Reader's survey results and other announcements will j 7 Our Internet Site: http://www.worldbank.org/htmI/pr _ ___ _ ju;se~~:: VoluXit 7, Number: 5, yJune 1996 Transition Economics Division * Policy Research Department * The World Bank From Plan to Market: A Twenty- Eight Country Adventure Director Alan Gelb on the World Bank's new Development Report T- tlhe new World Development experience any surprises working on tive geographical situation, historical Report is in the bookstores. this report, which summarizes the background, andsocialfabric;theirgov- T The one-year project draws on transformation experiences of emments'administrative capacity; their years of research and operational twenty-eight countries from the leaders'proficiency-influence succes- expense across the Bank. It summa- World Bank's perspective? sive developments: This was no sur- rizes the major features of transition: prise to me. But I was quite surprised to what is common to the experiences of A. We point out in the report that inifial see such strong similarities between the once centrally planned economies, differences among reforming econo- countries in terms of how people and comprising one-third of the world's mies-originating from their distinc- businessesrespondtoreforms.Wetend population, that are changingto market What's inside or at least to market-oriented econo- mies. The authors did not seek to pro- Media at Crossroads. Will the Quotation of the Month: "East duce an "operational manual" explain- postsocialist press surrender to pressure Germany's ... economy was value-sub- ing how to make transition easy and groups or take seriously its watchdog tracting and cost-unconscious. "Professor painless. Instead,thereportsummarizes role? Latest ratings of Freedom House. Prybyla on the cost of German unifica- the lessons learned over the past seven (page 4) tion. (page 15) years, in order to inform and educate RapidExpansionofPrivateSectorinCen- Book of the Month. Joseph Stieglitz: the worldwide public, including the tral Europe. Michael Boris and Michel "Wither Socialism?" Reviewed by Mar- "actors" themselves: the policymakers Noel's article is supplementedbyLaszlo tin Schrenk. (page 17) and the populations in the transition Csaba's analysis of unpopular features economies. Staff Director Alan Gelb of privatization. (page 6-10) Milestones of Transition (page 19) was interviewed by the Transition edi- TakingtheLeadOut.WorldBankcould World Bank/IMF Agenda (page 25) tor, Richard Hirschler. help eliminate lead from gasoline in tran- sition economies, writes MagdolnaLovei. Conference Diary (page 30) Q. Before takingon thejob ayearago (page 11) New Books and Working Papers as director of the new World Devel- Bosnia Projects: Correction (page 12) (page 31) opment Report (WDR), you headed the Transition Division in the World NewR Democracies Barometer Surveys. Bibliography of Selected Articles Bank's Policy and Research Depart- check the mood in Eastern Europe and (pag ) ment for six years. Given your long Russia, hard hit by prolonged inflation exposure to transition issues, did you and unemployment. (page 13) The World Bank/PRDTE to think of countries like China and on their merits. This approach is re- Q. To take on another con.troversial Poland as very different, but when we flected in the report. issue, what does the report suggest is look closely, we see that smaller busi- the right size for the government and nesses, often involved in services or Q. Another hotly debated issue is the the state sector? exports, are among the most dynamic relationship between economic lib- sectors in both economies. Another eralization and political freedom. A. Again, much depends on the particu- surprise was that when we considered How closely are they related? lar situation of a given country. In sev- the root cause of the extensive output eral countries, including the Baltics decline in the transition economies we A. Fromthecross-countryevidenceand and most CIS economies, the govern- found that it had much less to do with also the evidence over time, it is quite ment sector has shrunk sharply both in therestrictivemacroeconomicpolicies, clear that in Central and Eastern Eu- absolute size and as a share of the and much morewith thedrastic changes rope and the former Soviet Union, there economy. Nevertheless, their major in the structure of demand. has been a close relationship; in other problem is still how to secure enough words, economic reform has been led revenues to fund the government's es- Q. Another surprising element in by political change, and generally, sential functions as the revenue base the report is the neutral view taken has also declined sharply togetherwith in the Big Bang-versus-gradualism output. In the economies of the more debate-not taking a side on this is- advanced reformers (those of the sue. Did the World Bank change its Visegrad countries), governments and earlier position? state sectorsare still large. Taxratesare high, while tax administration is not as A. The optimal speed of reform-that effective as in the industrialized coun- is, whether radical Big Bang reform or tries. As a result, there is a tremendous gradual reform works better-has been pressure toward informalization of the one of the most widely debated issues economy, and the black econoniv bothoutsideandinsidetheWorldBank. spreads like mushrooms. The report spells out the conditions under which one or another kind of re- Q. Under these circumstances, what form can work well. We all know that are the biggest challenges on the reform-sdoni'tproceedatthesamepace. government spending side? If you wantto bring inflation down from very high levels, you have to move where the political change has been A.Alargepartofgovernmentspending quickly. If you cannot afford to subsi- sharpest, the economic reform has also is accounted for by social transfers, of dize a huge, overbuilt state sector, you been sharpest. There are several rea- which the largest single component is have to act rapidly, otherwise you will sons for this. One theory that was de- oftenpensions. Herewehaveadifficult go off into hyperinflation. But we also veloped eloquently by Mr. Balcerowicz problem. The impact of the transition now recognize that the size and nature isthata sudden political changecreated differs for different age groups. Young of sectors repressed under the previous a window for reform, during a period of people have more opportunities now- economic system make a huge differ- extraordinary politics. This allowed re- they can make their way in the market ence. China, forexample, could achieve forms to proceed much more rapidly economy and they can look forward to a great deal of growth and productivity that they normally would in a political higher earnings. Many of the elderly, increase once it liberalized its large re- environment where political groups op- on the other hand, are in ad ifficult situ- pressed sectors, such asagriculture. This pose any type of radical reform. The ation-they were unable to save, or if gave them space for gradual reforms in opinion polls in these countries also they did, the savings have been eroded other areas. We now understand these suggestthaton the level of individuals by inflation. Governments try to linkages much better. In general, we there is a close relationship between soften the negative effects of transi- should avoid being dogmatic and say- attitudes toward political reform and tion. To some degree they have al- ingthatonetypeofpolicy isalwaysthe economic reform. This might be spe- ready done this through, for example, bestforall countries. You haveto look cifictoCentral and Eastern Europeand early retirement programs. But the at each country and judge the policies the FSU, and does not necessarily pre- fiscal burden is extremely high, espe- vail in othercountries around the world. cial ly if the measure becomes institu- 2 May-June 1996 Transition tionalizedas partof social policy. This Q. The report's suggestions are periences can be very instructive to means that some very difficult re- rather general in nature, lacking others. forms, such as raising the retirement specific policy recommendations. age, need to be introduced rather Q. How much independence did you quickly in these countries. A. Country-specific policy recom- enjoy in completing this report? mendationsareusuallynotpartofthe Were you subject to any kind of Q. But this and other social policy WDR. The 1996 WDR is, however, pressure from member countries? reforms will certainly influence unique. Earlier reports usually dealt the political attitudes of voters. with global topics, such as labor mar- A. During the research process we Looking around Central and East- kets, infrastructure, and poverty, is- felt quite independent and able to give ern Europe and the FSU, parties sues with a fairly long history of re- ourviewsaboutwhatisgoingwrong preaching piecemeal, cautious re- search, study, and record. This WDR and what policies seem right in the form in the social arena are surg- deals with the ongoing transition pro- various countries. Onereason forthis ing ahead, even in the Czech Re- cess, where many aspects are still is that the difficulties of transition public, the ultimate archetype of uncertain; and it focuses on certain are well recognized. There is no such courageous reforms.... parts of the world. It makes a large thing as a perfect reform in any trans- number of policy recommendations, forming country. The major purpose A. We have to remember that the typicallytoaddressproblemsexperi- of the report, as I said, was to learn Central and East European countries, enced by many countries. where the problems were, to be able particularly, are historically and cul- to find matching policies. turally part of Europe, and the prob- Q. What would the Bank like to lems of an overdeveloped welfare accomplish with the release of this Q. While the WDR points out that state are common in many parts of report? "transition is not over and the pro- Europe, not only the CEE. But in most cess continues to have profound transition economies the levels of A. First, to stimulate learning across social, political, and strategic ef- social transfers, government spend- thetransition countries. Somearewell fects," the Bank's Transition Divi- ing, and the burden of taxation are ahead of others. There is room for sion has been dissolved. This being much higher, maybe by 20 to 25 per- drawing lessons from experience, in- the case, will research on transi- cent of GDP, compared with other formingthepublic,andformingcon- tionwithintheBankbewound up? countries at comparable levels of per sensus on important issues. These capita income. These latter countries countries have a very different tradi- A. I don't think that research on tran- thus have far more space for invest- tion of economic analysis; and though sition economics will be wound up. ment and the potential of achieving some are relatively well-versed in The transition economies are impor- higher growth. In a sense, transition market-based economic analysis, oth- tant members of the Bank, and still countries face a tradeoff. They may ers have had I ittle experience with it. face significant problems, and in some have to swap some degree of rapid This report is translated into Russian respects their problems are very dis- growth for meeting their social obli- and Chinese, and is widely dissemi- tinctive. Butthe research department gations. If they can sustain reforms nated. Second, the WDR provides a hastraditionallybeen organized along and a favorable macroeconomic en- synthesis and interpretation of the more functional lines, with divisions vironment, direct foreign investment events of the past five years for havingfunctional responsibilities. The can complement the m issing domes- policymakers in these countries. effect ofthe reorganization wil be to tic investment to some degree. But it Third, we want to present major ele- shift work on transition economies would not be enough to compensate ments of the transition process to into the functional divisions. Even for relatively moderate rates of sav- other, developing countries that are though the division will close down, ing. Thus, the real tradeoff is the trying to develop a more effective researchers will move to other units choice between a very high growth marketsystem and arestrugglingwith of the research department and will track with temporarily small social similar problems. Again, some coun- be able to carry on with their work. transfers paving the way for an in- tries have moved far more quickly World Development Report 1996, creased pie to redistribute, or a lower than others in addressing problems in From Plan to Market, World Bank, growth track with large social trans- the transition to market and their ex- 1996, 24] p. To order see page 32. fers. Volume 7, Number 5-6 3 The World Bank/PRDTE Postsocialist Media: Watchdog Over Fair Market Practices? by Richard Hirschler Withtlhe 1989-91 revolutionarychanges bers of the overseeing boards in radio nia and Romania). Production and dis- in Central and Eastern Europe and the and television organizations. In many tribution costs increased, and yet the collapse of the Soviet Union, overt po- countriesthe state controlsthe media in distribution systems remained inad- litical oppression and censorship be- part through ownership and funding. equate.Withthedeterioratingeconomic caine a thing of the past in most coun- (In Belarus 90 percent of 700 publica- situation fewer people could afford to tries of the region. Press freedom has tions with a national circulation of 10 buy newspapers. (Armenia's 2.6 mil- been declared as part of the legal foun- million is owned fully or in part by the lion adults purchase only40,OO0 copies dation of the new democratic systems. government. In Ukraine the state owns of the country's dailies.) In Russia only In most countries new media (press) and finances 46 percent of the regis- 15 percent ofthe country's 10,500 pub- laws have been approved or are await- tered media.) The government can fun- lications are financially self-sufficient. ing parliamentaryapproval, or new con- nel advertisements ofstate-owned com- Foreign investment has made headway stitutions contain provisions guarantee- panies or agencies to favored papers in some countries, primarily in the ing freedom of the press. Newspapers and broadcasts, and provide otherforms Czech Republic, Hungary, and Poland. and radio and television stations have of subsidies. Discrimination againstthe In mid- 1994, 50 percent of Czech me- started to mushroom across the independent press is evident in high dia assets were in foreign hands, and postsocialist world. But in many coun- taxes and fines, or refusal to deliver sixteen ofthe majortwenty-five dailies tries of the FSU and Central and East- newsprint. were foreign-owned. In Poland foreign ern Europe the state retains (or has re- owners hold an average 56 percent of captured) control ofnational television Tougfl-nances. The short-lived media the equity in national and provincial and radio networks, while subtle, more boom that followed the 1989-91 period newspapers. direct governmenit interference can be gavewaytoaconsolidation ofthecom- detected in the written press and broad- municationsmarket. Manypapersclosed Tabloid versus responsible journal- castinig. (See box onpage 5for a cross- down as state subsidies dried up and isnL An increasing number of private country comparison ofpressffreedom newsprint became both expensive and newspapers and radio and television in Central andEastern Europe, the FSU in short supply (for example, in Alba- stations in transition economies choose and other countries.) Major trends on the media front are already discernible: Morxes-Inspirator of the economic agenda for Russia's Governm2ent interference. Although cmuit privatization has made spectacular progress in the written press and local \ broadcasting, sale of the national radio and television networks has stalled in - many countries, and proceeds only slowly even in the advanced reformer countries, like the Czech Republic, Hungary, and Poland. The state-run postal systems often have near-monopo- lies in distributing newspapers and magazines, while television and radio- transmittingfacilitiesand licensing(ac- cess to frequencies) are still under di- rectgovernmentconitrol. (Although this is true in many industrial countries as well). Govermnents appoint the heads ofthe state-owned mediaorselectmem- From the Russian daily Nezavisimaya Gazeta. 4 May-June 1996 Transition to entertain and satisfy mass demand Press Freedom and Monitoring Capacity-A Cross-Country (and powerful advertisers), in order to Comparison by Freedom House, 1996 inorease readership and audience, and (m995 ratings in parentheses) hence, profits. It is an open questiont wlietherthe limiited national media mar- Ratings take into accountnational laws 2. Developing monitoring capac- kets can adequately support vehicles andregulations,politicalandeconomic ity-partial press freedom (60-30) for responsible journalism, which ad- pressuresandcontrolsovermediacon- vocate democracy; communicate pub- tent, andrepressiveactionsagainstthe Kyrgyzstan 60 (52) lic opinions, concerns, and hopes; and media (for example, censorship, ha- Croatia 58 (56) investigateabuses of political and eco- rassment, killing ofjournalists). The Russia 58 (55) nomic power-in other words, whichi scale is from 100 (no press freedom) Armenia 56 (57) fulfill the watchdog role of the press. to 0 (maximum press freedom). Romania 49 (50) Investigative reports have been a fa- . . . . Slovakia 41 (55) vorite genre in the tranisition media, but 1. Virtually no monitoring capacity Bulgaria 46 (39) reporters face particular difficulties (if (100-60) Ukraine 39 (42) they survive at all, which is not always Macedonia 36 (34) the case as has been seen in Russia): North Korea 100 (100) Mongolia 34 (41) *Enterprises,banks,andgovernmentin- Cba 90 (90) Hungary 34 (38) stitutionsarereluctantto provide infor- Cuba 90 (90) Hungary mation and data even if these do not Turkmenistan 84 (84) 3. Advanced monitoring capacity- constitute business secrets (freedom of China 83 (83) press freedom (30-0) information acts are still not in effect). Serbia/Montenegro 77 (87) *Editors are under pressure not to dis- Bosnia-Herzegovina 76 (72) Slovenia 27 (37) close compromising information. (In Uzbekistan 71 (79) Lithuania 25 (29) Belarus newspapers were prevented Albania 71 (67) Estonia 24 (25) from publishing a report, delivered to Belarus 70 (67) Poland 21 (29) parliament in December 1994, in which Azerbaijan 69 (69) Latvia 21 (29) the Belarus government was accused VietNam 68 (68) Czech Republic 19 (21) ofcorruption. The government canceled Georgia 68 (70) af prinptingon wlithoveighentindepen- Cambodia 65 (60) Source:"Press Freedom 1996: Journalists dent papers, which in turn had to halt Moldova 62 (47) as Pariah" and "The Press-Pressed and dentpu atiofrs tichin days.)h Laos 62 (68) Oppressed, Press Freedom Worldwide, publication for tehl days.) Kazakhstan 62 (61) 1995," International Surveys of the Free- -Media owners with a hidden stake in dom House, New York. not embarrassing friends in business or government may prevent publication of compromisingstories;or, inlcaseswlhere nese economy opens up, and as state papers'commercial success. To increase such stories are pushed through, the subsidies dry up, the survival of media circulation, they actively promote ad- surviving "old boy networks" may see outlets, including radio and television vertisingandthe publication ofpopular to itthatthedisclosurescarrynoconse- stations, becomes more and more de- stories. This trend seems unstoppable, quences(that is, incriminated individu- pendent on advertising income. Inves- despite efforts to control the news: for als are not indicted, faulty business prac- tors-governmentand party officials- example, private satellite dishes have tices continue). are now launching profitabletelevision come under scrutiny and were banned ventures in their jurisdictions. Many in 1993(1 million were already in use). In China the press is still under goverm- officials, in charge of controlling the The encroaching Internet further frus- ment control and is considered a useful press in the regional party-branches, trates advocates of state press mo- medium forpersuadingand mobilizing have acquired shares in "their" papers nopoly. the public. (In 1986, for example, Hu and are thus motivated to seek these Yaobang ordered that 80 percent of news should deal with the positive as- (The assistance of Professor Leonard N. Sussman, Freedom House, New York, pectsof modernization, and 20 percent and Professor Everette E. Dennis, Freedom Forum Media Studies Center, withtheslortcomnigs ButastieChi- Columbia University, New York, is greatly appreciated) Volume 7, Number 5-6 5 The World Bank/PRDTE Private Sector Expansion in Central Europe by Michael S. Borish and Michel Noel A s the immediate aftershocks fourcountries. ownershipchanges have pecially in labor-intensive light manu- of the transition to market sub been relatively slow in industry, and facturingand service industries,and last side, the founders of the more vigorous in agriculture and the yeartheprivatesectoralreadyemployed Visegrad Group-the Czech Republic, service sector. 