35667 The Newsletter About Reforming Economies Beyond Transition July -- September 2005 · Volume 16, No. 3 http://www.worldbank.org/transitionnewsletter Theme of the Issue: Ukraine After the Orange Revolution and Understanding Reforms Investment Climate in Ukraine in the First Half of 2005: The Role of Institutions and Efficiency in Ukraine Reasons for Concern Andrew Tiffin 3 Irina Akimova 14 Democracy Promotion in Ukraine: the Role of the EU The Rise and Decline of Economic Populism after the Iryna Solonenko 5 Orange Revolution Anders Aslund 16 The Ukrainian Labor Market in Transition Hartmut Lehmann, Katherine Terrell 6 New Findings Donetsk: A Powerful Business Empire Formation of Social Capital in Central and Eastern Europe Kerstin Zimmer 8 Jan Fidrmuc and Klarita Gerxhani 18 Economic Reforms and Productivity Enhancing Reallocation Believe but Verify? Russian Views and the Market in Ukraine and Russia D. Andrew Austin, Tatyana Kosyaeva, Nathaniel Wilcox 20 David Brown, John Earle 10 Too Much of a Good Thing? Credit Booms in Bulgaria, Romania, and Ukraine Productivity and Efficiency in Ukraine Christoph Duenwald, Nikolay Gueorguiev, Andrea Schaechter 21 Valentin Zelenyuk 11 Voice: Greenfield Academics Doing Business 2006 in Ukraine 12 Jody Lanfrey Ono 24 Ukraine's Accession to WTO 13 World Bank \ IMF Agenda 25 New Books and Working Papers 27 Conference Diary 30 2 · Beyond Transition -- The Newsletter About Reforming Economies From the Managing Editor: Dear Reader, Transition is still transforming the post-Soviet political landscape. Popular movements of different colors and shades are unseating governments throughout the region. Understanding these episodes of dramatic institutional change, or at least change in political power, requires a wide lens. Change is often triggered by specific issues, but the preconditions are usually much more complex. Beyond Transition normally has a cross-country theme, but in this issue we focus on one country, Ukraine, and the striking developments there over the last two years. To shed light on the scope of the reform process we bring together research and opinion pieces on different aspects of Ukrainian reforms. Ukraine is important in its own right, with 55 million people and a strategic location in between the enlarged European Union and a Russia that is reasserting its role in the world. Ukraine is also an interesting example of an economy that, after years of stagnation and muddling-through, experienced rapid growth, but without institutional development keeping pace. The events of last October brought this imbalance to the fore. The lead article by Andrew Triffin puts the Ukrainian economy in international perspective. As he points out, Ukraine is poten- tially a very wealthy country, with an enviable endowment of both natural and human resources. But a persistent and widespread pattern of market-unfriendly rules and practices has prevented the country from using these resources efficiently. In another con- tribution, Valentin Zelenyuk uses growth accounting to look at the evolution of Ukrainian productivity and efficiency over a longer historical period. The case of Ukraine post- October 2004 brings out the challenges in sustaining institutional change. The new government start- ed off with a strong and far-reaching mandate, but had to work under the rules of democracy in view of upcoming parliamen- tary elections in March 2006. Such rules invite economic policy-making driven by election cycles. How can reformers resist the temptation to resort to "extraordinary politics" or administrative intervention? How can they commit themselves to not play- ing the populist card? Most emerging market economies also have emerging political institutions and are struggling with these challenges. The going has gotten particularly tough in Ukraine as income inequality has increased dramatically for over a little more than a decade. Justified resentments over unfair privatizations and poorly enforced laws and regulation are also easily channeled into simplis- tic policy proposals that either assume a first-best world of well-functioning institutions, or are weakly concealed attempts to transfer power from one group to another. The purpose of this issue is not to evaluate the pros and cons of different regimes in Ukraine, but to see what a sample of recent research has to say about the challenges facing policymakers and the lessons from previous reforms. We include short articles on the effects of privatization and labor market policies. Kerstin Zimmer discusses the business-government relationships in Donetsk, an important part of the current power arrangement in the country. To give a sense of Ukraine's political realities, this issue also includes the reflections of two observers, Anders Aslund and Irina Akimova, both with extensive, in-depth experience of working in Ukraine.Although they represent two different perspectives, their views of the reform process largely coincide. Judging by their contributions, the achievements of last fall are by no means secure. An important aspect of institutional change in Central and Eastern Europe has been the desire to join the European Union (EU). But this aspiration in Ukraine, so palpably manifested on Independence Square last fall and in the new government's program, has not been met with much enthusiasm in the EU. Iryna Solonenko discusses EU support for democratization in the country. In the past these programs have had very little to show in terms of results, but she argues that the situation