http://www.worldbank.orgfhtml/prddr/trans/WEB/trans.htm                          I   8     8  I  o
THE NEWSLETTER ABOUT REFORMING -ECONOMIES
1RANSITION
Volume 9, Number 6        The World Bank in collaboration with The William Davidson Institute   December 1998
Development Based on Participation-A Strategy
for Transforming Societies
by Joseph E. Stiglitz
M        any development strategies  identical to more-developed countries,
have focused narrowly on eco-  except for this lack of capital and possi-    Announcement
nomics. But this focus on eco-  bly certain inefficiencies in resource al-
nomics has led to a confusion of means  location.
with ends: higher GDP is not an end in                                      We are pleased to announce that the
itself but a means to improved living stan-  The same fallacy pervaded the philoso-   World Bank's Transition newsletter
dards and a better society, one with less  phies of the 1970s and 1980s. The cen-   and the William Davidson Institute
poverty,betterhealth,andimprovededu-  tral role that government played in   at the University of Michigan Busi-
cation. Furthermore, past strategies have  planning and programming was seen as    ness School-the prominent think
confused cause with effect: to some ex-  part of the problem of development rather   tank specializing in research and ap-
tent, the changes in society that may be  than as part of the solution. This per-   plication of transition issues-have
called modernization are as much a  spective held that governments claimed    signedsa jointpublicabonagreement:
cause of the increases in GDP as a re-  too large a role for themselves, one for   Davidson is contributing both to the
suit. Development itself is a transforma-  which they were intrinsically unsuited.   publication  and to editorial content
tion of society, a societywide shift to new   The solution, then, was to rely heavily   for the enrichment of the newsletter.
ways of thinking that cannot be accom-  on markets and, in particular, elimination    Executive DirectorofWDl, Jan Svejnar,
plished through enclave-based growth in  of government-imposed distortions asso-   and Joseph Stiglitz, Senior Vice Presi-
a dualistic economy.                 ciated with protectionism, government   dent and Chief Economist of the
subsidies, and government ownership.   World Bank, are members of the edi-
Lessons of History                   In the 1980s, the focus shifted to mac-   toral board of Transition. This coop-
roeconomic problems, to "adjust-   eration marks further progress toward
Past strategies failed to give sufficient  ment" of fiscal imbalances and misguided    our goal of presenting Transition as a
prominence to this transformative role of  monetary policies. Given the macroeco-   global forum for ideas related to tran-
society. The development models popu-  nomic imbalances, it was impossible for   sition theory and practice-for re-
lar in the 1960s saw development as sim-  markets to function properly.     search institutes and universities, as
ply solving a complicated dynamic                                           well as businesses and policymakers.
problem, which would improve the effi-  All three of these development strategies    The William Davidson Institute
ciency of the allocation of resources, and  saw development as a technical prob-
lead to accumulation of capital (either  lem requiring technical solutions-bet-       _   _   _
through transfers from abroad or through  ter planning algorithms, better trade and
higher savings rates at home). Less-de-  pricing policies, better macroeconomic
veloped countries were portrayed as  frameworks. They did not reach deep           Ann Arbor Michigan
Development Research Group                                                                 The World Bank F



down into society, nor were they based  * Successful development efforts in the  stabilization, and privatization but
on a belief that a participatory approach  Unjted State,s as, well as many other  still did not grow. The technical so-
was necessary. The laws of economics  countries had involved an active role for  lutions wer6 evidently not enough.
were universal: demand and supply  govemment.                          An economy needs an institutional
curves and the fundamental theorems of                                 infrastructure. While the banks in East
welfare economics applied as well to  * Many societies in the decades before  Asia lacked adequate supervision, the
Africa and Asia as they did to Europe  active govemment involvement-or inter-  banks in Russia not only lacked that su-
and North America. Time and space, in  ference, as these doctrines would put  pervision, they did not even perform their
the view of these strategies, did not bind  it-failed to develop. Indeed, develop-  core function of providing capital to new
these scientific laws; therefore the tech-  ment was the exception around the  and growing enterprises. Russia turned
nical approach was the appropriate one.  world, not the rule.          ordinary economic laws on their head,
managing to reverse the usual tradeoffs
As remarkable as the narrow focus of  * Worse still, capitalist economies be-  between equity and efficiency. Moving
these approaches was their lack of his-  fore the era of greater government involve-  from inefficient central planning to decen-
toric context. They failed to recognize  mentwere characterized not only by high  tralized market mechanisms, shifting
that:                              levels of economic instability, but also  from inefficient state ownership to private
by widespread social and economic prob-  property, introducing the profit motive,
lems. Large groups, such as the aged  and similar reforms should have in-
and the unskilled, were often left out of  creased output, though perhaps at the
any progress, and left destitute in the  price of a slight increase in inequality.
Contents                    economic crashes that occurred with
such regularity.                   Instead, Russia achieved a huge in-
China                                                                 crease in inequality, at the same time
* Challenging Deflation 4          Defining Events                    that it managed to shrink the economy,
* Success of the Zones 6                                              by up to a third according to some esti-
* How to Do Business 8             Three events of the past quarter-century  mates. Living standards collapsed with
The Dark Side of Voucher           are beginning to shape views on devel-  GDP levels, as life spans became shorter
Privatization 10                  opment strategies:                  and health worsened. All too late, it was
recognized that without the right institu-
Czech Economy 12                   First, the collapse of the Soviet-style  tional infrastructure, the profit motive-
Reader's Forum: The Disaster with   socialist economies and the end of  combined with full capital market
Russia's Treasury Bonds 13        the Cold War. Some have focused on a  liberalization-could fail to provide incen-
single lesson that emerges-the ineffi-  tives for wealth creation and could in-
William Davidson Institute         cacy (and dangers) of a large govemment  stead spark a drive to strip assets and
* Information and Finances 15      role in the economy. From this, some  ship wealth abroad.
* Latest Research Findings 18     jump to the opposite conclusion: that re-
liance should be placed wholly on markets.  Third, the rapid growth of the coun-
DHL Report: CIS Customs 21         But there are two broader implications of  tries of East Asia, which showed that
the end of the Cold War: the ideological  a reduction of poverty, widespread
Hungary and Slovenia: FDI and For-   debates should be over, and there should  improvements in living standards,
eign Trade Compared 22             be agreement that while markets are at  and even a process of democratiza-
the center of the economy, govemments  tion could accompany successful de-
Milestones of Transition 26        must play an important role. The issue is  velopment. East Asian governments
one of balance, and where that balance  failed to follow many of the dictums of
World Bank/lMF Agenda 28          is may depend on the specific character-  the usual consensus early in their de-
istics of the country, the capacity of its  velopment. Rather than giving the
Conference Diary 31                government, and the institutional devel-  economy over to an untrammeled private
opment of its markets.             sector, for example, governments started
New Books and Working Papers  33                                       some highly productive steel mills, and,
Second, many countries that fol-  more generally they pursued industrial
Bibliography of Selected Articles 39   lowed the dictums of liberalization,  policies to promote particular sectors.
* TRANSITION, December 1998                                      © 1998 The World Bank/The William Davidson Institute



Governments intervened in trade, though  that needs to be strengthened, and they  * Openness to the outside world-es-
more to promote exports than to inhibit give voice to often-excluded members of  pecially through foreign direct investment
particular imports. And they regulated fi-  society, facilitating their participation. Our  and trade-brings with it the new knowl-
nancial markets, engaging in mild finan-  research shows that development projects  edge about production technologies and
cial restraint, lowering interest rates, and  with higherlevels of participation are in fact  effective institutions that is vital to the
increasing the profitability of banks and  more successful, probably in part because  development transformation. Note, how-
firms. They put heavy emphasis on edu-  those projects make fewer erroneous as-  ever, that openness to short-term capi-
cation and technology, to close the  sumptions about the needs and capabili-  tal brings with it no such ancillary
knowledge gap between them                   ties of beneficiaries.     benefits, but does carry considerable
and the more advanced coun-                                             risk-as the Asian crisis countries have
tries. While the impact of indi-              Given limits on resources-  discovered.
vidual policies remains a                    including the administrative
subject of dispute, the mix of               capacities of the Bank and  * Capacity-building-in the end, a suc-
policies clearly worked well.                of developing countries-we  cessful transformation must come from
need to identify areas where  within the country itself. To accomplish
Indeed, the present crisis                   the government's limited ac-  this, the country must have institutions
notwithstanding, it is clear                 tions can have large-scale ef-  and leadership to catalyze, absorb, and
that East Asian countries                    fects, and areas where lack  manage the process of change, and to
have succeeded in trans-                     of action can have disastrous  manage the changed society.
forming their societies over a span of  effects. Although the priorities will differ
several decades. Even with a few  from country to country, there are some  Many of these elements have begun al-
years of zero or even negative growth,  common elements:                ready to take shape. Within the World
their per capita GDPs at the turn of                                    Bank and the development community
the century will be a multiple of what  * Education is at the core of develop-  more broadly, there has been increas-
it was a half-century ago, and far  ment. Without it, a country cannot at-  ing attention in recent decades to issues
higher than those of countries that  tract and build modem industries, and  of health and education, and a move be-
have pursued alternative development  cannot adopt new growing technologies  yond measures of GDP to look at life
strategies. Moreover, poverty rates will as rapidly in the rural sector. But most  spans and literacy rates. We have rec-
be a fraction of what they were a half-  fundamentally, if development repre-  ognized the importance of economic
century ago, literacy will remain nearly  sents the transformation of society,  security, and stressed the creation of
universal, and health standards will  education is what enables people to  safety nets.
continue to be high.                learn to accept, and to help engender,
this transformation.                There has been a growing consensus
Keys to Success                                                         on the objective of democratic, equi-
* Infrastructure-particularly commu-  table, and sustainable development.
These defining events have led to a recog-  nications and transportation-is vital for  Here, I have tried to argue that the whole
nition that the old technical solutions are  the conduct of business in the modern  is greater than the sum of these parts,
sorely lacking. Policies that are imposed  world. Much of the infrastructure can be  and that successful development must
from outside may be grudgingly accepted  supplied privately, provided that the gov-  focus on the whole-the transformation
on a superficial basis, but will rarely be  ernment establishes the appropriate  of society.
implemented as intended. Development  legal and regulatory environment. Do-
cannot be just a matter of negotiations  ing so must be given high priority.  Based on the 1998 Prebisch Lecture
between a donor and the govemment. Ex-                                  by Joseph E. Stiglitz, Senior Vice
cessive conditionality of foreign donors  * Health is also vital: an unhealthy popu-  President and Chief Economist of the
reinforces traditional hierarchical relation-  lation cannot be a productive labor force.  World Bank. Mr. Stiglitz gave the lec-
ships, rather than involving large seg-  A basic standard of health should be  ture titled, 'Toward a New Paradigm for
ments of society in a discussion of  viewed as a fundamental human right.   Development: Strategies, Policies, and
change-and thereby catalyzing change                                    Processes, at UNCTAD in Geneva, on
in ways of thinking. Development must  * Knowledge enriches the human spirit,  October 19, 1998.
involve and support groups in civil society;  and, like education and health, leads to
these groups are part of the social capital  a more productive society.
© 1998 The World Bank/The William Davidson Institute                             TRANSITION, December 1998  U



Deflation: A New Challenge for China's Policymakers
by Chi Fulin
T        hrough its effective anti-inflation  redundant production capacities.  most, enterprises should be motivated
policy, China has staged a suc-  * Essential macroeconomic policy mea-  to invest. The root of insufficient effec-
cessful economic soft landing  sures have been delayed too long. If in-  tive demand is that enterprises are not
and thus was relatively well protected from  vestment had been stimulated properly  interested in expanding their capacities.
the Asian financial crisis. However, be-  or encouraged a year earlier, deflation  If this trend continues, economic decline
ginning in the second half of 1997, sev-  probably could have been avoided.  is almost unavoidable.
eral signs of an economic decline  * The economic performance of state-
became apparent, such as the steady  owned enterprises is too poor to produce  At present, the investment and finance
drop of commodity prices, sliding con-  adequate tax revenue for the state or in-  systems in China are no longer favorable
sumption, a decline in investment, and  creased paychecks for employees; in  either to large, nonstate enterprises, or to
a rising unemployment rate. The writing  other words, both state and consumer  small and medium-size enterprises, forces
is on the wall; China, stepping out of the  purchasing power is cramped.  that in recent years spearheaded eco-
shadow of inflation, is confronted with the  * Farmers are unable to achieve mean-  nomic growth. As recently as the first quar-
problem of deflation.               ingful gains in their income through more  ter of 1998, China's industry is estimated
intensive agricultural production because  to have grown by 8.2 percent, with 25 per-
Deflationary Dangers Ahead          of drastic increases in production costs  cent of the growth produced by the state
(machinery, fertilizers, and so on).  sector and 75 percent attributable to
Deflation is usually marked by two im-  * Reforms in housing, health care, edu-  nonstate enterprises. The nonstate sec-
portant features: a steady drop of com-  cation, and pension systems have per-  torisfacedwith an increasinglyconstricted
modity prices and a decline of monetary  suaded Chinese consumers to save  channel for raising funds, as banking be-
supply. Although commodity prices have  more. It has also slowed consumption.  comes more and more regulated. Due to
fallen steadily in China, the GDP in-                                   the costs and risks of providing loans,
creased by 7 percent in 1997, and there  How to Overcome Deflation?     bankstendtoformcloserrelationshipswith
was no drop in the money supply. How-                                   large, state-owned enterprises, and with
ever, certain signs of deflation do exist in  Deflationary tendencies are stil intensify-  key sectors and regions. At the same time,
China's economy: commodity prices have  ing in China, discouraging enterprises from  opportunities for the nonstate sector, as
fallen steadily for 11 months and the vol-  expanding production and investment, and  well as the small and medium-size enter-
ume of national consumption has de-  risking a deterioration in unemployment  prises, to raise funds by issuing stocks
creased; enterprises are running at 60  and interruption of market-oriented activi-  and bonds in the capital market are slim.
percent of their full capacity; enterprise  tes. Therefore, the fight against deflation  Such obstacles to acquiring financing are
stocks reached 3,000 billion renminbi, rep-  has become the focus of current macro-  a key factor hampering investment and
resenting 40 percent of GDP. The supply  economic policies. To maintain an eco-  hence development of the nonstate sec-
of major products exceeds demand, and  nomic growth rate of 8 percent, and  tor and small and medium-size enter-
the average supply-demand ratio has de-  compensate for decline in exports and for  prises.
teriorated to about 90 percent. All these  relatively low domestic consumption, the
suggest that China has to face a new situ-  govemment has decided to introduce mea-  The current investment environment
ation-economic deflation. Besides the  sures to stimulate investment, primarily  poses additional problems for the fight
already mentioned economic slowdown,  through its own program to spend more  against deflation. For instance, there are
and the negative impact of the Asian fi-  on infrastructure development.  few investment projects with good eco-
nancial crisis on China's export indus-                                 nomic prospects; loss-making enter-
tries, the deflation has been intensified  The government's extra spending is be-  prises suffer further blows because of the
by the following factors:          ing financed through issuing treasury  steady fall in commodity prices; small
* Monetary stimulus lacks a clear focus.  bonds. It is an expedient way of raising  and medium-size enterprises are sub-
The increase in money supply did not ac-  money, although it has its limitations. In  ject to heavy taxation and collection of
celerate enough industrial restructuring;  order to ease the burden on public fi-  nonbudgetary fees. In the process of
new investments, which were targeted to  nance, investment should be mobilized  stimulating demand to pull up the
stimulate final demand, mostly increased  from the whole society. First and fore-  economy, attention should be given not
TRANSITION, December 1998                                     © 1998 The World Bank/The William Davidson Institute



only to the government's purchase de-  enlarge the scope of stockholding enter-  present time-sensitive opportunities and
mands, but also to fostering investment  prises. Providing the right incentives will  challenges for investment. Demand-and
in enterprises, especially in                 help avoid earlier miscalcula-  consumption--'by the huge rural popula-
the nonstate economy. Sev-         -          tions in which several state-  ton should be further expanded, through
eral obstacles impede the ex-                 owned enterprises, in a blind  development of local infrastructure and re-
pansion of rural demand:                      pursuit of rapid development,  form of the investment and financing re-
* Farmers have low levels of   _'             imprudently created parallel  gime. Construction in small townships
income and consumption.                       capacities, regardless of mar-  should be accelerated. The nonstate sec-
* Rural infrastructure is expen-              ket demand.                tor should be encouraged to invest in the
sive and inefficient (for ex-                                            high technology and information industries.
ample, the electricity tariff is              Reasonable investment and
extremely high). This limits                  fund-raising systems should  Without the growth of consumption, in-
farmers' demand for consumer durables.  be established through reforms. For in-  vestment can never cycle on its own. If
* Capital goods are expensive and of in-  stance, interest rates should be differen-  consumption is to get a boost, a priority
ferior in quality.                  tiated, depending on the borrower's  must be housing reform. People badly
* Many township enterprises do not op-  financial standing, replacing the present  need housing, yet some residential build-
erate efficiently, which reduces the in-  single rate system. Special arrangements  ings lie idle in the market. And though
come of farmers.                    can be made to facilitate lending to the  the government has issued a series of
* Governments at various levels indulge  nonstate sector as well as to small and  reform packages, some of these have
in unreasonable fee collections and put  medium-size state-owned enterprises.  produced little effect. Clearly, a mortgage
a heavy burden on farmers.          The govemment's role as regulator should  credit system needs to be implemented.
be separated from its role as owner. This  Moreover, consumption credit for con-
Proposed Measures                   way, the market can allocate resources  sumer durables should be initiated.
better, alleviating the burden on public fi-  Credit for the purchase of cars should
In a global environment where network  nance.                            be provided to support development of
economy and knowledge economy are                                        the auto industry as a new economic
developing by leaps and bounds, invest-  Reconstruction of small and medium-size  growth point.
ment opportunities have become scarce  cities should be the focus of investment
in a host of traditional industries. Invest-  for the 1999. The migration project along  The author is President of the Haikou-
ment policies should target opening up the  the Three Gorges and rehabilitation of the  based China Instftute for Reform and De-
infrastructure sector so as to gradually  flooded areas along the Yangtze River  velopment (CIRD), Hainan Province.
The "D" Word: It Can Be Both Good and Bad
Deflation is the opposite of inflation: prices in goods and services  revolution. Cottage industries gave way to mass production.
rise under inflation, and decline under deflation. Too many goods  The result was massive growth. Wholesale prices declined
are chasing too little money. As prices decline, many compa-  by 46 percent. Most wages fell a bit during the period but
nies-producing goods and services-find their profits squeezed  prices fell faster than wages. The standard of living improved.
to the point where they cut wages and, eventually, workers. Fall-
ing prices also mean that borrowers must repay their debt with  Economists relate current deflationary trends not just to the
money worth more than at the time of borrowing. These and  global effects of the East Asian crisis-characterized by
other factors can accelerate the decline in prices, and the down-  overinvestment, overcapacity, and falling prices. Japan has
ward spiral can lead eventually to a major depression.  basically been at zero inflation for some time now. New is-
sues of treasury bonds are carrying negative interest rates.
There is good deflation and bad deflation, however. In U.S.  Other factors that strengthen deflationary trends include de-
economic history, "bad" deflation characterized the 1930s:  clining military expenditures, following the end of the Cold
mass destruction of purchasing power, wage cuts, failures.  War, and governments' efforts to cut deficit spending. In ad-
The basic problem was that supply exceeded demand. But dition, the continuing enterprise restructuring, improvements
the United States also experienced good deflation from the  on the technological front, and revolutionary innovations in
end of the Civil War to the end of the 19th century. The  retail trade (including car sales) have all contributed to dras-
railroads opened new markets and spurred the industrial  tic cuts in costs and prices.
3 1998 The World Bank/The William Davidson Institute                              TRANSITION, December 1998  U



