sanjay Kalra and Torsten Slok, Inflation tel: 202-473-6896, fax: 202-522-1159, try Study, 1999, 344 pp. and Growth in Transition: Are the Asian email: Itabada@worldbank.org. The au- Economies Different? WP 991118, thor may be contacted at cmichalopoulos The Czech Republic was perceived until 1999, 24 pp. @worldbank.org. 1996 as the most successful transition economy in Central and Eastern Europe. Economic Reforms in Kazakhstan, Technical Papers But the Czech miracle came to a halt in Kyrgyz Republic, Tajikistan, Turk- mid-1997. Its future economic develop- menistan, and Uzbekistan, Occasional Mustapha Nabli, Integration, Vulnerabili- ment and successful integration into the EU Paper 183, 1999, 77 pp. ties to Crisis, and EU Accession in depends on its capacity to recover a sus- Five Central European Countries, TP tainable output growth path. This report Carlo Cottarelli and PeterDoyle, Disinflation 439,1999, 75 pp. focuses on the Czech economy from the in Transition, 1993-97, Occasional Paper perspective of its pursuit for EU member- 179,1999, 46 pp. The study assesses the possible vulner- ship. abilities in the Czech Republic, Estonia, This paperfocuses on the 1993-97 experi- Hungary, Poland, and Slovenia-slated to TradeCAN: Database and Software for ences of 10 Central and Eastern European be the first in the region to join the EU-as a Competitiveness Analysis of Na- countries and the Baltics, Russia, and other they proceed with global financial integra- tions, 1999, CD-ROM. countries of the former Soviet Union. It re- tion and EU accession. views a range of policies implemented in TradeCAN is a powerful new CD-ROM transition economies through the prism of Gordon Hughes and Magda Lovei, Eco- designed to analyze international, na- their contribution to disinflation and factors nomic Reform and Environmental Per- tional, and regional competitiveness in thatwereparticulartothetransitioncontext. formance in Transition Economies, TP commodities and manufactured exporLs. Some Central and Eastern European coun- no.446,1999,80 pp. The source of TradeCAN data is the tries managed to reduce inflation to the two- COMTRADE database. digit range by the end of 1992, while inflation Most global economic and environmental remained close to or above 1,000 percent watchers expect transitions to market World Bank Research Program-Ab- in the Baltics, Russia, and other countries of economies to yield environmental benefits. stracts of Current Studies, September the former Soviet Union. But by the end of The changing incentives that a market 1999, 221 pp. 1997, inflationexceeded 100 percentinonly X TRANSITION, October 1999 (D 1999 The World Bank/The William Davidson Institute one country. Median 12-month inflation in the tant reforms in the monetary-fiscal mix have cash funds are thus available for unoffi- whole transition group fell from 950 percent been undertaken. Liberalization, the sec- cial salary payments, investment, or dis- at the end of 1992 to 11 percent at the end ond plank of first generation reforms, has cretionary use by the entrepreneur. of 1997. also been successfully implemented with the liberalization of prices, the trade and for- Russian black cash tax evasion schemes BOFIT Publications eign exchange regimes, and the near differ from traditional Western-style cash completion of small-scale privatization, al- evasion schemes. First, Russian schemes To order: Bank of Finland, Institute for though the onset of the Russian crisis in concern mainly firms, not individuals. Sec- Economies in Transition, (BOFIT) Pub- 1998 negatively affected both internal and ond, this evasion is possible even when a lications, P.O. Box 160, FIN-0010 external balances. This paper presents the firm does not get its receipts in cash. Third, Helsinki, tel.: 3589-183-2268, fax: currenteconomicpictureforAzerbaijanand Russian schemes are almost risk-free for 3589-183-2294, email: bofit@bof. fi, then assesses economic policy issues fac- a legally operating firm. Therefore, the level Internet: http://www.bof.fi/bofit. ing the country. of tax evasion in Russia exceeds the lev- els in developed countries. Virtually all en- Discussion Papers The potential flow of oil-based monies terprises in Russia have an incentive to into Azerbaijan can produce "Dutch Dis- use a black cash scheme: thousands of Jukka Pirttila, Evasion and Economies ease" syndrome, affecting Azerbaijan sham firms affiliated with private banks go in Transition: Lessons from Tax through a rising real exchange rate, unpunished. Indeed, black cash evasion Theory, 