65 percent of all workers, up from 16 Slovakia, Hungary, and Poland-face percent in 1989. the challenge of achieving sustainable Private Sector Growth in the economic development. (The fifth Visegrad Countries, 1989-95 Theprivatesector'sshare intotal credit member of the group, Slovenia, joined (percentage of total) rendered increased from 13 percent in in Janiuary 1996, and is not conisidered Czech R. Hungary Poland Slovakia 1991 to 69 percent in 1995. This in- in this article.) One key ingredient of Item '89 '95 '89 '95 '89 '95 '89 '95 crease was helped by the Czech thisgrowthisthedevelopmentofacom- GDP 5 60 20 70 28 59 10 62 Republic's balanced fiscal strategy, petitive,financiallysound,anddynamic Employ- which included government recourse private sector. The latest statistics con- ment 16 65 20 65 47 66 10 55 to domestic credit, as well as the ag- firm that-quantitatively at least-the Credit 13 69 37 30 16 37 2 39 gressive enterprise privatization pro- privte ectr sareof hes contres' Depos- private sector shareoftheseountries' its' 71 69 - 75 64 77 61 76 gram and the bank lending flows, as overall output, employment, invest- Nt The base yearfor credits anddeposits part ofbank restructuring policies. The ment, and trade has noticeably in- is 1991. private sector share of bank deposits creased. - Not available. has been stable over the period. While a. Including households. the household sector is a net lender, the In the four Visegrad countries the pri- Source: The authors. difference between household deposits vate sector in 1995 accounted on aver- Czech Republic and loans to the sector is much nar- age for 60 to 70 percent of GDP (up rower(7percent)thaninotherVisegrad fromr4to25 percent in 1989),andfor55 j j h h countries, where households provide to65 percentofemployment, compared he pr e sec or hare ino te Czech most of the financing for the govern- with I Oto20 percent in 1989-except P i n gro tom about in ment and enterprise sectors. (On bank cent of GDP in 1989 to 60 percent in Poland, where employment already 1995. Most of this growth is due to privatization, see box on next page). stood at 47 percent in 1989 (see table). M ostlownerowteduesto Although part of this growth has come small-scaletowner-operated businesses Fixed investment declined from 27 to from privatization, particularly in the whle the output of the large-scale in- 29 percent of GDP in 1989-90 to 20 Czech Republic and, more recently, dustrial state enterprises has declmined percent in 1993-94, and then shot up to Hungary, much of the private sector Ne growth has been from new startup en- terprises with no links to the earlier tenets of central planning. New busi- nesses in the region-though often self- employed or small-scale and in the ser- vice sector-are generating far higher profit margins than the state-owned sector. The surge in private activity has been accompanied by an industrial decline in the Czech Republic and Slovakia, while in Hungary and Poland, owner- sh ip changes have resulted in a setback in agricultural production. Meanwhile, the expansion of services, as a percent- age of GDP, has been pervasive. In all From the magazine WorldPress Review. 6 May-June 1996 Transition Czech Bank Privatization: Postponed Privatization ofthe Czech Republic's four National Bank of Slovakia. The four larg- reduced to just one or two each year for largest commercial banks, the Ceska est banks between them account for around the next two years. Sporitelna, Komercni Banka, 70 percent of the banking sector. All of CeskoslovenskaObchodniBanka(CSOB), them are expected to perform strongly in A partnership with a foreign player is not and Investicni a Postovni Banka, owned 1996. necessarily the only option available to largely by the National Property Fund thebanks. KomercniBankapredictsafur- (NPF), the state privatization agency, has The Big Four play a crucial role in the therriseinprofitsin l996to6billionkoruna, been postponed, the Czech National Bank economy. They are aprimary source ofdebt up from 5.1 billion in 1995. The bank plans (CNB) announced just before the May financing for most of the country's large to declare a 20 percent dividend out of its election. and medium-size companies, and they also 1996 profits, compared with 19 percent in have significant shareholdings in many 1995 and 12 percent in 1994. On May 22 Earlier,thegovernmenthadrejectedaplan companies through subsidiary investment Komercni Banka reported net profits of to sell part oftheNPF's 45 percent stake in fund companies. Critics of the voucher 2.26 billion koruna for the first quarter of Ceska Sporitelna through a global deposi- privatization scheme have pointed to this as 1996, a 54 percent rise overthe same period toryreceipt(GDR) issue. Ceska Sporitelna evidence that the state still controls the lastyear. The increase inprofitswas largely currently controls about 55 percent of all country's industry through its shareholdings duetohigher income from foreign exchange retail deposits in the country, mainly ow- in the large banks (though no investment and securities operations, as net interest ingto its role duringthe communist eraas fund is allowed to own more than a 20 income fell by 8.6 percent. the only savings bank for ordinary citi- percent stake in a company, and many large zens. The bank expects its net profit to investment funds are not associated with CSOB, although still almost fully state- doublein 1996,havingfallento 1.37billion the banks). owned, outperformed all other domestic koruna($50million) in 1995 from 1.63 bil- banks in terms of earnings per share in lion in 1994. The GDR issue was intended Another argument for bank privatization is 1995, outdoing the 1994 top performer, to finance the bank's restructuring pro- the perceived need for strong foreign part- the privately owned Zivnostenska Banka, gram, aimed atrationalizing its branch net- ners. So far, only a limited number of for- which is closely associated with the Ger- work and its use of human resources, as eign banks-including Citibank, ING, man- based BHF-Bank. All of the largest well asfinancingnew investmentdesigned Credit Anstalt, and Bayerishe Hypotheken four banks have recently received good to diversify its customer base. It had ex- und Wechsel Bank of Munich-have re- international credit ratings. Although pected to raise up to $80 million for this ceived licenses to operate, while some heavy bad loan provisions have hit recent purpose. However, privatization, and not moved into the Czech market through ac- profits, it is widely felt that the worst is the raising offunds, was the principal aim quiring stakes in smaller-size local banks. over, and the prospects for future profits of the GDR issue. This is now changing, as the profitability of are healthy. Although the competition in the sector increases, and as many banks the market is expected to intensify, the The NPF's stakes in the other three large shift their focus from corporate banking to banks seem determined to restructure banks are as follows: 49 percent in retail and private banking services. The quicklywithouttheneedforpressurefrom Komercni Banka (the country's largest CNB reversed itstwo-and-a-half-yearmora- new owners. bank), 33 percent in lnvesticni a Postovni torium on new banking licenses, announc- Banka,andmorethan20percentinCSOB. ing that it is granting licenses to Based on news agency releases and re- In addition, 20 percent of CSOB is owned Westdeutsche Landesbank Girozentrale and ports of Oxford Analytica, the UK-based by the Czech Ministry of Finance, 27 per- the Midland Bank. It seems likely, how- international consultingfirm. cent by the CNB, and 24 percent by the ever, that licenses for foreign banks will be 31 percent in 1995. The decline in do- Hungary 1990, but their average number of em- mestic investment until 1995 was par- ployees was only about one-fourth of tially offset by an increase in foreign The private sector share of GDP in the 1990figure.Laborproductivityand investment, which totaled $3 billion by Poland rose from 20 percent in 1989-90 value-added perworker have increased the end of 1994, or 2.5 percent of GDP to 70 percent in 1995, a more than five- over this period. Aside from the rise in during 1991-94. The country attracted fold increase in dollar value over a pe- small-scale new businesses, the num- significantly greater investment than riod of six years. There has been a shift ber of self-employed has also almost Poland or Slovakia. Lower tax rates, in the sectoral mix toward trade and doubled since 1990, to around 800,000 lower property rentals, better telecom- services, as in the other Visegrad coun- people. munications services, and solving some tries, with the number of infrastructure other infrastructure problems faced by firms slightly up and manufacturing Due to persistent fiscal deficits, credit businesses would probably ensure a firms down. In 1993 three times more toenterpriseshasdeclined,whilecredit steady flow of foreign investment. private businesses registered than in to the government (in the form of secu- Volume 7, Number 5-6 7 The World Bank/PRDTE erssince 1991,providemostofthe lend- Hungary, the share of agriculture in Despite the evidence of a dynamic pri- ing to the public sector. Three-quarters GDP has declined, while the shares of vate sector, lending to this sector has of the total deposits in the system are industry and services have increased. been limitedduetothe increase in credit attributable to the private sector. to the government-and to some large As elsewhere in the region, the average buttroubled state-owned enterprises- As elsewhere in the region, total invest- private Polish business is small-scale. which has taken as much as 70 percent ment declined as a percentage of GDP Attestingtotheirdynamism,small-scale of lending since 1991. The private sec- over the transition period. Total invest- businesses created 3.5 million newjobs tor share in total credit increased in 1995, ment accounted for 26 percent of GDP between 1991 and 1993 and provided but has generally been low despite real in 1989, declined steadily to 15.5 per- realwage increases of 3.5 to4.0 percent GDP growth of 4 percent since 1992. cent in 1992, and recovered after 1993, in 1994 when public sector wages were On a net flow basis, between 1991 and reaching 22.5 percent in 1995. This re- stagnating. covery was a result of the surge in for- eign investment, which offset the de- Returning To The Old Country cline in domestic investment in real terms. Over 1991-95 as much as 28 percent of investment in Hungary was foreign. With $10.6 billion in cumulative FDI during 1991-95, Hungaryattracted more foreign investmentthan all its tran- sition neighbors. The Privatization Law - - adopted in 1995 to pursue privatization aggressively through 1997, including the sale of partial or total stakes in blue chip infrastructure companies, has al- ready had a dramatically positive im- 'Al pact on FDI: Hungary attracted $4 bil- lion in 1995. PolandU The private sector share of Poland's GDP rose from 28 percent in 1989 to 59 percent in 1995, representing a three- fold increase in dollar value between 1989 and 1995. The Polish private sec- tor now produces mainly in trade and industry, although most industries are ________- still in the state sector. Newly priva- tized companies in Poland last year 6: r, showed an average rate of return more .1- L c::; thandoublethatofPolishlenterprisesas 1iT1 f awhole, according toarecent report of the Central Statistical Office (GUS). Net profitability for firms that were privatized was 4.3 percent in 1995, com- pared with a profit rate of 2.0 percent for all enterprises. Over the past six "Godfather Balog proved to be an efficient crisis manager in the United years, 1,022 state-owned companies States." employing 1.1 millionpeoplehavebeen turned over to private hands. As in From the Hungarian daily Nepszabadsag. 8 May-June 1996 Transition 1995, total credit to households and comes from services privatized in the as a consequence of their private enterprises increased by $7 bil- first wave of voucher privatization, as nonperforming loans, reduced lending lion, while credit to the government well as private investment in industry, to indebted state-owned enterprises increased $8.5 billion; state enterprises construction, retailtrade, and roadtrans- (SOEs). The SOEs covered their defi- experienced a credit decline of $1 bil- port. Most private businesses are small- cits out of government borrowing. As lion during the period. As in Hungary scale and are service-oriented. As the earlier state cooperatives received and Slovakia, three-quarters oftotal de- uncompetitive heavy industrial firms abouttwo-thirds of all lending increases positsarefromtheprivatesector,mostly laid off their workers, enterprises got to the private sector, households and households. smaller, although state owned enter- new enterprises received only margin- prises are still employing on average ally more credits. Fixed investment Totalfixed investmenthasdeclinedasa fourteen times more workers than are declined sharply from 35 percent of percentage of GDP, from 38.5 percent registered private enterprises. GDP in 1991 to 23 percent in 1994, in 1989to 15.2 percentin 1992and 16.0 rebounding in 1995 to 28 percent. The percent in 1994. Private investment Initially, scaled-down state interven- low level of total investment has been accounts for at least two-thirds oftotal tion, liberalized prices, and lower bar- partly due to the low level of foreign investment, and is mostly in industrial riers to trade helped the growth of pri- investment. From 1992 to 1995, FDI in manufacturing and equipment. Foreign vate businesses. Butmajorrestructuring Slovakia reached only $561 million, or direct investment (FDI) over 1991-94 efforts are still required in order that I percent of GDP. Political instability, was weak, but strengthened consider- these businesses maybecomecompeti- reversals and delays in privatization, ably in 1995. In Poland FDI accounted tive on a sustainable basis. At present, andperceptionsofprotectionismtoward for little more than 4 percent of total profitability is low or negative in most stateenterpriseshavereduced FDI flows investment in 1994, compared with 25 sectors, and many state-owned enter- to Slovakia. percent in Hungary. The balance of prises continue to rely on government payments value of FDI in Poland over subsidies. (In 1993 state subsidies- Michael Borish is Consultant and 1991-94 was merely $1.6 billion, much divided evenlybetweenthe agricultural Michel Noel is Division Chief Europe less than Hungary's $6.6 billion and the and industrial and transport sectors- and Central Asia Office, the World Czech Republic's $3.0 billion, each of reached nearly 6 percent of GDP.) To- Bank. which has about one-quarter the size of gether with the tax arrears of the state Poland's population and 40 percent of sector (5 percent), the total burden to This article is based on the authors its GDP. Such favorable developments the budget came to nearly 12 percent of study "Private Sector Development as the debt forgiveness from the Lon- GDP. During Transition-The Visegrad don and Paris Clubs in 1994, the growth Countries," Discussion Paper no. in exports and domestic demand, and Notsurprisingly,netlendingtothegov- 318, World Bank, 1996, 175 p. To theprospectoflargeinfrastructurecon- ernment (via banks' purchases of secu- order: Ms. J. Freund, tel. (202) 473- tracts, as well as privatization in the rities) increased in 1991-95.The banks, 9771. manufacturing sector (for example, in car manufacturing in 1995), should ac- celerate FDI flow. In 1995 Poland at- The Visegrad Group: Inducing Trade by Reducing Tariffs tracted $2 bi l lion in foreign capital, more than the total for the period between The idea for the Visegrad Group was for- cal equipment) tariffs will be fully liberal- 199 .an 1994. mulated in Bratislava in May 1990 after izedin 1997; andforselectedtextile, steel, 1991 and 1994. the disintegration of Comecon and the and paper goods, as well as cars, present Warsaw Pact. On February 15, 1991, at a dutieswill remain effectiveuntil2000-02. Slovakia summit in Visegrad, Hungary, the leaders Customs duties for several agricultural of Czechoslovakia, Hungary, and Poland goods have been cut as of this year, and Despite little progress in privatization signed adeclaration agreeingtocooperate the process continues. Slovenia joined in Slovakia since 1993, the private sec- in matters of common interest. The mem- CEFTA on January 1, 1996; Bulgaria and bersalsoformedtheCentralEuropean Free Romania could also be included eventu- tor contribution to GDP has increased TradeAgreement(CEFTA)toinducetrade ally. Visegrad is considered an interim from 27 percent in 1991 to 62 percent in in Central Europe by reducing tariffbarri- arrangement to facilitate trade while the 1995. In dollar terms, private sector ers.Tariffsforso-calledmedium-sensitive formulas for European Enlargement and activity is now nearly fourtimes greater goods (chemicals, paper, andtimber) have NATO membership are being worked out than n 199. Mos of tis inrease been lifted as of 1996; for more sensitive for these countries. than in 1991. Most of this increase goods(textiles, steel products, and electri- Volume 7, Number 5-6 9 The World Bank/PRDTE Debate Privatization and Social Acceptance-The Flip Side By Laszlo Csaba The social consequences of privatiza- closures, and the like are nothing new case with several bank consolidation tion are completely different in the West for students of modern business eco- programs). and the postsocialist countries. In the nomics. Regulatory systems of the West, privatization of even large pub- OECD countries apply elaborate rules *Improvement of corporate gover- lic companies has marginal significance and procedures for how to deal with nance has not been a major issue. If in terms of the overall economy. In a these developments. Countries in the managers or the state pick owners, it is low-inflation environment, the income East, however, were unprepared, they difficult to expect more efficient con- redistributional effect is also marginal. lacked the elaborate regulatory system trol over managerial activities. This The public can be persuaded that once and the human resources they needed applies to various free distribution these companies are sold to private to cope with these problems. schemes, designed to overcome social owners, efficiency improves through apprehension over spontaneous priva- better control over corporate manage- *Many agents of privatization have tization. Companies that are supervised ment, through transparency, and been representatives ofthe postcom- by state-owned or investment funds are through elimination of govern- ment munist parties. Those who at first merely operating under a more sophis- interference. Massprivatization(forex- preached their misgivings about capi- ticated, indirect form of public owner- ample, in Britain) usually meant the talism, later turned into the vanguard ship. As no new money or managerial sale of a few selected companies to a ofthe newly born entrepreneurial class. skill is invested into these large number of small investors. The The old economic elite has converted pseudo-privatized firms, their overall outcome usually had no negative ef- the situation rents into palpable private performance rarely improves dramati- fect on the well-being of the average wealth. Since previously hidden in- cally. If it does, it has more to do with voter; on the contrary, the small inves- come differences have become visible, competitive pressures exerted by lib- tors benefited from the cash-in ofquick the apprehension about and rejection eralized imports and subsidy cuts, than dividends, and the public at large from, of the old/new bosses, also in their with the reorganized ownership struc- for example, improved railway and capacity as persons interested in maxi- ture. phone services. mizing asset value, is hard to overesti- mate. The point that no other alterna- *Finally, many privatized firms con- In the postcommunist hemisphere, on tive was open to find competent owners, tinue to depend on government sup- the other hand: since no one else was realistically avail- port, requiring tariff protection against able, may well be true, but it does little imports competition, and demanding *Privatization was launched at a time to dispel protests against this type of subsidies and debt writeoffs for retain- when significant redistribution of in- power and wealth redistribution. ing workers. Appropriate liaisons to come and wealth was already under the government can secure big busi- way. Thus, social sensitivity was al- *Sale has initially played little if any ness deals. ready badly hurt, before any role in privatization. In Hungary, for , - redistributional impact ofprivatization example, the nouveau riche became as- cerptsr th author cntrib- could be felt, set holders by capitalizing on their ad- tribution in Eastern Europe, " edited vantageous positions as managers or' vantgeos poitins a maager or by Luigi Mittone, E. Elgar Publishing *Privatization was preceded by de- party aparatchiks-for example, Li Mitte, E. aroPubishn cades of ideological prohibition and through spontaneous privatization (USA), forthcoming in 1996. (Unde indoctrination. Thus, both the public (managers pick their owners or turn identicaltitle,hKOPINTgDATQRGDis- and the government were by and large themselves into their own bosses); cussiontPapers,nNo.32, 1995.) psychologically and technically unpre- through collection of vouchers, com- pared for the massive changes in own- pensation notes, or acquiring the con- Laszlo Csaba is Director at the ership structures. Disrespect for rules, trolling package through an KOPINT-DATORG, Economic Re- corruption, misuse of dominant mar- employee-manage-ment buyout; and search, MarketingandComputingCo., ket position, monopolistic behavior, through cooperation with authorities Ltd., Hungary, (To order: H-1081 hostile takeovers, transfer pricing, tax (to privatize claims of a company while Budapest, Csokonai u. 3; tel. (361) 266- evasion, arbitrary and massive layoffs, nationalizing its liabilities, as was the 6640, fax (361) 266-8858.) 