has changed. If Ukraine meets "tests on constitutional reform and the parliamentary elections in 2006... then opportunities for closer cooperation and integration ...will appear." Let us see. Erik Berglof, Managing Editor The World Bank· 3 Theme of the Issue: Ukraine and Understanding Reforms The Role of Institutions and Efficiency in Ukraine Andrew Tiffin U kraine is potentially a very wealthy country, with an instead a situation in which producers are discouraged from enviable endowment of both natural and human adopting best-practice techniques; either because of burden- resources. But unfortunately, the economy has not some regulations, or because their economic environment is been able to use these resources efficiently. Using cross such that they are unable to employ these techniques prof- country data, our study suggests that Ukraine's inefficiency itably. Therefore, the presence on the ground of suboptimal arises mainly from a persistent and widespread pattern of technologies may be a symptom of poor efficiency, rather than market unfriendly rules and practices. Looking forward, a result of unavailable technology. particularly in light of the new administration's ambitious For the purposes of our study, the main challenge is to reform agenda, the study finds that durable growth in explore the reasons behind these international differences in Ukraine will depend primarily on the authorities' ability to efficiency. Theoretically, there is a strong view that low levels secure the basic foundations of a modern market economy. of efficiency result from an underlying absence of market- friendly institutions. In this context, "institutions" refer to the Following the dramatic political events of 2004, the incom- set of formal and informal constraints that shape an individ- ing Yushchenko administration moved quickly to articulate ual's ability to act productively and cooperatively. Typically, a their new policy goals. They presented a broad agenda that market-friendly institutional base will include the rule of law, extended beyond simple macroeconomic stabilization, focusing secure property rights, enforceable contracts, an even-handed instead on accelerating Ukraine's institutional transition and transparent government, and so on. toward a modern market economy. Much of this agenda is To quantify the level of efficiency in Ukraine, we develop a anchored within a medium-term strategy of greater integration stochastic-frontier framework that exploits a recent cross- with the European Union (EU) and global markets, and has country dataset provided by Baier, Dwyer, and Tamura (2004). been expressed operationally in documents such as the In short, this framework allows us to estimate what a country Ukraine-EU Action Plan and the recent Development Policy could have produced if it were operating at 100% efficiency, Loan with the World Bank. using the best available technology. The actual output of the Our study investigates the economic importance of institu- country is then measured against this hypothetical benchmark tions in Ukraine, and attempts to quantify the potential bene- as a guide to its overall level of efficiency. To investigate the fits of structural reform. It addresses two questions. To what impact of market-enhancing institutions, we use the indices extent have market-unfriendly institutions hampered econom- provided in the World Bank's cross-country governance ic performance in the past? And what would be the likely pay- dataset, as developed and presented in Kaufman and others off if the new authorities succeed in their medium-term objec- (2005). The results are illustrated in Figures 1 and 2 below, tive of strengthening market-enhancing institutions? which clearly show that Ukraine is operating well below 100 From the large and growing literature that seeks to explain percent efficiency, and that this outcome is strongly associated international differences in income, a key finding is that with its weak institutional base. income disparities result mainly from differences in productiv- ity, rather than factor accumulation. In turn, these differences Soviet Bloc Countries were 20-35% Less Productive in productivity can be broken down into differences in: i) tech- nology, representing a country's knowledge as to how factors Our study may also help quantify the impact of technology of production can best be combined, and ii) efficiency, repre- constraints during the cold war. From our results, legal restric- senting how effectively a country's factors are actually used. tions on the flow of technology from west to east meant that It should be stressed that, in this context, "technology" the best-practice technology available to the Soviet bloc coun- refers to the sum of knowledge that is implicitly available to tries was about 20-35% less productive than the technology local producers. This is conceptually distinct from the tech- available to the rest of the world. nologies that are actually observed in the workplace. Indeed, By 2000, however, the latest western technology was equal- most of this type of knowledge is publicly available, and even ly available to all countries, including those in Eastern Europe proprietary information is typically accessible through licens- and the former Soviet Union. Over the 1990s, therefore, these ing arrangements or foreign direct investment. In this sense, the countries faced an inflow of new ideas and techniques and so presence of obsolete production techniques does not necessar- enjoyed a dramatically accelerated pace of technological ily imply a technology/knowledge gap. Rather, it may reflect growth. 