China's Development. Zgones-Learning From
Their Success
by Michael Elhman
n interesting example of a suc-  * Low labor and other costs (for ex-  possible) and labor (although companies,
A   cessful local state entrepreneur-  ample, land). European firms can hire  if they wish, can recruit workers directly).
ship is provided by the Kunshan  production workers in the zone for $200 a
Economic and Technical Development month including social charges, which is  * Stable labor relations. Recently in
Zone, established in 1985 in Jiangsu  perhaps 10-15 percent of labor costs in  two Kunshan Zone factories, young
province, about 50 kilometers (30 miles)  Westem Europe. Furthermore, labor pro-  graduates, in one case, and production
inland from Shanghai. (Kunshan is now  ductivity is high (in modem, purpose-built workers, in another, demanded higher
administratively a city, with about half a  factories, which produce relatively simple  wages from their foreign employers. In
million inhabitants.) By November 1998  products, are managed by Western per-  both cases the local party secretary in-
the zone had attracted about $4 billion  sonnel, and run at full capacity) and does  tervened and warned the employees that
in foreign direct investment from 420  not appear to be notceably lower than in  there was no shortage of job applicants
companies, mainly wholly owned sub-  Europe.                           outside the factory gates. At the same
sidiaries of overseas companies. These                                 time, he urged management to improve
subsidiaries and joint ventures with for-  At the end of 1994, Chinese entrepre-   wages in due course. The situation
eign firms have provided 30,000 jobs,  neurship was boosted by the following:   calmed down, strikes were avoided in
more than half of the 58,000 total. The   * Five national special economic   both enterprises, and after a while,
zone's exports are running at about $1.2  zones.                       wages were increased.
billion annually. It has become a major  * Fourteen coastal open cities, which
source of income for Kunshan, generat-  included 260 special economic zones   * Chinese-style fiscal decentraliza-
ing about half of the city's budget. What  under the jurisdiction of cities and   tion, which ensures that a substan-
explains this success and does it have   counties.                     tial share of the income generated
any lessons for Eastern Europe and the   * Six open cities along the Yangtze   by development zones flows to the
former Soviet Union?                R Eighteen open cities that are inland   municipal authorities. Although corrup-
provincial capitals.               tion is a serious problem in China, offi-
Explaining Factors                  * Thirteen open cities along border   cials of the Kunshan Zone, operating
regions.                          within the framework of an official nab'onal
* Easy access to the world market.  * Thirty economic and technical de-   policy of opening China's economy to
Shanghai is an intemational gateway that  velopment zones (currently there are  the world market, and subject to party
can be reached quickly by road, water,  32 of these).                  discipline, have devoted themselves to
and rail transport.                 * Fourteen free trade zones.       municipal (and as a result, regional and
* Thitteen frontier economic coopera-   national) development.
* An efficient, helpful "one stop" bu-  tion zones.
reaucracy. The Kunshan Zone competes   * Fifty-two new- and high-tech devel-   Relevant Lessons
with other special zones/industrial parks   opment zones.
in China that are also trying to attract for-  * Eleven national tourist zones.  Are there any relevant lessons from the
eign investment. While Kunshan does not                                Kunshan Zone development for Eastem
offersuperiortax concessions, itdoes con-  * Readily available infrastructure. In  Europe and the former Soviet Union to
centrate on providing good services. Al- additon to its prime location, the Kunshan  bear in mind? It is perhaps worthwhile to
though, like many such zones, it initially  Zone provides land, water, sewerage, elec-  step back and recall the final years of the
aimed to attract hi-tech industry, invest-  tricity, and other energy sources. Cus-  Soviet Union. At that time, obvious loca-
ment mainly supported the development toms, banking, and telecommunications  tions for similar economic zones would
of low-tech industry in the area. Neverthe- facilities are also available. The authori-  have been in the regions of Leningrad,
less, local authorities accepted this, and  ties are prepared to offer ready-made fac-  Odessa, or Nakhodka. Although there
made the best of what was on offer.  tories (purpose-built ones are also  was a lot of talk in the perestroika period
i TRANSITION, December 1998                                      C 1998 The World Bank/The William Davidson Institute



about creating Kunshan-type zones, noth-  engineers, computer programmers), abun-  * Private land ownership is not im-
ing much happened on the ground. What  dant natural resources, and a sizable  fportant. In Russia there has been a
were the constraining factors?       home market. As long as the Soviet Union  heated debatebn private ownership of land.
remained intact, its military programs and  Kunshan's Development Zone shows that
* The Gorbachev leadership, impa-  state security apparatus hindered Russian  private land ownership is not necessary
tient to see results, changed its eco-  scientists' involvement in FDI projects. As  for successful economic development.
nomic policies frequently in response to  for natural resources, the prospect of sell-  Abundant foreign direct investment flows
disappointing outcomes of previous ini-  ing off the nabonal heritage to foreigners  to China, despite the fact that all land be-
tiatives, without allowing for the neces-  and of creating competition for domestic  longs to the state and foreign firms can-
sary time lag between economic policy  producers proved politically untenable,  not buy land, but must rent it or buy a
changes and results. In contrast, China's  while high infrastructure costs and low raw  lease (for up to 70 years).
Kunshan Zone was set up in 1985, but  materials prices were further obstacles.
its success became obvious more than  And the domestic market, though it did  Under What Category?
10 years later. This example of Chinese  attract some foreign direct investment,
gradualism would not have appealed to  was mainly served by imports. Investors  As far as economic policy is concemed,
the impatient perestroika leaders.   sought to avoid the risks involved in at-  Kunshan Zone fits into none of the normal
tempting production in the Soviet Union.   categories. There is no "planning," since
* Political instability in 1989-91                                         the state does not dictatewhich firms come
frightened off foreign investors.    Two additional points have relevance for  to the zone (they choose to come) nor
Eastem Europe and the former Soviet  what they produce when they get there.
- The lack of any attempt to create an  Union states:                      Development hasn't come in response to
efficient, friendly, one-stop bureaucracy                                  the 'market," since the zone was initiated
*  Location  is important. The  by local state authorities that had set up
According to the 1998 Corruption Per-   Kunshan Zone would be inconceivable  both the physical and the crucial adminis-
ception Index (www.transparency.de),   in one of China's western provinces.  trative and bureaucratic infrastructure.
out of 85 countries considered, ranked    Physical access to the world market,  There is no 'industry policy"involved, since
from least corrupt to most corrupt,   preferably by sea, is an enormous eco-  the zone was not an initiative of the cen-
China was 52nd, with a score of only   nomic benefit. This suggests that ar-  tral government and the state does not
3.5 (where 10 means perfectly incor-   eas along the Baltic sea, and to a  determine which firms or sectors benefit
rupt and Ocompletely corrupt). This was   lesser extent the Adriatic, might also  from it, norwhat they produce. And it can't
well below the rankings ofthe advanced    have been able to create such zones.  be called the product of 'regional policy,"
transition countries of Central Europe.   In addition, such areas as northwest  as the zone's creation is not the result of
However, Russia came in 76th, with a    Russia, western Poland, western   central govemmenteffortsto stimulate de-
score of 24. The index also indicates    Czech Republic, and western Hun-  velopment of a particular region. Rather,
that between 1995 and 1998, China    gary-which are near the eastern bor-  the zone is an example of a municipality
became significanty less corrupt, with   der of the European Union-might also  using its natural advantages (location,
a steady improvement in its score.  have been able to support such an ini-  cheap labor, and effective govemance) to
tiative. Although these regions, unlike  create a physical and administrative envi-
interested in municipal, regional, and na-  China, did not have the advantage of  ronment in which the market can flourish.
tional development had a dampening effect.  very low labor and other costs, they  The success of China's Kunshan Devel-
Officials atall levels in the Soviet Union used  did have the advantage of easy access  opment Zone shows that local state en-
the freedom they gained during perestroika  to the very large EU market and to EU   trepreneurship, can play an important
to further their personal interests.  sources of supply. On the other hand, as  positive role in economic development.
the transformation process progresses
* The inability of the municipalities in  and the entire national economy opens  The author is fellow of the Tinbergen In-
greater Leningrad, Odessa, and  up to foreign investment, there is less  stitute, Amsterdam and Rofferdam, and
Nakhodka to create the requisite in-  need for special enclaves where only  a professor on the Faculty of Economics
frastructure for industrial parks. The  foreign direct investment is welcome.  and Econometrics, Amsterdam Univer-
Soviet Union failed to use effectively its sig-  Such zones are likely to figure most  sity. This article is based on his visit to
nificant assets to attract foreign direct in-  strongly in the early stage of transfor-  the Kunshan Economic and Technical
vestment-highly skilled labor (scientists,  mation.                        Development Zone, in November 1998.
© 1998 The World Bank/The William Davidson Institute                                TRANSITION, December 1998  a



How to Do Business-Chinese and Western
Negotiation Cultures
by Theresia M. Tauber
N      egotiation style is based on gen-  grounds, people developed norms based  and their relationships, and the conse-
eral assumptions, behavioral  on laws, rules, and regulations that ap-  quences of the quarrel's outcome for the
patterns, and norms of the  ply to the individual. They desired justice  whole group. This basic difference be-
negotiators culture. Chinese and various  to be "blind," for example, disinterested  tween "rules" and "relationships" leads
Western cultures developed their re-  and impartial. In Eastem cultures, on the  to three more tendencies:
spective patterns and norms for very  other hand, under the influences of Con-
good reasons. Living conditions differed  fucian, Daoist, and Buddhist thinking and  * Group thinking versus individualism.
and so did the norms that were neces-  tradition, people developed norms based  * People focus versus task focus.
sary to help the communities survive in  on whatever was necessary to maintain  * Elaborate versus flat hierarchies.
those particular conditions.         good relations within their group (a vil-
lage, in the old days; a business unit,  Today these differences still lead to dif-
Basic Differences: Roots in History   later on). To them, justice should be not ferent assumptions and behaviors in
'blind" but open-eyed, with a clear un-  business. Most basically, both sides
In Westem cultures, with their Jewish,  derstanding of the situation at hand-  want security for their transactions. Un-
Christian, Greek, and Roman back-  with all of its implications, its players  fortunately, the ways of getting security
and reassuring the other side of one's
Table 1. Take "rules" and "relationships" into account                  goodwill are different due to the divergent
roles that rules and relationships play.
Advice to Chinese Negotiators   Advice to Westem Negotiators           (Table 1 presents some tips for both
sides.)
Lay down the basic points of your  Don't try to cover in your contract all
mutual business in contract form early  conceivable possibilities. This looks  Group Thinking versus Individualism
on. This will signal your serious  like you expect the worst from your
interest Have the points intermally  relationship. Focus on the most likely  When Chinese and Western delegations
clarified because the Westem side will and most dangerous eventualities.  meet, they will find their structures dif-
be stunned by a later change.                                          ferent. Westemers will be more willing
if Westemers start with the most crtical Chinese like to settle easy points first.  to voice individual opinions, whereas
issues, this is probably a positive  Having come halway with a partner,  Chinese will not openly contradict their
signal. They want to get the biggest    they will feel more motivated to get  group. (See table 2.)
problems out of the way early on to    through the more difficult issues as well.
make sure there really is a common                                     Both cultures, it should be noted have,
base and they are not wasting their                                    problems with efficient team work: West-
time on a hopeless case.                                               erners, because individuals can act like
If your partner mentions a legal  If your partner mentions a legal     "lone wolves"; Chinese, because the
requirement in his home country, there  requirement, check twice. Laws are in  group thinking applies to long estab-
is not too much hope for a way around. constant flux in China. Your partner  lished in-groups and not to a delegation
Westem laws don't give much leeway.  might not know the latest regulations or  that recently and only for technical rea-
mnight use this unclear situation for  sons has been put together.
tactical purposes.
Westemers believe that a signed  In China a signed contract is not the  People Focus versus Task Focus
contract makes it easier to design new  end of negotiations but a serious
actions around that invariable fact The  beginning point The Chinese believe  To varying degrees, Westerners are more
idea of renegotiating a written  that in this flexibility lies a chance to  task- than people-focused, with Ger-
agreement is appalling to them and  make the best use of new situations.  mans and Swiss being the extreme. In
creates deep     .                                                     their eyes, small talk is superfluous.
* TRANSITION, December 1998                                        C) 1998 The World Bank/The William Davidson Institute



Table 2. Take the role of individual and group into account                stages, so the whole process takes much
longer than when only one culture is in-
Advice to Chinese Negotiators    Advice to Western Negotiators           volved. (See table 4.)
If you want the other side to take  Stop at once any internal dispute in  Some Final Hints
seriously certain members of your  front of a customer or potential partner!
team, arrange for enough speaking  Think in advance of little signs that any  Forthe Chinese: The argumentthat"This
time for these members. Those who    member of the team can make to      is done (not-done) this way in China"
keep silent will be underestimated.    indicate "we need a time-out." And
watch during the negotiations for those  should be used only when it is based on
signs.                                reality. More and more, Westemers have
ff you feel you get along better with a    If you do feel particularly in sync with a  prepared their trip to China carefully and
certain member of the other team, you  certain member of the other team,  can tell when you have used this argu-
may contact this person as a       however, don't show it openly. it would  ment for tactical reasons. They will con-
"troubleshooter" when necessary. This  endanger that person's position in the  sequently mistrust you in all other things
individual will then feel responsible to   team, and he or she might even be  you say.
act as a mediator. (Without acting  taken out of the delegation.
against core interests of his or her
team!)                                                                    For Westerners: The argument that"This
is internationally accepted practice"
should be used only when it is based on
They think that arguments for agreeing  side have to consent, a process that  reality. More and more, Chinese are ex-
to a deal must be based on rational facts.  seems to take longer than the decision  tremely aware of international business
And they believe that what a customer  of a powerful boss. The fact is that both  procedures and see through your bluff.
wants most of a sales or service repre-  cultural systems have fast and slow phases
sentative is expertise and promptness.  in their decisionmaking process. Unfortu-  For both sides: Reciprocity is generally
People-focused persons use small talk  nately, these phases occur at different  well received, both in wording and in the
as an important base for business. Mu-
tual acquaintances, the giving of "face,"    Table 3. Take the role of "facts" versus "face" into account
and mutual dependence are more reli-
able to them than figures. They look for    Advice to Chinese Negotiators    Advice to Westem Negotiators
representatives with whom they can have
a trusting relationship. They assume that    Take into consideration that loss of    Do not unwitfingly allow others to lose
face is not so much feared by      face. This hurts a Chinese more than
all Westerners are technically capable   Westemers. Most often, they will not   you think and more than he or she
of serving them, and it is more important    concede important points only to save  shows. They will consequently hold you
to them to know whether and how some-    face.                             in very low esteem.
one is willing to do them that service.
Expect Westemers to make you lose    Expect Chinese to purposely try to
face without even knowing it, since they  make you lose face, particularly when
While negotiating, the difference between  are not so familiar with that concept.    your business relationship is not yet
task- and people-focused partners also   Tell them that what they said or did is   sound. If you want to maintain the
shows in the way they deal with the con-  considered rude in your culture but add  relationship, show that you understand
cept of "face." (See table 3.)           politely that you are sure they did it    the concept and insist that a certain
unintentionally. Westemers will be glad  thing your partner wants you to do is
about your openness and gratefully  unacceptable because it would make
Elaborate versus flat hierarchies        accept this important piece of     you lose face in your company.
information.
Typically, negotiators from each cultural
background believe that the other ap-    A Westemer who calls something you   If the other side wants something that is
pro.ch will make decisionawant to specify in a contract  nonsense, in your opinion, but does not
proach will make decisionmaking pro-    "nonsense" most probably does not    harm you, accept it. There is no need to
cesses much longer and results less    intend to insult you but believes he is   hurt the other side. Just explain to your
reliable. The Westerner is frustrated be-  helping you avoid a mistake      boss at home why the clause is in the
cause after each round, the next high-    (Westemers do that among          contract.
est level on the Chinese side must also    themselves, too.) Ignore this comment
be convinced. The Chinese is frustrated  or point out that it is not good form in
because many equals on the Westem        your culture.
(© 1998 The World Bank/The William Davidson Institute                                  TRANSITION, December 1998   I



handling of a contract. Around the turn   Table 4. Take the role of hierarchy into account
of the last century, unequal treaties were
forced upon the Chinese by Western
imperialists. Ever since, reciprocal    Advice to Chinese Negotiators   Advice to Westem Negotiators
clauses have been important to Chinese
negotiators and should be included wher-    You will meet fewer levels of hierarchy  You will meet more levels of hierarchy
ever possible. When it comes to fulfill-   than you are used to. Whoever is sent  than you are used to. Each one will
by a Westem company to negotiate in  expect a few concessions from you.
ing the clauses of a contract, Westerners    China is normally fully authorized to  Make sure to parcel them out so that
will only maintain their original interest    make the necessary decisions, even if everybody will be satisfied. The top
in keeping their word if they experience    he or she is still young.     leader wIll decide, but not against
that their Chinese partners do the same                                   strong negative feelings from his or her
with their obligations.                                                   subordinates.
In order to help your counterpart  Expect impressive-sounding business
To sum up; While both cultures-East-    understand your position within your    cards (almost everybody is a director or
ern and Western-are basically well    company, give him or her an         vice director) and translate your own
adapted to the needs of their people,    organizational chart showing the  position description into a compatible
problems arise when the two sides meet.   structure of your business unit.  version.
There are no general rules as to who    Westemers get confused by too many
should accept whose preferences. Each    important titles.
meeting will develop its own microcul-
ture. It is crucial to smooth this process  The author has built up the intercultural  sharing with her his experience as a suc-
if negotiations are to succeed. It is thus  China and Asia training program at Si-  cessful negotiator in China. See also his
necessary to get to know the specifics  emens in Munich, Germany. (Email:  short guide to negotiating in China, forth-
of the other side in order to develop a  ttw.@t-online.de) She thanks Dr. Marec  coming in the China Economic Review,
strategy for successful talks.       Bela Steffens (also at Siemens) for  Januaty-February 1999.
Voucher Privatization with Investment Funds:
A Sure Way to Decapitalize Industry
by David Ellerman
There has been rough consensus among  where economic institutions have had  most all the shares in a portfolio com-
postsocialist reformers and their Westem  time to evolve, one finds two extremes,  pany so that they will reap most of the
advisers that voucher privatization was the  the mutual fund ("unit trust" in the UK)  capital gains from the development and
quickest and most politically popular tech-  and the (venture capital) holding com-  restructuring of the company. They epito-
niqueforachieving mass privatization. How-  pany, which have rather opposite insti-  mize the active owner that exercises
ever, without intermediaries this method  tutional logics.                 voice rather than exit.
would spread ownership too wide and thus
create a problem of "corporate gover-  Mutual funds hold a diversified portfolio of  The voucher investment funds have been
nance." So the thinking goes that voucher  shares with only a small percentage from   envisioned by postsocialist reformers as
privatization needs to be augmented by  any given publicly traded company. The  a mixture of mutual funds and holding
voucher investment funds to provide the  funds exercise no direct corporate gover-  companies, a chimera with no direct
corporate governance necessary for re-  nance over companies. They are the very  counterpart in an evolved market
structuring the privatized enterprises.  model of the passive institutional owner  economy. Western-style legislation re-
that lives by the 'Wall Street Rule" of vot-  stricting any mutual fund's share in a
Western Models                       ing with one's feet. Exit is preferred to voice.  single company (for example, a 20 per-
cent maximum) has been enacted in
In a developed market economy such as  Holding companies operate in a diametri-  most voucher investment fund regulations
the United Kingdom or the United States,  cally opposite way. They hold all or al-  as if the funds were mutual funds. But in
*  TRANSITION, December 1998                                       (© 1998 The World Bankf/he William Davidson Institute



the next moment, the voucher funds are  exchanged their voucher for a share in  striving for profits and dividend payments
described as the vehicles for restructur-  the fund), so control is in the hands of  through efficient govemance. Indeed, prof-
ing the voucherized enterprises as if the  the fund management-typically a  its and divide6ds have been an insignifi-
funds were holding companies.       separate fund management company.  cant source of fund income so far. These
The fund management company's fee  arrangements not only reduce the incen-
Obstacles to Good Governance        is usually set by regulation as a fixed  tive to restructure; they may provide a dis-
percentage of the portfolio's net asset  incentive. Selling a controlling stake to a
There are substantive reasons why the  value, rather than being linked to prof-  strategic investorwould remove the board
voucher investment funds will have  its or increases in the value of the port-  sinecures for the fund managers and their
trouble functioning in the way mutual  folio. If, for example, a fund owns 30  friends.Andsignificantrestructuringwould
funds operate in the West. Most of the  percent of a company, and the fund  probably involve exposing and eliminat-
shares owned by the voucher funds  management company is entitled to a  ing the special side deals and bypass ar-
have no real market. In the West only  3 percent fee, then a $100 increase in  rangements for the fund management
a small percentage of these companies  the value of the portfolio company in-  company.
qualify to be publicly traded and an  creases the management company's
even smaller percentage would qualify  fee by a mere 90 cents, or 3 percent of  Investment and Disinvestment
in the transition economies. Yet the  the 30 percent.
voucher privatization programs have                                     Postsocialist enterprises typically re-
corporatized medium-size to large so-  As it has turned out in the Czech Re-  quire serious restructuring if they are to
cialist enterprises of almost any qual-  public and in Russia, fund management  produce profitable products that people
ity, and have issued their shares in  companies have found other, more lucra-  will want to buy at prices people are will-
return for vouchers. The voucher funds  tive ways to utilize their power without  ing to pay. The hope that Western firms
thus have a portfolio full of shares that undertaking the difficult job of restruc-  would become involved on a large scale
are essentially illiquid at any significant turing. One way is simply by collecting  and would provide funds and the neces-
price ("junk shares").              directors' fees for sitting on the boards  sary expertise has, in most postsocialist
of scores of portfolio companies. Another  economies, not been realized. Rather,
But the funds probably will not operate  prominent method of siphoning or tunnel-  Western investors have preferred "green-
as restructuring holding companies ei-  ing value out of portfolio companies has  field" investment to the restructuring of
ther. Unlike the typical holding com-  been through special contracts and  existing companies. There have been a
pany, which owns the majority of  nontransparent side deals with firms re-  few exceptions, notably in Hungary. But
shares in its portfolio companies and  lated to the fund managementcompanies.  most postsocialist firms have been un-
thus stands to profit significantly from   The profits made through these bypass  able to find Westem strategic investors.
its investment in restructuring the com-  firms are not shared with other owners of
panies, a voucher investment fund may  the portfolio company, not to mention the  The alternative to direct strategic invest-
own 20 percent, or at best 30 percent,  citizen-shareholders of the fund.  ment is portfolio investment. There has
of shares in a portfolio company. Thus,                                 been some modest Western portfolio
if the fund spent the time, effort, and  As these examples illustrate, problems  investment in Central European and Rus-
financial resources to restructure the  of corporate governance abound. Since  sian investment funds. The Polish mass
company, it would see 70 to 80 per-  the individuals running the investment  privatization has tried to design funds to
cent of the capital gains accrue to  funds are not stakeholders but are em-  be managed by "Western experts" who
other, free-riding shareholders.    ployees of separate companies con-  would restructure the companies in their
tracted to manage the funds, and since  portfolio. But this approach has not met
In light of the regulations restricting  they will gain little from the increased  expectations because of the large num-
voucher fund stakeholding in compa-  profitability of funds, they lack the proper  ber of firms in each portfolio, the distance
nies, then, the funds have little eco-  incentives to provide effective corporate  of the fund from the day-to-day chal-
nomic  motivation  to  undertake  governance, the very reason they were  lenges of restructuring a company, and
time-consuming and costly restructur-  hired.                           the typical lack of industrial expertise on
ing. Yet the incentive is even weaker                                   the part of the fund managers. The in-
than this restriction would suggest. A  Investment funds find the trading of shares,  vestment funds tend to be managed by
given fund may have thousands of in-  transfer pricing, and nontransparent eq-
dividual shareholders (citizens who  uity transactions far more lucrative than      Continued on page 13
C 1998 The World Bank/The William Davidson Institute                             TRANSITION, December 1998  l