2/1999, 43 pp. which endangers the nonoil sector. This is presently one of the most profitable busi- should become a policy concern in the nesses in Russian banking. This study considers the pervasive tax eva- medium-to-long term. Structural reforms sion of transition economies, with particular in public finance to deal with expected CEPR Publications reference to Russia's tax system. Starting surpluses are lagging and are necessary with a survey of theoretical literature on tax in the next phase of the transition of To order: Centre for Economic Policy Re- evasion and corruption, it argues that, al- Azerbaijan. Significant reforms are re- search, 90-98 Goswell Road, London thoughstandardtaxtheoryoffersmanyin- quired also in banking, specifically EClV 7RR, United Kingdom, tel.: sights, certain special features of transition privatization, improvement in regulation, (44171) 878-2900, fax: (44171) 878- economies deserve attention. These include and supervision. 2999, email: cepr@cepr.org. the legacy of socialism resulting in a state willing to exercise discretionary power but Andrei Yakovlev, Black Cash Tax Eva- Beata Smarzynska, Composition of For- possibly lacking credibility and public sup- sion in Russia: Its Forms, Incentives, eign Direct Investment and Protection port, the "disorganization" phenomenon, and Consequences at Firm Level, 3/ of Intellectual Property Rights in Tran- which hampers efficienttaxadministration, 1999,44 pp. sition Economies, 2228, September and the relationship of restructuring, speed 1999, 49 pp. of reform, and the tax system. It also con- The main idea of this scheme is the re- tains recommendations on reform of the tax placement of high-taxed elements of to- Contrary to the hopes of transition econo- system to achieve reasonable deterrence of tal revenue, such as salary or profit, with mies, foreign investors in the region are evasion. low-taxed elements, such as material ex- characterized by low, rather than high, re- penditures. The basis of such a replace- search and development (R&D) intensity. Rupinder Singh and Juhani Laurila, ment is the contract betweenaclient and The results also indicate that investors Azerbaijan: Recent Economic De- an intermediary "sham" firm. Under the with higher R&D spending are more likely velopments and Policy Issues in terms of the contract, the client (a real- to engage in nonmanufacturing projects Sustainability of Growth, 5/1999, 53 pp. sector enterprise) transfers money to the than in local production. The empirical bank account of the sham firm in ex- analysis links these findings to weak pro- MacroeconomicstabilizationinAzerbaijan change for a phony work report. In ex- tection of intellectual property rights has been successful. Following cessation change for bank payments to the sham (IPRs). The negative effect is especially of conflict with Armenia, and the decline of firm, the client receives unaccounted for strong in those technology-intensive sec- GDP by 60 percent from 1990 to 1995, cash-"black cash." The total amount of tors that, according to surveys, rely heavily the government, in effect, implemented a black cash returned equals bank pay- on IPRs. Weak IPR protection encour- big-bang reform process in 1995. The in- ments minus the commission of the sham ages investors to undertake non-manu- flation rate has now declined to the lowest firm, typically less than 2 to 3 percent of facturing projects rather than local rate of any transition country and impor- the initial client's payment. These black production. (D 1999 The World Bank/The William Davidson Institute TRANSITIION, October 1999 U Irena Grosfeld, Stanislav Kolenikov, Elena Stanislav Gelfer and Enrico C. Perotti, the inherent links between the two stages, Paltseva, Claudia Senik-Leygonie, and Red Barons or Robber Barons? Gov- it would be highly expedient already to take Thierry Verdier, Dynamism and Inertia ernance and Financing in Russian these problems into account in the first on the Russian Labor Market: A Model FIG, 2204, August 1999. round. One particularly important neces- of Segmentation, 2224, 1999. sity is a reform of the EU constitution, in- OECD Publications cluding measures to prevent a relative The puzzling coexistence of elements of in- political preponderance on the part of the ertia and dynamism on the Russian labor To order: OECD Washington Center 2001 smaller EU members. Proposals for a re- marketcan beexplained bythefactthat risk- L. Street, NW, Suite 650, Washington, form of the EU's structural policy and fora averse workers face