10 May-June 1996 Transition Toward an Unleaded Environment: World Bank Support to Transition Economies by Magdolna Lovei he World Bank has made an ur- lead-based paint or solder in food cans ers (most transition economies be- gent plea for a worldwide phase- and water supply systems, and ceramic long to this category). Cars can run on outof leadedgasoline,sayingthat glazes. Insomecountriesnotorious"hot unleaded gas without a converter, and the phiase-out needs to come faster and spots" werecreatedby industrial sources only some older models need lubricat- soonerthan replacing old cars with new such as lead smelters that expose work- ing gasoline additives to substitute for ones would permit, and sooner thani ersandthelocalpopulationtoextremely lead. Such additives have been used to could be achieved by placing catalytic high levels of lead. In most cities, how- support the total phase-out of lead in converters in every car. The World ever, leaded gasolineaccountsfor80to Austria, Slovakia, Sweden, and Thai- Bank's call to action was presented 90 percent of airborne lead pollution. land. duringthe recentCity Summit, the U.N. Airborne lead disperses widely, and ac- Conference on Human Settlements cumulates inthe soil, persistingfor long The Cost of Elimination (Habitatll).,held in earlyJune in Istanbul. periods oftime. In 1995 Bulgaria launched a regional A Beast in Your Tank Because of soaring increases in auto- initiativetoacceleratethelead-elimina- mobileuseworldwide,theproblemswill tion process in Central and Eastern Following the discovery in 1921 that only worsen if leaded gas continues to Europe. Slovakia, first to take action lead improves the quality of gasoline, be used. In 1990 there were some 518 amongthetransitioneconomies,phased the worldwide use of lead additives million cars and trucks worldwide. By outleadedgasolineby 1995, increasing surged. By the early 1970s cars buried 2010 that number will growto 816 mil- the market share of unleaded gasoline annually375,000tonsofleadwith fuel. lion, with mostofthegrowth occurring from 6 percent in 1992 to 100 percent Leadconcentrations in gasoline reachied in developingcountries andCentral and lastyear. In Romania, ontheotherhand, 0.6-0.8 grams per liter. But lead, aheavy Eastern Europe.Notonly is automobile the lead content of domestically used metal that has long been known as a use increasing in cities, but because ur- gasoline has remained high, and most neurotoxin, is a substance that adversely ban populations typically have hIigher ofthe unleaded gasoline production has affects the nervous system even at low concentrations, larger numbers ofpeople been directed to export markets. In most levels of exposure. are being exposed to dangerous lead countries of the former Soviet Union, pollution. Today, 1.7 billion peoplelive in the permitted lead content in gasoline is Recentstudies indicatethatno safe level cities-by 2025 the global urban popu- still twice the level that the European of lead exists. Childreni are especially lation will double to 4 billion. Several Union allows, and in several develop- susceptibleto ingested lead becausetheir countries have banned all leaded gaso- Lead Use in Gasoline in digestive systems have fast absorptioni line, includingAustria, Brazil, Canada, Selected Transition rates. Their intellectual development Colombia,Japan,Slovakia,Sweden,and Economies, 1995 suffers permanent damage manifested the United States. With World Bank M by leamingdisabilities, hyperactivity, and support, Thai land banned lead gasoline Content in of Unleaded other behavioral abnormalities. A sig- in 1995 after converting its petroleum Country Gasoline (gil) Gasoline (%) nificant negative relationshiip has beeni production to unleaded fuel. Bulgaria 0.15 1 5 found between exposure to lead and the Croatia 0.60 - IQ of children. For adults, even low In most developed countries the wide- Czech Rep. 0.15 18 levelsofleadexposure-occurringusu- spread use of catalytic converters will Hungary 0.15 50 ally throughi inihalationi-causes hyper- soon "crowd out" leaded gasoline. It is Latvia 0.37 23 Polanda 0.15 21 tension, high blood pressure, heart dis- also possible, however, to get rid of Romania 0.60 6 ease, and early death. leaded gasoline in those countries Russia 0.37 45 where the renewal of the car park is Slovakia 0.00 100 People may be exposed to lead from slow, and where most vehicles are - Not available. various sources including lead pipes. not equipped with catalytic convert- Source: The author. Volume 7. Number 5-6 11 The World Bank/l'RDTE ing countries in Africa, Latin America. taxes on unlleaded gasoliine-are nec- use of unleaded fuel and to accelerate and the Middle East, lead concentra- essary to carry out lead phiase-out pro- the elimination of lead. The Bank also tions are four to five times that level. grams. If governmeits allow refineries urged countriestopursuethietotal piase- to earn a reasonable return oin their in- outofleadedgasolineindependentlyfrom Generally, counitries can recoverfive to vestment, financing is usually available the use of catalytic converters. Coun- ten times the cost of convertinig to uin- from commercial sources. tries could get rid of leaded gasoline leaded gas in health and economic sav- within five years if they would commit ings. The United States, for example, Unleading the Environment themselves to pursue a comprehensive saved more than) $10 for every $1 it phase-out program and set the proper invested in the conversioni due to re- The World Bank recommended during policies. The Bank is assisting govern- duced hiealthi costs, savings on enginie the Istanbul meetinigthietotal piase-out ments in their efforts to iicrease public mai ntenianice. and i m proved fuel effi- of leaded gasoliine. It urged those COuID- awareness of the problem, design lead ciency.Leadedgasoline,becauseitcon- tries in Africa, Asia, Eastern Europe, phase-out strategies, set in place sup- tains lead saltsand hialogen acids,causes Latin America, andtihe Middle Eastthiat porting fiscal policies, and mobilize fi- greatercorrosion ofautomobile exhaust still use large amounts of lead in gasoliine nancing forrefi nery modifications. systems and requires more frequent oil to take the first step by reducingtlhe lead and spark plug chaniges. According to content of their gasoline to 0.15 grams The author is economist in the World U.S. studies, switchinig from leaded to per liter or less, and to follow up by Bank's Environment Departmient. unileaded gasoline may increase engine introducinig incentives to encourage the life by as muchi as 150 percent. Bosnia Projects-A Correction Refinery modernization typicallyfacili- tates the phiase-out of leaded gasoline In the previous issue of Transition (voluume 7, number 3-4, 1996, page I 1), refer- produCtion. A recent study has pointed ence was made incorrectlyto twenity approved World Bank reconstruction projects prou tha .ect phassngoutulead fromngas oline in Bosniia anid Herzegovinia, as of April 30 1996. In fact, on ly seven were approved oLut that pliasilig out lead from- gasol iiie D ZS at a technically less advanced refinery by the Board of Directors as of May 3 1. 1996. Following is the correct list of in Russia would cost between $0.065 approved anid proposed World Bank projects. and $0.02 per liter ofgasoline (depend- World Bank Projects in Support of the Priority ing on teclhical alternatives) under the Reconstruction Program in Bosnia and Herzegovina, current production structure. It would as of April 30, 1996 (us's rn2i/ion/ cost only half as mucih, however, if the WB Group Appproval Date refinery's production structures were Pro/ect Name Project Cost Support Actual/Proposed modified to better reflect market de- ApprovedTrustFund-supported Projects mand. Emergency Recovery 160 45 February29, 1996 Emergency Farm Reconstruction 50 20 March28, 1996 Althougil the techin ical process of plias- Water, Sanitation, and Solid Waste Urgent Work 70 20 March 28, 1996 ing out lead fromgsolineEmergency Transport Reconstruction 161 35 March29, 1996 i 1g 0Lit Iead from-ngasol I ie is s irl pie atid WarVictim Rehabilitation 30 10 May 14,1996 the costs are modest. Iimplemenitinig suichl Emergency Education Reconstruction 33 10 May 14,1996 programs isacomplextasktihatrequires Emergency District Heating Reconstruction 58 20 May 14, 1996 a broad social consenisus and appropri- Proposed IDA-supported Projects ateprice,tax,and importpolicies. Also, Transition Assistance Adjustment 110 90 June 1996 iaovenmenits should educate thlepublic Emergency Electric Power Reconstruction 174 30 June/July 1996 a t Emergency LandmmineClearing 67 7 June/July 1996 Demobilization Support and Local Public Works 43 15 June/July 1996 of using ulileaded gasoline, and about Microbusiness/Local Initiatives 15 7 Summerl996 proper fueling practices. Promoting DemobilizationSupportandTraining 20 7 Summer 1996 social consensus among affected gov- Emergency Natural Gas System Rehabilitation 58 15 Summer 1996 Emergency Housing Repair and Reconstruction 50 15 Summer 1996 ernmiieiit a(yeincies. consurner groups,e . I . Essential Hospital Services 95 15 Fall1996 and nongovernmenitorganiizations, rais- Education Reconstruction 60 20 Fall 1996 ing public awareness. regulating fuel Transport Reconstruction 11 158 20 FalIl996 specifications. and introducing incenl- Emergency Forestry 35 15 FalII996 tives-for exam ple, imposinig lower Water Management Rehabilitation 80 15 FalIl996 12 May-June 1996 Transition Fears and Hopes-New Democracies Barometer Surveys By Richard Rose and Christian Hearpfer L ife in the marketeconomies of Three-quarters of Central and East Inflation hits everyone, including Central and Eastern Europe is Europeans see inflation rather than pensioners who are outside the labor L a novel experience for hun- unemployment as the greater threat force and people who workallyear- dreds of millions of people who have to their family after exposure to the and zooming prices affect the unem- spent almost all their lives in a com- twin threats of transition (table 1). ployed, too. By contrast, an annual mand economy. For decades, politi- There is little difference between average of 10 percent unemployment cized bureaucracies rather than mar- countries in the degree of anxiety is also indication of 90 percent of the ket mechanisms allocated goods and caused by inflation. This is especially labor force in work. The annual aver- services. Transition has therefore striking given the very substantial age understates the percentage out of been a learning experience in the col- cross-national differences in inflation. work at some point during the year. lege of hard knocks. In Russia 62 percent ofthe population Yet, the wider the pool of unem- regardsinflationasthegreaterthreat. ployed, the shorter the period when To understand what has been learned individuals on average are without a in the abnormal circumstances of the Table 1. Inflation Is a Greater job temporarily for any given annual economic system transformation, we Threat than Unemployment. unemployment rate. Among the two- can turn to the normal social science thirds of CEE adults in the labor force, method of the sample survey. The Q. Do you feel that rising prices are the 76 percent report that in their fam i ly, New Democracies and New Russia bigger threat to your family, or is it no one has been unemployed during Barometer surveys of the Paul unemployment? the past year. Even among those who Lazarsfeld Society, Vienna and the (percent) have experienced recent unemploy- CentrefortheStudyofPublicPolicy, Country Inflation Unemployment ment, an absolute majority still re- University of Strathclyde, Glasgow, Czh R 4 gard inflation as the greater threat. systematically collect data about mass Szech v . 86 18 response from nationwide represen- Rlovakia 82 23 Supply: Rather Unaffordable Than tative samples of more than 12,000 omania Unavailable people in eleven countries of Central Poland 76 24 and Eastern Europe and the former Slovenia 73 27 Everyone in a transition society has SovietUnion. Hungary 70 30 experienced two radically different MajoBCocer:lglanaveriag 76 24 ways of regulating demand: through Major Concern: Inflation eRussia 61 24 shortages and through prices. There Russia____________61 ______38____ are thus very few "don't knows" when Inflationand unemploymentaremuch Source: The authors. people are asked: Do you think it is greater causes ofanxiety in transition better to have lots of goods in the societies than in established market The demand for price stability is ris- shops even if the prices are much economies. The restructuring of the ing, even though inflation rates are higher (capitalism), Is it better when economy puts at riskthe employment falling. In the 1993 New Democra- prices are kept low by the state, even of peoplewhothoughtsocialism prom- cies Barometer survey, an average of though there are often few goods in ised a job, if not work, for life. The 57 percent of Central and East Euro- the shops (socialism)? In every tran- introduction ofmarket prices has been peans named inflation as the bigger sition society, opinion divides into met by governments trying to print threat. lntheautumn 1995 surveythe two more or less equal groups: an their way out of the resulting squeeze share ofthose who regard inflation as average of 55 percent in Central and on incomes,makinginflationamatter themoredangerousfoeo,hittinghouse- Eastern Europe prefer a "window- of great concern. holdsaswellas financial institutions, shopping" economy (have an abun- hiad risen to 76 percent. dance of merchandise, if only to Volume 7, Number 5-6 13 The World Bank/PRDTE glance at it through the shop win- ReWblic, Poland, and Slovenia a ma- When Central and East Europeans are dow), and 45 percent prefer stable, jority are now positive aboutthe tran- asked how long they think it will take low prices even if it means shortages sition economy and negative about the government to sort out their re- (table 2). the command economy. Almost half spective country's economic prob- the families in the CEE region expect lems, two-fifths say they don't know. Table 2. It Is Better To Have their economic situation to improve Among those with an opinion, half More Goods than Controlled in the next five years, and only a sixth think it will take at least another de- Prices. expect it to get worse. In Russia, how- cade to getthe national economy right. ever, pessimists are almost as numer- Similarly, the average citizen in these Q. Is itbettertohave lots of goods inthe ous as optimists. countries expects that it will take five shops even if the prices aremuch higher, to ten years to reach a satisfying eco- or is it better if prices are kept low by Table 3. There Are More nomic situation. the state, even though there are often Pessimists than Optimists. few goods in the shops? Richard Rose, Professor at Univer- (percent) Q. Is your household better off now sity of Strathclyde, is Director of Prefer Prefer than five years ago? Do you expect your the Centre for the Study of Public More Controlled situation to improve in the next five Policy and since 199] has directed a Country Goods Prices years? series of Barometer surveys in Cen- Poland 69 31 (percentage answering yes) tral and Eastern Europe and the Slovenia 63 37 Past- Present- former Soviet Union. Romania 62 38 Present Future Czech R. 56 44 Country(BetterNow) (Better in Future) Christian Hearpfer is scientific sec- Hungary 49 51 Bulgaria 18 46 retary ofthe Paul LazarsfeldSociety, Bulgaria 47 52 Czech R. 26 51 Vienna. (Information. tel., (44141) Slovakia 41 59 Slovakia 16 42 552-4400, fax (44141) 552-4711; Average 55 45 Hungary 9 37 [Internet: http://www. strath. ac. Russia 59 41 Poland 20 49 uk.80/Departments/CSPP/). Source: The authors. Romania 15 47 Slovenia 15 48 Age accounts for much of the differ- Average 17 46 ence in preferences between the two Russia 22 25 systems. Theunder-thirties are awin- Source: The authors. dow-shopping generation; two-thirds prefer high prices and lots of goods in shops. By contrast, among the over- sixties, only 44 percent prefer more Young People Are Mbre Nrket-oriente choice and higher prices in a market (Prctage pmferitng moe goods in shops, even atr higher pices) economy. Differences by age are con- sistent across all countries in the re- 6662 gion (see the figure). 