Czech Economy: Downgraded Banks but Improved Outlook
On November 5, Standard & Poor's (S&P) reduced the Czech  the sale of Ceskoslovenska Obchodni Banka (CSOB), to
Republic's long-term local issuer credit rating fromAAtoAA-  be completed by mid-1999. Slovakia has large debts in
, the long-term foreign currency issuer credit rating from A to  this bank, but because of the change of government in
A, and the short-term foreign currency rating from Al to A2. Slovakia and improvements in bilateral relations, Prague
Despite the downgrade, the Czech Republic still enjoys the  now has a better chance for a settlement. Sell-off of Ceska
best rating among the Central European transition economies.  Sporitelna would follow in mid-1999. The other state-owned
The agency also lowered the ratings of the country's three  bank, Komercni Banka, is also targeted for privatization by
major banks-Komercni Banka, Ceska Sporitelna, and  2000. However, the poor state of the banks and the dire
Ceskoslovenska Obchodni Banka. The banks' downgrades  need for substantive restructuring could delay the sales.
followed their exposure in two areas:                (The banks' bad loan portfolio equals 20 percent of the
Czech GDP.) The government must decide whether to un-
*Domestic corporate borrowers, whose reliability is nowweak-  dertake this restructuring itself, incurring high costs but
ening as industrial performance begins to show signs of dete-  with the benefit that a higher price can then be secured, or
rioration.                                           sell the assets quickly at cheaper prices. The IFC and the
* Negative external developments-events in Russia and po-  EBRD are planning to invest several hundred million dollars
tential problems in Slovakia, where the new government faces  to boost the Czech government's banking privatization pro-
major difficulties as it begins to implement long-delayed eco-  gram. The IFC board has approved a potential $75 million
nomic reform.                                        equity investment alongside a strategic investor in CSOB,
the country's fourth biggest bank. The EBRD is also consid-
Despite the recent deterioration of the financial state of ering investing in CSOB, possibly even before full privatization;
Komercni Banka and Ceska Sporitelna, in particular, the gov-  and it has already bought an 11.8 percent stake in another
ernment has been reluctant to confirm its original intention to  Czech bank. The IFC and the EBRD are focusing on the
provide support to the banks if it is needed.        banks because they believe their long-delayed privatization
will not only strengthen the banking sector before EU mem-
The country's downgrade came as a result of recent deteriora-  bership and help prevent an Asian-style bad debt spiral,
tion in the Czech economic and financial environment. The major  but will also help restructuring of the industry.
problems, together with signs of improvement, are as follows:  * The government's worsening budgetary position, the
result of continued recession and the growing indebtedness
* Insufficient efforts to reform the legal system, leading  of the public sector. Real GDP fell 1.7 percent year-on-year
to low foreign investor confidence. But: The first lawsuits  in the first half of 1998. But: The draft budget for 1999 as-
claiming mismanagement were recently filed against former sumes a deficit of 31 billion koruny ($1 billion)-its level
managers of failed investment funds. This is a significant step  should not exceed 2 percent of GDP. In October, consumer
toward showing foreign investors that the country is improving  prices fell 0.2 percent month-on-month, putting year-on-
the quality of its legal process. The government is committed  year inflation at 8.2 percent. The foreign trade balance is
to designing an incentive package intended to attract higher  also improving. In response, the Czech National Bank (CNB)
levels of foreign direct investment. While the package has not in mid-November cut the two-week repurchase rate by 1
yet been drafted, tax breaks and other incentives are already  percent, to 11.5 percent, the third cut from a 15 percent
being granted to selected investors on a case-by-case basis.  level in January. Lower interest rates and the moderate
Improvements in the transparency of capital market opera-  budget deficit are expected to ease the current economic
tions and reform of the legal system are essential to reviving  recession during the first half of 1999. Moreover, provided
investor interest, but have long been delayed.       interest rates continue to fall, the interest rate differential
* Slow progress in the privatization of the banking sec-  between the koruna and hard currencies such as the dollar
tor, resulting in continued inefficient capital allocation, and  and deutsche mark will be lower, enabling a gradual depre-
insufficient restructuring of major enterprises, many of which  ciation of the koruna. A weaker koruna would boost Czech
are owned, through investment funds, by the state-owned  exports, which are highly price-sensitive, further stimulat-
banks. This leaves exports vulnerable to external develop-  ing recovery.
ments, particularly a global economic slowdown. But: Finance
Minister Ivo Svoboda recently emphasized the need to accel-  (Based on reports of Oxford Analytica, the Oxford, U.K-based
erate banking privatization. The government plans to begin  Intemational Research Group)
*  TRANSITION, December 1998                                     © 1998 The World Bank/lThe William Davidson Institute



Continued from page 11              can in the form of salaries, bonuses, per-  strategy to achieve voucher privatization
quisites, and side deals. This two-sided  with investment funds.
such professionals as financial analysts,  grabfest by fund managers and enterprise
lawyers, and accountants, who have little  managers-together with the accompany-  The author is economic adviser to the
or no managerial or technical experience  ing drift, stagnation, and decapitalization  Senior Vice President, Chief Econo-
in industry.                        of the privatized industrial sector-may  mist at the World Bank; Email:
prove the most prevalent result of the  dellermanWworIdbank.org.
In the Czech Republic and in Russia,
the shares in the funds' portfolios were
acquired in return for citizens' vouchers
invested in the funds. The capital nec-  Readers' Forum
essary to start up the funds and the fund
management companies was provided Destructive Force of Russia's Treasury Bonds
by the founders, or by loans, and was
usually spent on equipment, premises,  by Anatoliy Zheleznyak
staff salaries, and advertising. The costs
of advertising were high as each fund  On August 17 in Russia, the Kiryenko  and access to budget funds, and founded
sought to distinguish itself from the oth-  government and the central bank an-  privileged banks with close ties to gov-
ers in the frenzy to attract citizen vouch-  nounced temporary suspension in the  emment authorities. Such banks include
ers. These costs were eventually  redemption of treasury bills (GKOs)-the  Oneksim Bank, Menatep, InkomBank,
recovered from the firms themselves. The  short-term government bonds. In the  and dozens of others. These financial
real impact of these "investment" funds  course of a few weeks the financial struc-  oligarchs, together with newly emerged
was the disinvestmentof thefirms in their  ture of the country collapsed: major  natural monopolies-such as Gazprom,
portfolio. Thus, capital for restructuring  banks were paralyzed, stock exchanges  and UES Russia, the electricity giant-
is probably the last thing that could have  shot down, tax collection came almost  have become the real masters of Rus-
been expected from voucher investment  to a halt, the ruble's exchange rate fell  sia. With the collapse of the Soviet
funds. The argument that voucher funds  by two to three times, consumer prices  system, the oligarchs gained unlimited
were important for "capital market devel-  shot up by one-and-a-half to two times,  freedom of action, and took advantage
opment" turned out to be false.     and many people once again lost their  of it as they not only divided the economy
savings. The struggling economy was  between them but also carved up the
Almost nothing was left to pay dividends  delivered yet another blow as the state  political power.
to the funds' citizen-shareholders, who  of its dying industries became even more
soon realized that the value of their "na-  desperate, thousands of small and me-  In otherwords, privatization of both prop-
tional patrimony" was being siphoned off  dium-size firms went bankrupt, and un-  erty and power in pseudo-democratic
by this layer of financial intermediaries. employment increased dramatically.    Russia was carried out by unlawful and
The political fallout has been serious.                                  criminal methods from the outset. Some-
Thus, the August events revealed the  times the tactic was direct appropria-
In summary, the long-term  conse-  enormous role played by the GKO  tion-formerdirectorsofplantsassumed
quence of voucher privatization with in-  mechanism in the country's financial,  private ownership, acting on the principle
vestment funds is a de facto real sector  economic, and political systems. The  that "what you protect, you own." In other
decapitalization in favor of short-term  coilapse of the GKO caused a quick and  instances, property and wealth were
rent seeking by fund managers. This  pervasive disintegration across the whole  embezzled, sometimes secretly, some-
takes place through board sinecures and  system. How to explain the destructive  times openly, and sometimes with the
lucrative side deals with portfolio com-  force hiding behind these "peaceful"  use of arms and violence. Deceit and
panies and through financial market ma-  bonds?                          theft, corruption and extortion, terrorism
nipulation. In the absence of strong                                     and gangsterism, these are the corner-
corporate governance from the funds and  In the 1980s and 1990s the leading elite  stones of post-Soviet Russia's economy
lacking stable ownership of their own,  in Russia managed to privatize (or grab)  and politics. Close ties were forged be-
many enterprise managers exploit the  most of the nation's economy. A unique  tween the "new Russians," who stole
postsocialist version of the "separation of  social group emerged, the 'new Rus-  state property, and their "brothers in
ownership and control" to seize what they  sians." They were able to get financing  arms," who grabbed state power. Thus,
i) 1998 The World Bank/IThe William Davidson Institute                            TRANSITION, December 1998  i



politics and business, private and state-  Finance Ministry, always desperate for  And the bankers? The financial crisis is
owned, merged. Property yielded power  money, for five years shun investors,  generating monetary emission and the
and power commanded property, and  except the privileged banks? By attract-  newly printed rubles will flow to these
each opened up opportunities that were  ing thousands of small 'unorganized"  privileged banks.
previously unavailable.             lenders, it could have borrowed more
money, at less ruinous interest rates.  The GKO mechanism thus brought to-
In recent years one of the most effective  Why didn't the government do it?  gether three sets of players: the privi-
tools used by the financial oligarchs to                                 leged banks, as lenders; the state; and
appropriate government money has been  The criminality of the GKO mechanism  the people, the taxpayers. The state
the GKO, the short-term government debt  has been exposed through another de-  persisted in paying huge interest rates
instrument invented in 1993. The GKO  velopment. The August incident was  to the banks out of the federal budget,
mechanism works like this: The state  used by the banks as camouflage for a  which was funded by Russia's tax-pay-
(to be exact, the Ministry of Finance, with  grandiose deceit. The leading banks,  ers. Toward the end of 1998, the state's
central bank participation) borrows  citing the moratorium on GKO payments,  monthly payments due to redeem ma-
heavily from the "privileged" commercial  used the state's bankruptcy to suspend  turing GKOs would have amounted to 20
banks, with redemption periods of up to  all payments to their clients: small  billion rubles-more than total tax pro-
one year, and at interest rates that range  banks; small and medium-size enter-  ceeds in the precrisis months! Obviously,
from 20-50 to 100 percent annually. This,  prises; and individual investors-mostly  the Russian economy is neither market
in an environment with almost sup-  from the middle class, the very cross-  nor centrally planned; it became an
pressed inflation! That's how government  section of society on whom optimists  economy of deception and theft.
assets end up in private pockets. The  have pinned their best hopes for Russia's
privileged banks obtain not only unusu-  future. The banks used their available  The author is a sociologist in Kharkov,
ally high interest payments, but also a  resources instead, to speculate with for-  Ukraine. The complete version of this
guaranteed profit. State resources be-  eign currency. Thus, many of their cli-  article in Russian is available from the
come more and more depleted, and in-  ents suffered heavy losses and went  author: Email: zheleznyak@yahoo.
evitably the moment arrives when all  bankrupt. Individual depositors were al-  com.
federal government proceeds must be  lowed to transfer their frozen accounts
used to pay GKO debt.               to the quasi state-owned Sberbank (sav-  Translation by Vitaly Kartamyshev is
ings bank) but had to take huge losses.  greatly appreciated.
A government that has delayed salary
payments to doctors, teachers, and the                  -                        .2
military for months and years, that has
reneged on every commitment to both 
its people and the international commu-
nity, that has lied routinely in its deal-
ings with others, had never- until August                               Qxi
17-failed to make its GKO debt pay-
ments since inception of the GKO bond
mechanism.ji
The average Russian (excluding the "new
Russians') for a long time couldn't af-
ford to buy bonds as the minimum pur-
chase was set at 100,000 rubles. Only   4                                       unf
on July 10, when the state was close to                              ,~               ~'~~
defaulting on its debt, was the minimum 
purchase lowered to 10 000 rubles
($1,500 at that time). Thus was the
middle class finally offered the opportu-
nity to lend money to an already sinking
state. The question arises: Why did the  From the Polish weekly Wprost
M   TRANPSITION, December 1998                                                             C) 1998 The World Bank



William Davidson Institute
Information Flows and the Financial Sector
Banks and stock markets can only perform their intermediating role effectively-that is, allocate capital-if critical
reforms are implemented in the real economy of a transition country. Effective corporate govemance and an enforceable
commercial code provide basic conditions for a flow of information that ensures the effectiveness of stock markets and
bankruptcy procedures. These issues are addressed in the following summaries of William Davidson Institute working
papers.
Why Do Stock Prices in Emerging Markets Move in Tandem?
by Randall Morck, Bernard Yeung, and Wayne Yu
On a recent visit to China, we were given  of market size, for the stock markets of  to invest in diversified country portfolios,
access to a tape of Chinese stock price  small, rich countries, such as those of  but see little point in picking stocks if
data. To our great surprise, we found that  Denmark, Ireland, and New Zealand, ex-  corporate or political insiders routinely
nearly all of the stocks move together-  hibit little comovement; while the stock  siphon off economic profits. Thus, stock
called comovement-either up or down,  markets of large, less-developed coun-  prices in countries with deficient insti-
on any given day. This is not what stock  tries, such as those of Brazil and India,  tutional structures exhibit a high degree
prices are supposed to do. The eco-  exhibit substantial comovement. Both in-  of comovement.
nomic purpose of a stock market is to  dividually and jointly, country size, vari-
channelcapitaltocompaniesthatshould  ous Herfindahl indexes (measuring  We also find that a high level of legal
grow and away from companies that  industrial concentration), and various  protection for public investors is corre-
should not. This is because a firm's cost  macroeconomic volatility measures all  lated with more firm-specific price varia-
of capital falls when its stock price rises  fail to account for the finding. Compar-  tion, consistent with the view that such
and vice versa. The efficient markets hy-  ing firms' returns on assets also fails to  protection encourages the capitalization
pothesis holds that shareholders' opin-  explain why stock prices move or do  of firm-specific information into stock
ions about firms' future prospects affect not move together on the stock ex-  prices.
stock prices and thereby allocate capi-  change.
tal among firms. If the prices of all com-                              Our results suggest that simply estab-
panies in the economy rise and fall  In contrast, institutional development  lishing a stock market in a low-income
together, the stock market may be fail-  can explain stock price comovement  country is unlikely to improve its
ing in its role as an information proces-  better than per capita GDP does. In  microeconomic allocation of capital.
sor and microeconomic capital allocation  countries with more corrupt govern-  Stock markets appear to channel capi-
device.                             ments, stock prices have a greater ten-  tal selectively across firms only in
dency to move together. (Political  economies that have relatively honest
Subsequently, we compared the degree  corruption perhaps impedes information-  governments and relatively high levels
of stock comovement across 40 coun-  based trading, leaving the markets to  of protection for public investors' prop-
tries using weekly and biweekly stock  'noise" traders. They are the opposite  erty rights over their investments.
returns data for 15,920 firms. In rich coun-  of "rational" investors who buy securi-
tries, on average, just over 50 percent of ties based on accurate expectations of  The authors, Randall Morck at Univer-
stocks move in the same direction. In  future returns.) Further, reduced legal  sity of Alberta, Bemard Yeung, Univer-
poor countries, the fraction moving to-  protection for public investors also ac-  sity of Michigan, and Wayne Yu, Queens
gether is economically and statistically  companies high comovement. These  University, disseminated their study"The
significantly higher.              findings raise the possibility that inad-  Information Content of Stock Markets:
equate legal and political systems may  Why Do Emerging Markets Have Syn-
In other words, comovement of stock  render the gathering of and trading on  chronous Stock Prices"as William
prices is negatively correlated with per  firm-specific information relatively un-  Davidson Institute Working Paper no.
capita GDP. The result is not an artifact profitable. Traders may still be willing  44A.
© 1998 The World Bank/The William Davidson Institute                             TRANSITION, December 1998  U