4 · Beyond Transition -- The Newsletter About Reforming Economies Figure 1. International Differences in Efficiency duction continued in the same old manner, and showed little improvement. Moreover, Ukraine and other countries from the CIS 50,000 also experienced a serious contraction in Global Production Frontier, 2000 output over the 1990s, despite significant 45,000 ($US, PPP) capital investment. In contrast to other 40,000 countries in Eastern Europe, former mem- bers of the Soviet Union largely failed to 35,000 replace the old central planning apparatus 30,000 with a viable alternative. So, rather than moving to a more market-oriented system, Worker 25,000 50 percent efficiency the new states of the CIS found themselves per 20,000 without an effective institutional setup. Instead, they faced a chaotic system that 15,000 30 percent efficiency Output encouraged a surge in rent-seeking behav- 10,000 ior and uncertainty regarding property rights. 5,000 0 Efficiency is Key 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 Capital per Worker The nadir of Ukraine's output contrac- tion occurred in 2000. Since then the econo- For the most part, those countries that were not part of the my has grown strongly, often surpassing local and internation- Soviet Union were able to capitalize on this rapid influx of new al forecasts. The causes of the recovery reflect a complex com- technology, posting significant gains in output per worker. For bination of factors, including: a huge boost in competitiveness countries such as Romania and Poland, these gains resulted pri- following the financial crisis of 1998, the availability of signif- marily from increases in efficiency rather than factor accumula- icant excess capacity, and a recovery in neighboring Russia. In tion (although in the case of Poland, the net vertical movement addition, however, Ukraine's turnaround also reflected the conceals an investment collapse and subsequent boom during the impact of first-generation reforms on efficiency introduced in 1990s). For countries such as Slovakia and Hungary, on the other 1999-2000. These focused initially on the energy sector, and hand, output gains were the result of improved efficiency com- were key in reducing the prevalence of barter payments and bined with significant increases in capital stocks, which in turn arrears. Addressing Ukraine's nonpayment culture in turn reflected dramatic inward flows of foreign direct investment. helped foster a more efficient allocation of resources and the In contrast, CIS countries dealt less well with the sudden beginnings of a working financial system. exposure to western techniques during the 1990s. Instead pro- Looking forward, our study suggests that lasting improve- ments in living standards will depend most- ly on the authorities' ability to further Figure 2. The Impact of Institutional Strength increase Ukraine's efficiency; rather than higher rates of capital accumulation. This in 100 turn will require a sustained commitment to Technical Efficiency, 2000 90 improving market-oriented institutions, and (percent) a renewed effort to push forward long- 80 delayed structural reforms. 70 In this light, the reform agenda outlined by the new administration, which is 60 anchored within the Ukraine-EU Action 50 Plan, is both timely and appropriate. The Action Plan covers a wide range of tasks 40 and measures, and by harmonizing 30 Ukrainian standards with those of the EU, it aims to accelerate Ukraine's progress 20 toward a market-based economy that is 10 firmly integrated within Europe and global markets. 0 2,0 1,5 1,0 0,5 0,0 0,5 1,0 1,5 2,0 2,5 continued on page 13 Institutional Strength (Principal Component) The World Bank · 5 Democracy Promotion in Ukraine: the Role of the EU Iryna Solonenko T he European Union (EU) from its creation has promoted strengthening of civil society, and people-to-people contacts. democracy in other countries. Expanding EU norms and Additional funding from the European Investment Bank is con- values beyond its boundaries has been a prominent part ditional upon Ukraine's successful implementation of the of EU foreign policy. However, EU initiatives to spread Action Plan. Previously, a lack of conditional instruments European values of democracy and the rule of law have had deprived the EU of sufficiently strong leverage to push Ukraine only a weak influence on former Soviet states and in particular towards reforms. Moreover, EU carrots held out to Ukraine on Ukraine. In terms of its quality of democracy score, annual- were too small to stimulate reform by themselves. ly compiled by Freedom House, Ukraine scored 4.5 (on a scale Secondly, the ENP offers new elements to enhance the from the highest 1 to the lowest 7) in 2004 and 2005. This was socialization process, which according to Michael Emerson, the best score among post-Soviet countries, but was, however, along with conditionality, is an important tool in the well below the EU new member states, which averaged 2.03. Europeanization of neighbouring countries. In particular, the Democracy in Ukraine has been marred by the prosecution of EU now extends programs to Ukraine aimed at fostering peo- journalists and election rigging, prompting policy analysts to ple-to-people contacts and sharing experiences of transition at tag Ukraine as a "defective democracy" (Beichelt, Pavlenko all levels, including educational programs. In addition, the EU 2005). While