54 44 In the 1995 Barometer survey, an av- erage of 56 percent said their house- hold wvas worse off now than five years previously; only 17 percent said Y they were better off (table 3); the rest reported that their situation was un- chanWd. Macroeconomic evaluations 18-29 30-39 4049 5059 60 similarly show atendency to view the transition economy less favorably than Age group the old system, although in the Czech 14 May-June 1996 Transition Quotation of the Month: "East Germany's whole economy was value-subtracting and cost-unconscious." Professor Jan S. Prybyla on the Price of German Unification T he East German economy was 700 billion gross (morethan$1 trillion) able in areas such as preference for in much worse shape than had and DM 500 billion net ($750 billion) generous welfare infusions into the T been expected, not least because of public money will have been spent market mechanism and for a high so- those in charge of it took seriously the on the "cure of Trabies." cial content of property; tolerance, in- intrinsically flawed communist idea- deed ready acceptance, of government central command planning included- From the perspective of market democ- intervention in and regulation of many translating it with humorless but disci- racy (free enterprise and representa- areas of private and civic life; defer- plined diligence into nonviable tiveconstitutionalgovernment),thedam- ence to hierarchies and bureaucratic structures and catastrophic policies. age done to the easterners' psyche by authority; acquiescence in far-reaching forty-five years ofMarxist-Leninistso- redistributionism; emphasis on eco- With a view to corporate takeover, cialismcomingontopoftwelveyearsof nomic security, social stability, and Volkswagen AG sent a Herr Heuss to National Socialism, is not easily cap- managed competition (Ordnung- Zwickau to find out how the Trabants tured in deutsche marks or expressed spolitik); and avoidance-at least in (relatively cheap, East German cars) by any figures of arithmetic. The short public pronouncements-of sharply were made there. He emerged shocked list ofalleged disabilities includes weak defined ideological positions. Thus, from the huge plant, babbling "My personal initiative; demotivated work despitethetalkofspiritualriftbetween God!" TheTrabantoperation wasvalue- ethic; deficient sense of individual re- east and west Germany, there exists, subtracting: valuable material, labor, sponsibility for one's life; strong aver- not far below the surface a hard core of and capital inputs went in at one end; sion to risk; overdeveloped sense of shared cultural and national habits and shabby Trabies came out at the other, entitlements, particularly with respect affinities chiseled over the centuries. their bodies made from compacted to security of income and employment trash. The final output was worth less and provision of rudimentary housing, From the German national standpoint, than the sum of the inputs. What was health, and recreational services sup- the window of opportunity for unifi- not fully understood at the time was plied by governmentatzeroornominal cation had to be used when it opened that East Germany's whole economy prices; preference for egalitarian out- in 1989-90.The unique historical op- was value-subtracting and cost-uncon- comes; confusion over personal and po- portunity was political, first and fore- scious. I itical identity; and negative, often hos- most. So-me out-of-pocket expenses, tile attitudes toward private property, later much decried, had perforce to In 1989, Hans Modrow, the last commu- profit-making, entrepreneurship, and be borne in advance of formal politi- nistheadoftheGDR, putthe EastGer- the material achievements of the mar- cal unification in contravention of man economy's net worth at 1.5 trillion ket system, which is seen as too selfish, economic theory's short-run dictates. WestGerman marks (DM). A year later, harsh and shallow (reflexive anticapi- Two good examples are the monetary his Christian Democratic successor, talism). union (July 1, 1990), carried out at Lothar de Maizi&re, slashed the figure the unrealistic exchange rate of 1 :1 to DM 800 billion. After unification, Nowmarketdemocracy isamansionof between the deutsche mark and worth- Detlev Rohwedder, head ofthe privati- many rooms, capable ofputting up (and less ostmarks; and the short time zation agency Treuhand, put the value putting up with) all sorts of guests, in- schedule envisaged for raising nom i- of the assets on his agency's books at a cluding uncongenial ones. Contrary to nal wages in the east to western lev- comparableDM600billion, buton sec- conventional wisdom, the communist- els based on overly optimistic as- ond thought, a year later, lowered this induced attitudes of today's east Ger- sumptions about increases in the assessmentto zero-assets and liabili- mans (Ossis) and the democratically marginal productivity of eastern la- ties just balancing each other out. In formed attitudes of the west Germans bor in the proximate future. These 1994 Birgit Bruel, Rohwedder's suc- (Wessis), while in many respects dis- politicallymotivated-departures from cessor,putthefigureatminus DM300 similar, are not qualitatively all that the prescripts of economic analysis billion. By the end of 1995 some DM different. The similarities are remark- were followed by large fiscal trans- Volume 7, Number 5-6 15 The World Bank/PRDTE fers from west to east, to the tune of All in all, given the gargantuan di- Jan. S Prybyla is professor of eco- DM 180 billion a year gross, directed mensions of the undertaking and the nomics at Pennsylvania State Uni- at a population of 16 million (roughly relatively short time that has elapsed versity. Excerpts from the author's half the total west German tax rev- since the signing of the formal unifi- study: "The German Curefor Trabies enues, 4 to 5 percent of west German cation documents on August 31, 1990, and Lesser Ills, " Pennsylvania State GDP a year, DM 11, 250 per east the results have been positive and University, Working Paper no. 11- German head), and DM 130 billion encouraging. 95-11, University Park, PA 16802. net, in the first three years after uni- fication (90 percent of it transferred through the federal government), Slowdown in Eastern Germany (Too) transfusions that helped raise the share of public spending in and the The Berlin-based German Institute for changes in the labor participation rate. Economic Research now estimates east Job creation remained strong in the arti- ratio of public debt to gross domestic German growth for 1996 at less than 4 san craft sector, which, through regional product to uncomfortably high lev- percent, compared with earlier estimates assistance, has been targeted asapriority. els. (Interest payments on the public of 4 to 6 percent. Over the past couple of This year, however, unemployment in the debt of DM 100 billion a year, not years, eastern Germany has become east could rise to 15.5 percent, up from counting the $50 billion annual cost Europe's fastest-growing region, with in- 14.0 percent last year. Ofservicigthe debts of municipal dustrial expansion rates of 20 percent in of servicing th et fmncpl 1994 and close to 15 percent in 1995. But Harmfulaeffects ofwageharmnonization with housing authorities, the railroads, the the boom has been significantly affected the west have declined and, since 1994, post office, and Treuhand, are the by the slowdown in western Germany in productivityhasgrowninlinewithwages. second largest item of public spend- the second halfof 1995. Signs of faltering The final move to parity with wester wage ing after welfare.) If assistance on the growth became apparent in autumn, with levels-will takeplce in bAt a decline of 4.5 percent in manufacturing gaining-will takeplace in July 1996. At same gross scale were given to Rus- output in October present, wages in theengineeringand elec- sia, it would cost DM 2 trillion a year, trical industries are equal to 94 percent of fifty times what was sent by the en- Theslowdowningrowthcanbeattributed western levels. Unitwage costs inthe east to three main factors: are, in the aggregate, 31 percent higher tire West In 1993. -Six percent appreciation in real terms of than in the west, although in manufactur- theGermanmarksinceearly 1994. ing the disparity is only 11 percent. A large part of the transferred re- *Wage increases of around 5 percent for sources has been spent on weaving 1995 withasimilarlevelexpectedfor 1996 Transfers on the order of at least DM 200 sourcialeshaf netsein thent onweast ng th.t . .Teincreasingtaxburden,whichha billion gross (DM 140 billion net) can be social safety nets in the east that is, -The increasig tax burden, which has expected for several more years, despite for insurance against social unrest. dampened consumer spending. widespread calls for a reduction of west- The downsizing and reconfiguration Public and private investment in the east to-easttransfers-to avoid the creation of of the overmanned and distorted east totals DM750 billion ($504 billion)and pro- a subsidy mentality. The 1996 federal bud- ductive investmentper person is one-third get foresees the following investment sup- German economy entailed by 1994 higher than in the west. Nonetheless, out- port inthe east, targeted atthe manufactur- the shedding of3 million jobs (2 mil- putisstillheavilydependentonconstruc- ing sector and particularly at small and lion of them in manufacturing, nearly tion and installation as well as on sectors medium-size firms: I million in farming), adrop in indus- shelteredfromextraregionalcompetition. * Special investment grants to the manu- trial output in 1990-91 of 65 percent, Industries such as brick making, food pro- facturing sector (DM 16.4 billion). t o ip , cessing, and light metal working account * Regional investmentgrants (DM 3.2 bil- and open unemployment of 18 per- for 40 percent of manufacturing output, lion). cent, not counting additional dis- comparedwithonly 13 percent inthewest. * Research and development assistance guisedunemploymentofroughlyone- The easfs merchandise exports make up (DM2.1 billion). third ofthe laborforce. Germany also only 1.8 percent ofthe German total. *Capital injection assistance for small and paid the Soviets to take out their The labor force has shrunk by 40 percent medium-size enterprises (DM 1.35 bil- 340,000 military personnel, directly since unification and there are now only laorsM by subsidizing housing construction 622,000 peopleemployed in industry. Im- - Labor market assnstance (DM 2)55 bil- frSitodrrer o, provement in the labor market has been for Sovilet so ldilers retu rnil ng home, steady after the lows of 1992 and 1993. In To sum up, investment assistance remains and indirectly by extending economic 1995 there was a2 percentrise in employ- crucial to the development ofthe Eastern assistance to the Commonwealth of mentandthenumbersreceiving assistance German economy. Independent States. And it is still underspeciallabormarketprogramsfellby B paying for the environmental mess 7 1,000. An increase of 33,000 in the un- U-ased ontreorntsiofa xordnsultingarmhe left behind by Soviet troops. employment total over 1995 reflects a internatioa conshinfirm 16 May-June 1996 Transition Book of the Month Joseph E. Stiglitz: Wither Socialism? by Martin Schrenk "WitherSocialism?"isnot-asthetitle Stiglitz is widely known as one of the ...[which] holdsthat all onehasto do is might suggest-another refutation of pioneers of the new information eco- correctly assign property rights, and the now-disintegrating real socialism nomics; according to the bibliography economic efficiency is assured. This ofthe ]970s and ] 980s by contrasting it he isthe authororcoauthorof 129 pub- myth is a dangerous one because it has withtlhe pure model ofcompetitivecapi- lications in this area. Information eco- misled many of the countries in transi- talism widely used as reference point in nom ics challenges key assumptions of tion to focus on property rights issues, much of the literature on system trans- the competitive capitalism model and on privatization, rather than a broader formation. Rather, the book's focus is focuses on information inefficiencies, set of issues. Resolving property rights "market socialism," by whicih the au- such as imperfect competition is certainly not sufficient, and may not thor means neithertlhe incolherent blend (ol igopol istic practices); incomplete even be necessary," the author remarks. of central planning and market coordi- markets for goods, labor, capital, and Voucher privatization, that is, free dis- nation tried by some Central European land-in particular, forward markets; tribution of assets, amounts to a "nega- countries in the 1980s, nor a utopian and incompleteandcostly information, tive lump-sum tax." This loss of gov- "third way." Instead, Stiglitz focuses aswellaslimitsandcostsofprocessing ernment rents requires raising tax on the market socialism model of Lange, available information. Otlherconstraints, revenues, which has distorting conse- Lerner, and Taylor, prevalent in the such as increasing returns (including quences.Althoughthetheoreticalargu- 1930s, which was based on the assump- research and development, learning- ment forfast and complete privatization tioIn that if public enterprise managers by-doing), furtherweaken the basis for is questionable, practical economic ar- enjoyenough independence intheirbusi- competitive capitalism. Stiglitz con- guments may yet support such a strat- ness decisions, they behave rationally cludes that both capitalist and market egy,especially ifthe government is los- (equalize marginal reveniueto marginal socialism models are operationially ir- ingcontrol overstate-owned enterprises. cost)-that is, that the efficiency of the relevant. free market system can be reproduced Privatization can provide other practical without private property. Let us summarize the author's position benefits, such as a consequent change on four closely related issues: competi- of incentives, ahardening ofbudgetcon- Why should one devote awhole book to tion, privatization, capital markets, and straints, and ademonstration ofpolitical a model that never extended beyond the role of the state. commitment to systemic change. Effi- academic debate, and which has pro- cient corporate governance-the main duced little new theoretical insights for *Competition. Change of ownership argument for swift privatization-is decades? Stiglitz' surprising answer is will improve performance automatically highly unlikely, whatever privatization that the model of market social ism and and swiftly only by assuming perfect model is used, and there is no plausible that of competitive market capitalism competition.Butinmoderneconomies, answertotheintriguingquestionofwho sufferfromthesamensimplifiedassump- due to informational and other con- would monitor the monitors-in other tions. In the author's words, "market straints, imperfect-mainly oligo- words,whowouldcontrolthebusiness socialism took the neo-classical model polistic-competition prevails. Thus, decisions ofthe managers if share own- seriously, that was its fatal flaw." subjecting firms to real competition is ershipweredispersed. Therefore, banks Through a discussion of the common more important than changing owner- should be given a prominent role as and differing qualities of these two ship. Competition serves crucial func- owners. Indeed, banks have the infor- "pure" models, the author explores the tions: it generates information about mation derived from, and power ex- defects of "real market economies" the success orfailure of firms, which in erted through, granting or withholding (capitalistortransition), drawingasharp turn enables management to develop financing. (Stiglitz urges the transition line between feasibility and utopia. rationalinicenitivestructures;anditpro- economiestoadoptthecontinentalEu- Thus, the transition issues come into motes innovation. ropean and Asian model 'of banking.) focus only gradually. in the chapter on Mutual or peermonitoring byacoalition privatization, well into the second half -Privatization isviewedashavingfallen of the major "stakeholders" (including of the book. under the spell of the "property myth stateholdingcompanies)could provide Volume 7, Number 5-6 17 The World Bank/PRDTE more competent corporate governance institutional arrangement. However, likely to persist in one form or another. than any alternative, in contrast to the empirical evidence suggests that tran- He suggests, further, that even forget- fashionablefocuson sharelholdervalue. sition economies with a weak govern- ting its theoretical shortcomings, the ment can be better off with private ar- narrow neoclassical model which holds *In the capital markets, information rangements. The role of government, that individuals'self-interest is the only shortcomings have particularly grave therefore, cannot be defined on the ba- motivating force for economic and so- consequences. The social return of in- sis of the insupportable normative cial relations will not convince those formation generated on the security axiom that government should be as who have decided to quest for a more markets is negligible; nor is is such in- small aspossible.Apragmaticapproach humane and egalitarian society. The formation useful for developing ratio- would be more proper, choosing be- author makes no secret of his convic- nal patternsofsavingsand investment- tween the public or the private alterna- tion, pointing out, "the question is even in highly industrializedeconomies. tive,dependingonwhichwould perform whether the insights of modern eco- Reshuffi big existing state ownership- better under the existing informational nom ic theory and the utopian ideals of the primary function of the stock mar- and institutional constraints. the nineteenth century can be brought ket-is essentially a zero-sum game, closer together?" predominantly driven by rent-seeking Only in the last few pages of the book and by perceptions, rather than infor- does Stiglitz offer a veiled answer to JosephE. StiglitzisLoanKennedyPro- mation on fundamentals, with at best the title's question. In a philosophical fessor of Economics at Stanford Uni- minor effects on aggregate efficiency, rather than economic conclusion, the versity. the authorclaims. Stock markets, there- author tries to explain the incessant ap- fore,areprimarily"therichlman'shorse peal of Marxism over more than a cen- Martin Schrenk is consultant, World track, or the middle-class' gambling tury.Hepredictsthatalthoughthe"great Bank. casino," with little effect on raising socialistexperiment"hasrunitscourse, funds and allocating resources. Even its perseverance suggests that the Stiglitz, Joseph E. 1995. "Wither So- mature equity markets may distort en- "dream of a better world, ... a central cialism?" MITPress. Cambridge, MA terprise behavior; a good example is theme in the development of Western 338p.. the linking managers' rewards to civilization since the Reformation," is short-term stock price fluctuation. Therefore, it is a myth that a good stock market is all one needs, Stiglitz points Negligence out. _ _ _ _ _ *Role of the State. The scope for mas- sive coordination failures resulting from information deficiencies in competition, privatization, and capital markets leads to the rejection of the "folk theorem" that "anything the government can do, theprivatesectorcan dobetter." Stiglitz believesthatonthecontrary,there isno intellectual foundation for the separa- tion of efficiency and equity concerns. Government intervention can improve welfare beyond correcting the tradi- tional market failures, such as exter- nalities, public goods, and monopolies. Economic history offers innumerable examples of both market and govern- ment failures, but no "controlled ex- "I tried not to notice when you left your tools inside your patients, but this periments" exist that could settle the time it was something really expensive." question in favor of one or the other From the Hungarian d ai y Nepszabadsag . 18 May-June 1996 Transition Milestones of Transition W orldwide flows of foreign lion rubles. Of the 19.6 trillion rubles centof thetotal.Thecontinuingdecline direct investment (FDI) thatshouldhavebeen collected in May, in GDP will make it more difficult for ," [soared to a record $325 bil- only 4.9 trillion rubles had been col- the government to deal with the yawn- lion from $222 billion in 1995, lectedbythemiddleofthemonth.(Un- ing budget deficit because of its impact UNCTAD's World Investment Report collected revenues atthe end ofthe first on tax revenue. 