a tradeoff between D.C., 20036-4922, tel. (202) 785-6323, or re-assessment of its budget priorities are wages and access to social services pro- 1-800-456-6323, fax (202) 785-0350, also urgently needed. vided by the firm. Wage arrears can be Intemet: http://vw.woecdwash.org To order: Federal Institute forRussian, East viewed as an implicit contract between firms European and International Studies, (BlOst, and those less productiveworkers. The most Financing Newly Emerging Private Bundesinstitutfurostwissenschaftliche und productive workers leave their initial firm, Enterprises in Transition Economies, internationale Studien), Cologne, Gerrnany contract on the spot labor market, and con- 1999, 286 pp. Lindenbornstr, 22, D-50823 Kdln, Ger- centrate in the best performing firms. The many, tel. :49221-57470, fax: 49-221- model uses a panel dataset containing Other Publications 5747110, Email: administration@biost.de. 13,410 firms for the period of 1993-97. Paul J.J. Welfens, Economic Aspects of Gerhard Heilig, Can China Feed Itself?A Chong-en Bai, David Li, Yingyi Qian, and the Eastern Enlargement of the Euro- System for Evaluation of Policy Op- Yijiang Wang, Anonymous Banking and pean Union, Bericht des BlOst 7, Janu- tions, 1999. Internet http://wwW.iiasa.ac.atl Financial Repression: How Does ary15,1999. andCD-ROM. China's Reform Limit Government Pre- dation without Reducing Its Revenue? The EU intends to expand itself eastward China has enough arable land and water 2221, August 1999. in two stages as of the year 2001, bring- to feed its projected population of 1.48 ing the number of members up to 21 and billion in 2025,even at currently available China's economic performance of the eventually 26. Any manner of eastern ex- levels of agricultural technology. Accord- past two decades presents a puzzle for pansion commencing immediately afterfull ing to a detailed Agro-ecological Assess- the economics of transition and devel- consummation of monetary union will face ment model (AEZ), which was developed opment. Enormous private business in- the EU with a number of adaptation needs. by IIASA and FAO and recently applied to centives were unleashed that have fueled While the eastern expansion will place an China on the basis of greatly improved soil, rapid economic growth despite the fact additional financial burden on the 15 coun- terrain, and climate databases, the coun- that China has had very weak "conven- tries of the EU, there is no mistaking the try has enough cultivation potential to pro- tional institutions"-like the rule of law and economic advantages-at least in the long duce about 650 million tons of grain. The separation of powers-to constrain the term. A serious politico-psychological assessment takes into account that about government from arbitrary intrusion into problem posed by the intended expansion 25 percent of the arable land will be re- economic activities. One mechanism that is that the higher budgetary contributions served for other types of agricultural pro- has limited the government's ability for pre- that the major member countries will have duction, it also discounts land needed for dation and harassment is commitment to pay are visible immediately, while the infrastructure. However, China should take through information decentralization, "club benefits" of expansion, at least for the the following measures: where the key institution is "anonymous existing members, become visible only in- 0 Greatly improve water use efficiency in banking"-a combination of the use of directly. agriculture. cash fortransactions and the use of anony- 0 Remove bottlenecks in transportation mous savings deposits. The government A model simulation performed forAustria, infrastructure, technology, and logistics. has benefitted from improved private in- byway of example, shows thatthe burdens * Promote larger farm sizes by gradual centives by collecting quasi-fiscal rev- on the national budget and the labor mar- privatization of the arable land. (A modifi- enues from the state banking system ket as a result of the first round of expan- cation of the strict land-transfer rights and through "financial repression"-a combi- sion will be relatively light. Indeed, there introduction of private ownership would nation of controls on international capital are even bottom-line benefits to be ex- introduce a market for arable land). flows with restrictions on domestic inter- pected. Greater problems are likely in the 0 Moderately increase imports of (feed) est rates. second round of expansion, and, due