Working Out Good Bankruptcy Laws
by Elazar Berkovitch and Ronen Israel
The relationship between entrepreneurs  capital market. Therefore, the relation-  advantage and creditors are unlikely to
looking for funds to establish new firms  ship between creditors and firms is rela-  collect sufficient evidence to file for bank-
and outside investors who provide the  tively distant; creditors obtain most of  ruptcy.
funds is fundamental to all economic  their information from the financial mar-
systems. The need for outside financing  kets and their own independent investi-  Based on these considerations, our
creates two economic inefficiencies.  gations of the firm's affairs. Managers  proposed optimal bankruptcy laws for
First, with debt outstanding, the borrow-  cannot see and do not have control over  various economic systems are as fol-
ing firm may continue to operate when it the information processed by creditors.  lows:
should be liquidated. This happens be-  Therefore, managers do not have a stra-
cause in liquidation the creditor receives  tegic advantage relative to creditors.  1. In developed countries with a mar-
everything and the manager is removed  Moreover, the quality of the information  ket-based system like that in the United
and receives nothing, whereas if the firm  that is available to creditors increases  States, where information acquisition
continues, the manager can extract ben-  as capital markets become more effi-  technologies are well developed and
efits from running the firm. The second  cient. (An example is the U.S. economy.)  most financing is at arm's length, bank-
source of inefficiency is in the financing                              ruptcy law includes both a creditor chap-
stage, where some valuable projects are  2. In a bank-based system, most cor-  ter and a debtor chapter.
not financed because the inefficient liq-  porate financing is done through banks
uidation policy described above is an-  and other financial institutions. Banks  2. In developed countries with a
ticipated by the creditors.         take an active interest in firms, usually  bank-based system like that in Ger-
by having representatives on the board  many or Japan, where information ac-
A well-designed bankruptcy law should  of directors and maintaining veto power  quisition technologies are well developed
aim at minimizing the cost of these inef-  over certain activities. Managers are  and most of the financing is done through
ficiencies. As such, the bankruptcy law  likely to have a good idea of the infor-  banks, bankruptcy law includes only a
has to address the following issues:    mation creditors are processing at any  creditor chapter. The rules goveming this
time. Thus, managers have a strategic  chapter are biased in favor of banks and
* It should facilitate liquidation whenever  advantage; they can preempt creditors  other creditors and give no protection to
creditors receive information indicating  by filing for bankruptcy first if they learn  the manager. In such economies bank-
that liquidation is optimal.       that the creditors have sufficient evi-  ruptcy law should protect debtors (with-
dence to file for bankruptcy. On the  out requiring a legal procedure similar
X It should prevent excess liquidation by  other hand, managers can avoid bank-  to Chapter 11 of the U.S. bankruptcy
creditors.                          ruptcy if they learn that creditors don't law).
have sufficient evidence to file for it.
* It should provide managers with incen-  (Germany and Japan are good ex-  3. For countries with an underdevel-
tives to liquidate the firm voluntarily when  amples of such an economic system.)  oped system with poor information ac-
creditors fail to discover that continua-                               quisition technologies and concentrated
tion would result in inefficiencies.  3. In an underdeveloped system, the  financing, such as the transition econo-
financial markets, financial institutions,  mies, an optimal bankruptcy law should
* It should structure the distribution of and accounting systems are not yet de-  include both a creditor chapter and a
the cash flow in liquidation to maximize  veloped. There are no reliable informa-  debtor chapter, but with a stronger bias
the ability of the firm to finance valuable  tion collection entities, such as rating  toward the borrowing firm than in the
projects.                           agencies and financial analysts. As in a  case of a market-based system.
bank-based system, most corporate fi-
To focus the discussion, we concentrate  nancing is done by banks and other fi-  The authors, ElzarBerkovitch and Ronen
on the following three representative eco-  nancial institutions. But information  Israel, of the University of Michigan, dis-
nomic systems:                     transmission in the economy is poor,  seminated their paper "Optimal Bank-
so creditors are unlikely to have ac-  ruptcy Laws across Different Economic
1. In a market-based system, most  cess to information. Managers in such  Systems" as William Davidson Institute
corporate financing is done through the  an economy do not have a strategic  Working Paper no. 143.
m   TRANSITION, December 1998                                     © 1998 The World Bank/The William Davidson Institute



The Trap of Not Letting "Too Many" Banks Fail
by Janet Mitchell
In recent years banking crises have af-  suffering financial distress. Troubled  Regulation, and Bank Bailouts" was dis-
flicted many countries throughout the  banks often attempt to hide their loan  seminated as William Davidson Institute
world. Regulators' responses to these  losses by passively rescheduling loans  Working Paper no. 146.
banking crises have varied widely, rang-  in default. This behavior can worsen a
ing from multiple bank closures (Argen-  crisis; regulators may not detect the   Recent working papers of the
tina, United States) to widespread bank  problem until it has become serious or  William Davidson Institute:
rescues (Bulgaria, Czech Republic,  widespread. As the notion of too-many-  Internet:  http:/lwww.wdi.bus.
Hungary, Japan, Norway, Sweden).  to-fail suggests, the number of banks   umich.edu/
Why do regulators in some instances  suffering from financial distress is also
apply tough policies to troubled banks  important. Although the well-accepted   Randall  K. Morck,  David  A.
and in other instances rescue many of  concept of "too-big-to-fail" can explain   Strangeland, and Bemard Yeung, In-
them? This paper argues that the no-  rescues of large, individual banks ob-  and  Economic Growth, WP 209,
tion of "too-many-to-fail" explains mul-  served in different countries, it cannot  September 1998.
tiple bank rescues. If too many banks  explain the simultaneous rescue of sev-
in an economy are financially troubled,  eral banks. In contrast, "too-many-to-fail"  Steven M. Burgess and Mari Harris,
the social costs of closing all of them   captures the idea that multiple bank clo-  Values, Optimum Stimulation Lev-
may exceed the costs of rescuing  sures can generate high social costs-   els and Brand Loyaltyi Now Scales
them.                               arising from reductions in the output of  tember 1998.
firms deprived of financing, and from the
Yet regulators may realize that they risk  significant resource costs required to im-  Janet Mitchell, Bankruptcy Experi-
being trapped in a "too-many-to-fail" situ-  pose tough, case-by-case policies on   ence in Hungary and the Czech
ation, and they may take measures to  many troubled banks.               Republic, WP 211, October 1998.
eliminate this risk. One such measure                                    Yordan Staykov, The Marketing Sys-
is to weaken bank regulation. By weak-  The proposition that regulators may have  tem in Bulgarian Livestock Produc-
ening regulation (for example, definitions  to become soft in order to be tough im-  tion-The  Present State  and
of bank solvency), regulators diminish  plies that it can be less costly for regu-   Evolutionary Processes during the
their own ability to detect troubled  lators to weaken banking regulations ex   Period of Economic Transition, WP
banks but simultaneously increase the  ante and to apply tough policies expost  212, October 1998.
credibility of the threat to be tough with  to a smaller number of troubled banks   Martina Lubyova and Jan C. van Ours,
financially troubled banks that are ac-  (allowing some troubled banks to go un-   Effects of Active Labor Market Pro-
tually discovered. Becoming soft in  discovered) than to detect more troubled   grams on the Transition Rate from
regulation can permit regulators to be  banks but be forced to rescue them. This   Unemployment into Regular Jobs
tough in banking crises. Indeed, early  suggests that in emerging market econo-  in the Slovak Republic, WP 213,
in the U.S. savings and loan crisis, regu-  mies and in economies in transition,
lators weakened solvency requirements  where the risk of systemic banking cri-  Milan Vodopivec, Does the Slovenian
so that fewer banks would qualify as  ses is high, it may be impossible for  Public Work Program Increase Par-
insolvent. In Japan an early regulatory  regulators to implement stringent bank-  ticipants' Chances to Find a Job?
response to the banking crisis was to  ing regulations without running the risk   WP 214, December 1998.
relax rules for banks to qualify for ad-  of a bailout of the entire banking sys-  Jochen Kluve, Hartmut Lehman, and
vantageous tax treatment for loan loss  tem. The outcome may be only a gradual  Christoph Schmidt, Active Labor
provisions.                         strengthening of banking regulation over   Market Policies in Poland: Human
time, as the risk of a systemic banking   Capital Enhancement, Stigmatiza-
Regulators' responses to banking crises  crisis subsides.               tion or Benefit Churning? WP 215,
thus depend on a number of factors, in-                                  December 1998.
cluding how the banks themselves have  Janet Mitchell is a professor in the Fac-   Katherine Terrell and Vit Sorm, Labor
handled their bad loans; what type of  ulties Universitaires Saint-Louis and   Market Policies and Unemploy-
banking regulation was in place prior to  ECARE, Free University of Brussels.   ment in the Czech Republic, WP
the crisis; and the total number of banks  The paper "Strategic Creditor Passivity,   216, November 1998.
(C 1998 The World BankiThe William Davidson Institute                             TRANSITION, December 1998  M



Latest from the Davidson Institute's Publication Profiles
Starting with this issue, the William Davidson Institute (WDI) will profile the latest findings of its research fellows. The goal is
to highlight academic and policy publications appearing in leading joumals in order to provide readers with an up-to-date
perspective on the main theoretical and empirical issues analyzed by the fellows. Most of the studies have appeared earlier
as Davidson Institute Working Papers. The published papers reflect revisions based on referee comments and subsequent
theoretical and empirical investigations. Whenever possible, Publication Profiles will review several related papers to provide
a comprehensive perspective on the state of knowledge in a given area.
Disorganization Explains Initial Economic Decline
Oliver Blanchard and Michael Kremer, "Disorganization." Quarterly Journal of Economics, November 1997; Gerard Roland
and Thierry Verdier, 'ransition and the Output Fall." Economics of Transition, forthcoming, January 1999.
Countries of the former Soviet bloc have  Central planning was characterized by  has played a more important role in the
been in transition from central economic  a complex set of highly specific relations  former Soviet Union than in Central Eu-
planning for almost 10 years. The vari-  between firms, meaning that firms typi-  rope.
ety of outcomes across many dimen-  cally had one supplier for each input and
sions-from degree of privatization to  one buyer for output. In a market  Roland and Verdier emphasize the costs
unemployment levels to speed of eco-  economy, relationships like these lead  of searching for new trading partners sub-
nomic recovery-is of great interest to  to abuses by one or both parties, which  sequent to the end of central planning and
economists and policymakers looking to  would have adverse effects on overall  the introduction of price liberalization-
advise these countries early in the tran-  production. Market economies eliminate  and the fall in investment associated with
sition process.                    such negative effects either by encour-  such a search. They show that the out-
aging competition (many buyers and  put contraction is followed by a post-tran-
The measured drop in output from prere-  sellers eliminates specificity) or through  sition output level that is higher than the
form levels was dramatic in all of these  the evolution of institutional arrangements  pre-transition level. Their analysis also
countries. The lowest level of decline-  such as contracts and vertical integra-  leads them to conclude that Chinese-
on average, about 20 percent-was in  tion. Under central planning, the main  style gradual liberalization, characterized
the Czech Republic, Hungary, and Po-  instrument available to prevent the ad-  by a lower level of disorganization than
land. By contrast the Baltics, Russia,  verse effects of specificity was the coer-  the all-at-once approach, may prevent
and Ukraine have each seen output de-  cive power of the central planner.  the output disruption and temporary fall
cline by more than 50 percent. Even tak-                               in investment generated by a big bang
ing into account problems with data  Transition of these economies has elimi-  policy.
collection and interpretation, there is a  nated the central planner, but institutional
clear trend of dramatic decline in GDP  arrangements common in the West have
in the initial stages of reform for these  been slower to arise. As a result, a num-   Destination: Europe
countries. Strikingly, in almost every  ber of economic relations have broken
case, GDP fell after prices and trade had  down. Sectors with the most complex
been liberalized.                  production processes have suffered the       v
most dramatic output losses. Trade be-
Both Blanchard and Kremer (1998) and  tween former republics of the Soviet
Roland and Verdier (forthcoming, 1999)  Union has collapsed, and many firms re-
examine one explanation for the de-  port shortages of inputs despite price lib-
cline in output: a theory of disorgani-  eralization. Blanchard and Kremer argue
zation.  Blanchard  and  Kremer  that this general 'disorganization" has
emphasize the cost of losing the coor-  played an important role in explaining the
dinating function of central planning in  output decline. Providing evidence forthis
the absence of institutional arrange-  theory, they show that output has fallen
ments that ease transactions in mar-  most in sectors with the most complex pro-
ket economies.                     duction processes, and that disorganization  From the Hungarian Economy
M  TRANSIT1ON, December 1998                                    (D 1998 The WoTld Bank/The William Davidson Institute



Searching for Optimal Unemployment Policies
John Ham, Jan Svejnar, and Katherine Terrell, 'Unemployment and the Social Safety Net during the Transition to a Market
Economy: Evidence for Czech and Slovak Men." American Economic Review, December 1998; 'Women's Unemployment
during the Transition: Evidence from Czech and Slovak Micro Data." Economics of Transition, forthcoming, January 1999.
Katherine Terrell and Vit Sorm, "Labor Market Policies and Unemployment in the Czech Republic." Joumal of Comparative
Economics, forthcoming, March 1999.
As the transition to a market system  tworepublicswereonecountryfrom 1918  market incentives and (b) providing
began in the early 1990s, all Central and  until January 1993, except during World  an adequate social safety net that
East European (CEE) economies, ex-  War II. They thus shared the same laws  ensures public support for the tran-
cept for the Czech Republic, registered  and regulations, institutions, currency,  sition?
unemployment rates that rose dramati-  and government programs for many
cally from zero to double digits and were  years. Despite the common history, their  The Ham, Svejnar, and Terrell studies
accompanied by long periods of high  labor markets have performed differently  calculate the effect of marginal changes
unemployment. The Czech Republic was  since the Velvet Revolution of November  in unemployment compensation on the
an intriguing outlier, with its unemploy-  1989, with the Slovak labor market re-  duration of unemployment, and they es-
ment rate hovering in the 3-4 percent sembling those of the other CEE econo-  timate the impact of removing unem-
range, well below the 6-8 percent OECD  mies in terms of unemployment rates  ployment benefits altogether. In both
average, and with only short periods of and periods of high unemployment.    republics unemployment benefits have
high unemployment throughout the early                                only a moderate effect on lengthening
to mid-1990s. The CEE unemployment With the average high unemployment  a high unemployment period. Thus,
crisis contributed to a political backlash  period lasting three to four times longer  policymakers in both low and high un-
as voters rapidly ousted the first reform  in Slovakia than in the Czech Republic,  employment transition economies have
governments. Analysts and policymak-  the studies show that nearly 50 percent  considerable latitude in providing an
ers have wondered whether the Czech  of this difference is explained by differ-  adequate social safety net without jeop-
experience provides any policy lessons  ences in labor market demand and de-  ardizing incentives and efficiency. The
that could be useful for other transition  mographic conditions in the two republics. studies also find that married women in
economies. The studies profiled in this  For example, the Czech Republic, un-  the Czech Republic are more respon-
review have focused on answering the  like Slovakia and other CEE economies,  sive to changes in benefits and entitle-
following questions:               was able to provide jobs to low-skilled  ment than single women are-which is
workers at a rate similar to skilled work-  the pattern of behavior in market econo-
Why has the unemployment problem   ers. The remaining difference is ac-  mies-whereas in Slovakia the re-
associated with the transition been  counted for by the behavior of firms,  sponse patterns of married and single
rriuch less severe in the Czech Re-  individuals, and institutions in the labor women to these changes are similar.
public than in other transition coun-  market. For example, in the Czech Re-
tries?                             public the private service sector grew  Terrell and Sorm (1999) focus on the
faster, foreign investment was higher,  effects of both passive labor market poli-
Comparing the experience of the Czech  and the impact of the decline in military  cies, based on unemployment compen-
Republic to the experience of other CEE  production was less, and enforcement  sation, and active labor market policies
countries, it is difficult to account for dif- of labor regulations was stricter than in  -but in the Czech Republic only. The
ferences in relevant laws, institutions,  Slovakia. Also, Czech factories were  two important policy questions they ad-
and definitions of variables. To minimize  newer and better located than those in  dress are: (1) To what extent did the un-
this difficulty, Ham, Svejnar, and Terrell,  Slovakia. There were greater opportuni-  employment benefits deter people from
(1998, 1999) collected and analyzed  ties for Czechs than for Slovaks to work  leaving unemployment and increase the
parallel microeconomic data sets from  in neighboring western economies.  duration of the unemployment period? (2)
a sample of about 6,000 individuals in                                To what extent did the active labor mar-
the Czech and Slovak Republics.    To what extent is the unemployment  ket policies help employ people more
compensation system striking the right  rapidly than they would have been em-
Slovakia is a natural country for compari-  balance between (a) reducing govern-  ployed on their own, without the assis-
son with the Czech Republic because the  ment intervention and introducing  tance of the district labor office? More
C) 1998 The World Bank/The William Davidson Institute                          TRANSITION, December 1998  C



specifically, to what extent were hard-  The Terrell and Sorm study is the first to  unemployed before. Moreover, the labor
to-employ people targeted for assistance  evaluate active labor market policies in  offices assist more individuals who re-
through active labor market policies, pri-  terms of their effective targeting and abil-  ceive unempldyment benefits than those
marily through finding jobs from labor  ity to reduce the length of unemployment  who do not. This finding is consistent
offices, and, to some extent, receiving  duration of different groups in the Czech  with the hypothesis that the labor offices
assistance in the form of job subsidies?  Republic. To address this issue, they  are motivated to reduce the costs of as-
estimate and compare the probability  sistance programs.
Terrell and Sorm's work complements  that an in a given week an unemployed
the studies of Ham, Svejnar, and Terrell  individual finds a job with the help of the  Overall, the results of the three studies
by examining the effects of unemploy-  district labor office to the probability that  suggest that by providing support to the
ment compensation using the same  someone finds a job on his or her own.  unemployed job seekers and assisting
methodology, applied to an identically  People who find jobs on their own reflect them in finding employment, unemploy-
drawn sample of individuals. Those indi- the preferences of the market. To the ex-  ment compensation and active labor
viduals, however, became unemployed  tent that the characteristics of each  market policies such as job brokering
one year later, when the transition was  group differ, one can learn how the la-  programs increase the social acceptabil-
in a more mature phase and the  bor office intervenes in the market to  ity of the transition without creating tre-
economy was growing rather than de-  help certain groups of unemployed  mendous inefficiency. Unemployment
clining. The authors confirm that unem-  people over others.            benefits do not prolong unemployment
ployment compensabon allows individuals                                 periods by much, and job brokering pro-
to search for jobs without substantially  The authors find that active labor market  grams are focused on assisting the hard-
prolonging their duration of unemployment. policies lower the unemployment dura-  to-employ, and only after they have been
Moreover, they conclude that these ben-  tion of the groups that tend to have longer  unemployed for some time. Neverthe-
efits do not have a greater impact on the  unemployment periods: women, Roma-  less, higher demand for labor is clearly
durations of unemployment in periods of  nies, the handicapped, the less edu-  the most effective way of reducing the
economic growth as compared with pen-  cated, and those who have been  duration of unemployment.
ods of recession.
Terrell and Sorm find that education is
important in the unemployment equation: i
in general, the less educated the indi-
vidual, the longer his or her duration of
unemployment. While previously unem-              -  .      t
ployed men find it difficult to find a job,    ji                              I
previous unemployment did not affect a    0          a
woman's chances of finding employ-
ment.
The paper also examines the differences
in duration of men and women's unem-
ployment, and finds women are unem-
ployed an average of 8.6 weeks longer   CFl                                       v
than men. One-third of this difference can
be attributed to dissimilarities in the de-
mographic characteristics of men and
women, with educational differences
seeming most important, and to varia-
tions in local labor demand. Two-thirds
of the difference in the unemployment                    r
rate is due to differences in the behavior   "I'm not gonna tell you everything because I don't want to upset you."
of the unemployed individuals, employ-
ers, and institutions.              From the Hungarian Economy
*  TRANSITION, December 1998                                      © 1998 The World Bank/The William Davidson Institute