1996-to be published in July or Au- quarter totaled 48.4 trillion rubles, up gust-points out. Inflows to develop- more than 15 trillion rubles from the Theaveragesubsistenceminimumdur- ing countries climbedto an all-time high start of the year.) ing January-April 1996 was 360,000 of $97 billion in 1995 from $86 billion rubles per month ($75)-73 percent in 1994. China accounted for the lion's Russian Prime Minister Viktor higherthan forthe same period in 1995, share, attracting $38 billion last year. Chernomyrdini saidthetaxreformscur- Goskomstat reported in mid-May. The FDI flows to Central and Eastern Eu- rently being prepared by the govern- numberofpeoplelivinginfamilieswith rope posted record inflows of $12 bil- mentforimplementationnextyearwill incomes below the subsistence mini- lion, double the previous year's total, cut taxes on companiies thatwere up to mum during January-April was 35.4 withtheCzech Republic, Hungary, and date with their tax payments. Compa- million-9 million fewer than for the Russia prominent among recipients. nies that have given up bartering and sameperiodin 1995-andreal incomes paying assessed taxes in full will qualify in April 1996 were 3 percent higherthan Russia for a 3.5 percent reduction in taxes on in April 1995. Goskomstat Chairman theirprofits. Tax-paying businesses will Yurii Yurkov said thatthese figures, cal- The Russian governmeit is preparilg a also qualify to compete for state coIn- culatedaccordingtothelaborministry's package of emergency measures to tracts, andwill beeligible for state loans methodology, should be regarded as the boostrevenuesthatwillbe implemented and credits. Chernomyrd in said the gov- minimum to ensure physical survival. within weeks if President Boris Yeltsin ernment plans a tougher corporate tax Income differentials have grown again: is reelected, government officials re- environment in which tax deferments the incomes ofthe richest I O percent of ported. The measures are likely to lead are granted only to enterprises on the the population were 13.6 times higher to higher prices for consumer goods, brink of bankruptcy. He also predicted thanthoseofthepoorest lOpercent;the gasoline, electricity, and alcoholic bev- that interestrates will fall by upto athird equivalentfigureforJanuary-April 1995 erages,thusalsoraisingtaxes. Thegov- by the end ofthe year if monthly infla- was 13.3 times. The average salary in ernmentis consideringcuttingsubsidies tion continues at or below 1.5 percent. April was 775,000 rubles($155), 4 per- for rent and utilities, restricting corpo- cent higher than in March. During the rate cash transactions, and banninihg cor- Russian GDP fell by 3 percent in Janu- first quarter of 1996 gas industry work- porate dividend payments until all state ary-May compared with the same pe- ers earned the highest salaries, making and private debts are settled. riod in 1995, Goskomstat reported on an average of2.75 million rubles ($570) June 19. Industrial production fell by4 a month, while agricultural workers Failure to collect taxes remains the percent, with a steep 24 percent fall in earned the least, about 260,000 rubles. Russian government's major headache. light industry and construction materi- Atpresent, the minimum wage is 75,900 Tax revenues have been far below ex- als, accordingtoFinansovyelzvestiya. rubles($15),andtheminimumpension pectations this year and forecasts for Althoughthe decline in production had is 69,575 rubles ($14) a month. The the future are even more pessimistic, stopped as of April, it resumed in May. wage debt to workers in state-funded Finansovye Izvestiya reported May 28. Inflation meanwhile fell from 4.1 per- enterprises and organizations is grow- From January through April 1996, the cent in January to 1.5 percent in May. ingagain.GoskomstatreportedonJune federal budgetcollected58trillionrubles (A survey of Russian industry showed 19 that the debt to state workers has intaxes, 15.5trillionrubles(or22.6per- that more than 80 percent ofplant man- reached 4.2trillion rubles($838 million), cent) less than planned. And the agers expect productionto start stabiliz- up 20 percentfrom early May. Thetotal government's tax collection record is ing in the second half of this year.) The wage debthas risen to 27.1 trillion rubles. getting worse, not better. January's tax otherpositivetrend isforeigntrade,which income was 13.9 trillion rubles, grew by 12.1 percent in the first four There are 877,000 small businesses in February's 12.8 trillion rubles, March's months of 1996, reaching $42.8 billion. Russia, accounting for about 15 percent 17.6trillionrubles,andApril's 13.5tril- Trade with CIS states made up 26 per- of the labor force and 12 percent of Volume 7, Number 5-6 19 The World BankJPRDTE Russia's GDP, Vyacheslav Prokhorov, rubles to the dollar. The precise value Belarus chairman of the State Committee for will be set each day. The central bank the Support of Small Businiess, said on will be able to defend the currency President Alexander Lukashenko on June 6. Small businesses-defined as against steep falls, using its substantial May 28 issued orders that impose strict those with fewer than 200 workers- reserves of about $13 billion in central control on Belarus's twenty commer- employ 8.9 million peoplefull-timeand bank and financeministry gold and for- cial banks and order 178,000 private another5 mi]lion part-time. Theirregis- eign exchange assets. businesses to reregister by January 1, tered number has shrunk by 2 percent 1997. The Belarus Central Bank was to since 1994. Private investment in the Baltics review bymid-June whetherstate prop- sector reached about 28 trillion rubles ertywaslegallytransferredtocommer- ($5.6 billion) by the start of 1996. The Bank of Estonia has announced cial banks when they were established that bad loans accounted for about 2.2 and was charged with ensuring that the PresidentYeltsin approvedthecriminal percentofthe loan portfolioofEstonia's state is compensated for any losses. code on June 13. The code was adopted commercial banks at the end of April. The government will be able to impose bytheDumaon May24 and the Federa- The value of bad loans grew by 7.5 temporary management on a bank if it tion Council on June 5 and will go into percent in April, to reach 178 million reports losses for more than three effect on January 1, 1997. The new krooni ($15 million) out of an overall months. Banks are obliged to report code pays particular attention to eco- loan portfolio of 8 billion krooni. The transactions exceeding $10,000, and nomiccrimes, includingunfaircompeti- Union Bank of Estonia held the most each bank has to reregister its opera- tion and money laundering. bad loans(37.5 million krooni),followed tions with the government by Septem- bythe savings bank and North Estonian ber. Commercial businesses face clo- The government hopes to raise 12.4 Bank, with bad loans of 30.5 and 29.6 surebyawidearrayoflegalbodiessuch trillion rubles ($2.5 billion) this year by million krooni, respectively. The Inno- astax authorities, the president's office, selling stakes in majorenergyand com- vation Bank had the lowest number of and the KGB security service. Reasons munications companies, Federal Prop- bad loans (900,000 krooni). forclosure includetaxevasion, notearn- erty Fund Deputy Chairman Vladimir ing a profit, not filing a financial report Malin has announced. The fund intends Preliminary results of the first house- with the government in a specified pe- to sell off a 34 percent stake in Norsi- hold budget survey conducted by the riod, and inactivity for six months. The Oil, a 29 percent stake in NAFTA- Lithuanian Statistics Department indi- Belarus government lost a third of its Moskva, and a 1.5 percent stake in cate that abouttwo-thirds of most fam- budgetrevenueslastyearduetounpaid LUKoil, as well as 25 percent of shares ily budgets was spenton food and hous- taxes. These tighter regulations come a in Svyazinvest, 22 percent in Moscow ing in the first quarter of 1996. The weekafterLukashenkobroughtthebank Central Telegraph, and I percent in the survey of 2,133 households found that payment-clearing institution understate national power grid EES Rossii. Malin the average monthly per capita income control, saying laws were broken set- said the government will probably not was 446 litai ($111.50), with urban in- ting up the center and funds were mis- repeatthecontroversial loans-for-shares comeat517 litai andrural incomeat403 used. The Minsk currency exchange auctions. litai. The family budget was spent on was nationalized in Aprilandstrictcon- food products (47.7 percent); housing, trols were put on the foreign exchange TheRussian MinistryofAgricultureex- heating, and electricity (18.4 percent); market. "The state and onily the state pects this year's grain harvest to be 75- clothing (7.6 percent); leisure and en- will run our country, our economy," 78 million metric tons, up from the 67 tertainment (2.2 percent); and educa- Lukashenko said earlier this month. mil lion last year, which was the lowest tion and culture (1 .0 percent). Only 0.4 since 1963. percentofthosepolledconsideredtheir China living conditionsto bevery good, and 6.1 As ofJuly I therublewill beallowedto percent said their conditions were very China's GDP is expected to grow 10.4 float within a range of 5,000 to 5,600 to bad. A fifth said that they had experi- percent in the first half of 1996 over the the dollar, instead of the present range enced difficulties in the past few years same period a year earlier, the State of 4,550 to 5,150 rubles to the dollar. in making timely payments for their PlanningCommissionreported.China's Then for six months the Russian cur- apartments and communal services, fixed asset investment in the first quar- rency will be allowed to depreciate while 45.1 percent said they had not. ter grew by 16.2 percent over the 1995 gradually to between 5,500 and 6,100 2 0 May-June 1996 Transition level, which was down 18 percent from China's labor ministry has warned that in real interest rates from negative to the previous year. Retail prices rose by in a worse-case scenario there could be positive since October 1995. Retail price an average of 7.6 percent year-on-year 153 million workerswithoutjobs bythe inflation fell to 7.7 percent in the first in the first four months of 1996. The turn of the century if the government quarter of 1996, well below the 10.9 trade deficit for the first four months of takes no action. percent interest rate on a one-year loan. the year was $700 million. The trade China's central bank has freed interest deficit could reach about $500 million Effective May I the central bank cut ratesonthenationalrenminbiinterbank this year after a $16.7 billion surplus in interest rates on loans and deposits by market as of June 1, a key move toward 1995. Foreign reserves rose to $80.8 an average of seventy-five basis points making, interest rates market-driven. billionattheendofthefirstquarterfrom and ninety-eight basis points, respec- $73.6 billion at the end of 1995. tively. The rate cuts follow the reversal Bulgaria-Dancing On the Brink Bulgaria's government is trying to pare losses of the state owned enterprises and persisted in carrying out tough reforms its heavily indebted state sector and shore employ 25,000 people. They will add 0.6 agreed on in May." Alberto Musalem of up its ailing banks. Over the past six years percent to the 12.5 percent unemployment the World Bank's Sofia office stated dur- the six governments that have come and rate. Another seventy companies are to be ing a news conference. The bank is wait- gone, and the consequent shifting of min- cut off from state-owned bank loans and ing for progress on structural reform, in- isters and programs, have resulted in con- given one yearto devise restructuring plans. cluding the closure of unprofitable fusion that has dried up foreign invest- Job losses could reach 60,000 when com- enterprises, before it releases $30 million ment. Privatization is stalled, the panies that cannot be closed, such as the to be used to cover severance pay for state-controlled economy is dominated by state railways, are restructured. displaced workers. The Bank has been Soviet-era companies, and Bulgaria is in *Acceleration of privatization; 42 percent holding back $400 million in project loans an economic crisis. Foreign debt payments of all state-owned firms are to be sold for to Bulgaria, but it could redirect some of for the whole year will total $1.2 billion. cash orprivatization vouchers. (The Center those funds to help alleviate the social The country's foreign reserves are below for Mass Privatization announced on June side effects of shutting down state enter- $600 million. The government expects to 17 thatjust over 3 million people-or 48.7 prises. receive between $700 million and $I bil- percent of those eligible-have bought lion in financial assistance after reaching privatization vouchers.) Bulgarians are being hit hard by the an agreementwith the IMF andthe World -Consolidation of the banking sector, in- country's economic crisis and falling liv- Bank. cluding shutting down up to five insolvent ingstandards,atatimewhentheirmonthly banks. The Bulgarian parliamenton May 14 wages have shrunk from the equivalent of Prime Minister Zhan Videnov, in an ad- passedamendmentsgivingthenationalbank $1 10tojust$70,duetotheplungingvalue dress to parliament on May29, announced the right to declare commercial banks insol- of the leva against the dollar. Bulgaria's new austerity measures agreed with the vent and to recommend to the court that currency, the leva, has lost some 70 per- IMF. Videnov said that by adopting the they be declared bankrupt. Several banks cent of its value since the beginning of austerity program the government hopes facingaliquiditycrisishavebeentakenover 1995. The National Statistical Institute tobeableto collect 140 billion leva($1.47 bythe BulgarianNational Bank, such asthe announced that the prices of goods moni- billion) in 1996. The measures include: state-controlled Mineralbank and First Pri- tored by the government went up by 10.8 -Gasoline price hikes of up to 80 percent. vate Bank. Individual savers would get all percent in the first half of June. This is *Increases in the VAT rate from 18 to 22 their money back. twicetheincreasepredictedbyeconomists percent beginning in June. and statisticians. The country is experi- *Increases in excise duties on alcohol. Theannouncementofthestabilizationpack- encing a severe grain shortage, as produc- -Introduction of a 5 percent import sur- age camejustdays after Bulgariaon May 27 ers have been unwilling to sell at the low charge on imports, effective from July 1, reached a preliminary agreement with the government-controlled prices. Falling 1996, to June 30, 1997. Certain interme- International Monetary Fund on a standby bread supplies and grain shortages have diate goods will be exempt from the im- loan that Bulgaria urgently needs to meet triggered panic in several Bulgarian cities. port surcharge which will be phased out its foreign-debt obligations. The IMF's Ex- Bakeries throughout the country have by the end ofthe century. Crude oil, natu- ecutive Board is to meet in July to consider been forcedto close orto rationtheirsales. ral gas, electricity, coal, nuclear fuel, Bulgaria's application for a $600 million metals, cotton, pharmaceuticals, and un- standby credit. Based on press reports and briefs of Ox- refined sugar will be exempt from the fBulgariacouldreceivethefirsttrancheoof rd Analytica, the UK-based interna- duty. "Bulgaria coledin rcivepth mefrst trancheio ti.onal consulting firm, and the contrib u- *Closure of sixty-four loss-making com World Bank lending in September, earli- tion Of Zeljko Bogetic, World Bank panies that account for 25 percent of total est, on the condition that the governmentBulgara. Volume 7, Number 5-6 21 The World Bank/PRDTE Czech Republic the country's economic problems. Re- that companies such as the Khaidarkan spondents were evenly split between Mercury Plant, Mailisuu Electrical The Czech Republic's first-quarter 1996 those agreeing that unprofitable com- Lamp Factory, and Ak-Suu Corn-Pro- GDP growth in real terms reached 4.3 panies should be closed immediately, cessing Plant are expected to attract percent, keeping the country on track even if such steps result in higher un- foreign investors.Thegovernmentalso for annual GDP growth of above 5 per- employment, and those who thought intends to step up privatization in such centthis year. However, capital invest- that the government should keep such sectors as energy production, telecom- ment growth slowed while household companies afloat. munications,andmining.Inaddition,it demand-driven by real wages will allow foreign firms to manage lo- growth-accelerated. Real growth of Hungary cal enterprises in order to improve the Czech exports in 1995 was 7.9 percent latter's financial situation. against real growth in imports of 19.2 The European Bankfor Reconstruction percent. Foreign capital flooded the and Development (EBRD) approved Poland country in 1995, raising national bank ECU 1.073 billion worth of moderniza- reserves to $13.9 billion at the end of tion projects in Hungary in 1995. The Poland's foreign trade, which has been 1995 from $6.2 billion ayearearlier. But EBRD is now reviewing applications growing steadily forthe past five years, foreign currency reserves fell to $12.6 for eight new projects in Hungary, the reached a record $51.9 billion in 1995, billion by the end of April 1996, from largestbeingtheproposed ECU 32 mil- with exports reaching $22 billion and roughly$14.2 billionatthe beginningof lion credit aimed at financing develop- imports $29 billion. The value of 1995 February. ment of Budapest's Ferihegy Airport. exports per capita was $593. In highly developed countries, the figure ranges The trade deficit increased sharply in Hungary hopes to complete the sale of between $5,000 and $15,000. Aprilwithlthecumulativedeficitfor 1996 state-owned enterprises within two risingto koruna38.9 billion ($1.4 billion) years, Privatization Minister Tamas Poland's Main Statistical Office (GUS) at the end of April from koruna 26.3 Suchman has announced. Privatization has issued two very different estimates billion ($950 million) a month earlier. of the energy sector will be completed, of the extent of poverty in 1995, This puts injeopardy government fore- and fifteen to eighteen large industrial Rzeczpospolita reported on May 16. casts of a roughly $3 billion year-end enterprises will be offered for sale. The According to the Institute of Labor and shortfall. The koruna has appreciated current value of all state enterprises is Social Affairs, each household needed by more than 2 percent in the past two about HUF 1,200 billion; two-thirds of 359.3 zlotys($135)perpersonpermonth months alone. The quarter's current ac- these will be put on the block. Hungary to meet basic needs. Using that stan- count deficit widened to $541 million hopes to increase the private sector's dard, GUS has estimated that 49 per- from $217 million inthe same period in share in GDP to 85 percent by 2000, cent of households lived in poverty in 1995. The capital account surplus fell from the current 70 percent. 1995,comparedwith34percentin 1990. sharply in the first quarter to $90 mil- According to GUS's second method, lion from $2.1 billion forthe period last The Budapest-based economic research however-the one employed in the year. firm GKI forecasts 1996 GDP growth EU-only 12.8 percent of households of around 1 percent, a 25 percent infla- live belowthe poverty line. This method A survey conducted by the Center for tion rate, and a $2 billion balance of sets the poverty line at a per capita EmpiricalStudies(STEM)indicatesthat payments deficit. Real wages are ex- householdincomeequalto50percentof 50 percent of Czechs are dissatisfied pected to drop by 6 percent. the average monthly expenditures of a with theirfamilies' economic situations. single-person household, a calculation A report issued on May 21 stated that Kyrgyzstan whichfor 1995 results inafigureof207 some 45 percent of the poll's 1,595 re- ziotysperperson. Accordingtothe sec- spondents agreed that "the gover- Thegovernmentwill sell itscontrolling ond method, poverty incidence has re- nment's effort to reduce differences interest in 100 industrial companies in mained stable since 1993. between the rich and the poor damages order to increase the inflow of foreign the national economy," while 55 per- capital into the economy, according to Poland'sgovernmentplansto lower in- cent disagreed. About 53 percent ex- AskarSarygulov,headofKyrgyzstan's come and corporate taxes in 1997 to pected the privatization of formerly State Property Fund. An article in the maintainhigheconomicgrowthandlow state-owned companies to help resolve May 16 Finansovye Izvestiya reported inflation, the finance ministry has an- 22 May-June 1996 Transition nounced. The government envisages is to sell off shares in fifty-seven state Merrill Lynch International in order to average annual economic growth of at enterprises, including those of Polish increase Romania's foreign exchange least 5.5 percent and calls for reducing Copper, the nation's second most prof- reserves. The Romanian branch of thebudgetdeficitto 1.7percentofGDP itable firm. Problems in selecting an Citibank will finance the purchase of by2000. adviser for the privatization and con- U.S. farm equipment with a $90 mil- flicts about the numbers of shares to be lion loan. As of end-April Poles had purchased sold to domestic and foreign investors 55,600 new imported automobiles al- have reportedly contributed to delays. The Association of Entrepreneurs and readythisyear,asmanyasinallof 1995, The group of large and profitable firms Constructors of Israel (AECI), the Gazeta Wyborcza reported on May 27. to be privatized this year include the country's largest importer of foreign Althoughthis year'sduty-free allotment Paper and Cellulose Factory of Swiec, labor, has suspended hiring of Roma- of 37,000 cars has been exhausted, the the Pulawy Fertilizer Company, and nian workers and will repatriate almost 25 percent customs fee now levied on Impex Metal. 