to grain and use good cropland in the labor- E TPANSVEON, October 1999 (D 1999 The World Bank/The William Davidson Institute intensive cultivation of high-value crops, To order: Library of Institute of Economics, lized ever-larger rescue packages, yet it such as vegetables, fruit, or nuts. H-1502, Budapest PO. Box 262, fax: 361- has often failed to achieve its stated aims. * Support further research in biotechnol- 319-3136, email: biblio@econ.core.hu. Does this mean that the IMF must trans- ogy. form itself, or even, as has been sug- * Intervene in the grain sector to guaran- Jiri Vecernik and Petr Mateju, eds., Ten gested, that it has become useless? The tee a sufficient grain supply through more Years of Rebuilding Capitalism: Czech new world economy still needs an IMF but attractive producer prices. Society after 1989, Academia, Prague, many of its practices have to be rethought * Actively use family planning as a means 1999. and its role redefined. The IMF's tradi- to prevent a larger than expected growth tional views of exchange rate regimes in food demand This is the first "social report" on the Czech and the desirability of unfettered capital To order: Intemational Institute forApplied Republic, describing changes in the de- mobility no longer correspond to the situ- Systems Analysis (IIASA) Schlossplatz mographic, economic, social, and politi- ation of many developing countries. It 1, A-2361 Laxenburg, Austria, tel.: 43- cal areas in 1989-98. needs to recognize that 21st century cri- 2236-807-0, fax: 43-2236-71313, email: To order. Jiri Vecernik, email: vecernik ses fundamentally differ from those that info@iiasa.ac.at. @mbox.cesnet.cz. dominated during the first 50 years of its existence. Jarmo Eronen, Cluster Analysis and Barry J Eichengreen, Jose De Gregorio, Russian Forest Industry Complex, Dis- Takatoshi Ito, and Charles Wyplosz, An Special Publications cussion Paper 682, Elinkeinoelaman Independent and Accountable IMF: Tutkiuslaitos, 1999. Geneva Reports on the World Eco- ADB Review, a quarterly publication pub- To order ETLA, The Research Institute of nomy 1, September 1999. lished by theAsian Development Bank. the Finnish Economy, Lonnrotinkatu 4 B To order Asian Development Bank, Pub- 00120 Helsinki, Finland, tel: 3589-609-900, The liberalization of capital movements lications Unit, P.O. Box 789, 0980, Ma- fax: 3589-601-753, Internet: http./wvwwelta.fi/ has deeply affected the IMF's business. nila, Philippines, email: adbpub@mail. Crises occur with more violence, and asiadevbank.org, Internet: http://www. M. Holt Russin, and others, eds., The Post- leave deeper scars. The IMF has mobi- adb.org. Soviet Handbook: A Guide to Grassroots Organizations and Internet Resources, Revised Edition, University of Washington Press, October 1999,416 pp. To order University of Washington Press, Peculiar Interpretation of Corruption PO. Box 50096, Seattle, Washington, 98145-5096, United States, tel.: (206) 543-4050, fax: (206) 543-3932. 1 A Istvan Janos Toth, Ownership Structure, w NE t O ) °Ar Business Links, and Performance of J1 -t'A AG F A 74 L' 6 76 Firms in a Transforming Economy, The p O LC 7, , Case of Hungary, Discussion Paper F O - - 1999/3, Institute of Economics, Hungarian Academy of Sciences, Hungary, June 1999, 82 pp. The business conditions of Hungarian en- terprises in 1997-98 were characterized by a stable company structure developed by 1996, a holding structure that has ap- peared but is not dominant, and dominant private ownership. Foreign-owned com- t panies have a decisive role in this struc- ture. They have the most outstanding growth and profitability parameters. From the World Press Review. © 1999 The World Bank/The William Davidson Institute TRANSITION, October 1999 Marie Lavigne: The Economics of Transition-From Socialist Economy to Market Economy Reviewed by Martin Schrenk Literature on transition tends to be a highly inconsistent efforts to fix the systemic de- tion that adherence to the prescriptions of perishable commodity. A rare exception is fects by piecemeal patching were unsuc- the "Washington Consensus"-the macro- Marie Lavigne's book, The Economics cessful, further weakening the economy. economic framework conceived to stop the of Transition, first published in 1995, of 0 The shaken ideological self-confidence downward spiral of crises in Latin Ameri- which a revised second edition recently and political events in 1989 strengthened can countries in the 1 980s ratherthan as a appeared. What makes this book differ- each other and, as a result, the