Searching for a Common Customs 
Code in the CIS 
by Garry Kemp
Seven years after the creation of the  for stimulating trade. The Central Asian  Resistance to Creation of a Customs
Commonwealth of Independent States  and Caucasus states have generally  Union
(CIS)-comprising the countries of the  been more determined to develop foreign
former Soviet Union minus the three  investment by easing customs restric-  From the point of view of some of the
Baltic states-some of its political lead-  tions.                       CIS countries, there are as many rea-
ers seem to be agreeing on one focus                                    sons not to cooperate more closely
point: its development into a customs  Some observers claim the Iron Curtain  with their neighbors as there are rea-
union for the ex-Soviet territory.  has been replaced by a curtain of red  sons to cooperate. First, there is the
tape. Companies that previously dealt fear of going under during any future
Root Causes of Customs Problems   with one set of strict, but relatively clear  Russian economic meltdown, some-
in the CIS                          customs procedures now must deal with  thing that encourages each state to look
at least 13 sets. There is widespread  beyond its borders for new trade routes
Until 1992 a common market existed  confusion and a lack of clarity about how  (such as the Silk Road project and the
among the republics of the former Soviet customs rules should be applied, and  southern pipelines). Second, there is the
Union. Goods moved freely from one re-  interpretations of the rules can vary from   natural resistance of nationalism and the
public to another, although there were lim-  one customs point to another, even within  many unresolved conflicts between CIS
its on what could leave and enter the  the same city!                   countries (such as that between Arme-
Soviet Union itself. Following the indepen-                             nia and Azerbaijan). Consider the diffi-
dence of Latvia, Lithuania, and Estonia,  Unwanted Diversity            culties that even the stable, like-minded
the remaining republics put into place the                              governments making up the European
trappings of sovereignty-including local This lack of clarity has resulted in cus-  Union have faced while attempting to
currencies, central banks, border controls,  toms officials going to extremes to err  create their own common market.
and national customs authorities. In prac-  on the side of caution. Every 't' must be
tice, however, this hindered the economic  crossed and every Y dotted. Required  Nevertheless, the CIS countries still have
development of the region. Although most documentation can be refused even when  a common language (despite national-
of the CIS customs codes were originally  minor typographical errors are made. For  ist tendencies, Russian is still the lin-
based on 20-year-old Soviet regulations,  example, an airway bill can be refused if  gua franca of the CIS states), a shared
they have long since diverged, thanks to  two digits of a 10-digit number are writ-  history (including shared problems as a
a stream of executive and legislative or-  ten incorrectly, even if the bill itself and  result of trying to adapt to a market sys-
ders followed by a second wave of orders  other documents quote the number cor-  tem), and economic interdependency.
detailing how each piece of legislation was  rectly.                    For these reasons most multinationals,
to be implemented.                                                      including DHL, continue to reflect the Cl S
Sending a product for repair or return  in their organizational and commercial
Customs Functions                   under warranty can also be fiendishly  structures.
complicated. While the practice of an
Answers to the fundamental question of  individual temporarily exporting and re-  Solutions
what customs is meant to achieve differ  importing a warranty item without being
depending on the interest of the CIS  subject to duties is accepted as normal  DHL's approach to customs in the CIS
member. Russia-which aims to gener-  in the West, in the CIS such transac-  is on a country-by-country basis, with
ate up to 45 percent of government rev-  tions are subject to extensive registra-  common long-term goals but differing
enue through customs-Belarus, and  tion and licensing, often leading to  issues. The best short-term solution
Ukraine have traditionally viewed the  additional rounds of paperwork and de-  available may be multilateral movement
customs process first and foremost as  lays every time a piece of machinery  toward simplifying procedures, increas-
a revenue earner rather than as a method  needs to be fixed.            ing automation in the customs process,
© 1998 The World Bank/The William Davidson Institute                              TRANSITION, December 1998  U



establishing a consistent interpretation
of customs regulations, and continuing Foreign Trade and FDI m  Hungary
to empower the companies that perform   an                .        .
clearance. In themselves, these steps and Slovema: DLfferent Paths-
would be a huge improvement on the
current state of affairs. At a political level,  Different Outcomes
there is now a realization that the moun-
tains of paperwork and bureaucracy in  by Bartlomiej Kaminski
the CIS need to be reduced.
Among the frontrunners seeking mem- relative autonomy to enterprise manag-
Unified Approach?                   bership in the European Union, Hungary  ers. And Slovenia became the most re-
and Slovenia are standouts. Democratic formned economy, under Yugoslav market
In November 1998, Russian Prime Minis-  Hungary successfully avoided a default  socialism. Each country had a unique op-
ter Yevgeniy Primakov stated that bring-  on $35 billion in foreign debt,        portunity-Hungary in 1989,
ing back a common economic space "is  a legacy of the Communist                 with the breakup of the War-
the way towards the economic revival of  era, and has become one of              saw Pact; Slovenia in 1992 with
the CIS countries." Primakov expressed  the most stable and growth-             the dissolution of Yugoslavia-
the hope that an initial customs union in-  oriented of the transition           to shift to a democratic politfi-
volving Belarus, Kazakhstan, the Kyrgyz  economies. Slovenia-de-                 cal system, a market-orented
Republic, and Russia could be extended  spite relatively slow economic          economic system, and a
to all 12 countries in the CIS-to facilitate  growth-has maintained its         sharply altered trade regime.
their integration into the world community  position as the most advanced       Both countries chose a rela-
rather than isolate them from it. CIS Ex-  economy in postsocialist Cen-        tively gradualist path, in the ab-
ecutive Secretary Boris Berezovsky  tral and Eastem Europe, mea-                sence of political or economic
backed up this notion when he said that  sured by both GDP per capita and the  incentives to introduce shock measures.
the CIS should 'follow the example of the  quality of its physical infrastructure. Un-  Despite similarities in their methods, how-
European Union. The creation of a free trade  der the "socialist regimes, each country  ever, Hungary and Slovenia chose differ-
zone seems the best option, with com-  experimented with economic reforms that  ent development paths-including their
mon customs regulations and a common  were politically feasible: Hungary intro-  foreign trade regimes. This article ana-
economic space aimed at facilitating mar-  duced a two-tiered banking sector and  lyzes the motives and results of these
ket-based relations."               a modem taxation system, and granted  different approaches.
As the leading air express carrier in all the  Quite different initial conditions deter-  were ready to sell flagship companies
CIS states, DHL has a keen interest in any  mined the countries' distinct reform ef-  to strategic, primarily foreign investors,
steps that would support trade within and  forts, particularly in determining foreign  in order to increase budget revenues.
with the CIS to the benefit of DHL custom-  trade, as well as adopting policies to-  They were also willing to open up to
ers, who are the largest investors in the  ward foreign investment: Hungary had  foreign investors a large part of the in-
area. Far from undermining individual sov-  high external debt, producing a precari-  dustrial and service sectors, including
ereignty, a unified CIS approach to trade  ous  macroeconomic  equilibrium;  telecommunications and banking. This
would serve each member's best interests  Slovenia, in contrast, was freed of the  resulted in a large influx of foreign direct
and open them up to further trade and in-  requirement to subsidize other republics  investment-between 1990 and 1997
vestment opportunities.             of the former Yugoslavia. The challenge  Hungary absorbed about one-half of the
Slovenia faced was inflation and-in be-  foreign capital invested in Central Eu-
The author is DHL's area director for the  coming an independent state-launch-  rope. This development also helped to
CIS. DHL is interested in comments from  ing its own currency.          create effective corporate governance at
individuals or companies regarding cus-                                 the earlier state-owned enterprises.
toms issues in Central and Eastem Eu-  These differences set the stage for a dif-
rope and the CIS. Please contact either  ferent approach to institutional transition.  In Slovenia, with macroeconomic stabil-
Richard Kanarecky or Dirk Singer at the  Hungary came to the conclusion that  ity quickly achieved and the economy
RED Consultancy, tel. 44-171-465-7700,  rescheduling its high extemal debt would  rebounding, the sense of urgency to
Email: richardkeredconsultancycom.  bring more harm than benefit. Conse-  implement microeconomic reforms
quently, the successive governments  quickly evaporated. The main method of
TRANSITION, December 1998                                       (D 1998 The World Bank/The William Davidson Institute



privatization was insider (management-  The Slovene government has restricted  of industrial development, FDI should be
workers) buyout, arising out of strong tra-  foreign direct investment (FDI) in auditing  around 3-5 percent of GDP, instead of
ditions of self-management. But this  agencies, investment companies that  the present 1.5 percent.)
method carries several risks. Where there  manage investment funds, and stockbro-
is a lack of well-developed product and  kerages. Moreover, a majority of the di-  In Hungary joint ventures have been al-
capital markets, managers are not con-  rectors in joint stock companies must be  lowed since 1972, although under the
strainedbycompetitionorthroughthefluc-  Slovene citizens. As a consequence of  communist regime, foreign equity
tuation of the stock market, and this can  these and similar restrictions, Slovenia  couldn't exceed 50 percent. Some mul-
lead to weak corporate govemance. There  is attracting far less foreign capital than it tinationals established their presence
is also a strong incentive to keep outsid-  should. (Considering Slovenia's superb  early, even if they did not really invest
ers, or foreign investors, out.     geographical locabion, and its high level  until around 1990. Subcontracting links
The Slovene Path
In the post-independence period, Slovene economic policy  math of the Russian crisis was inconsequential. The stock
has concentrated more on achieving macroeconomic stabil-  market index suffered noticeable losses in August and Sep-
ity, in terms of external and internal balances, than on insti-  tember, about 20 percent, but given the small size of the
tutional reform. Slovenia has run a balanced current account  market this move of domestic investors from equity to cash
since 1995 under a floating exchange rate regime, while the  is of little consequence for the economy as a whole. Bonds
general government budget has also been more or less bal-  do not play a significant role in the financial system. Interest
anced for the past few years (a 0.3 percent of GDP surplus  rates are indexed and have been falling in line with the con-
in 1995, and a 1.0 percent deficit in 1996 and 1997).  tinued trend of declining inflation in Slovenia-inflation for
1998 is expected to be 8 percent year-on-year, down from
The current account balance has been achieved not only  around 10 percent in 1996 and 1997.
through floating the tolar but also by the introduction of capi-
tal account controls. Foreign capital has been discouraged  The government undertook a costly rehabilitation of the bank-
informally from flowing into Slovenia in recent years because  ing sector in the mid-1990s, although there has been liffle
of the privatization program's bias in favor of insiders. For-  transfer of ownership. Most of the sector remains state-
eigners were almost entirely excluded from participating.  owned-notably the largest bank, Nova Ljubljanska Banka,
Slovenia formally introduced capital controls in the aftermath  and the third-largest bank, Nova Kreditna Banka Maribor.
of the Czech currency crisis in the first half of 1997 to pre-  The sector's bad loans were transferred to the budget, al-
vent appreciation of the tolar, and worsening of the current  lowing bank failures to be largely avoided. Hence, very little
account in the balance of payment. Borrowers were required  restructuring has been carried out. Consolidation of the bank-
to deposit tolar in "custody accounts" in authorized Slovene  ing sector and privatization of large state banks are expected
banks. The inflow of foreign currency dropped significantly in  to proceed very slowly.
the second half of 1997.
There has been little restructuring in the real sector, leaving
The restrictions were later relaxed somewhat, but the inflow  Slovenia dependent on high levels of exports if it wants to
of both foreign direct investment (FDI) and of short-term port-  sustain growth. GNP growth has recently accelerated, from
folio investments and credits to Slovenia did not increase sig-  3.1 percent in 1996 and 3.8 percent in 1997 to an annual-
nificantly. In the first half of 1998, FDI was only $33 million,  ized rate of 6.5 percent in the first half of 1998. This was
portfolio investments $190 million, and credits negligible.  mainly the consequence of increased foreign trade in the
period, with exports up 8.5 percent and imports up 9.0 per-
This policy has, however, delayed restructuring of the finan-  cent year-on-year in the first half of 1998, in turn due to
cial and real sectors. The Slovene equity market is small  higher growth in the EU and the CEFTA states. Thus, if there
and dominated by privatization coupons or shares. The capi-  is a slowdown in Europe, Slovenia's growth rate can also be
talization of the Ljubljana stock exchange was about 15 per-  expected to decline. This vulnerability, together with EU ac-
cent in terms of Slovenia's GDP in July 1998-approximately  cession requirements, is likely to force Slovenia to relax its
$2.5 billion. Foreign participation fell to almost zero in the  capital controls and open up to foreign investment in the
second quarter. Thus, capital flight during and in the after-  medium term.
C) 1998 The World Bank/The William Davidson Institute                             TRANSITION, December 1998   X



Hungary's Conservative Budget
The Hungarian government's 1999 budget plan is tight, re-  percent its inflation forecast, to 10-11 percent for 1999. Real
flecting government concem about a downturn in export de-  wages are expected to rise by around 2 percent. Current
mand. Economy Minister Attila Chikan recently noted that  indications are that a thorough overhaul of the tax system
the European Commission had reduced its forecast for EU  will be attempted in 1999. However, the reforms being tabled
GDP growth in 1999, to 2.4 percent from 2.8 percent, and  for the 1999 budget are relatively modest.
warned that the 5 percent Hungarian growth target was con-
ditional on EU growth remaining above 2 percent. Growth  The government will face growing fiscal pressures from two
will be led principally by industry-September figures showed  areas in particular over 1999:
industrial output up some 14 percent year-on-year, despite
the impact of the Russian crisis in reducing demand for prod-  * Social security. The pensions and health social security
ucts in some key industries.                         funds-brought under direct government control by the new
govemment-show sizable deficits, estimated at 77 billion
Just in case, the government has created a special contin-  forints for 1998 (up from 51 billion in 1997), and expected to
gency fund of around 33 billion forints ($154 million) to cover  increase rapidly to 193 billion forints in 1999. Of the 1999
the shortfall if Hungarian growth in 1999 is only 4 percent.  deficit, 140 billion would likely be financed by the central
The government is also concerned that the current account  budget, with the rest coming from asset sales. Expenditure
deficit may increase as a result of accelerating domestic  on family welfare benefits will increase to 252 billion forints,
demand. Its reluctance to cut taxes may be partly attribut-  an increase of 18 billion on 1998, while the child benefit will
able to a wish to dampen demand.                     become a universal entitlement from January.
* Agriculture. The Ministry of Agriculture has asked for sub-
The budget deficit target is 4 percent of GDP for 1999, com-  stantial subsidy increases for the agricultural sector, to 155
pared with a projected deficit of 4.7 percent for 1998. (The  billion forints, from 104 billion in 1998. However, thus far the
budget deficit is due to fall to 3.5 percent of GDP in 2000  Finance Ministry has resisted this, promising instead to raise
and 3 percent in 2001.) Overall, the government hopes to  the agriculture budget by 18 percent in recognition of the
raise spending by some 2-3 percent in real terms in 1999,  serious difficulties faced by the sector as a result of the
compared with 1998. The government has reduced by 1  collapse in CIS demand.
with Western firms had been building  percent of the aggregate equity of Hun-  role in the generation of exports. Just
since 1968, so managers were accus-  garian companies was in foreign owner-  four multinationals-IBM, Philips, TDK,
tomed to cooperating with foreigners. Af-  ship, and this proportion has risen since.  and Sony-account for roughly one-fifth
ter the 1989 "revolutions," the only country  Banking and processing have the heavi-  of exports.
that was attractive to intemational inves-  est foreign ownership presence, at more
tors was Hungary, which had a good  than 50 percent. According to data from   As part of a drive to encourage invest-
record in its relations with private and  the State Privatization Agency, the  ment, the Hungarian parliament has ap-
multilateral financial institutions. (Poland  country's most active foreign investors are  proved tax allowances affecting large
should have been a competitor, but for  from Germany, followed by the United  investment projects in high-unemploy-
several years foreign investors avoided  States, France, and Austria. Hungary is  ment regions. Companies with capital in-
dealings there because of the country's  the only country in the region to have at-  vestment projects worth over 10 billion
moratorium on servicing its external debt.)  tracted significant Japanese investment,  forints and which started up after Decem-
In 1998 firms with foreign capital were  which now surpasses $500 million.  ber 31, 1996, have been made exempt
responsible for three-quarters of Hungary's                              from corporate taxes for 10 years, if their
exports and imports.                Of the 50 largest multinationals, 40 are  employee ranks increase by at least 500
present in Hungary, providing more than  over the 10-year period and annual tum-
By the end of 1997, cumulative FDI in  60 percent of total FDI. Multinationals  over increases by at least 5 percent of
Hungary since the start of market transi-  produce nearly 25 percent of GDP, ac-  invested value compared with the previ-
tion reached $17 billion, making it the only  cording to estimates. In the country's  ous year. The exemption will be offered
East European state with per capita  small, open economy, the multinationals  for the last time on the tax year 2011.
FDI above $1,000. As of end-1997, 50  have developed an especially important  One should note that these incentives
*  TRANSITION, December 1998                                      C) 1998 The World Bank/The William Davidson Institute



Developments in External Sector in Hungary and Slovenia (millions of dollars)  tve restrictions. Foreign inves-
tors can be shielded from these
Country               1990  1991   1992  1993  1994  1995  1996  1997   batriers, however, if they move
Hungary                                                                      to free trade zones, and take
Exports              9,588 10,187 10,705  8,906 10,701 12,867 13,145 15,958   advantage of the so-called
Imports              8,647 11,382 11,123 12,648 14,554 15,466 16,209 18,851   'dutydrawback,"claimingback
Current account balance  379   403   352 -4,263 -4,054 -2,535 -1,689 -1,126   thedutypaidontheimportcon-
International reserves   1,186  4,028  4,462  6,816  6,853 12,095  9,837 10,267   tent of the export. (By the end
(in months of imports)   1.6   4.2   4.8   6.5   5.7   9.4   7.3   6.5
Real GDP (percent)    -3.5  -11.9  -3.1   -0.6   2.9    1.5   1.3    4 0   its attraction, as products from
Slovenia                                                       8,310e8,372
Exports                            6,681  6,083  6,828  8,316  8,310  8,372 free-trade zones will lose their
Imports                            6,141  6,501  7,304  9,492  9,421  9,358   preferential treatment in the
Current account balance             926   188   600   -23    39    70   Pan-European markets, in-
International reserves              720   788  1,499  1,821  2,297  3,315   cluding EU and EFTA mem-
(in months of imports)              1.4   1.5   2.5   2.3   2.9    4.3   bers.)Asanothervestigeofthe
Real GDP (percent)                  -5.5   2.8   5.3   4.1    3.1    3.8  command economy, Hungary
still applies an annual global
quota on imported consumer
have been made available to all inves-  liberalize under commitments to the  goods (the level has fluctuated between
tors, foreign and domestic alike.  World Trade Organization as well as re-  $400 million and $600 million over 1994-
gional trade agreements. Both countries  98). Around 6 percent of Hungary's exports
gional~ ~ ~ ~~~~~r still subjecnts    tot nonuuntnesicns
Foreign Trade Dissimilarities     are signatories to the Pan-European  are still subject to nonautomatic license
Cumulation Agreement (1997), and  requirements
There have also been similarities in the  around 80 percent of their respective  Both countries, however, have demon-
evolution of the two countries' foreign  manufacturing imports are duty-free.    strated that they have intemationally com-
trade policies. The collapse of the old                               stitedustheyhacitiondlyoth
economic regime put an end to the  Hungary has fallen behind in dismantling  Ptiti ae i shtriacpaci   nan  bot
state's administrative micromanagement vestiges of central planning. Nontariff bar- countries are shifting from natural re-
in both countries. Both were driven to  riers still abound, among them quantita-  source- and unskilled labor-intensive
products to capital-
Cumulative FDI Inflows, Per Capita and as a Share of GDP                            and skilled labor- in-
tensive products.
This suggests that
Country           1990 1991  1992 1993  1990-93  1994  1995 1996  1997 1994-97  they will be able to
(avg)                            (avg)  integrate into the
Per capita                                                                          European Union at a
Estonia              0    0   55  163          55   305   440  513   620       476  higherendofthevalue
Czech Republic      12   61  153  216         111   301   549  683   809       586  added spectrum; in
Hungary             29  168  308  531         259   639 1,068 1,256 1,439   1,101  other words, despite
Poland               2    10   27   71         28   119   213  329   411       268  gloomy predictions,
Slovenia             0    0   56  112          42   154   239  328   476       299  Hungary will not be-
come a provider of
As share of GDP                                                                     cheap, mass-pro-
Estonia           0.00  0.00  2.17  6.64     1.66 12.20 16.59 18.89 22.03    3.85  duced goods.
Czech Republic    0.38  2.48  5.86  7.97     1.99 10.41  16.15 19.10 21.81    3.46
Hungary           0.98  5.55  9.71 16.01     4.00 18.87 29.40 33.98 38.26    5.56  Yet Hungary's perfor-
Poland            0.16  0.56  1.36  3.37     0.84  5.39  8.48 12.06 14.48    2.78  mance in EU mar-
Slovenia          0.00  0.00  0.88  1.77     0.44  2.36  3.27  4.19  5.67    0.98  kets excels that of
Source: Global Development Finance, The World Bank, Washington D.C., 1998,           Slovenia. The pace of
and Economic Survey of Europe 1998 No.1. United Nations Economic Commis-  change has been much faster for
sion for Europe.                                                      Hungary's exports to the European
© 1998 The World Bank/The William Davidson Institute                          TRANSITION, December 1998  U