45,000.Themoveshouldstemthe steady the saleofforeign autos is showing little stream of workers into higher-paying sign of slowing the import boom. Romania illegal jobs. Ten or twelve thousand Romanian building workers have left Trade union representatives have re- The National Federation of Pensioners their legaljobs and are now working on jectedthePolishgovernment'splanfor rejected the Romanian government's the black market, according to Israeli restructuring the coal-mining industry planto increase pensions byamere 8.3 sources. This embargo will cost the by 2000, saying the plan is incomplete percent starting on June 1. In response Romanian labor market $500 million. and calling for a coal summit. Twenty to the pensioners' protest, the govern- The planned repatriation could bloat of sixty-five coal mines will be liqui- mentofNicolaeVacaroiuannounceda Romania's 9.4 percent unemployment dated and 80,000 of 270,000 employ- rise of 10.5 percent. Even this higher rate. ees will be laid off in five years. Indus- increase leaves retired Romanians with try Minister Klemens Scierski said only 67.4 percent of the purchasing Ukraine Poland produces as much coal as the powerthey had in 1990. Yet many in the entire European Union, which has about government worry that the latest rise is Pavlo Lazarenko, Ukraine's new prime 200 mines. But the EU mines employ dangerously high. Vacaroiu warns that minister,announcedthathisgovernment 170,000 people-100,000 fewer than unless measures are taken to prevent willallocateanother35trillionkarbovantsi work in Poland's sixty-five mines. Two early retirement, the statewill be unable ($189 million) to bail out the country's unprofitable mines will be liquidated to pay all pensions by the end of 1997. troubledcoal industry, Ukrainiantelevi- by 2000. Production will decrease by sion reported on May 30. Part of the 20 million tons annually, from the cur- Romania has everychanceofmaintain- funds will go toward payment of the rent 100 million. Some 80,000 workers ing last year's 7 percent GDP growth government's 38 trillion karbovantsi will take early retirement or be laid off, rate for the foreseeable future, Eco- wage debt to miners, while some 6 tril- although many of the latter will be nomic Reform Minister Mircea Cosea lionwillbeusedforstatecoalpurchases. requalified in other lines of work. The said in mid-May. With 90.5 percent of Coal IndustryMinisterSerhiiPolyoakov restructuring will be subsidized by the Romanians having already exchanged said the government plans to shut down government. The industry lost$316mil- government coupons for company 100 unprofitable mines, mainly in the lion in 1995 and has accumulated debts shares, the country's privatization pro- Donetsk and Luhansk oblasts. He said of $1.78 billion. The average miner's gram can be considered a success, ac- there are plans to transfer all social basic monthlywage is 700 zloty($277). cording to Cosea. facilities and services in the country's coal miningtowns to thejurisdiction of Workonthisyear's privatizationofstate The World Bankhas decidedto unblock local councils. enterprises via public offer has been an $80 million credit line representing seriously delayed, so that it will be a the second tranche of an EFSAL loan, In an attempt to avert growing social miracle if any firm is sold before the Romanian media reported on May 27. tension, Ukraine's parliament on May third quarter, Privatization Minister National Bank of Romania Governor 23 voted to use a $150 million foreign Wieslaw KaczmarekannouncedonMay Mugurlsarescuannounced onthe same credit to start paying off more than $1 23. According to the "Directions for daythatthebankwillfloata$150million billion in wages, pensions, and student Privatization in 1996," the government Eurobond issue in June jointly with grants. "We recommend the govern- Volume 7, Number 5-6 2 3 The World Bank/PRDTE ment use the credit from Japan to cover rate of34 to 40 percent, down from 181 the Slovenian government. The plan ourwage debts, which are growing daily percent last year. will go into effect the beginning of and which now amount to $1.19 bil- July. Labor-intensive industries, lion," parliamentary banking commit- Slovakia whose international competitiveness tee chief Viktor Suslov told the cham- has been most eroded by the tolar's ber,whichvoted279to3 infavorofthe Slovakia'stradedeficitforthefirstfour real effective appreciation, will get motion. Manyteachersanddoctorshave months of 1996 reached 21.5 billion extra support. Key features of the not been paid since the beginning ofthe crowns ($693 million). Slovakiahad its package include reductions in the so- year. Parliament also directed the gov- highesttrade deficitwith Russia, while cial security tax rate from the current ernmentto cut some capital projectsfor its trade with the Czech Republic was 42 percentto 38 percent, and increases 1996 and use the money for wage pay- balanced. While exports fell by I mil- in the investment tax credit from 20 ment. lion crowns in April compared with the percent to 30 percent, in order to re- previous month and were lower than in duce the tax burden and labor costs in Deputy Prime MinisterAnatoly Kinakh the same period last year, the growth in the enterprise sector. said Ukraine's monthly inflation rate imports caused foreign currency re- should be I to 2 percent by the end of serves to drop by $80 million since the Slovenia has received the highest ini- the year. Inflation was 2.4 percent in beginning of the year, reaching $3.3 tial credit rating of any country in April, down from 9.4 percent in Janu- billion in mid-May. transition, putting it at or above the ary. Industrial outputfell by 2.5 percent rating enjoyed by the Czechs. in the first fourmonths ofthe year com- Data released by the Slovak Statisti- Moody's has rated it at A3, while pared with a 12.7 percent drop in the cal Bureau showed year-on-yearcon- IBCA and Standard & Poor's have same period lastyear. Central bank chief sumer inflation was 6.0 percent in given it A ratings. These ratings came Viktor Yushchenko predicted GDP April, down from 1 1.2 percent in the before Slovenia's first Eurobond flo- would fall between 1.8 and 2.0 percent same month last year. But energy tation; some $200 million in bonds this year after an 11.8 percent fall in prices are still fixed by the state. The will be sold in June. But while the 1995.Ukrainehasslowedasteepfallin state electricity monopoly recently rating agencies praised Slovenia's GDP and forecasts an annual inflation proposed to the government price in- macroeconomic management, they creases of 10 percent for retail cus- stressed the need to restrain wage tomers and 5 percent for wholesale costs, accelerate privatization, and re- beginning July 1. form the pension and health care sys- Lending Policis .The state gas utility tems. Meanwhile, the Slovenian in- LEnding Po0l& icies [ is seeking a 7 per- flation rate was up to 1.2 percent in ~~ ~. cent retailI price rise. April, a higher month by rate than "in,: gg.a - ::-,-,Ea't I'm 3 3 Slovakia has the seen in the previous twelve mzontlhs. s Xrong 3 lowest inflation rate raising concern that inflation wvi II hit in Central and East- the double digits in 1996, rather thian Curope, beating be held to the 6 to 7 percent plainnied. the Czech Republic, which had an 8.9 Viet Nam IIOII1eI~s percent year-on- year rate in March. Viet Nam and its commercial bank creditors have announced an agree- Slovenia ment on general financial terms to settle about $1 billion of debt princi- An eonoic ack- pal and interest arrears. The agree- 3 3 1 ! , age to improve eco- ment, signed in Hanoi in mid-May, 0i0 E nomic competitive- will clear the way for the country to ness and stimulate tap international markets for invest- growth in the second ment capital. Hanoi will be able to half of 1996 has write down about 50percent ofa large been approved by chunk of its debt. From the Hungarian daily /ilaggazdasag. 24 May-June 1996 Transition World Bank/IMF Agenda Russia Negotiates Si Billion World finance ministry for monitoring the is- Yuan Convertibility Next Year? Bank Loan suance of government securities. Central bank Governor Dai Xianglong World Bank President James *May 30: $80 million to finance two said China plans to adopt current ac- Wolfensohn announced May 23 during environmental projects-subsidizing count convertibility for the yuan by the his Moscow visit that the World Bank the gradual elimination of chemicals time it hosts the IMF and World Bank will lend Russiaover$ Ibilliontoover- thatdamage the ozone layer(produced Annual Meetings next year in Hong haul its coal-miniiig iidustry($530 i-n i - in the aerosol and refrigeration sectors); Kong. Among the policy changes lion) and reform its agricultural sector and protecting rare animals and plants planned for the second half ofthis year ($500 million). The loan follows an to preserve biodiversity. are an extension of the pilot scheme agreementoon a$350 million Bank loan allowing foreign-funded enterprises to for repairi ng bridges. The loans bring *June 4: $270 miillion foramedical equip- hold foreign exchange and trade itfreely the total amount the World Bank has ment project at primary and secondary with banks. The central bankalso plans lent to Russia to $6.5 billion, making health care facilities in thirty-four se- toincreaseasofnextmonththelimiton the country the Bank's third- largest cli- lected oblasts, providing medical equip- individual foreign exchange purchases ent after Chiina and Mexico. ment, consumable supplies, and techni- from banks. Dai dismissed suggestions cal and clinical training in the operation by some Western economists that the Recently Approved Loans to Russia: and maintenance of equipment. This 8.7 percent decline in China's exports loan will also finance consultant ser- duringthefirstquarterofthisyearmeant *May 8: $300 million to hielp finance vicesforsurveydesignanddatacollec- that its currency was overvalued. He the transfer of housing from enterprises tion, as wel I as computer hardware and said the $1 .2 billion first-quarter trade to new private owners in six pilot city software,to supportthe implementation deficit was caused by delays in paying projects. Housing is the largest of the of a system of national health accounts. tax rebates to exporters and heavy im- social assets owned by Russian enter- ports of capital goods. China is still en- prises. They have been encouraged to *June 16: $58 million to support legal joyingacapital inflowthatsupportsthe divest housinig since the launch of the reform in Russia. The project, with a yuan exchange rate, according to Dai. mass privatization program in 1992, but total value of $89.4 million, aims to If inflation continues to fall, Chinese tenants and local councils are reluctant improve the performance of Russia's authorities will consider a further re- to take over housing because of the legal systems. laxation of credit later this year. burden of mainteniance and utilitycosts. In the pilot cities the counicils already Ruble Convertibility Loans to China have managed to increase the propor- tion of operating costs paid for by ten- Russia formally accepted the obliga- TheWorldBankonMay30announced ants from 13 percent to 35 percent. The tions of the IMF's Article VIII govern- ithadapproved loansworth $360million six cities, chosen by competition, are ing currency convertibility for current to help improve rural living standards Novocherkassk, Orenburg, Petro- internationial transactions. The IMF said and road networks in two Chinese prov- zavodsk,Ryazan,Vladimir,anidVolkhiov. Russia's acceptance of the obligations inces. InGansutheBankwillcontribute The Russian govermenit will spend was a welcome step toward full con- $150milliontoa$259millionprojectto anotlher $250 million on the project, vertibility of the ruble and marked an build the Changma Dam on the Shule mainlyforbuildingrepairandthe instal- important in ilestone in the country's Riverandfinancethevoluntaryresettle- lation of meters. rapid integration into the global ment of 200,000 poor people to newly economy. Russia has met economic developed irrigation land. AnotherWorld *May 30: $89 in ill ioI to support the de- targets in the latest review of its perfor- Bank loan of$2 10 million will help build velopmentofcapital markets in Russia: mance by the IMF Board, opening the an 85-mile(1 36-km) highway segment to improve the markets' regulatory in- way for a fresh $330 million Expanded and improve 1,000 miles ofrural roads in frastructure and supply telecommunii- Finanicial Facility drawing. Henan province. cations and computerequipment; and to create a computerized system at the Volume 7. Number 5-6 2 5 The World Bank/PRDTE IDA Credits to China-For How added that the Belarus government. vironmental consequences of the Long? could improve trade balances by free- government's decision to close unprof- ing the exchange rate, which is propped itable coal mines; the loan wi ll support BytheendofthiscenturyChinaisgoing up artificially at about 12,500 to the a pilot project that will test ways of to lose access to the World Bank's low- dol lar, roughly 25 percent below black closing mines safely (with due regard interestcreditwindow, and in the future market values. fortechnical,environmental, economic, borrowing money wi ll be more expen- financial, and social issues), ensure that sive for the country, reported the South Ukraine: IMF Supports Reform Ef- workers have other job prospects, and China Morning Post on May 26. This forts... monitor and evaluate project findings is the result of changing government for subsequent operations elsewhere in donorattitudes and reduced availability The IMF has approved a nine-month the sector. of concessionary funds for poor coun- standbycreditequivalenttoabout$867 tries. "China is now in a position to million to support the Ukrainian Projects for Bosnia borrow money on international capital government's 1996 reform program. markets," Pieter Bottelier, head of the The loan will be disbursed in monthly The World Bank approved on May 14 Bank's Beijing office is quoted as say- installmentssubjecttomonthlymonitor- three projects worth $40 million for ing. "In just a few years China has the ing of the government's fulfillment of Bosnia-Herzegovina. The Bank will historic opportunity to make the jump program targets. The main goals of re- provide$20millionofa$40millionproject from a receiver to a donor country and form include: lowering inflation of the to renovate Sarajevo's gas and heating contribute to World Bank funds," karbovanet to a monthly rate of I to 2 systems. It will also come up with $10 Botteliersaid. The World Bankhascom- percent by the end of 1996, reducing the million of a total $33 million to restore mitted to date some $25 billion to China. budget deficit to 3.5 percent of GDP by seventy primary schools and build five the end of the year (from 5 percent in new ones; the EU's Humanitarian Or- World Bank Halts Programs to 1995), furthercutting state subsidiesto ganization is also participating in this Belarus enterprises, expanding liberalization of project. In addition, the Bank will pro- foreign trade, and accelerating privati- vide $10 million of atotal $30 million The World Bank has suspended all pro- zation. Auctions ofstate enterprises are for rehabilitation of war invalids, psy- grams for new credits to Belarus. The being stepped up with the aim of priva- chological assistance for war victims, remaining $55 million of $170 million tizing at least 70 percent ofthe shares in and medical equipment and orthopedic already allocated by the Bank will be a total of 5,000 medium-size and large devices. (See page 12). distributed once Belarus restarts priva- enterprises by the end of 1996. tization and converts 250 state-run en- World Bank Stepping up Bosnia terprises intojoint-stockcompanies. (By .... in Tandem with the World Bank Loans the end of last year 550 enterprises had changed hands, although the govern- On June 27 the World Bank approved The World Bank on June 16 cleared ment had promised to turn 800 enter- a$310 million enterprise development Bosnia'sdebtarrearsofmorethan $450 prises over to the private sector.) The adjustment loan to Ukraine. According million inoverdueprincipaland interest IMF has already halted successive to the recently agreed three-year coun- paymentsowed the Bank on loans made tranches ofa $300 million standby credit try assistance strategy, further loans are to the former Yugoslavia. The Bank agreed in 1995. Restrictions on foreign under preparation: a $300 million pri- agreedtoconsolidatethosepayments in exchange markets remain in place,there vate sectordevelopmentloan anda$250 aseries ofnew loans,totalingupto $650 is no sign of abolishing the fixed ex- million loan in support of agriculture. million, and thus paved the way for change rate, and monetary and credit Another $75 million will help to im- stepped-up lending. (The Bank has al- policy are not as tight as required by prove urban transport in the cities of ready committed to lend Bosnia $150 IMFguidelines.Anextra$480millionin Kiev, Krivojrig, and Lviv. The Bank millionunderaspecialtrustfundsetup farm subsidies constitutes a major dan- also intends to give Ukraine a $250 mil- in February.) gerto stabilization. Belarus has plunged lion credit to support structural reform into aforeign investment-crisis, with the ofthe coal industry and $170 million to Appeal to International Donors lowest level of invested foreign capital establish a preexport guarantee fund. In in Eastern Europe, according to World mid-May a loan of $15.8 million was Theintemationalcommunityhaspledged Bank economist John Hansen. Hansen approved to mitigate the social and en- $1.8 billionto Bosniaforreconstruction 26 May-June 1996 Transition in 1996, but several key donors have term as managing director, beginning climateor investmentlawcodes in spe- not yet committed their funds, accord- January 16, 1997. It will be the first cific countries. (MIGA facilitates the ing to a World Bank report discussed timethatanlMFmanagingdirectorhas flow of private foreign direct invest- during the recent Bosnia Reconstruc- served a third term. ment by providing coverage-guaran- tion conference held in Florence, Italy. tees-againstthe majorpolitical risks of The Bosnian government worked out a IMF Agrees with Kazakhstan on currency transfer and currency expro- $5.1 billion three-to-four-year plan that ESAF priation, as well as war and civil distur- was endorsed by donors in December bance, and by offering legal advice and to start repairing the estimated $50 bil- Kazakhstan and the IMF on May 20 marketing services to developing and lion war damage. "About 20 percent of signed an initial agreement on a three- transition countries. Information on 1996 pledges are still unconfirmed or yearESAF (extended structural adjust- MIGA: Shaila Fernandes, Room U12- uncommitted," the World Bank said. mentfacility)loanofundisclosedamount 135, tel. (202) 473-8058, fax (202) With the reconstruction program now (accordingtotheFinancialTimes,about 522-2630, (Email: sfernandes@world under way, 1996 growth rates could $450million), subjecttolMFBoardap- bank.org). reach around 35 to 40 percent. Assum- proval. Kazakhstan had earlier received ing growth averages about 10 percent a a $290 million one-yearstandby facility Wolfensohn in Viet Nam yearbetween 1998and2000,GDPcould but has not used it because of its large recoverto close to two-thirds of its pre- foreign reserves. In the fall of 1995 Endingafour-daytrip, WorldBankPresi- war level by 2000, the Bank pointed Kazakhstan adopted a three-year pro- dent Wolfensohn announced on May 15 out. gram aimed at accelerating privatiza- that the Bank will provide Viet Nam tion and reducing inflation from 60 per- with $1.5 billion in IDA credits for the $50 Billion GAB Facility cent in 1995 to 27 percent in 1996, and coming three-year period starting July thento 12 percentin 1998. Someecono- 1. To keep economic growth on track, During their recent Paris meetings the mists predict that the Kazakhstani the government needs to promote fair G-10, the ten leading industrialized economy will exhibit positive growth competition and unleash the creative countries, approved a new $50 billion thisyearforthefirsttimesinceindepen- energy of the Vietnamese people, the emergency borrowingfacility (General dence in 1991. presidentpointed out in his closingpress Agreementto Borrow, GAB)to bolster conference in Hanoi. Viet Nam's chal- the International Monetary Fund's re- MIGA Guarantees to Transition lenge is to reduce widespread poverty sources. Members of the G-10 will Economies Surge whilecopingwithahighdebtburdenleft contributesome75 percentofthedoubled over from the prereform period. To gain borrowing facility. The remaining 25 In the first nine months of the current access to international capital markets, percentwillcomefromagroupofcoun- fiscalyear,startinginJuly, 1995, MIGA the country needs to renegotiate (re- tries including Australia, and Austria, (theMultilateral InvestmentGuarantee structure) its outstanding commercial Singapore, and Spain, in recognition of Agency, an affi I iate of the World Bank debtandrubledebt, saidMr. Wolfensohn. their increasing role in the global Group) has issued more than forty con- (Viet Nam, after China, is now the sec- economy. SaudiArabiaisalsoexpected tracts of guarantee for the European ond-largest recipient of IDA credits, to take part. The new members will andcentralAsiantransitioneconomies, receivingabout$500millionayear.) have the right to be consulted before covering about $575 million worth of any credits are advanced, giving them projects. (The region now accounts for Credit to Viet Nam's Bank for the greater official recognition in global almost 25 percent of MIGA's total out- Poor finance. The facility is not seen as a standingportfolio,coveringprojectsin substitute for more permanent expan- Bulgaria,theCzech Republic, Hungary, On May 7,1996, IDA approved a $122 sion of IMF resources through a capital Kazakhstan, Kyrgyzstan, Poland, Rus- million rural finance projectto improve increase. sia, Slovakia, and Uzbekistan.) MIGA living conditions in Viet Nam's rural recently launched the Investment Pro- areas by encouraging private sector in- Camdessus Reappointed motion Agency Network (IPAnet), an vestments and strengthening the bank- electronic investmentmarketplace, with ing system's ability to finance them, The IMF Board of Executive Directors an internet web site (http:\\ipanet.net) while increasingthe rural poor's access unanimously selected Michel providingmacroeconomic information to financial services. The project in- Camdessus to serve a third five-year on various topics, such as investment cludes a line of credit for viable rural Volume 7, Number 5-6 27 The World Bank/PRDTE investment through the Bank for the growth at about 6 percent a year in the World Bank Activity in Lithuania Poor, created by the government in medium term, but this will depend on August 1995. the availability of external financing Aftertalks in Washington in early May, for investments. the World Bank signed a negotiation IFC: Emerging Stock Markets protocol for a $10 million loan to help Expand *Georgia-with its per capita GDP of finance a project to provide insulation $410 in 1994-is among the poorest forLithuanianresidences. (Altogether, Investors in emerging markets fared countries of the former Soviet Union. 