domestic factors account for most of Ukraine's is planning to offer Ukraine initiatives aimed at strengthening problems, the EU has enough room to play a more active role the administrative capacity of civil servants at all levels. The in building a democratic Ukraine. ENP also promises to improve cross-border cooperation by The effectiveness of the EU's policy towards Ukraine is hin- permitting a single application process for organizations from dered by several important shortcomings. To begin with, eco- either side of the EU-Ukraine border, and a joint selection nomic interests and security considerations have left value pro- process for projects. motion and norm dissemination in the shade. The budget Third, the ENP regularly monitors progress. According to reflects this: only 15 million euro out of 212 million over the the Action Plan Plus, adopted by the EU Council in December period 2004-2006 have been earmarked for legal and adminis- 2004, monitoring will be carried out at the end of each year. trative reform, 10 million euro for civil society, media and Previous policy arrangements lacked mechanisms to monitor democracy, and 25 million euro for education and training -- progress. For example, the European Commission, which pro- areas related to democracy promotion. The emphasis has been duces annual progress reports on each accession country, made on improving the business environment: commercial law is the no attempt to assess the development of the EU-Ukraine rela- key priority among initiatives to strengthen the judicial system, tionship until 2003. and the key areas for legislation development are competition, Finally, these policy developments will succeed only when intellectual property, and standardization procedures. At the Ukraine aspires to EU membership and when real political will same time 60 million euro is envisaged for the Action Plan on and commitment to EU values emerge. Until recently, the Justice and Home Affairs, which mostly deals with combating Ukrainian political leadership had no desire to join the EU. illegal migration and border management. Pro-EU rhetoric was simply used by the authorities to legit- Within this institutional mosaic an important element has imize themselves in the eyes of the European democratic com- been missing: a strategic commitment by the EU to integrate munity. Despite the significant number of ambitious programs Ukraine. Even if the promise of future membership, which and documents, and far-reaching declarations, domestic policy played a crucial role in the transformation of the Central has demonstrated that Ukraine's authorities do not share basic European states, is not forthcoming in the foreseeable future, democratic values with the EU. This became especially evident strong integration incentives would have a stronger impact on when the public authorities employed strong anti-EU and anti- mobilizing domestic actors and eventually carrying out reforms. Western propaganda during the pre-election period in 2004. With the development of the European Neighbourhood The Orange Revolution has arguably changed the situation. Policy (ENP), the EU has acquired new instruments to promote Before the recent turmoil within the political elite, the author- democracy in Ukraine. The ENP has provided new incentives ities demonstrated a higher level of commitment to domestic for Ukrainian reforms. reforms than before. If Ukraine passes the tests of constitu- Firstly, the adoption of the EU-Ukraine Action Plan, supple- tional reform and the parliamentary elections of 2006, and suc- mented by the 10-point plan of Benita Ferrero-Waldner and cessfully implements the Action Plan, then opportunities for Javier Solana, has offered Ukraine such incentives as EU sup- closer cooperation and integration between Ukraine and the port for Ukraine's World Trade Organization accession and has EU will appear. granted Ukraine market economy status. Furthermore, it has started negotiations on facilitating a visa regime for Ukrainians, Iryna Solonenko is Director of the European Program at and increased EU assistance including in the field of democracy the International Renaissance Foundation, Kyiv, Ukraine. She and the rule of law, legislative approximation, support for the has contributed this article to BT. 6 · BeyondTransition -- The Newsletter About Reforming Economies The Ukrainian Labor Market in Transition Hartmut Lehmann, Katherine Terrell T he findings from five recent studies of the Ukrainian Which factors are producing these differences? Is it the dif- labor market shed some light on the extent, incidence, ferences in men's and women's rewards for labor market char- and costs of wage inequality, the gender gap, unem acteristics or differences in their productive characteristics? ployment, and worker displacement brought about by the Ganguli and Terrell find that if women were rewarded as men transition to a market economy. are, the wage gaps would fall to almost nil throughout the dis- tribution. The different ceilings in the public and private sec- Knowledge of labor market adjustment during the transi- tors are largely due to differences in men's and women's pro- tion in Ukraine, the second largest successor state of the former ductive characteristics, which favor men in the public and Soviet Union, has been very limited. Until recently, due to the women in the private sector. The fall in the gender gap in the absence of appropriate and accessible data, no serious research lower part of the wage distribution from 1986 to 2003 is