Union, despite its seemingly more pro- Milestones of Transition
tectionist trade policies. Spectacular
changes in Hungary's export structure
point to a massive emergence of "sec-  cis                                the former Soviet Union at $57.7 billion, or
ond generation" firms-primarily local                                      17.6 percent less than in 1997. Imports
branches of multinationals-demonstrat-  Moldova                            for 1998 are 25 percent down from 1997.
ing progress in industrial restructuring.  Central bank's hard currency reserve  Foreign investment down. Foreign in-
Eighty percent of Hungary's exports are  hal in  s hardovan reservestmen investotadown. Foe6 il-
directed toward the European Union. Be-  halved in 1998- The Moldovan National   vestment in t Russia totaled just $1.6 bil-
tween 1994 and 1997 the value of its ex-  Bank's hard currency reserve shrank to  lion in the third quarter of 1998, down from
ports to EU countries increased by 132  half its previous level during 1998 and is  $3.7 billion in the second quarter and $4.0
percent, as rapidly growing export earn-  currently $150 million. The central bank  billion in the first quarter. Investment fell in
ings and an influx of foreign capital al-  ran short of its own net hard currency as-  almost all sectors of the economy. For-
lowed an increase in imports, thereby  sets to satisfy state needs, so it had to  eigners took a total of $1.3 billion out of
providing higher-quality products for both  resort to the IMF. "The reserve shall be  the country in the third quarter, so net for-
consumption and investment. Hungary  replenished immediately upon the anival  eign investment amounted to less than
registered the highest export growth rates  of $35 million from the Intematonal Mon-  $300 million. Net foreign investment in the
over 1995-97, compared with five other  etary Fund and then $35 million from the  first nine months totaled $3.4 billion. There
first-wave candidates. During this period  World Bank," National Bank President Le-  was a net outflow of foreign capital in the
the share of manufactured products in-  onid Talmaci said. Since August 17 (the  financial services industry ($200 million)
creased from 71 to 85 percent.       date Russia freed the ruble rate), the bank  and in advertising and auditing ($270 mil-
has spent some $100 million over two  lion) in the first nine months.
In Slovenia the shift toward a more tech-  months to redeem treasury bonds and
nology- and skilled labor-intensive export  underpin the Moldovan lei on the currency  EU plans new $5 billion aid program.
structure is progressing more slowly than  market. In eariy November the bank an-  The European Union is putting up $5 bil-
expected. This is partly the result of a  nounced it was ceasing its currency inter-  lion for a new aid strategy for Russia, aimed
lack of new industrial capacities and "sec-  ventions to preserve the country's hard  principally at subsidizing and encourag-
ond generation' firms, and partly because  currency reserve. The inflation rate in 1999  ing foreign private investment. Tough con-
of low FDI flows. The weak incorporation  is expected to hover around 15 percent.  ditions will require the fulfillment of precise
of local firms into global networks of pro-  The expected budget deficit in the first half  interim performance targets before new
duction and marketing, especially in tele-  of 1999 should be financed from   money is released. The existing Tacis pro-
communications and financial services,  privatization revenue, according to Talmaci.  gram, which has spent over $3.3 billion
has slowed corporate restructuring.                                        since 1991 as the EU's main aid and tech-
Russia                               nical assistance vehicle, is to be over-
In summary, the pattem of integration has                                  hauled and renamed. This follows a highly
defied earlier predictions. Both Hungary  Industrial output dropped 5.5 percent  critical intemal review that concluded that:
and Slovenia have demonstrated that their  while inflation surged to 84.4 percent,  "coherent strategies for promoting the two
industrial and service sectors are able to  in 1998. Russia's Economics Ministry has  Tacis objectives of market-orientated re-
withstand the competitive pressures of the  reported that the ruble has plummeted by  forms and the reinforcement of democracy
European Union. However, FDI plays a  nearly 70 percent since September. Rus-  are largely absent." The new scheme pro-
crucial role in restructuring in transition  sia has the worst-performing stock mar-  poses to put 25 percent of EU funds into
economies; thus, attracting large amounts  ket among 32 transition countries  promoting private investment and another
of foreign capital will help Hungary, with its  monitored daily by the International Fi-  25 percent into incentive schemes to re-
high-value-added products, integrate into  nance Corporation. As a result of Russia's  ward the best development projects in each
the European Union, while Slovenia's re-  crisis and lower world prices for oil  of the former Soviet states. The current
strictive policies goveming FDI can make  (Russia's main source of export income),  approach, under which Tacis has sup-
its integration efforts more difficult, despite  the country's foreign trade for the period  ported 1,011 separate programs, is to be
initial advantages.                  from January to November was down 13.6  replaced by a priority system of putting
percent as compared with the same pe-  more resources into fewer than 100 better
The author is a professor at the Univer-  rod in 1998. The Economics Ministry said  controlled projects. The EU will keep work-
sity of Maryland, College Park, and con-  final reports were likely to put exports for  ing on aid projects to improve the safety
sultant at the World Bank.           1998 to countries outside the territory of  of Russian nuclear power plants and to
*  TRANSITION, December 1998                                       (D 1998 The World Bank/The William Davidson Institute



inculcate banking, accounting, and finan-  ($860 million) and planned to use an-  administrative regions in EU countries.
cial skills.                        other 5 billion rubles in 1998. In 1999 the  The new scheme also brings back 308
bank plans to provide another 25 billion  county-level units that existed in Poland
Population down further. Between  rubles' worth of stabilization credits.  decades ago. Local units, such as towns
January and October 1998, Russia's                                       and villages, remain largely as they were.
population fell by 311,000, or 0.2 percent,  Ukraine                     The 16 regional govemors are appointed
to 146.4 million, figures from the State                                 by the government, while politicians at
Statistics Committee revealed. Natural  State debt is accumulating. Finance  lower levels were elected in nationwide
population decline remained the chief rea-  Minister Ihor Mityukov reported that state  local voting iast October. Economists say
son for the dropping numbers. In 1998  debt totaled $14.9 billion as of October 1,  that to make the administrative reforms
Russia saw 439,400 new migrants,  of which external debt had risen $1.4 bil-  truly effective, more taxing powerwill need
whilel74,500leftthecountry. (Thefigures  lion from the start of the year to $10.9 bil-  to be shifted to local govemments.
for 1997 were 490,200 and 196,600, re-  lion. "We have now reached a critical point,"
spectively.) The mortality rate, which rose  he said. The govemment plans to raise 23.1  Inflation down to one digit. The annual
to 15 per 1,000 in 1995 from 7.4 per 1,000  billion hryvni ($6.74 billion) in budget rev-  inflation rate from October 1997 to Octo-
in 1960, put Russia behind all the coun-  enues in 1999. The national bank's goal in  ber 1998 dropped to one digit (9.9 per-
tries in Europe, America, and Asia, apart  1999 is to preserve the hryvnya exchange  cent) for the first time since Poland began
from war-torn Afghanistan and Cambodia,  rate at 4 hryvni to $1, bank chairman Viktor  reforming its economy. Consumer prices
according to a report by the presidential  Yushchenko said. Economy Minister Vasyl  rose by 7.6 percent from January to Octo-
Commission on Women, the Family and  Rohovyy told the parliament that GDP is  ber 1998, down from 10.8 percent in the
Demography. The rise in the mortality rate  expected to fall by 1.5 percent in 1998,  same period in 1997. Lower inflation can
has been attributed largely to the effects  instead of growing by 0.5 percent, as pre-  be attributed to smaller price increases
of rampant alcoholism and declining stan-  viously projected. The economy is pro-  for foodstuffs following the good harvest
dards of health care.               jected to grow by 1 percent in 1999.  and surplus agricultural production of 1998.
Organized crime controls nearly 50  Central and Eastern Europe           Romania
percent of the Russian economy,  Estonia
Prosecutor General Yury Skuratov, who                                    Poor performance in 1998. Alone
was cited according to Interfax. Skuratov  Spending cuts. The cabinet approved  among the transition economies in Cen-
said organized crime is blocking the  cutting the 1999 budget by 800 million  tral and Eastern Europe, Romania's
normal operation of banking institutions,  kroons ($62 million), based on projected  economy has by most measures per-
making the shadow businessmen rich  GDP growth of 4 percent. As a result, lo-  formed worse since a reformist govern-
and creating a federal budget deficit.  cal municipalities will receive considerably  ment was elected to replace the former
Prosecutors estimate 50 percent of all  less money, as will those ministries whose  Communists (in Romania's case, in No-
commercial banks and 40 percent of  budgets were expected to show the big-  vember 1996), according to research
state-owned companies are criminally  gest growth in 1999, including the Minis-  scholar Michael Wyzan. Although infla-
controlled, thus affecting between 40 and  try of Interior. The opposition had rejected  tion is down and the exchange rate has
50 percent of Russia's annual gross do-  the original 18.45 billion kroon budget,  been relatively stable in 1998, GDP will
mestic product. Russia's natural gas,  which was based on GDP growth of 6 per-  decline between 3 and 6 percent for the
oil, and coal sectors have been particu-  cent, as overly optimistic.    second consecutive year, and privatization
larly hard-hit by organized crime units.                                 efforts have been largely stalled. After ex-
Poland                              periencing positive growth from 1993 to
Salvaging the banking system. Cen-                                       1996, GDP fell by 6.6 percent in 1997.
tral Bank of Russia First Deputy Chair-  Administrative restructuring. Poland  Industrial production was down by 19.1
man Andrei Kozlov estimates that of the  redrew its domestic administrative map  percent in the first half of 1998, relative to
country's roughly 1,500 banks, at least  under a plan that aims to increase govem-  the same period in 1997. Slower growth
720 will have to close their doors. Kozlov  ment efficiency. The makeover, which went  in imports has been more than offset by
said rescuing the banking sector will cost  into effect January 1, 1999, replaces the  a decline in exports.
141 billion rubles ($8.3 billion). To date,  country's communist-era division into 49
the central bank has granted stabiliza-  regions with 16 larger ones, which design-  We appreciate the contributions of FRE
tion credits of nearly 15 billion rubles  ers say are more in line with existing  correspondent Robert Lyle.
C) 1998 The World Bank/The William Davidson Institute                             TRANSITION, December 1998  v



World Bank/IMF Agenda
World Bank Approves $400 Million  In a review of its overall strategy toward  hosted a special financing meeting to
Loan to Russia                     Russia, the Bank's Board of Executive  mobilize additional balance-of-payments
Directors approved an 'interim plan" for  support for the poorest countries neigh-
The World Bank approved a new $400  working with Russia in the midst of the  boring Russia: Armenia, Azerbaijan,
million road construction loan for Rus-  current crisis. The plan will focus on so-  Georgia, the Kyrgyz Republic, Moldova,
sia on December 22. With this loan the  cial issues, structuring a strong reform  and Tajikistan-which have been hard-
Bank's total commitments (net of can-  program, and continuing project prepa-  est hit by the crisis. The meeting was
cellations) to Russia-for the 41 projects  ration, pending a decision on future lend-  called to support these countries' own
involved-increased to some $11.3 bil-  ing that will be made in the context of  efforts by raising funds to cover half of
lion. The latest loan is expected to con-  the new country assistance strategy,  the financing gap caused by the Rus-
tribute to major improvements in road  scheduled for next June.        sian crisis. Participants in the meeting
financing, particularly through signifi-                               pledged nearly $200 million to bolster
cantly increasing the road user charges  IFC Finances Georgian Oil     the countries' foreign reserves. More-
paid by heavy trucks; and to improve the  Development                  over, some participants indicated that
condition of selected high-priority roads                              more may be added in coming months.
and bridges in the federal road system,  The International Finance Corporation  The meeting, chaired by John Odling-
including in Siberia and the Far East,  will finance further development of the  Smee, Director of the European II De-
and in the regional road systems of the  Ninotsminda oil field in the Republic of  partment of the IMF, and Johannes Linn,
Krasnoyarsk and Khabarovsk regions. It Georgia through a $6 million loan to  Vice President of the World Bank, in-
will also help further develop the private  Ninotsminda Oil Company (NOC). The  cluded participants from Canada, Ja-
road construction and consulting indus-  Ninotsminda field, which was first devel-  pan, Russia, and the United States,
tries and expand the use of competitive  oped in the 1980's, currently has a 2,000  several European countries, the Euro-
bidding.                           barrel-per-day capacity and accounts for  pean Union, and the Asian Development
more than 50 percent of Georgia's do-  Bank.
The Bank is attempting to find ways to  mestic oil output. Production is shared
continue to help Russia, despite the fi- between NOC and Georgian Oil, the  Donors Pledge $2.2 Billion to
nancial crisis and the fact that Russia  state oil company of Georgia. IFC's loan  Vietnam
does not yet have a comprehensive re- will allow at least five more wells to be
covery strategy, Vice President for Eu-  drilled in order to increase production and  Foreign donors pledged financial sup-
rope and Central Asia Johannes Linn  realize the field's full potential.  port of $2.2 billion to Vietnam, but of-
pointed out. The crisis has already taken                              fered to provide another $500 million to
a heavy toll on the Bank's current lend-  NOC is owned by CanArgo Energy Cor-  support the implementation of an ac-
ing projects in Russia-the number of  poration of Calgary, Canada (with 68.5  celerated reform program. During their
projects with a satisfactory implemen-  percent) and JKX Oil and Gas PLC of  Sixth Consultative Group Meeting in
tation rate dropped from around 80 per-  London, UK (31.5 percent). The project  Paris (the annual forum for discussions
cent in July to only 54 percent in  will help to redress Georgia's large en-  between the Government of Vietnam
November, Country Director for Russia  ergy deficit and improve its external trade  and the international donor community)
Michael Carter noted. Some projects  balance, as well as contributing to the  on December 7 and 8, the participants
were brought temporarily to a halt be-  govemments fiscal revenues. Develop-  concluded that the aid package should
cause of the financial crisis, which has  ment of the Ninotsminda field will be  fund the social and financial costs of
frozen funds in some banks and in some  undertaken by Georgian staff and man-  the reforms, especially state-owned en-
instances prevented local Russian part-  agement, and the project is expected to  terprise (SOE) reform, banking reform,
ners from paying their share of the  directly employ more than 100 people.  including comprehensive restructuring
projects. The $1,850 million in undis-                                 of the four state-owned commercial
bursed drawings from three adjustment World Bank-IMF Support for Poorest  banks); and trade liberalization.
loans await compliance with conditions  Countries Neighboring Russia
of tranche disbursement and agreement                                  The donors agreed that Vietnam faces a
on a broad economic reform plan with  The International Monetary Fund (IMF)  serious economic situation and strongly
the IMF.                           and the World Bank on December 11  supported its plans for reinvigorated
*  TRANSITION, December 1998                                     © 1998 The World Bank/The William Davidson Institute



rural development, but noted that in-  (DEM 145.7 million) to Bulgaria in sup-  market, improve work incentives for the
creased investments in rural areas will  port of the government's social protec-  unemployed, and protect workers who
be effective only if they are accompa-  tion reform program, to be used in the  are laid off ufider the structural reform
nied by policy and institutional reforms.  following areas:             program.
Loan Supports Bulgaria's Social     * To help reform the pension system,  * To strengthen and consolidate means-
Protection Reform                   encouraging the development of a sec-  tested benefits for the most vulnerable,
ond and third pillar pension provision to  strengthen the management and quality
The World Bank on November 19 ap-  diversify old-age risk beyond the public  of social assistance services, and in-
proved an $80 million-equivalent loan  system.                          crease community and private participation
IMF Lowers Growth Forecasts for Transition Economies
For the countries in transition to market economies, the In-  ties. The IMF reports that Estonia and Lithuania, in particu-
ternational Monetary Fund (IMF) forecasts on average a nega-  lar, are vulnerable to changes in sentiment in global financial
tive growth rate of nearly 1 percent in 1998, and a nearly 2  markets. The Fund dramatically lowered its forecast for the
percent decline in 1999. The latest IMF analysis was re-  Transcaucasus and Central Asian nations to 2.1 percent in
leased on December 22 in the Fund's most recent interim  1998 and 3.0 percent for 1999-cutting by one-half its earlier
reassessment of its World Economic Outlook.          forecasts. Following are the latest IMF forecasts of GDP growth
in 1989 and 1999 for selected countries in transition:
The IMF said that both economic and social conditions in
Russia have 'deteriorated dramatically" since the August fi- Projected Economic Growth
nancial crisis. Moscow continues to lack macroeconomic poli-  (percent)
cies that would help restore the confidence of investors and  Country            1998        1999
establish the preconditions for sustainable growth; has a large
underlying fiscal imbalance; and has current budget plans  Transition Counties    -0.8       -1.9
that simply fail to meet the requirements for tuming the situa-  Albania          8.0         8.0
tion around. For any hope of success, Russia would have to  Arbaenia              5.5         4.0
reestablish stability-oriented economic policies, accompanied   Azerbaijan        8.0         7.5
by significant banking system restructuring, the normaliza-  Belarus              7.0         2.0
tion of relations with creditors, and a return to the unfinished   Bulgaria        5.0        3.7
task of structural reform. Among the steps required would be   Croatia             2.4         1.3
a fiscal policy that is based on the bulk of government expen-  Czech Republic    -1.5        1.0
ditures being financed by tax revenues, without resort to ar-  Estonia            5.1         3.6
rears, and whose financing would allow inflation to be   Georgia                  4.0         2.0
reasonably contained, said the IMF.                  Hungary                      5.2         4.8
Kazakhstan                  -1.5        n.a
In Central and Eastern Europe, the Fund report said, Hun-  Kyrgyz Republic        6.0         4.6
gary and Poland have weathered the financial market tur-  Latvia                   6.0        5.0
moil reasonably well while in the Czech Republic output  Lithuania                 5.3        4.0
should recover in 1999. For all the countries of Central and   Macedonia          5.0         5.0
East Europe, excluding Belarus and Ukraine, the Fund is  Poland                   5.6         5.1
forecasting growth in 1998 of 2.9 percent and a much better  Romania              -5.5        -2.0
3.2 percent in 1999. Ukraine, in addition to facing reduced   Russia             -5 7         -8.3
trade from Russia and other effects of the country's crisis, is  Slovak Republic   4.0         2.0
also confronted with the consequences of its persistent bud-  Slovenia            4.4         4.5
getary imbalances and inadequate reform efforts. The Baltic  Tajikistan            3.4        4.0
countries-Estonia, Latvia, and Lithuania-have been hit by   Turkmenistan           3.6        12.1
both reduced access to private external financing and direct  Ukraine             -1.7        -3.5
effects of the Russian crisis, especially in banking and trade  (Robert Lyle, RFE)
(D 1998 The World Bank/The William Davidson Institute                            TRANSITION, December 1998  U



in the delivery of social assistance pro-  Excluding Central and Eastern Europe  sible responses to the 1998 financial
grams and services.                 and the Baltics, the countries of the  crises. Counlries with large reserves
former Soviet Union would have a nega-  have, by and large, coped betterwith the
* To reform the health system by im-  tive 3.7 percent growth rate in 1998,  turmoil than those with smaller ones, and
proving its fiscal sustainability and by re-  and an even worse negative 4.3 per-  this is likely to prompt countries to re-
ducing costs of health benefits to  cent in 1999. The Bank's report says  think their reserve policy. But efforts by
employers.                         the 30 percent decline in oil prices and  emerging market economies to create
similar drops in metals and agricultural-  current account surpluses to build up re-
The loan has a maturity of 20 years, in-  resource prices have pushed Russia's  serves could have a deflationary impact
cluding a five-year grace period, and will  current account into deficit, with 25 per-  on the world economy.
be at the standard interest rate for  cent of the government's revenues tied
LIBOR-based, deutsche mark single  to oil and gas sales. Resource-depen-  The IMF could build on its latest experi-
currency loans. Since joining the Bank  dent Azerbaijan, Kazakhstan, and  ences to become an international lender
in 1990, Bulgaria has received commit-  Uzbekistan are being hurt by this as  of last resort-sort of a national central
tments of loans totaling more than $1.13  well. Terms of trade figures of CIS coun-  bank that can provide unlimited funds to
billion for 16 projects.           tries (this index compares export price  a bank that has short-term problems and
changes to import price changes) de-  can provide collateral. Interest rates on
World Bank's GEP: Global Spillover  teriorated an estimated 13.5 percent  emergency loans would be determined
of the Russian Crisis              in 1998, or 1.5 percent of total GDP.  by a government's economic policies
Central European countries, in con-  and financial management, with lower
The global economy took a bigger hit trast, saw a 6 percent gain in terms of  charges for those adhering to standards
than anyone expected from the finan-  trade in 1998, or 2 percent of GDP. The  that are being drawn up by the major in-
cial crisis that began in Asia in 1997  main indirect spillover of the Russian  dustrialized nations. Governments that
and spread to Russia in 1998, accord-  crisis affecting developing and transi-  failed to meet the new code of good eco-
ing to the World Bank's annual report  tion countries around the world is the  nomic conduct or that delayed approach-
on Global Economic Prospects, which  reduced availability of private capital  ing the IMF until crisis was inevitable
adds that it is too soon to tell whether a  and the increased cost of borrowing.   would likely be penalized with higher in-
worldwide recession is in store in 1999.                                terest rates and demands for sweeping
The Bank lowered its worldwide per  IMF Could Become World Lender    policy reforms.
capita growth forecast for 1998 to less  of Last Resort
than one-half percent (0.4)-compared                                    World Bank Fights Tobacco
with 3.2 percent in 1997-and projects  IMF First Deputy Managing Director  Epidemic
that global growth in 1999 will be just  Stanley Fischer said in early January
1.9 percent.                       that bigger central bank reserves, more  If present smoking patterns persist, at least
transparent financial systems, and an  100 million of the 340 million Chinese males
The Russian crisis has been a major  enhanced role for the Fund are all pos-  below age 29 will eventually be killed by
part of the downturn in global output and
the report says the potential for spillover
effects within the region of Central and
Eastern Europe and Central Asia re-
mains high in the near term. But in the
entire region, only 4 of the 25 countries
had negative growth rates in 1998-
Czech Republic, Romania, Russia, and
Ukraine. (The IMF added Kazakhstan
to this list of "negative growth coun-            //^\$ 
tries," while the World Bank predicted           ,
0.5 percent growth for 1998 in this Cen-       t                __
tral Asian country. In general, the Bank
is a bit more optimistic in its forecasts
than the IMF.)                      From theWorld Press Review
*  TRANSITION, December 1998                                     © 1998 The World Bank/The William Davidson Institut