leadership prescription to the return to growth-is suf- ent? Probably the thorough attention that of the established order deserted, speed- ficient to ensure vigorous and sustainable the author pays to the take-off conditions ing up the collapse. development in the transition countries. In of the transition process: the framework of support of this contention she refers to the central planning and political control under The authordidnot miss a chance to note that predictions of an authoritative IMF study: Soviet-type real socialism. the hotly debated issues of the early 1990s- even in the absence of any external shocks shocktherapyversus gradualism, speed and or cyclical disturbances, the Central and Part I of the book, "The Past: Real Social- sequencing of reform steps, gradual versus East European economies will need on ism," is unchanged. This succinct review rapid privatization, restructuring versus average 30 years to converge even to the of socialism is more than an exercise in privatization asthe firststep of enterprise sec- levels of three lowest income countries of economic history. Its key message is that tor reform, grand design versus learning by the present EU. She concludes, "in this devotees of the neoclassical model, who doing, and so on-have by now all but van- sense, transition may well never be over." rely solely on the premise of the geneti- ished from the agenda, receiving only pass- cally programmed "homo economics," can ing reference. Now they are dealt with as The author's analysis of post-socialist hardly understand the institutional ob- matters of ideology, not economics. privatization and associated changes of stacles that thwarted transition in many the financial sectorfollow a distinct institu- countries. This model tends to ignore that When is the transition process over? It tionalist approach. This is evident when cognitive and behavioral parameters of depends on the target point. From the sys- she deals with the unresolved issue of cor- economic and political actors evolved dur- temic perspective, Lavigne rules out "mar- porate governance. Field research in this ing the lifetime process of socialization ket socialism" or any other "third way" as area has still failed to show a convergence and then were suddenly exposed to a radi- ineffective-and otherwise rejected by the of standard patterns in the transition cally different sociopolitical culture. "Learn- new political elite. In this sense, transition economies with the text book model of ing" a new sociopolitical paradigm is at countries, while not yet fully-fledged mar- capitalist economies. In particular the best a time-consuming process-atworst ket economies, are moving toward "nor- insider-outsider separation remains it is impossible within a single generation. mal" countries. Nevertheless, their legacy largely blurred in transition economies. The requires the need for an extended-both emphasis on naively egalitarian-motivated The next chapters have been substantially in scope and time-period of active state voucher privatization frequently resulted in revised to include the lessons learned dur- involvement in order to cope with the gaps pronounced insider control. She criticizes ing the past decade. Deciding which fac- in the institutional structure and the defi- the neglect of agriculture-an issue largely tors caused the collapse of the Soviet cient microeconomic practices. In the ignored in the literature. system 10 years ago is still widely debated. author's view this implies maintaining fea- There are many widely differing interpreta- tures of a "mixed economy"-which, in turn, The Economics of Transition-From tions. Lavigne claims three interrelated de- requires an enhanced political economy Socialist Economy to Market Economy, velopments were decisive: orientation of economic policy, distinct Second Edition, Marie Lavigne, St Martin from that of the free-market model. Press, New York, 1999, 328 pp. * Unable to cope with new challenges of development, the socialist system in the The author also approaches the question Martin Schrenk is a retired World Bank 1980s lost its economic vitality. of the end point in the transition process specialist. Transition welcomes back his * The politically elite gradually lost confi- from the perspective of outcome. She reviews that for many years became dence in the future. Poorly designed and raises serious doubts about the assump- regular features of ournewsletter. * TrANS ITo0, October 1999 ( 1999 The World Bank/The William Davidson Institute Bibliography of