existed on the behavior of individuals and households in explained partially by the improvement in women's productive Ukraine's labor market. characteristics and partially by the worsening in men's rewards With the arrival of the Ukrainian Longitudinal over time. However, probably the most important reason for Monitoring Survey (ULMS), carried out in 2003 and 2004, the reduction in the gap is that the value of the minimum wage panel data on individuals both in and out of work have was set relatively high in 2003 and it raised the wage floor for become available. ULMS, which was patterned after the a larger number of women than men. Russian Longitudinal Monitoring Survey (RLMS), contains a Thus, if the new government wants to implement gender household questionnaire and a lengthy individual question- equal policies, it should start re-evaluating the system of com- naire, as well as an extensive retrospective section, which pensation in the public sector and recognizing the incidence of allows a complete reconstruction of workers' employment discrimination. If it were to eliminate the gaps in the public record between 1998 and 2003. The 2003 ULMS was carried sector, or at least reduce them to the current levels in the pri- out on a representative sample of approximately 4,000 vate sector, Ukraine's gender wage gaps would be on par with households and 8,500 individuals. In 2004, 81% of the indi- the EU. viduals were resurveyed. In the second half of 2006, the data In the second paper by Ganguli and Terrell ("Institutions, from these first two waves will become accessible to Markets and Men's and Women's Wage Inequality: Evidence researchers anywhere in the world. from Ukraine," 2005) the authors find that the wage inequali- We present here a brief survey of findings from five recent ty of full-time workers rose between 1986 and 2003 -- that is, unpublished studies that have used these data to analyze dif- the Gini coefficient increased from 0.291 to 0.333. This, how- ferent aspects of the labor market. ever, is not as much as in Russia over this period. The increase in inequality has been driven by market forces through changes "Glass Ceiling" Lower in the Public Sector in wage premiums, especially in inter-industry differentials. The changes in the composition of the labor force, which can As Ukraine considers the process of negotiating entry be attributed to a larger exodus of low skilled workers from into the EU, discussions have begun on how to create gen- full time work, moderated the increase in inequality. der equal policies in line with those of Western Europe. Wage gender inequality for all workers grew in the top half "Wage Ceilings and Floors: The Gender Gap in Ukraine's of wage distribution and actually fell in the bottom half from Transition" (Ganguli, Terrell, 2005) presents the first esti- 1986 to 2003. The rise in the top half however, is not as great mates on the gender gap in the distribution of wages at dif- as may be expected after a decade of reform. The decline in ferent points in time: during communism in 1986, at the woman's wage inequality in the lower half of the distribution beginning of the transition in 1991, and after Ukraine start- in 2003 was driven by institutional change. The minimum ed to be considered a market economy in 2003. In all three wage, acting as a wage floor primarily for women, is playing time periods, the authors find the gender gap in wages is an important role in lowering the growth in inequality. much higher in the top half of earners than in the bottom Looking ahead, if the government wants to ameliorate the half. Men earn about 45-50% more than women in the effects of market forces on wage inequality, it should recognize 50th, 75th and 90th percentiles of the wage distribution, the importance of maintaining the value of, and compliance consistent with the hypothesis of a "glass ceiling." On the with, the minimum wage. other hand, the gender gap narrowed from approximately 0.20-0.40 in 1986 and 1991 to 0.10-0.20 in 2003, indicat- Older People and Females: More Probable to Lose Job, ing that the wage floor rose for women in 2003. Closer Harder to Find One inspection of two sectors -- the private and the public -- reveals the striking finding that the glass ceiling is lower in In recent years there has been much policy discussion about the public than in the private sector while the floor for both unemployment in transition countries and the impact of unem- sectors is the same. ployment benefits on the duration of unemployment. Since the The World Bank· 7 incidence of long-term unemployment in Ukraine is very high The principal argument for privatization around the world from an international perspective, it is particularly interesting is that profit orientation will increase firm efficiency and com- to study the behavior of the unemployed and the determinants petitiveness. Does any increase in efficiency, however, come at of the duration of unemployment. A priori, unemployment the expense of workers? If privatization results in layoffs, wage benefits or income from casual activities or subsidiary farming cuts, or both, this could help explain why workers have so might be important factors that retard outflows from unem- often vehemently opposed privatization. ployment. The paper by Brown, Earle, and Vakhitov (2005) explores The paper by Kupets ("What is behind Stagnant the effects of privatization on worker job loss and wages to Unemployment in Ukraine: The Role of the Informal Sector", determine who the winners and