tobacco, warned the British Medical Jour-
nal on November 20, 1998. The joumal ronerence  Diary
published the results of the world's larg-
est-ever study of tobacco-related deaths  Mu asic (oru k                demieait-online.de, Intemet:-httpdmilwww.
and health hazards. Partly financed by a  March 8 (New York) and 9 (Washington,  balticnet.de/Ostsee-Akademie/Ostse
World Bank loan to China, the study in-  D.C.), United States           eakademie-Info.html.
volved 1.25 million Chinese and concluded
that in the mid-i 990s smoking was already  Organizer: Eurasia Group.   Unions and Industrial Relations In the
responsible for about 12 percent, or 0.7  Topics: Economic Stability in Russia and  Transformation Countries
million, of al a odult male deaths in China  the CIS (New York), by Boas Berezovsky,  Date changed: formerly November
plus about 3 percent, or 100,000, of all  Executive Secretary of the CIS; and Rus-  1998, now March 14-17, 1999, Berlin,
adult female deaths.                sian Foreign Policy and the CIS (Wash-  Germany
ington, D.C.).
Based on present smoking patterns, the  Information: Eurasia Group, 1133 Broad-  Organizers: Otto Brenner Foundation,
study predicts annual tobacco deaths  way, Suite 1600, New York, NY 10010,  Hans Bockler Foundation, Friedrich
will reach 1 million just after 2010, 2 mil-  United States, tel 212-366-9560, fax  Ebert Foundation.
lion by about 2025, and 3 million, almost  212-366-9699, Email: kapoor@eurasia  Languages: English, German, and
all male, by 2050, as today's young  9                                  Russian.
Call for papers: The Otto Brenner Foun-
adultse raea   nol age.cTwo outmofhree  Cultural Standards in Business and  dation invites researchers to propose
Ciesoreagemales now bivecom smokers andSociety in the European Union: Meth-  topics for lectures. Submit CV with list
before aods and Methodology in Intercultural  of relevant publications to the address
about half of those who persist will be  Research                       below. The costs of participation and
killed by tobacco in middle or old age.  March 10-13, 1999, Gloggnitz, Austria  travel will be covered for those appli-
China has about one in four of all smok-
ers in the world. One in two persistent Organizer: Institute for the Danube Re-  Information: Michael Guggemos, or Dr.
cigarette smokers-no matter where  gion and Central Europe, with support  Wim van Meurs, Otto-Brenner-Stiftung,
they live-is eventually killed by tobacco.  from the European Commission.
Languages: English and German.      Buero Berlin, Alfte Jakobstrasse 149, D-
Since 1991 the World Bank's formal  Information: Applications as discussants  10969 Berlin, tel. 49-30-834-8668, fax 49-
policy is to not lend for tobacco produc-  (informal letter; CV indicating nationality  30-25396011, Email: meurs@zedat.
tion, processing, or marketing. The Bank  age, and gender) and applications as  fu-berlin.de.
encourages governments to control to-  speakers (abstracts of about 500 words,
bacco and to reduce or minimize the  scientific CV) should be sent to: Sylvia  The European Union Enlargement to
tobacco epidemic. In its 1997 Health  Meierwewert, Forschungsinstitut fuer  the East, But at What Speed?
Sector Strategy Paper, the Bank strongly  Europafragen (Research Institute for Eu-  March 22-23, 1999, Paris, France
recommended that governments:       ropean Affairs), Wirtschaftsuniversitaet
'VWien, Althanstrasse 39-45, A-1090 Wien,  Organizers: GASI (University Marne la
* Significantly increase tobacco taxes,  tel 43-31336-5084, fax 43-1-31336-752,  Vallee) and ROSES (University Paris 1,
and thus prices.                    Email: Meierewe@fgr. wu-wien.ac.at Ap-  Pantheon Sorbonne).
plications should be received by January  Topics: EU enlargement in process,
* Implement complete bans on tobacco  18, 1999.                         East-West economic convergence in
advertising and promotion of tobacco  EnIri  th E         Uni  t E    Europe; costs and benefits of EU acces-
products.                           compass Central and Eastern Europe  sion for both associated countries and
Macmpass999 Centrl, anGEsermnyErp   EU members; microeconomics of EU
* Disseminate easily understood infor-  March 16, 1999, Kiel Germany    enlargement, including competition, in-
mation on health risks.             Organizer: Ostsee Akademie.         vestment, and enterprise adjustment.
* Research the causes, consequences,  Language: German.                 Information: Xavier Richet, Directeur du
and costs of tobacco use.           Information: Ostsee-Akademie, Trave-  Centre Interuniversitaire d'6tudes
muende, Europaweg 3, D-23570 Lue-  hongroises, Universit6 Paris 3, 1, rue
* Increase funding and expertise for to-  beck, tel. 49-4502-803-203/205, fax  Censier, 75005 Paris, France, tel. 330-
bacco control units.                49-4502-803-200, Email: ostseeaka  1-45-87-41-83, fax 330-1-43-37-10-01.
C 1998 The World BankWThe William Davidson Institute                             TRANSITION, December 1998  U



International Conference: Recent De-  Transition Processes in Enterprise; and  473-1062, fax 202-522-0304, Email:
velopments and Problems in the  Transition Processes and the 21t Century.  bpleskovic eworldbankorg .
Transition Economies                 Information: Faculty of Economics,
March 25-27, 1999, Skopje, Macedonia  Radovanova 13, HR2100O Split, Croatia,  Fifth Annual CREEB Conference: The
tel. 385-21-362-465, fax 385-21-366-026,  Impact of Transformation on Indi-
Organizer: Sts. Cyril and Methodius  Email: eitconf@efst.hr, Intemet: http://  viduals, Organizations, Society
University, Faculty of Economics.    www.efst.hrleitconf/.                June 22-23, 1999, Chalfont St. Giles,
Information: Mrs. Valentina Ganzovska,                                    England
Faculty of Economics, Blvd. Krste  Germany and the Baltic Countries in
Misirkov bb, Skopje 91000, Macedonia,  the New Europe: Experiences of One  Organizers: CREEB, Buckinghamshire
tel. 38991 223-245, fax 38991 118-701,  Decade of the New "Neighborhood,  Business School.
Email: valentina@eccf.ukim.edu.mk.    May 28-30, 1999, Kiel, Germany      Information: Vincent Edwards, CREEB,
Bucks College, Newland Park, Chalfont
Eleventh Annual Bank Conference on  Organizer: Ostsee Akademie.           St. Giles, HP8 4AD, United Kingdom,
Development Economics (ABCDE)-  Language: German.                         tel. 44-1494-603159, fax 44-1494-
1999                                Information: Ostsee-Akademie, Trave-  874230, Email: creeb@buckscol.ac.uk
April 28-30, 1999, Washington, D.C.    muende, Europaweg 3, D-23570 Lue-  PHARE ACE Competition and
beck, tel. 49-4502-803-203/205, fax  Investment Summer Seminar
Welcoming address by James D.  49-4502-803-200, Email: ostseeak   August 27-September 5, 1999, Vysoke
Wolfensohn, President, the World Bank;  ademie@t-onfine.de, Internet: http://  Tatry-Podbanske, Slovak Republic
keynote addresses by Kenneth Arrow,  www.balticnet.de/Ostsee-Akademie/
Stanford University, and Joseph E. Stiglitz,  Ostseeakademie-Info.html.   Organizer: PHARE ACE, and coordi-
Senior Vice President Development Eco-                                    nated by the Center for Economic De-
nomics and Chief Economist, World Bank.  First ABCDE-Europe, 1999         velopment, Slovakia.
Sessions include: Economic Architecture  June 21-23,1999, Paris, France   Topics: EU enlargement, Economic
(Arminio Fraga/Dani Rodrik; Amar                                          Competition, Foreign Investment.
Bhattacharya/Joseph E. Stiglitz; Erik  Keynote addresses by Lionel Jospin, Prime  Information: Mr. Lubos§ Vagae, Center
Bergt6f; and Ann Florini); Social Issues  Minister, France; James D. Wolfensohn,  for Economic Development, BajkaIskca
(Francois J. Bourguignon; Glenn C. Loury;  President, the World Bank; Joseph E   25 827 18 Bratislava, Slovakia, tel 421-
Abhijit Banerjee; and Ravi Kanbur/Nora  Stglitz and Jean-Francois Rischard, the  Email: 7ubosv@03cphr.sk.
Lustig); Economics of Transition-Ten  World Bank. Sessions include: The New
Years After (Charles Wyplosz; Nicholas  Comparative Economic Systems (Round-  The Baltics in Research and Teaching
Stem; Yingyi Qian; and Anders Aslund).  table: Mustapha Nabli, Oliver Hart, Jean  in Germany, Europe and North America
Workshop sessions cover Health; Social  Tirole, Katharina Pistor); Transitfon-First  September 19-22, 1999, Kiel, Germany
Insurance; Decentralization and Environ-  Ten Years (John Flemming); Market Orga-
ment; Macro Issues; Financial Market;  nization (Roundtable: Isher Ahluwalia,  Organizer: Ostsee Akademie.
Trade Policy; and Aid Conditionality. Par-  Masahiko Aoki, Assar Lindbeck); PoverLy  Language: German.
ticipation for nonstaff by invitation.  and Inclusion (Francois Bourguignon and  Information: Ostsee-Akademie, Trave-
Information: Boris Pleskovic or Gregory  Anthony Atkinson); Global Externalities  muende, Europaweg 3, D-23570 Lue-
Ingram, Research Advisory Staff, WoRld  (Domenico Sinscalco); and Closing: Domi-  beck, tel. 49-4502-803-203/205, fax
Bank, 1818 H. Street, Room MC4-391,  nique Strauss-Kahn and Oskar Lafontaine.  49-4502-803-200, Email: ostseeak
Washington D.C. 20433, United States,  Workshop sessions cover Labor Markets,  ademie@t-online.de, Internet: http://
'                                      ~~~~~~~~~~~~~www. balticnet. de/Ostsee-Akademie/
tel. 202-473-1062, fax 202-522-0304,  Knowledge and Development, Gender Eco-  Ostseeakademie-lnfo.html.
Email: bpleskovic @worldbank.org.    nomics, Democratic Accountability, Social
Security, Trading Blocks, Environment and   We appreciate the contributions of the
Enterprise in Transition             Global Financial Crises. Participation by  Cooperation Bureau for Economic Re-
May 27-29, 1999, tibenik, Croatia    invitaton.                           search on Eastem Europe, Koenigin-
Information: Boris Pleskovic, Research   Luise-Str. 5, D14195, Berlin, Germany,
Organizer: University of Split.      Advisory Staff, World Bank, 1818 H   tel. 4930-8977708-68, fax 4930-897708-
Topics: Transition Processes and Economic  Street, NW, Room MC4-391, Washing-  99, Email: tribakova(diwberlin.de or
Development; Enterprises in Transition;  ton, D.C. 20433, United States, tel. 202-  dbowen@diw-berdin.de.
U  TRANSITION, December 1998                                       (D 1998 The World BankThe William Davidson Institute



New Books and Working Papers
The Macroeconomics and Growth Group regrets that it is unable to provide the
publications listed.
World Bank Publications             committees provide a useful framework  Changes in Economies of Scale Af-
for fiscal discipline and coordination of fect Poverty Rates for Different
To receive ordering and price informa-  fiscal policy.                  Households? WPS 2009, November
tion for World Bank publications, write:  * The integrity and independence of the  1998, 35 p.
World Bank, P.O. Box 7247-8619, Phila-  financial sector contribute to fiscal pru-
delphia, PA 19170, United States, tel.  dence in the public sector.     Much attention has been paid to the rela-
202-473-1155, fax 202-676-0581; or visit * Societal norms and consensus about  tive vulnerability of two well-defined
the World Bank bookstores, in the  the roles of various levels of government  household groups during the transition.
United States, 701-18th Street, N.W.,  and limits to their authority are vital to  Some observers argue that old-age pen-
Washington, D.C., or in France, 66 av-  the success of decentralized decision-  sioner households have been relatively
enue d'lena, 75116 Paris, Email:  making.                               protected because of a less steep de-
bookstworldbank.org, Internet: http:// * Tax decentralization is a prerequisite  cline in real pensions compared with
wwwworldbank.org.                  for subnational access to credit markets.  wages in most transition economies. By
* An internal common market is best  contrast, households with young children
Working Papers                      preserved by constitutional guarantees.  are believed to have experienced a sub-
* Intergovernmental transfers in devel-  stantial decline in living standards under
Romain Wacziarg, Measuring the Dy-  oping countries undermine fiscal disci-  reform and show strikingly higher rates
namic Gains from Trade, WPS 2001,  pline and accountability, and transfer  of measured poverty than pensioner
November 1998, 52 p.                dependencies cause a slow economic  households.
strangulation of fiscally disadvantaged re-
Empirical analysis confirms that trade  gions.                          But others argue that the elderly have
openness has a strong positive impact  * Periodic review of jurisdictional assign-  suffered more than the young during the
on economic growth, leading to acceler-  ments is essential to realign responsi-  transition. Can these conflicting view-
ated accumulation of physical capital,  bilities in accordance with changing  points about the relative poverty of old
enhanced technological transmissions,  economic and political realities.  and young households be arbitrated? The
and improvements in the quality of mac-  * Decentralized fiscal systems offer more  authors show that strong-though im-
roeconomic policy. The author uses  potential for improved macroeconomic  plicit-assumptions underpin certain pov-
data from a panel of 57 countries from   governance than do centralized fiscal  erty comparisons. Notably, using a per
1970-89.                            systems.                            capita measure of individual welfare as-
To order: Sarah Crow, Room MC4-706,  To order: Silvana Valle, Room G6-079,  sumes that there are no economies of
tel. 202-473-0763, fax 202-522-2578,  tel. 202-458-4493, fax 202-522-3124,  scale in household consumption, in the
Email: scroweworldbank.org.         Email: svalle@worldbankorg.         sense that the per capita cost of reach-
ing a specific level of welfare does not
Anwar Shah, Fiscal Federalism and  Jesko Hentschel and Peter Lanjouw,  fall as household size increases. Relax-
Macroeconomic Governance: For  Household Welfare Measurement  ing that assumption could affect com-
Better or For Worse? WPS 2005, No-  and the Pricing of Basic Services,  parisons, showing higher poverty rates
vember 1998, 46 p.                  WPS 2006, November 1998, 23 p.      among the elderly because their house-
To order: PREMAdvisory Service, Room   holds tend to be smaller than the house-
Some major lessons of experience about  MC4-501, tel. 202-458-7736, fax 202-522-  holds containing children.
fiscal reform in developing countries:    1135, Email: premadvisory@world
* Monetary policy is best entrusted to  bank.org.                       Even the nature of transition has impli-
an independent central bank with a man-                                 cations for economies of scale. The rela-
date for price stability.           Peter Lanjouw, Branko Milanovic, and  tive cost of housing and other goods and
* Fiscal rules accompanied by "gate-  Stefano Paternostro, Poverty and  services with at least some public good
keeper" intergovernmental councils or  the Economic Transition: How Do  characteristics has risen rapidly. These
C) 1998 The World Bank/The William Davidson Institute                            TRANSITION, December 1998   C



relative price shifts hit small households  the business climate so that firms re-  Other World Bank Publications
particularly hard because a greater  structure and the private sector thrives
share of their expenditures goes to pub-  within a market environment. Meeting  Zuzana Feachem, Martin Hensher, and
lic and quasi-public goods. But, transi-  this challenge requires actions on sev-  Laura Rose (eds.), Implementing
tion economies have also experienced  eral fronts. The Russian government  Health Sector Reform in Central Asia,
big increases in the relative prices of  asked the World Bank to write policy  Papers from the Economic Development
goods and services consumed largely by  papers to address this issue. This vol-  Institute (EDI) Health Policy Seminar in
children, such as kindergarten and other  ume contains those policy papers,  Ashgabat, Turkmenistan, June 1996.
education services. These increases  which were then presented at a high-  World Bank EDI Learning Resources
thus affect younger households more.  level workshop in Moscow. The topics  Series, 1998, 162 p.
include removing impediments to ro-
Since there is no accepted way to es-  bust interfirm competition, such as  Eduard Bos, Vivian Hon, Akiko Maeda,
tablish the true extent of economies of structural concentration, arbitrary regu-  Gnanaraj Chellaraj, Alexander Preker,
scale in a given country, the question  latory practices, and entry barriers;  Health, Nutrition, and Population In-
cannot be answered exactly. But clearly  strengthening corporate governance in-  dicators: A Statistical Handbook, 1998,
a small departure from a per capita mea-  centive systems; enhancing the na-  88 p. The book is based on the latest com-
sure may be enough in some cases to  scent institutional framework for the  pilation of information about levels and
overturn the conventional relative rank-  exercise of creditor rights and imple-  trends in health status, health determi-
ing of poverty headcounts; poverty among  mentation of enterprise bankruptcy pro-  nants, health systems, and health finance.
the elderly may then turn out to be worse  cedures; reducing barter and other  It also contains a data source summary,
than among children.                nonmonetary forms of business trans-  a list of definitons, and statistical tables,
To order Patricia Sader, Room MC3-632,  actions; and fostering enterprise re-  with data presented by country, region,
tel. 202-473-3902, fax 202-522-1153,  structuring. The volume also contains  and income group.
Email: psaderWworldbankorg.         formal comments on these papers, pre-
sented by senior Russian officials at  Assessing Development Effective-
Samuel Talley, Marcelo M.Giugale, and  the workshop.                    ness: Evaluation in the World Bank
Rossana Polastri, Capital Inflow Re-                                    and the International Finance Cor-
versals, Banking Stability, and Pru-  Harry G. Broadman (ed.), Russian  poration, 1998, 79 p. This publication
dential Regulation in Central and  Trade Policy Reform  for World  will appeal to anyone interested in the
Eastern Europe, WPS 2023, 1998.    Trade Organization Accession, no.  operations of the World Bank Group.
To order: Michael Geller, Room H-11-  401, 1998, 95 p.
105, tel. 202-458-5155, Email: mgeller                                  Global Commodity Markets, a quar-
@worldbank.org.                     Russia has manifested considerable  terly.
interest in accession to the World Trade
Cevdet Denizer, Raj M. Desai, and  Organization (WTO). This volume con-  Beginning in January 1999, Global Com-
Nikolay Gueorguiev, The Political  tains four policy papers that focus on  modity Markets will provide readers with
Economy of Financial Repression in  the most prominent topics during the  greatly enhanced and more timely infor-
Transition Economies, WPS 2030,  ongoing WTO accession process: the  mation on 46 primary commodities, to-
1998.                               dispersion of Russia's tariff structure,  gether with analytical special features,
To order Tseday Hailu, Room F-3P-198,  trade and investment in the service sec-  regional price indices, information on
tel. 202-458-5586, Email: thailu@world  tors, the treatment of state trading en-  transportation costs, and a macroeco-
bank.org.                           terprises, and the policy regime  nomic overview. Global Commodity Mar-
governing foreign direct investment.  kets will be published four times a year
Discussion Papers                   Bringing Russia into the rules-based  (January, April, July, and October). Each
WTO system is an objective broadly  issue will be available in print and elec-
Harry G Broadman (ed.), Russian En-  shared by the world community. As part tronic form.
terprise Reform: Policies to Further  of the process of making liberalization
the Transition, no. 400, 1998, 159 p.   commitments, as required by the ex-  Shobhana Sosale (ed.), Educational
isting members of the WTO, accession  Publishing in Global Perspective:
To enhance and sustain economic pros-  provides an opportunity to lock in re-  Capacity Building and Trends, 1998,
perity, Russian authorities must improve  forms.                        240 p.
M   TRANSITION, December 1998                                     © 1998 The World Bank/The William Davidson Institute