Selected Articles Postsocialist Economies Ellsworth, C. China's Natural Gas Indus- Mathias, A. Baltic Banking: Scandina- try Awakening, Poised for Growth. Oil vians Bid for Baltic Banks. Euromoney Cerny, M. Taxation and Transition: Non- and Gas Journal (United States), 97:23- (United Kingdom), 363:53-54, July 1999. profit Organizations in a Market 28,July 5,1999. Economy. Tax Notes International (United McCrary, E. S. Poland: Ready to Blast States), 19:1211-30, September27,1999. Ge, W. Special Economic Zones and Off. Global Finance (United States), the Opening of the Chinese Economy: 13:117-19, September 1999. Kolodko, G. W. Incomes Policy, Equity Some Lessons for Economic liberal- Issues, and Poverty Reduction in ization. World Development (United Micklewright, J. Living Standards and Transition Economies. Finance and Kingdom), 27:1,267-85, July 1999. Incentives in Transition: The Implica- Development, A Quarterly Publication of tions of Ul Exhaustion in Hungary. the International Monetary Fund(lnterna- Gilley, B. China: Selling the Farm. Far Journal of Public Economics (Nether- tional), 36:32-34, September 1999. Eastem Economic Review (Hong Kong), lands), 73:297-319, September 1999. Electronic access: http://www:imf.org/ex- 162:64, September 16, 1999. ternal/pubs/ft/fandd/1999/06/index.htm. Radosevic, S. The Product Structure of Neoh, A. China Needs the Big Money. Central and Eastern European Trade: Asia Far Eastern Economic Review (Hong The Emerging Patterns of Change and Kong), 162:82, September 9, 1999. Learning. MOCT-MOST: Economic Anh, D. N. Impact of Human Capital on Policy in Transitional Economies (Neth- Joint-Venture Investment in Vietnam. Liu, T. China's New Revolution. Banker erlands), 9(2):171-99,1999. World Development (United Kingdom), (United Kingdom), 149:12-13, September 27:1,413-26,August 1999. 1999. Szabo, G. F. The Hungarian Banking Sector-Past and Prospects. The Hun- Bickers,C.China'sChallenge.FarEast- Vietnam and America: No Trade. garian Economy (Hungary), 28(3):3-6, ern Economic Review (Hong Kong), Economist (United Kingdom), 353:48, September 1999. 162:43-44, September 23, 1999. October 23-29, 1999. cIS Bird, G. Miracle to Meltdown: A Pathol- Central and Eastern Europe ogy of the East Asian Financial Crisis. Arystanbekova, Z. The Maturing of the Third World Quarterly (United Kingdom), Brzezinski, B. Poland: Thin Capitaliza- Banking Sector of Kazakhstan. Jour- 20(2):421-37,1999. tion Rules. European Taxation (Nether- nal of lntemational Banking Law (United lands), 39:404-406, October 1999. Kingdom), 14(8): 267-70, August 1999. Broadman, H. G. The Chinese State as Corporate Shareholder. Finance and Guide, A. M. The Role of the Currency Jack, A. Grin and Bear It [in Russia]. Development, A Quarterly Publication of Board in Bulgaria's Stabilization. Fi- Banker (United Kingdom), 149:68-69, the InternationalMonetaryFund(lnterna- nance and Development, A Quarterly October 1999. tional), 36:52-55, September 1999. Publication of the Intemational Monetary Shapiro, R. and R. J. Hunter. Current Is- Electronic access: http://wwwimf org/ex- Fund (International) 36:36-39, September Shapin Ruan RaJ.oHuntematirnal ternal/pubslft/fandd/1999/06/index.htm. 1999. Tax Journal (International), 25(2): 59-70, Electronic access: http://wwwimf.org/ex- Spring 1999. Chan, W. K. L. Managing Construction temal/pubs/ft/fandd/1999/06/index.htm Projects in China: The Transitional Soderholm, P. Pollution Charges in a Period in the Millennium. Intemational Jones, C. Looking to the Future [in Transition Economy: The Case of Rus- Journal of Project Management (United Slovenia]. Banker (United Kingdom), sia. Joumal of Economic Issues (United Kingdom), 17:257-63, August 1999. 149:37-38, August 1999. States), 33:403-10, June 1999. Chinese Brands: Out of the Shadows. Jones, C. Losing Their Independence Ukraine: Realities of Burden Sharing. Economist (United Kingdom),352:50-51, [in the Baltics]. Banker (United Kingdom), Euromoney-(United Kingdom), 364:15-16, August 28-September 3,1999. 149:65-67, October 1999. August 1999. ( 1999 The World Bank/The William Davidson Institute TPANSIIION, October 1999 Subscribe to TRANSITION TRANSITION If you are not currently on our subscription list, beginning in calendar year 1999 you Senior Editor: Richard Hirschler may receive TRANSITION on a complimentary basis by writing to: Room MC3-374 Telephone: 202-473-6982 Jennifer Prochnow Fax: 202-522-1152 The World Bank, Email: rhirschler@worldbank.org 1818 H Street, N.W. 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