1.1 millionapartmentsshouldbeincluded poorly in 1995, butthat did not stop the Inflation declined from more than 60 in the heat insulation program.) The stock markets themselves from con- percent a month in 1994 to an average World Bank on May 9 approved a $5.9 tinuing to develop and expand, the of about 3 percent a month in 1995. A million loan and aGlobal Environment World Bank's IFC said in its annual new currency has been successfully Facility (GEF) grant of $6.9 million to "Emerging Stock Markets" Fact Book. introduced, the exchange rate has been enhance the use of geothermal energy New stock markets opened, and the stabilized, and the economy grew 2.3 in Lithuania. Designed for the city of number of listed companies grew by 14 percent in 1995. Seven thousand small Klaipeda, the project will demonstrate percent,an increasethe IFCtermed "im- firms are already in private hands, 125 the advantages and benefits of geother- pressive" given the drop in many share medium- and large-scale enterprises mal water as an energy resource in prices last year. The IFC Investable have beenprivatized, andtheprivatiza- district heating. A World Bank struc- Composite Index fell 10.3 percent last tion program will be completed by the tural adjustment loan to Lithuania may year as investors reevaluated the out- end of 1997. Further land privatization is not be approved unless the government look in the wake of Mexico's peso cri- being pursued (47 percent of cultivated makes significant progress in reforming sis. land has been privatized). In the past six the banking sector, reducing bordertar- months the World Bank has provided iffs on agricultural products, and raising Armenia, Georgia Consultative about $90 m il I ion in credits to Georgia. local consumer energy bills, according Groups Meet to an AP-Dow Jones report. Poland Receives Water and Capital The second Consultative Groups for Market Loans ... and in Estonia Armenia and Georgia met in Paris on May 29-30 under the chairmanship of On June 4 the World Bank approved The World Bank has granted Estonia a the World Bank to mobilize continued loansfor$12 million and DM13.2 million $15.3 million loan to boostprivateenter- external support for the two countries' for a water and wastewater project in prise, in support ofa $31 million project economic programs. Both countries have the provincial capital of Bielsko-Biala. to promote privatization of agriculture sharply reduced inflation, narrowed fis- Existing treatment plants will be reha- and to modernize agricultural drainage cal deficits, elitninated trade restrictions bilitated and upgraded. The project in- systems. and pricecontrols, and nearlycompleted cludes technical assistance and training small-size business privatization. How- and engineering services. With support Estonia's New Economic Policy ever, energy shortages remain a critical from another loan-$89 million (ap- constraint to output recovery, and lim- proved on May 30)-Poland's capital The IMF representativeto Estonia, Basil ited revenues have forced the govern- markets will be fostered through pro- Zavoico, revealed on May 23 that the ments to postpone public expenditures, viding advisory services, training, and country's new economic policy memo- even for basic maintenance. information technology to the securi- randum pays great attention to the pub- ties and capital markets commission lic sector debt, which could grow to as *Armenia's economy grew 5.4 percent and through support for key regulatory much as 4 percent of Estonia's GDP. in 1994 and 6.9 percent in 1995. Cur- programs. The loan will also provide The main problem is the lack of fiscal rently, about 3,000 small enterprises and software and telecommnmunications policy coordination between the central 500 medium- to large-scale enterprises equipment for secondary market trad- and local governments. Zavoico added have been privatized. In 1995, 52 per- ing services and for the finance minis- that the pressure by farmers to intro- cent of GDP was produced by the pri- try computers. Poland's local commu- duce high customs tariffs should be re- vate sector; this figure is likelyto riseto nities will receive a $50 million credit sisted since similartariffs in Latviaand more thani 75 percent by the end of line from the World Bank to develop Lithuania proved ineffective. 1996. Armenia expects to maintain local infrastructure. 28 May-June 1996 Transition SupportingKyrgyzTelecommunica- cial stabilization has largely been cal services, and improve small farm- tions achieved; inflation is the lowest among ers' access to commercial credits. Ac- al Ithe former Soviet countries; interest cordingtothe IDA, agriculture accounts The World Bank and the EBRD will rates are down to moderate levels; the for some 20 percent of Macedonia's participate in financing a major tele- exchange rate is free and stable; ex- economy, while some 70 percent of communications project in Kyrgyzstan. ports have increased, particularlytonon- farmland remains divided into small The World Bank has agreed to provide CIS countries; the production decline private plots. The loan is repayable over athirty-five-year, $18 million creditto has been halted; and notable progress thirty-five years, with a ten-year grace the government with a ten-year grace has been achieved in trade liberaliza- period. period, to be used to open a fifteen-year tion and privatization. Atthe same time, credit line for the state-owned only limited success has been achieved Support to Tajikistan Kyrygztelekom company. The EBRD in enforcing budget constraints on en- has agreed to provide a direct, govern- terprises and in privatizing agriculture. On May 16 IDA approved $5 mil l ion for ment-guaranteed $9.4 million loan to the The Moldovan governmenf s objectives Tajikistanto supportan institution-build- company,alongwitha$1.5milliongrant for 1996-98, agreed with the IMF, in- ing technical assistance project. The for personnel retraining. Kyrgyztelekom clude sustaining 4 to 5 percent annual goal is to shore up the State Property has saidthatthe companywill invest $5 GDP growth, lowering annual inflation Committee,the agriculture ministry, and million of its own money in the project. to 6 percentandthebudgetdeficitto3.4 the financial sector. The World Bank is In May the International Development percent of GDP, substantially improv- ready to lend the country more to pro- Associationprovidedthefollowingcred- ing collection of taxes and other rev- mote privatization,agricultural reforms, its to Kyrgyzstan: enue, reducing energy debts (incurred and poverty rel ief, Michael Mi l ls ofthe to Russia), completing privatization Bank's Dushanbe office said. Earlier, *$20 million to rehabilitate the thermal with external cash auctions, and estab- on May 8, the IMF approved a $22 powerplantand heatingsystem in Bishek, lishing a market-based agricultural sec- million standby cred'it to help upgrade transmission and distribution tor complete with trading in agricul- Tajikistan's economic program. Its goals facilitiesinthenorthofthecountry,and turalland. include cutting inflation from 1,200 help finance oil exploration; $18.5 mil- percent in 1995 to 180 percent in 1996; lion to assist health sector reform; and Loan to Macedonia's Agriculture curbing economic decline from last $11.6milliontoincreasesheepandwool year's 12.5 percent to 7.0 percent; and production. The World Bank's International Devel- carrying out structural reforms such as opmentAssociation (IDA)approvedon land reform, further privatization, and Praises and Credits to Moldova May 20 a virtually interest-free loan of enactment of legislation enabling the around $7.9 in illion to Macedonia. The national bank to exercise full and hmde- The World Bank on May 8 announiced loan is intended to help fund pilot pendent control over monetary and its approval of a $10 million loan to projects in agriculture, support privati- credit policies. support Moldova's efforts to boost ag- zation of veterinary and epidemiologi- ricultural exports and increase farmers' incomes. Anothier$ 10 million World Bank Premature Vendetta loan, approved on May 23, will help create better energy management and reduce energy imports, which currently consume 41 percent of the country's total earnings. Another goal is to coiLn- mercialize Moldova's gas and electric- ity sales and to make the state-owned companies financially viable. The IMF has approved credits worth $200 mil- lion to support the Moldovani government's reform programs for "It's your wife on the phone, Mr. Swinburn. She made a mistake with 1996-98. Reviewing the government's the numbers. You've only won $10.00." performance, the IMF found that finan- F e 9From the WorldPress Review. Volume 7, Number 5-6 2 9 IThe World Bank/l'RDT[l Conference Diary Economic Transformation--In- Sponsored by the Hungarianl Real Es- 43rd International Atlantic Eco- equality and Social Sector Reform tate Association, the Central European nomic Conference September 19-20, 1996 Washingtoni, Real Estate Association network March 12-17, 1997, London, United D.C., United States (CEREAN), and the Eastern European Kingdom Real Property Foundation (EERPF). Workshop organized by the National with funding from the United States Organized by the Atlantic Economic Research Cou1cil, Coin iniss ioIn on Be- Agency for International Development. Society. Information: International havioral and Social Sciences and Edu- Information: EERPF, Suite 550, 700 Conference, Campus Box 1101, South- cation. Information: Lee Walker, 2101 Eleventh Street, N. W., Washington, ern Illinois University ofEdwardsville, Constitution Avenue. N. W. HA 166, D.C. 20001. United States, tel. (202) Edwards-ville, Illinois, 62026-1101, Washington, D.C. 20418, UnitedStates, 383-1296, fax (202) 383-7549. United States, tel. (618) 692-2291,fax tel. (202) 334-2300,fax (202) 334-2201. (618) 692-3400, (Email:jvirgo@eniac. Intercultural Dimentions of Labor ac. siue.edu). Russian Economy in Transition and Human Resource Development September 23-24, 1996, Helsinki, Fin- December 2-4, 1996, Vienna, Austria TheRuleofLaw,Foreignlnvestment, land and Sustainable Development in Cen- Organized by the Research Institute for tral Asia Organized by the Working Group on European Affairs, Vienna University March 1997, New York, United States Techilology, Economy and Society of of Economics and Business Adminis- the Finn ish-Russiani Scientific-Techino- tratioii. Topics include: Transfer of man- Organized by the New York University logical Commission. Information: Dr. agement techniques; Intercultural hu- School of Law. Topics include: Soviet, Pentti Vartia, ManagingDirector, The man and organizational development Islamic, and Western influences on le- Research Institute of the Finnish in the East-West context. Information: gal development in Central Asia; Role Econonmy. tel. (3580) 609-9900, fax Claudia Feichtinger, Forschungs- of foreign investment and the rule of (3580) 601-753, or Mr. VesaKorhonen, institut fuer Europa-fragen, Wirt- law in addressingthe region's environi- Bank of Finland, Unit for Eastern Eu- schaftsuniversitaet Wien, Althanstr. 39- mental problems; Evaluation offoreign ropean Econom?ies, tel. (3580) 183- 45, A-1090, Vienna, Austria, tel. (431) investment in the region. 2834, fax (3580) 183-2294. 3133-65084, fax (431) 3133-6758, Information: (Email: ser8086@is4. (Enmail. feichtin@fgr.wu-wien.ac.at). nyu.edu) or (mgt4598@is4.nyu.edu). Values and Rules forActions in Man- agement and Economic Policy The Fourth Annual Conference on Social and Economic Problems of October 2-4, 1996, Prague, Czech Re- Marketing Strategies for Central and Coal Regions during Transition to pLiblic Eastern Europe Market December 4-6, 1996, Vienna, Austria September 23-25, 1997, Donetsk, Organized bythie Research Institute for Ukraine European Affairs, VieninaUniiversityof Organized by the Institute for Foreign Economics and Business Admninistra- Trade, Vienna University of Economn- Organized by the Institute of lidustrial tion. Inform7ation: Claudia Feichtinger, ics and Business Administration, and Economics, National Academy of Sci- ForschungsinstitutfuerEuropa-fragen, Kellstadt Center for Marketing Analy- ences of Ukraine. Wirtschaftsuniversitaet Wien, sis and Planninig, De Paul University, Information: Mikhail Popov, Institute Althanstr. 39-45, A-1090, Vienna, Aus- Chicago. Information: InstituteforFor- ofIndustrialEconomics, 77 Universitet- tria, tel. (431) 3133-65084, fax (431) eign Trade, Vienna University of Eco- skaya Str., Donetsk, 340048, Ukraine, 3133-6758, (Email. feichtin(fgr.wu- nomics and Business Administration, tel. (380662) 550-261, fax (380622) wvien.ac. at). Althanstr.39-45,A-1090, Vienna, Aus- 558-147. (Email: popov@iie.dipt. tria, tel. (431) 3133-65084, fax (431) donetsk.ua). Third Annual Conference of Central 3133-6758, (Email. jeichtin@,fgr.wu- European Real Estate Associations wien.ac.at). October 3-5, 1996, Budapest, Hungary 30 May-June 1996 Transition New Books and Working Papers The PRDTE unit of the World Bank regrets that it is unable to supply the publications listed World Bank Publications view that fiscal decentralization con- ers, in order to keep them cooperative tributespositivelytoprovincialorlocal and possibly to repel outsider interest. To receive ordering and price infor- economic growth. To order: Cynthia (Workers own a substantial chunk of mation for publications of the World Bernardo, Room NIO-053, tel. (202) shares, together with the managers.) Bank, write: World Bank, P.O. Box 473-7699, fax (202) 522-1154, Manyfirmsstilloperateundersoftbud- 7247-8619, Philadelphia, PA 19170, (Internet: prdpe@ worldbank.org). get constraints, so they are under less United States, tel. (202) 473-1155, pressure to reduce employment levels fax (202) 676-0581; or visit the World Jyotsna Jalan and Martin Ravallion, than enterprises in Central and Eastern Bank bookstores, in the United States, Transient Poverty in Rural China, Europe. Ifthe subsidy to insider-domi- 701-18th Street, N.W., Washington, WP no. 1616, June 1996,35 p. To or- natedfirmsdisappears,thosefirmswill D.C. or in France, 66 avenue d'Iena, der: Patricia Sader, Room N8-040, scale down employment and the provi- 75116, Paris, (Email: books@world tel. (202) 473-3902, fax (202) 522- sion of benefits. bank.org)(Internet: http.//www.world 1153, (nternet: psader@world bank. To order: Latifah Alsegaf Room M7- bank.org). org). 036, tel. (202) 473-6442, fax (202) 676-0965, (Internet: lalsegaf@world Policy Research Working Papers Simon Commander anTd- Andrei bank.org). Tolstopiatenko, Why Is Unemploy- F. Desmond McCarthy and Kangbin ment Low in the Former Soviet Country Studies Zheng, Population Aging and Pen- Union?EnterpriseRestructuringand sions Systems-Reform Options for the Structure of Compensation, WP Hungary: Poverty and Social Trans- China, Working Paper (WP) no. 1607, no. 1617, June 1996, 20 p. fers, World Bank Country Study, 1996, May 1996,47 p. To order: MilaDivino, 106 p. Room N6-056, tel. (202) 473-3739,fax In the former Soviet Union (FSU}- (202) 522-1157, (Internet: especially Russia-unemployment has The Chinese Economy: Fighting mdivino@,world bank. org). remained low and employment in state Inflation, DeepeningReforms, World andprivatizedfirmshasremainedhigh, Bank Country Study, 1996, 112 p. Tao Zhang and Heng-fu Zou, Fiscal while at the same time the informal or Decentralization, Public Spending, unofficial economy has grown swiftly. Sustaining rapid growth with low infla- and Economic Growth in China, WP Authors trace this development to a tion in Chinawill requirecontinued mar- no. 1608, May 1996, 46 p. combination of factors. Firms have re- ket reforms and a reorientation of gov- mained the primary site for social pro- ernment involvement in the economy. The allocation of fiscal revenue and tection; subsidiesforsocial benefits have Chinalowered inflation in 1995 tobelow expenditures between central and local effectively been a subsidy to employ- 15 percentwhile keeping growth above governments in China has affected eco- ment and have promoted the worker's 10 percent, and at the same time further nomic growth since reforms began in continuing attachment to these firms. improved its balance ofpayments, with the late 1970s. Authors claim that fiscal Firms, instead of laying workers off, the current account surplus expanding decentralization has lowered provincial significantly cut hours and wages, some- to 2 percent of GDP, inflows of foreign economic growth over the past fifteen times through wage arrears. The non- direct investment reaching $38 billion, years. The central government is con- monetary share of worker compensa- and foreign exchange reserves exceed- stantly constrained by I imited resources tion is significant and has grown during ing$73 billion. forpublic investment in highways, rail- the transition. Workers, in turn, keep ways, power stations, telecommunica- their jobs but try to earn additional in- For 1996, China is in a good position to tions, and energy, which are national come througl moonlighting or getting keep inflation below a target rate ofO 0 priorities and nationwide externalities. involved in the informal economy. percent and growth at 8 to 9 percent. These key projects may have more sig- But the government will need to place nificant impact on growth across prov- Despite privatization, managers have greater reliance on market forces, with inces than their counterparts in each preserved their discretion in decision- an emphasis on reform of state enter- province. This argumiientchallengesthe making, and are slowto fire theirwork- prises, the financial sector, and pubtic Volume 7. Number 5-6 31 The World Bank/PRDTE finance. In these key areas China should: last year. The IFC I nvestable Compos- Adjustment, IMF Occasional Paper Continue to diversify ownership of ite Index fell 10.3 percent last year as no. 137, May 1996,70 p. state enterprises and reduce subsidies; investors reevaluated the outlook in the promote competition to encourage wake of Mexico's peso crisis. greater efficiency by bringingdown trade and investmeni t barriers; and encourage Bartlomiej Kaminski, Zhen Kun Wang, Economist Intelligence Unit (EUI) privatization of smaller enterprises. and L. Alan Winters, Foreign Trade in publications * Transform state banks into genuine the Transition: The International commercial banks; and strengthen regu- Environment and Domestic Policy, To order: The Economist Intelligence lationofnonbankfinancial institutions. Studies of Economies in Transforma- Unit, 15 Regent Street, London SW1Y - Increase revenues by 6 percent of tion no. 20, 1996, 72 p. 4LR, United Kingdom, tel. (44171) gross domestic product to meet public 830-1000, fax (44171) 499-9767, finance requirements and balance the Constantine Michalopoulos and David New York, Economist Building, 11] budget,througlhacombinationofcontin- Tarr, Trade Performance and Policy West 5 7th Street, New York, NYI 001 9, ued economic growth, a broader tax in the New Independent States, Di- United States, tel. (212)554-0600, fax