Over the past three years the World Bank  Pollution Prevention and Abatement  Financial Perspective, December
has lent approximately $550 million for  Handbook 1998: Toward Cleaner  1998, 302 p.
textbook components within education  Production, The World Bank Group in
projects. This volume is based on the  collaboration with UNIDO and UN Envi-  Microfinance is not simply banking; it is
proceedings of a seminar tided "Under-  ronment Program, 1998, 550 p.   a development tool. It has been esti-
standing the Educational Book Industry,"                                mated that there are 500 million eco-
organized by the World Bank in 1997 in  The application of the guidelines set out  nomically active poor people in the world
Washington, D.C. It deals with such is-  in this book can minimize the use of re-  operating microenterprises and small
sues as policies for the provision of edu-  sources as well as reduce the quantity of  businesses. Most of these people do not
cational materials; growth of the publishing  wastes requiring treatment and disposal.  have access to adequate financial ser-
industry in developing countries; procure-  The guidelines are designed to protect  vices. The purpose of this handbook is
ment, protection, and copyright; and  human health, reduce discharge of pol-  to bring together in a single source guid-
longer-term solutions.              lutants into the environment, use com-  ing principles and tools that will promote
mercially proven and cost-effective  sustainable microfinance and create vi-
Ali Hashim and Bill Allan, Information  technologies, follow regulatorytrends, and  able institutions. The handbook takes a
Systems for Government Fiscal Man-  promote good industrial practices. These  global perspective, drawing on lessons
agement, Sector Studies Series, De-  guidelines represent good environmental  learned from the experiences of micro-
cember 1998, 46 p.                  management practices, which can be  finance practitioners, donors, and oth-
achieved and maintained with the levels  ers throughout the world.
Ismail Serageldin and Joan Martin-Brown  of skills and resources typically available
(eds.), Partnerships for Global Eco-  in countries in which the World Bank op-  Global Economic Prospects and the
system Management: Science, Eco-  erates.                               Developing Countries 1998/99-Be-
nomics, and Law, Proceedings and                                        yond Financial Crisis, 9th Edition,
Reference Readings from the Fifth An-  Barbara Nunberg, The State after Com-  1998, 150 p. (See Agenda, page 28.)
nual World Bank Conference on Environ-  munism: Administrative Transitions
mentally and Socially Sustainable  in Central and Eastern Europe, 1998,  IMF Publications
Development, 1998, 280 p.           286 p.
To order: IMF Publication Services, 700
Doing Better Business through Effec-  Following the heady days when com-  19th Street, N.W., Washington, D.C.
tive Public Consultation and Disclo-  munist regimes in Central and East-  20431, United States, tel. 202-623-7430,
sure: A Good Practice Manual, IFC-  ern Europe (CEE) were crumbling one  fax 202-623-7201, Email:publications
Environment Division, November 1998,  after another, international support was  @imf.org, Intemet:hffp://www.imf.org.
75 p.                               mobilized to help guide the region's
journey toward the free market. As ex-  Chong-Huey Wong and Luis Carranza,
The International Finance Corporation  perience with the economic reform   Policy Responses to External Imbal-
(IFC),theprivatesectorarmoftheWorld  agenda began to accumulate, the cen-  ances in Emerging Market Econo-
Bank Group, represents the world's larg-  trality of the state's role in helping to  mies-Further Empirical Results, WP
est multilateral source of debt and eq-  formulate and implement reform grew  98/103, July 1998.
uity financing of private sector projects  increasingly evident. This publication
in developing countries. IFC recognizes  aims to present an accurate, empiri-  High capital mobility could cause in-
that the private sector operates under  cal picture of recent trends in CEE ad-  stability in current accounts. There-
certain constraints, which at times make  ministration. It focuses on the three  fore, macroeconomic policy, if it wants
public consultation and disclosure par-  priority items on CEE countries' ad-  to restore external balance, must deal
ticularly sensitive and complex. The  ministrative agendas: restructuring the  directly with capital inflows. Nominal
manual is based on practical experience  machinery of government, reforming  exchange rates should be made suffi-
from current IFC activities and from other  government pay and employment prac-  ciently flexible to avoid inconsisten-
examples of international good practice  tice, and developing a politically neu-  cies between short-run and long-run
for public involvement and consultation  tral, professionalized civil service.  real exchange rates; credit tightening
in private sector projects. It is tailored to                           should be complemented by fiscal re-
assist companies working in developing  Joanna Ledgerwood, Microfinance  straint to reduce interest rate differ-
and emerging economies.             Handbook: An Institutional and  entials; and surveillance of the financial
(C 1998 The World Bank/The William Davidson Institute                             TRANSITION, December 1998  U



system should be strengthened to pre-  Wolf Oschlies, Makedonien im Som-  debilitating communicable diseases, col-
vent banks from excessive risk-taking.  mer 1998, Politisch-okonomische  lapsing infrastructure, and general impov-
Momentaufnahmen im Schatten des  erishment.
A. Lopez-Claros and S. Alexashenko,  Kosovo-Konflikts, no. 39, 1998, 31 p.
Fiscal Policy: Issues during the Tran-                                  Central Asian Environments in Tran-
sition in Russia, Occasional Paper no.  Stefanie Harter, Die Russische  sition, July 1997, 281 p.
155, 1998, 58 p.                    Luftfahrtindustrie:  Endgultige
Bruchlandung? no. 43, 1998, 34 p.  Regional Economic Cooperation in
Malcom Knight (ed.), Central Bank                                       Central Asia, July 1998, 354 p.
Reforms in the Baltics, Russia, and  Heinz Brahm, Die Erste Antikom-
the Other Countries of the Former  munistische Regierung in Bulgarien,  Women and Development Atti-
Soviet Union, Occasional Paper no.  no. 44, 1998, 37 p.                 tudes in Kazakhstan: Social Con-
157, 1998, 62 p.                                                        sequences, 1998, 170 p.
Asian Development Bank Publica-
G. Cottarelli, T. Krueger, and others,  tions                           Center for Social and Economic Re-
Hungary: Economic Policies for Sus-                                     search (CASE-CEU) Publications
tainable Growth, Occasional Paper no.  To order: Asian Development Bank, In-
159, 1998, 99 p.                    formation Office, P.O. Box 789, 0980  To order: CASE-CEU, Bagatela 14, 00-
Manila, Philippines, fax 632-636-2648,  585 Warsaw, Poland, tel. 4822-628-0912,
Julian Berengaut (ed.) and others, The  Email: adbpub@mail.asiandevbank.org.  fax 4822-628-6581, Email: case@
Baltic Countries: From Economic                                         case.com.pl.
Stabilization to EU Accession, Occa-  Armin Bauer, Nina Boschmann, David
sional Paper no. 173, 1998, 78 p.   Green, and Kathleen Kuehnast, A Gen-  Stanislaw Gomulka, Output: Causes of
eration at Risk: Children in the Cen-  the Decline and the Recovery, WPS
BundesinstitutfurOstwissenschaftliche  tral Asian Republics of Kazakhstan  8, July 1998, 31 p.
und Internationale Studien Publications  and Kyrgyzstan, April 1998, 158 p.
In the countries of Central Europe and the
To order: Bundesinstitut fOr Ostwissen-  Children in Central Asia are currently ex-  former Soviet Union, the quantity and qual-
schaftliche und Internationale Studien,  periencing an enormous deterioration in  ity of human capital is similar to what the
Lindenbomstr. 22, D-50823 Koln, tel.  what were once constants in their every-  successful emerging economies of East
0221-5747-0, fax 0221-5747-110,  day lives. Transition deprives them of a  Asia, Westem Europe, and Latin America
/ntemet: http://www.uni-koeln.de/extern/ comprehensive social safety net, free edu-  have or had-at similar levels of GDP per
biost.                              cation, nourishment programs, cultural  capita. Intematonal statistics suggest that
enrichment activities, socialized health  the growth rates of such economies can
Michail Ksenofontov, Langzeitprognose  care, and guaranteed employment upon  be high, provided the macroeconomic en-
der Soziookonomischen Entwicklung  reaching young adulthood. Before transi-  vironment is stable and the microeconomic
der Russlandischen Foderation, Au-  tion, child development indicators in  environment is liberal and competitive. In
gust 1998, 35 p.                    Kazakhstan and Kyrgyzstan were com-  the decades since the 1950s, the bulk
paratively high in relation to other coun-  of Latin American countries have, for the
Anatoliy S. Grytsenko, Ukrainian  tries. Some problems existed, especially  most part, failed to create such an envi-
Army: A Starting Point for the Next  pertaining to environmental degradation  ronment. The CE and FSU countries thus
Wave of Reforms, no. 30, 1998, 26 p.  and its direct effect on children's health;  know which model they should not follow.
but over the past five years, the difficult  On the other hand, the East Asia model
Gwendolyn Sasse, Die Krimt Regionale  processes of creating a market have  relies on a specific culture that limits so-
Autonomie in der Ukraine, no. 31,  opened an enormous societal gap into  cial transfers to very low levels, and there-
1998, 39 p.                         which children have been the first to fall.  fore, also limits the tax burden. This has
In spite of the high regard for children in  helped to vigorously lift national savings.
Bernhard Lageman, Die Osterweiterung  the Central Asian societies, the transi-  But that model may prove difficult to adopt
der EU: Tesffall fur die "Strukturreife"  tion has had devastating effects on many  by countries that developed and for sev-
der Beitrittskandidaten, no. 38, 1998,  families due to widespread unemploy-  eral generations operated according to the
41 p.                               ment, an eroding education system,  culture of a large welfare state.
*  TRANSITION, December 1998                                      © 1998 The World Bank/The William Davidson Institute



lraj Hashi and Jan Mladek, Fiscal and  Account in a Transition Economy:  May 1997. What lessons does this epi-
Regulatory Impediments to the En-  Two Simple Econometric Methods  sode contain for the design of macro-
try and Growth of New Firms: A Com-  and Their Application to Ukraine,  economic policy? One interpretation is
parative Analysis of Five Transition  Studies and Analyses 134, June 1998, that the koruna was the innocent victim
Economies, WPS 9, July 1998, 28 p.  23 p.                              of turmoil in Asia. This neglects the de-
terioration of competitiveness prior to the
Enrico C. Perotti and Stansilav Gelfer,  Malgorzata Antczak and Urban Gorski,  crisis. This crisis provoked a much-
Investment Financing in Russian Fl-  The Influence of Exchange Rate Sta-  needed adjustment in fiscal policy, which
nancial-Industrial Groups, WPS 10,  bility on Inflation: A Comparative  altered the monetary-fiscal mix and con-
July 1998, 27 p.                   Analysis, Studies and Analyses 137,  sequent equilibrium exchange rate. Ster-
July 1998, 30 p.                   ilization during 1994-96 unhelpfully
Lucjan T. Orlowski, Monetary Policy                                    delayed adjustment. Earlier abandon-
Targeting in Central Europe's Tran-  CEES Publications                 ment of the parity would have helped only
sition Economies: The Case for Di-                                     if it had also induced the required fiscal
rect Inflation Targeting, WPS 11, August  To order: Centre for European Economic  adjustment.
1998, 30 p.                        Studies, Department of Economics, Uni-
versity of Leicester, University Road, Le-  David Begg, Paul De Grauwe, Francesco
Przemyslaw Wozniak, Relative Price  icester LEI 7RH, United Kingdom, tel.  Giavazzi, Harald Uhlig, and Charles
Adjustment in Poland, Hungary and  44(0)116-252-2757, fax 44(0)116-252-  Wyplosz, The ECB: Safe at Any
the Czech Republic: Comparison of  2908, Intemet: http://www.le.ac.uk/eco-  Speed? Monitoring the European
the Size and Impact of Inflation, WPS  nomics/research/cees.html.      Central Bank, 1998.
12, August 1998, 46 p.
Annual Report 1997/98, Discussion  European Economic Perspectives
Marek Jarocinski, Money Demand and  Papers in European Economic Studies,  [Special Issue]
Monetization in Transition Econo-  University of Leicester, 1998, 23 p.
mies, WPS 13, September 1998, 38 p.                                    Janet Mitchell, The Problem of Bad
Barbara M. Roberts, Transition and  Debts: Cleaning Banks' Balance
Stanislaw Gomulka and Piotr Jaworski,  Changes in Industrial Concentration  Sheets in Economies in Transition,
Implicit Public Debt of the Polish  in Poland, no. 98/4, July 1998, 23 p.   September 1998, 36 p.
Social Security System, WPS 14,
September 1998, 71 p.              CEPR Publications                   EBRD Publications
CASE Studies and Analyses           To order: Centre for Economic Policy  To order: European Bank for Reconstruc-
Publications                       Research, 90-98 Goswell Road, London  tion and Development, One Exchange
EC1 V 7DB, United Kingdom, tel. 44-171-  Square, London EC2A 2JN, United King-
Dilemmas of Exchange Rate Policy  878-2900, fax 44-171-878-2999, Email:  dom, tel. 44171-338-7553, fax 44171-338-
in Central Europe, Studies and Analy-  cepr@cepr.org.                  6102, Intemet: http:/l www.ebrd.com.
ses 130, May 1998, 39 p.
Annette N. Brown and J. David Brown,  E. Philip Davis, Policy and Implemen-
Real Exchange Rate, Foreign Trade  Does Market Structure Matter? New  tation Issues in Reforming Pension
and Economic Growth, Studies and  Evidence from Russia, Discussion  Systems, Working Paper 31, August
Analyses 131, May 1998, 50 p.       Paper 1946, August 1998, 36 p.      1998, 22 p.
Krzysztof Rybinski, Capital Inflows in  David Begg, Pegging Out: Lessons  Philippe Aghion, Patrick Bolton, and
Central and Eastern Europe: Infla-  from the Czech Exchange Rate Cri-  Steven Fries, Optimal Design of Bank
tion, Balance of Payments and Rec-  sis, Discussion Paper 1956, September  Bailouts: The Case of Transition
ommended Policy Responses, Studies  1998, 29 p.                        Economies, Working Paper 32, Septem-
and Analyses 132, May 1998, 35 p.                                      ber 1998, 31 p.
Having pegged its exchange rate since
Rudiger Ahrend and Vadym Lepetyuk,  the outset of reform in 1991, the Czechs  Recapitalization should be made explic-
Forecasting Real GDP and the Current were finally forced to abandon the peg in  itly conditional on liquidations of
i 1998 The World Bank/The William Davidson Institute                            TRANSITION, December 1998  M



nonperforming loans. Ideally, recapital-  Hubert Gabrisch and Thomas Linne,  Transition, Proceedings of the Sec-
ization should not take the form of pur-  Russland-Krise: Ursachen, Folgen und  ond ECPD International Round Table,
chases of preferred stock or subordinated  Wege zu ihrer Uberwindung [Russia's  Belgrade, 1998, 270 p.
bonds. Of course, it may not be practi-  Crisis: Causes, Consequences, and   To order: European Center forPeace and
cal or feasible to set up such a condi-  Solutions], 12/1998, 19 p.     Development (ECPD) of the United Na-
tional scheme on short notice following                                 tions University of Peace, 11000
the outbreak of a banking crisis. This is  Other Publications           Belgrade, Terazije 41, tel. 38111-3246-
why the authors advocate the institution                                041, fax 38111-3240-673.
of bankruptcy procedures for banks in  Sten Berglund (ed.), The Handbook of
anticipation of future banking crises.    Political Change in Eastern Europe,  Katarina Ott, Tax Administration Reform
Edward Elgar Publishing Inc., United  in Transition: The Case of Croatia, Oc-
Greenwood Publishing Group Pub-  States, November 1998, 416 p.          casional Paper Series no. 5, Institute of
lications                           To order: Katy Wight, Edward Elgar Pub-  Public Finance, Croatia, April 1998, 34 p.
lishing Inc., 6 Market Street, North-  To order: Institute of Public Finance,
To order: Greenwood Publishing Group,  hampton, Massachusetts 01060, United  Katanciceva 5, 10000 Zagreb Croatia,
88 Post Road West, P.O. Box 5007,  States, tel. 413-584-5551, fax 413-584-  tel. 385-1-481-9363, fax 385-1-481-9365,
Westport, Connecticut 06881-5007,  9933, Email: kwightWe-elgar.com,  Email: ured@ijf.hr.
United States, tel. 203-226-3571, fax  Internet: http://wwwe-elgar.co.uk.
203-222-1502, Intemet: http://www.green                                 Shahin Yaqub, Poverty in Transition
wood.com.                           John T. Dori and Richard D. Fisher, Jr.  Countries: What Picture Emerges
(eds.), U.S. and Asia Statistical Hand-  from UNDP's National Human Devel-
Christopher J. Anderson and Carsten  book 1998-1999, The Heritage Foundation  opment Reports? PRUS Working Pa-
Zelle (eds.), Stability and Change in  Asian Studies Center, 1998, 97 p.  per no. 4, May 1998, 31 p.
German Elections-How Electorates  To order The Heritage Foundation, 214  To order: Poverty Research Unit, School
Merge, Converge, or Collide, Septem-  MassachusettsAvenue, N.E, Washington,  of African and Asian Studies, Univer-
ber 1998, 376 p.                    D.C. 20002-4999, United States, tel. 202-  sity of Sussex, Falmer, Brighton BN1
546-4400, Intemet http://wwwheritage.org.  9QN, United Kingdom, tel. 44-1273-678-
Silviu Brucan, Social Change in Rus-                                    739, fax 44-1273-623-572, Email: PRU@
sia and Eastern Europe-From Party  Foreign Companies in Russia Year-  sussex.ac.uk.
Hacks to Nouveaux Riches, Septem-  book 1998, Eastern Europe Market
ber 1998, 136 p.                    Intelligence, Business Monitor Interna-  Special Publications
tional, April 1998.
William H. Meyer, Human Rights and In-  To order: Michelle Gahan, 179 Queen  International Agriculture and Trade
ternational Political Economy in Third  Victoria Street, London EC4V 4DD,  Reports-Transition Economies: Situ-
World Nations, August 1998, 264 p.  United Kingdom, te/. 44171-248-0468,  ation and Outlook Series, a publication
fax 44171-248-0467, Email: busmon  by the United States Department of Ag-
Demetrius S. Iatridis and June Gary ~dial.pipex.com.                    riculture, Economic Research Service,
Hopps (eds.), Privatization in Central                                  May 1998, 31 p.
and Eastern Europe: Perspectives  Peter Newman (ed.), The New Pal-grave:  To order: United States Department of
and Approaches, August 1998, 224 p.  Dictionary of Economics and the Law   Agriculture, Economic Research Ser-
[3 volumes], Macmillan Reference Limited,  vice, 1800 M Street, N. W, Washington,
Wirtschaft im Wandel Publications   United Kingdom, 1998, 2,550 p.      D.C. 20036-5831.
To order Grove's Dictionaries Inc., 345  Journal of Transforming Economies
To order: Institut fur Wirtschaftsforschung  Park Avenue South, 10th Floor, New   and Societies, published by the Univer-
Halle, Delitzscher Strasse 118, 06116  York, New York 10010, United States,  sity Council for Economic and Management
Halle, tel. 0345-775-3701, fax 0345-775-  tel 212-689-9200, fax 212-689-9711,  Education Transfer, Cracow University of
3820, Intemet http://wwwiwh.uni-halle.de.  Email: grove@grovereference.com.  Economics, 5(2), 1998, 118 p.
To order: Sodertorns Hogskola, Box
Binnennachfrage Starkt Aufschwung  Negoslav P. Ostojic and Norman Scott  4101, S-141 04 Gyddubge, Sweden, tel.
[Domestic Demand Stimulates Eco-  (eds.), Experiences and Results of  468-5858-8059, fax 468-5858-8080,
nomic Growth], 9-10/1998, 31 p.     Privatization in the Economies in  Email: Victor.Pestoff@sh.se.
M   TRANSITION, December 1998                                     © 1998 The World Bank/The William Davidson Institute



Bibliography of Selected Articles
Postsocialist Economies            Farming in China. Joumal of Devel-  Cultural Change (United States) 47:1-26,
opment Economics (United States)  October 1998.
Chariton, R., R. McKinnon, and L. 56(2):307-36, 1998.
Konopielko. Pensions  Reform,                                         Poland-Finance and Investment: Fi-
Privatization and Restructuring in  Mo, P. Contract Responsibility Sys-  nancial Times Survey. Financial 7imes
the Transition: Unfinished Business  tems and Productive Efficiency: A  (United Kingdom), pp. I-VI, October 27,
or Inappropriate Agendas? Europe-  Case Study on State-owned Enter-  1998.
Asia Studies (International) 50(8):  prises in China. Bulletin of Economic
1413-46, December 1998.            Research (United Kingdom) 50:323-41,  Rutter, J. Finance Minister of the Year:
October 1998.                      The Return of Poland's Middle-Dis-
Cornia, G. A. Transition and Long-term                                tance Champion. Euromoney (United
Growth: Conventional versus Non-  Neruda, P. Despite Asian Fallout, Expect  Kingdom) 353:125-26, September 1998.
conventional Determinants. MOCT-  New Highs in FDI in 1998. Development
MOST: Economic Policy in Transitional Business/United Nations (Internatonal) 21,  Swinnen, J. F. M. Economic Transition
Economies (Netherlands) 8(1):7-32,  (500):1, 3, December 16, 1998.    and the Distribution of Policy Rents:
1998.                                                                 The Case of the Wheat-Flour-Bread
Sachs, J. Glimmers of Hope [in China].  Chain in Bulgaria. European Review
Neglected Key Issues in the Transi-  Far Eastem Economic Review (Hong  of Agricultural Economics (Netherlands)
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