base, and more rigorous tax collection. rections in Development, 1996, 30 p. (212)586-1181. For CountryForecast, Regional Overview: Jan Frost, tel. Technical Papers From Vision to Action in the Rural (44171) 830-1007, fax (44171) 830- Sector, 1996, 65 p. 1023. Domiique Panniier (ed.), Corporate Governance of Public Enterprises Thevolumenprovidestheplainningfrarne- Economies in Transition: Eastern in Transitional Economies, World work for future World Bank programs Europe and the Former Soviet Bank Technical Paper no. 323, 1996, in rural development and the basis for Union-Country Forecast, Regional 168 p. detailed implementation planning, skill Overview, First Quarter, 1996, 35 p. gap analysis, and budgeting. The volume draws lessons from the The report forecasts foreign direct in- contrasting experience of five transi- World Debt Tables: External Fi- vestment flows into the region at about tion economies (Hungary, Poland, Ro- nance for Developing Countries [ex- $20 billion a year in 1996-2000, or al- mania, Russia, and Ukraine) in corpo- tracts], 1996, 17 p. most $100 billion in total. Poland and rate governance-that is, management Russiaare expected to becomethe main and oversiglht-of private enterprises. destinations, with Hungary falling to It also contains relevant experience of fourth place. Foreign direct investment state asset management in Austria and IMF Occasional Papers into Eastern Europe (in US$ billion): New Zealand; railways in Canada and Germany; energy, coal, and telecom- To order IMFpublications: IMF Pub- 1994 1995 1990- 1996- munications in France; and steel in lication Services, 700-19th Street, 1995 2000 Britain. N.W., Washington, D.C. 20431, Hulngadry 1 4.4 1 2 13.0 United States, tel. (202) 623-7430, Czech Rep. 0.9 2.5 5.7 15.5 Otlher World Bank Publications fax (202) 623-7201. Slovakia 0.2 0.2 0.8 2.2 Emerging Stock Markets Factbook John R. Dodsworth, Erich Spitiller, Slovenia 0.1 0.2 0.5 3.0 1996, 1996, 300 p. MichaelBraulke,KeonHyokLee,Ken- Balaicns 0.4 0.4 1.3 1.9 neth Miranda, Christian Mulder, Russia 1.0 2.0 4.4 27.0 Investors in emerging markets fared Hisanobu Shishido, and Krishna Other CIS 0.7 0.9 2.9 6.4 poorly in 1995, but that did not stop the Srinivasan, VietNam: Transition to a Eastern Europe 4.8 10.5 27.2 63.9 stock markets themselves from con- Market Economy, IMF Occasional Eastern Europe tinuing to develop and expand. New Paper no. 135, March 1996, 58 p. and FSU 7.0 13.8 35.8 99.2 stock markets opened, and the number of listedcompaniesgrewbyl4percent, Ichiro Otani and Chi Do Pham (eds.), Michael Bradshaw,Russia'sRegions: an increase the IFC termed "impres- TheLaoPeople'sDemocraticRepub- A Business Analysis, 1996, 143 p. sive" giventhedrop in manyshareprices lic: Systemic Transformation and The report describes Russia's business 32 May-June 1996 Transition landscape. Aimed at Western compa- Richard Rose, New Democracies Ba- in the Privatization Process, 1996, nies planning or developing their re- rometer IV: A 10-Nation Survey, 320 p. gional operations (as a source for raw (SPP) no. 262, 1996. materials imports, markets for their JerzyJedlicki, WhatKindofCiviliza- products, and/or production sites), the tion the Poles Need, 1996, 352 p. report shows regional variations in size, wealth, and importance to the outside Central European University Press Ownership, Corporate Governance world. publications and Enterprise Performance in Cen- tral Europe [volume 3], 1996, 320 p. To order: CEUPress, Nador u. 9, H-1051 Budapest, Hungary, tel. (36I) Nigel Swain, Rural Transformation CentreforEconomicPolicyResearch 327-5000,fax (361) 327-5001. in Central Europe, January 1996, (CEPR) publications 272 p. Roman Frydman, Cheryl W. Gray, and To order: CEPR, 25-28 OldBurlington Andrzej Rapaczynski (eds. and con- Sharon L. Wolchik and Volodymyr A. Street, London WlXlLB, UnitedKing- tributors), Corporate Governance in Zviglyanich (eds.), Building a State: dom, tel. (44171) 734-9110, fax (441 71) Central Europe and Russia: Banks, Ukraine in a Post-Soviet World, 734-8760; and in North Americafrom Funds, and Foreign Investors [vol- 1996, 304 p. Customer Service, Brookings Institu- ume 1], Insiders and the State [vol- tion, tel. (800) 275-1447 or (202) 797- ume2], WorldBank/CEU Privatization 6258, fax (202) 797-6004. Project publication, Central Europe University Press, Budapest/London/ CERGE-EI Working Papers David M. G. Newbery (ed.), Tax and New York, 1996, 341 p. and 310 p. Benefit Reform in Central and East- To order: Lauree H. Graham, CERGE- ern Europe, September 1995. Written by distinguished economists, El Working Papers Coordinator, Uni- legal experts, and sociologists, these versity of Pittsburgh, Department of two volumes present an overview of Economics, 4M03 Forbes Quad., Pitts- emerging corporate governance insti- burgh, PA 15260, United States, fax Centre for the Study of Public Policy tutions in the transition economies of (412) 648-1793. (CSPP) publications Central Europe and Russia. The stud ies in the first volume concentrate on the E. Kocenda, Volatility of a Seemingly To order: CSPP Publications, Uni- creation of new governance systems, Fixed Exchange Rate, Working Paper versity of Strathclyde, Livingstone covering such financial institutions as (WP) no. 88, November 1995. Tower, 26 Richmond Street, Glasgow banks, private pension funds, and in- GI IXH, Scotland, tel. (44141) 552- vestment funds, as well as the role of J. Mercenier and N. Schmitt, On Sunk 4400, fax (44141) 552-4711, foreign investors. Studies in the second Costs and Trade Liberalization in (Internet: http://www.strath.ac. uk:80/ volume focus on the more spontaneous Applied General Equilibrium, WP no. Departments/CSPP/). development of existing institutions and 89, December 1995. managementpractices. They discuss the Yuri Levada, Democratic Disorder possible evolution of various owner- K. Zigic, Intellectual PropertyRights and Russian Public Opinion: Trends ship forms, such as employee, mana- and North-South Trade: The Role of in VCIOM Surveys 1991-95, Studies gerial, interfirm, and residual state Spillovers,WP no. 92, December1995. in Public Policy (SPP) no. 255, 1995. ownership. Peter Mair, What Is Different about David Dyker (ed.), Science and Tech- Postcommunist Party Systems?, SPP nology Policies for Transition WIIW Publications, Vienna no.259,1996. Economies, 1996,272 p. To order: The Vienna Institutefor Com- RichardRoseandStephenWlhite,Boris John S. Earle, Andrzej Rapaczynski, parative Economic Studies (WIIW), Yeltsin's ChangingPopular Support, and Joel Turkewitz, Human Resources Oppolzergasse 6, A- O101 Vienna, Aus- SPP no. 261, 1996. Volume 7, Number 5-6 3 3 TIhe World Bank/PRDTE tria, tel. (431) 533-6610,fax (431) 533- CenterforEuropeanPolicy.Studies no, 6610 50. 100, March 1996,22 p. To order. Cen- Other Publications tre for European Policy Studies, Place Vladimir Gligorov, Fears and Pas- du Congres 1, B-1000 Brussels, Bel- sions: The Prospects for Former Yu- Jose F. Alonso, The Foreign Assis- gium, tel. (322) 229-3911, fax (322) goslavia, WIIW no. 162, February tanceRequirementsofaDemocratic 219-4151. 1996, 24 p. Cuba: A First Approximation, Dis- cussion Paper no. 1, La Sociedad Christopher Findlay, Andrew Watson, Leon Podkaminerand others, Continu- Economica, London, 1994. To order: and Harry X. Wu (eds.), Rural Enter- ing Improvements in Central and La Sociedad Economica, 31 rue de prises in China, Unibooks, Australia, Eastern Europe: Russia and Ukraine Bellechasse. 75007 Paris, France, tel. 1996. To order: The University of Have Not Yet Turned the Corner, (331) 4555-4370,fax (331) 4555-4392. Adelaide, Department of Economics, WIIW no. 225, February 1996, 109 p. Chinese Economy Research Unit, Peter Biegelbauer, Realizing Adelaide, Australia 5005, tel. (08) Hungary's Potential: The Country's 303-4460, fax (08) 303-4394. Industrial R&D System in Transi- Ashgate Publishing Limited publi- tion, East European Series of the Insti- The Economic Survey of Europe cations tute for Advanced Studies, Vienna, 1995/1996, UN/ECE, New York and Austria, May 1996,28 p. Geneva, May 1996,191 p. To order: Ashgate Publishing Lim- ited, Gower House, Croft Road, Sincethe beginningofthetransition from In 1995 economic developments in the Aldershot, Hampshire, GUl1 3HR, realsocialismtocapitalismtheHungar- transition economies showed increas- United Kingdom, tel. (44171) 1252- ian innovation system has been going ing divergence: while many East Euro- 331-551, fax (441 71) 1252-317-446. through a number of changes. The tur- pean countries achieved rapid growth, bulence the industrial research and de- economic decline continued in Russia Richard M. Bird, Robert D. Ebel, and velopment (R&D) system has been and otherCIS countries. In 1996 growth ChristineJ.Wallich,Decentralization facingisevenrougherthanthechanges in the Czech Republic, Poland, and of the Socialist State, March 1996, the rest of the innovation system has to Slovakiawill likely remain in the 5 to 6 464 p. put up with. Despite a number of revi- percent range. Growth is expected to sionsofgovernanceandfundingmecha- pick up in the countries of the former Daniel S. Fogel, Firm Behavior in nisms as well as a more realistic ap- Yugoslavia.Inadditiontoreformuncer- Emerging Market Economies: proach of government to short- and tainties, Eastern Europe's dependence Cases from the Private and Public medium-term goals for R&D in Hun- on West European import demand also Sectors in Central and Eastern Eu- gary, industrial R&D still is neglected. affects its prospects for growth. In rope, January 1996, 204 p. Foran explanation ofthis factthe inter- Russiapositive GDPgrowth thisyear is est group structures ofthe R&D system far from certain. M. Peter van der Hoek and Hans van areanalyzed. Theresultsoftheanalysis To order: United Nations Economic Miltenburg, Conditions for Direct imply a solution for the problem. Fi- Commission for Europe (UN/ECE), Foreign Investments in the Baltic nally, a few measures are suggested, Information Office, CH-1211, Geneva States, April 1996, 200 p. which should helptorealize Hungary's 10, Switzerland, tel. (4122) 917-2893, economic potential. fax (4122) 917-0036. Raymond J. Struyk, Economic Re- To order: Institutefor Advanced Stud- structuring in the Former Soviet ies (IAS), Stumpergasse 56, A-1060 D. Gale Johnson (ed.), Long-term Bloc, May 1996, 350 p. Vienna, Austria, tel. (1) 59991, fax Agricultural Policies for Central (1) 597-0635. Europe, International Center for Eco- Mikl6s Szab6-Pelsozi, Fifty Years af- nomic Growth (ICEG), United States, ter Bretton Woods: The New Chal- Paul Brenton, Daniel Gros, and Guy 1996, 206 p. lenge of East-West Partnership for Vandille, OutputDecline and Recov- To order: ICEG, 720 Market Street, Economic Progress, March 1996, ery in the Transition Economies: San Francisco, California 94102, 250 p. Causes and Social Consequences, UnitedStates. 34 May-June 1996 Transition David Lane (ed., contributor), Russia To order: Jagiellonian University, Park, Maryland20742, tel. (301) 405- in Transition: Politics, Privatization Krakow, Ulica Krupnicza 2-4, 31-123 4771, fax (301) 405-4773. and Inequality, Longman, London/ Krakow, Poland New York, 1995, 237 p. Eastern Europe Newsletter and Rus- Richard Pomfret, Asian Economies in sia Briefing. Both publications assess Itisthe poor,thosewith lower levels of Transition: Reforming Centrally political risks in Central and Eastern education, those with inferior qualifi- Planned Economies, Edward Elgar Europe, the Balkans, and Russia. To cations, those living in the countryside, Publishing, United Kingdom, February order: 70 Bassein Park Road, London those whose vision of society empha- 1996, 176 p. W12 9RZ, United Kingdom, tel. (0818) sizes public virtues rather than private To order: Gower Asia Pacific, 43 743-2829,fax (0818) 743-8637, (Email: gains, who have lost out in the present Albert Road, Avalon, NSW 2107, 100316.1530@compuserve. corn). stage of transition. The articulation of Australia, tel. (02) 9918-2325, fax theinterestofthelosers,notonlythrough (02) 9973-1223. Management Development in the institutions of politics but also by Progress, a staff publication of the local political interests, may yet frus- Richard Pomfret, The Economies of ManagementDevelopmentandGover- trate and possibly reverse the drive for Central Asia, Princeton University nance Division, UNDP. Volume 1, num- marketization,theeditorpointsoutinhis Press, United States, 1996, 200 p. ber 1, February 1996 issue includes: introduction. To order: Princeton University Press, "Public Management and Civic Society To order: Longman Group UK Lim- California/Princeton Fulfillment Ser- in Georgia-International Workshop on ited, Longman House, Burnt Mill, vices Inc., 1445 Lower Ferry Road, ApproachestoParticipatoryLocalGov- Harlow, Essex CM20 2JE, United Ewing, New Jersey 08618, United ernance." To order: Kendra Collins, tel. Kingdom. States, tel. (800) 777-4726, fax (800) (212) 906-3654, fax (212) 906-6471. 999-1958. Francoise Lemoine, Trade Policy and Political Risk Services, a catalogue that Trade Patterns during Transition: WolfgangQuaisser,RichardWoodward, draws together newsletters, journals, A Comparison between China and and Barbara Blaszczyk (eds.), Privati- reports, and services of four leading the CEECs, Centre d 'Etudes zation in Poland and East Germany: international business publishers to as- Prospectives et d'Informations Inter- A Comparison [volumes I and 2], sist in conducting business. To order: nationales (CEPII), France, February Osteuropa-Institut Muchen, Muchen, PoliticalRiskServices, 632OFlyRoad, 1996, 40 p. September 1995, 325 p. and 581 p. Suite 102, P.O. Box 248, East Svra- To order: CEPII, 9Rue Georges Pitard, To order: Osteuropa-Institut Miichen, cuse, New York 13057-0248, United 7574OParisCedex.15, France, tel. (331) Scheinerstrabe 11, D-81679 Miuchen, States, tel. (315) 431-0511, fax (315) 5368-5500,fax (331) 5368-5503. tel. (089) 9983-960, fax (089) 9810- 431-0200). 110. Thomas P. Lyons, The Economic Jan Svejnar, Oleh Havrylyshyn, and The CEPII Newsletter, a free publi- Geography of Fujian: A Sou rcebook Sergei K. Dubinin, Economic Trans- cation producedbytheCentred'Etudes [volume 1], Cornell East Asia Series formation: The Tasks Still Ahead- Prospectives et d'Informations Inter- no. 82, November 1995, 181 p. A Symposium, Per Jacobsson Foun- nationales. To order: CEPII, 9 Rue To order: East Asia Program, 140 dation Washington, DC UnitedStates GeorgesPitard, 75740ParisCedex15, Uris Hall, Cornell University, Ithaca, 1995 77 ' France,tel.(331)4842-6464,fax(331) New York 14853, United States, tel. 9 P 5368-5503, (Email: Postmaster@ (607) 255-6222, fax (607) 255-1388. * cepii.fr). Marek M. Michalski, Regulation and Newsletters The Media Guide to the Former So- Competition in Telecommunications: . . vietUnion and Baltic States, published Compestitutionain Telecommunicions: CollegeParklnternational, published every six months by CIS Information miesninTransition [paper writtenfor bythe Office of International Affairs at Publishing. To order: CIS Information asemiesr in Transition[pers wC ittn for the University of Maryland at College Publishing, 11-13CharterhouseBuild- a seminar on "Fairness in Competition: Pr.ig,Lno CMA,U'ie ig The Role of Regulators," sponsored by Pak ings, London ECI M7AN, United King- USAIDT Bl do egt Hulat rs, Noredb To order. Office of International Af- dom, tel. (44171) 490-3774,fax (44171) ueSA7D, B p, ny o fairs, 0124 Taliaferro Hall, College 336-0681. Volume 7, Number 5-6 3 5 The World Bank/PRDTE Bibliography of Selected Articles Postsocialist Economies Markets (United Kingdom) 16(10):6, May Property in Murmansk. Polar Geogra- 10, 1996. phy andGeology(United States) 19(2):88- Foreign InvestmentSurvey: ThinkingGlo- 106, 1996. bal. BusinessCentral Europe(United King- Meyer, K. E. Direct Foreign Investment in dom)April 1996,p. 39. Eastern Europe: TheRoleofLaborCosts. Aukutsionek, S. Wasteful Production in Lotspeich,R.StrategiesforEnvironmental Comparative Economic Studies (United Russian Industry. Russian Economic Ba- Policy in Transition Economies: Com- States)37(4):69-88,1995. rometer(Russia)4(4):3-13,1995. mand versus Market Instruments. Com- parative Economic Studies (United States) Michalski, M. Bankingon Telecommunica- Avilova,A., A. Chepurenko, and V. Pripisnov. 37(4): 125-46, 1995. tions for Growth: The Case of Poland. Small Entrepreneurship and the State. Competitive Banking (Poland) 1995, pp. Russian Economic Barometer (Russia) Pleskovic, B. P. Introduction tothe Special 177-84. 4(4): 14-18,1995. Issue on Regional Science and Develop- ment. International Regional Science Re- OLeary, C. J. Performance Indicators A Can Democracy Save Russian Reforms? view (International) 19(1-2): 1-3, 1996. ManagementTool for Active Labor Pro- IRIS Update(United States) 6(1): 1-2,1996. grams in Hungary and Poland. Interna- Sutela,P. Economies underSocialism:The tional Labour Review (United States) Fondale,G.LegaciesofTerritorialReorga- RussianCase.ReviewofEconomiesinTran- 134(6):729-51,1995. nization for Indigenous Land Claims in sition (Finland), 1995, pp.5-22. Northern Russia. Polar Geography and Schmidt, F. Albania's Tradition of Prag- Geology(United States) 19(1): 1-21,1996. StateSocialism versus RevolutionarySo- matism. OMRI Daily Digest Transition cialism. TheFreeMarket(Lithuania)5:1-2, (Czech Republic) 2(7):33-35, 63, April FromCrisistoEconomicStabilizationand i995. 1996. Subsequent Growth. ProblemsofEconomic Transition (United States) 38(6):7-60, Octo- Toma, L. Goingto Market: A Commentary. Tedstrom, J. E Ukraine: A Crash Coursein ber 1995. Technological Forecasting and Social Economic Transition. Comparative Eco- Change (United States) 51(1), January nomic Studies (United States) 37(4):49-68, Krueger, G. Transition Strategies of Former 1996. 1 995. State-owned Enterprises in Russia. Com- narative Economic Studies (United States) Central and Eastern Europe The Improvement in the External Position 37(4):89-1 10,1995. ofCentraland Eastern European Countries. Beckmann, V., and K. Hagedorn. European Economy (Germany), Supple- Leontjeva, E. Taxes and Lithuania's Decollectivization Policies and Structural ment A, no. 2, February 1996, p. 1. Lacklustre Economy-Where to Search Changes in Agriculture in East Germany. forRemedies? TheFree Market(Lithuania) MOCT-MOST(Italy) 5(4): 133-52,1995. Chia 2(7): 1-7,1996. Brezinski, H., and M. Fritsch. Transforma- Cassel, D., and C. Herrmann-Pillath (eds.) Minniti, M. MembershipHas Its Privileges: tion: The ShockingGerman Way. MOCT- The East, the West, and China's Growth Old and New Mafla Organizations. Com- MOST(Italy) 5(4): 1-25,1995. Challenge and Response. Nomos parative Economic Studies (United States) Verlagsgesellschaft-Baden-Baden (Ger- 37(4):31-48,1995. Brucker, H. Selling Eastern Germany: On many), 1996, pp. 249-79. the Economic Rationale of the . Treuh andanstalt's Privatization and Re- Maurer-Fazio, M. Labor Reform in China: Politics, Economics and the Direction of structuringdStrategy. MOCT-MOST(ltaly) Crossingthe River by Feeling the Stones. Russian Reform-And Then There Was 5(4)s55 77C 1995. Comparative Economic Studies (United None. East/West Letter (United States) 5*4)55-77,1995. 'States) 37(4): 111-24, 1995. 4(6): 1,5, December-January 1995-96. Croatia: A Financial Times Survey. Finan- cial Times (United Kingdom), May30, 1996. CIS and the Baltics Privatization: Moscow's Changing Role cial Times (United Kingdom), May 30,1996. in Privatized Former State Enterprises. CzechRepublic-DoestheCountryNeed Andreyev, 0. A., M. Olsson, and A. 1. Russian Far East Update (United States) the EBRD Any Longer? East European Vinogradov. Privatization of Municipal 6(5):12, May 1996. TRANSITION is a regular publication of the World Bank's Transition Economies Division, Policy Research Department. The findings, views, and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations. Nor do any ofthe interpretations or conclusions necessarily represent official policy ofthe World Bank or of its Executive Directors or the countries they represent. Richard Hirschler is the editor and production manager, Room N9-069, tel. (202) 473-6982, Email: RHirschler@Worldbank.org. Jennifer Prochnow-Walker is the research assistant, desktop publisher, and producer of graphs and figures. If you wish to receive Transition, send name and address to Jennifer Prochnow-Walker, Room N9- 100, World Bank, 1818 H Street, NW, Washington, D.C.20433,orcall (202) 473-7466, orfax (202) 522- 11152 or Email JPROCHNOWWALKER@Worldbank.org. Information on upcoming conferences on transforming economies, indication of subjects of special interest to our readers, letters to the editor, and any other reader contributions are appreciated. 36 May-June 1996