losers are. The analysis sug- 2005) finds those who receive unemployment benefits do not gests that privatization reduces worker job losses of all types, have significantly longer spells of unemployment than those halving the dismissal and resignation rates. Wage levels are also who do not receive benefits. However, income from casual reduced by about 5%. Workers in worker-controlled firms suf- activities or subsidiary farming provides a strong disincentive fered large wage losses, while those in outsider-controlled firms for the unemployed to enter gainful employment. An individ- may have enjoyed wage gains. A possible explanation for this ual's age, marital status and gender, the level of education pattern could be that worker-controlled firms do not enjoy and place of residence are significantly related to the total substantial efficiency gains, necessitating labor cost cuts. time spent out of work. Older workers and females have Workers have chosen to accept lower wages in exchange for greater difficulties finding employment, while married per- continued employment. In contrast, workers in outsider-con- sons have a substantially easier time getting back to work. trolled firms need not make such an unpleasant trade off, as the Workers with completed higher education as well as residents firms may have expanded their scale, making cuts in labor of large cities have much shorter spells of unemployment and costs unnecessary. are more likely to return to employment. These results are The biggest winners from privatization appear to be clearly in line with those found in other transition unmarried and high-skilled workers (particularly those with economies. computer skills) and those in large firms. Private owners may In the transition literature, the discussion about restruc- invest more in new technologies, leading to increased demand turing and privatization focuses nearly exclusively on effi- for skilled workers. This is particularly likely in large firms, ciency issues and rarely considers the effects of these process- which tend to be more capital-intensive and where capital and es on workers in the short to medium term. Addressing this skills complement each other more. oversight, the paper by Lehmann, Pignatti, and Wadsworth (2005) estimates annual displacement rates for 1992-2002 Concluding Remarks and finds them to be between 2.7% and 4.9%, indicating that Ukrainian firms have been permanently laying off work- This short review of five recent papers on the Ukrainian ers at rates comparable to those in mature market economies. labor market that utilize the ULMS improves our understand- These estimates contradict the frequently held notion that ing of several phenomena in the labor market brought about involuntary separation from employment is unimportant in by the transition to a market economy. These include changes CIS labor markets because of low labor costs. Displacement in and some determinants of wage inequality and the gender is not entirely random. Female workers have a higher proba- gap, unemployment, and worker displacement and an under- bility of being made redundant than men. Job losers are typ- standing of who gains and who loses from privatization. ically older compared with job quitters, although their edu- Evidence on the extent, incidence, and costs of the above is cational backgrounds are similar. Workers in industry, con- needed in Ukraine to develop appropriate policies and institu- struction, wholesale and retail trades, and hotel services were tions, especially as Ukraine considers the process of negotiating particularly hard hit by redundancies. In addition, persons entry into the EU. residing in Kyiv city are disproportionately affected by per- manent layoffs. Hartmut Lehmann is a Professor of Economic Policy at By the standards of industrialized economies, displaced University of Bologna and Program Director of the Institute Ukrainian workers have extremely low return rates. While a for the Study of Labor (IZA) research area "Labor Markets in minority of workers finds reemployment after a very brief spell Emerging and Transition Countries". Katherine Terrell is of unemployment, the majority of workers linger on out of Professor at University of Michigan, Ann Arbor and Research work for a very long time. While the individual costs in terms Fellow at IZA. The five papers referred to in the article will be of unemployment are large in Ukraine, wage losses due to dis- part of a symposium on the Ukrainian labor market, which the placement are rather limited. For those who return to work, authors will guest-edit for the June 2006 issue of the Journal of there is evidence of a small fall in wages one year prior to dis- Comparative Economics. placement, and that this loss is not recovered in the first year The ULMS was initiated by the program "Labor Markets in a new job. in Emerging and Transition Economies" at IZA in Bonn, Germany, www.iza.org; the field work was carried out by the Winners from Privatization: Unmarried, High-Skilled Kiev International Institute of Sociology (KIIS). Workers 8 · Beyond Transition -- The Newsletter About Reforming Economies Donetsk: A Powerful Business Empire Kerstin Zimmer A t first sight, Donetsk is a rather typical old industrial aimed at the revitalization of the regional economy have not region. Its economy is based on coal mining, metal contributed to structural change, but instead have been used and steel production, machine building, and chemi for the enrichment of the regional business elite. cals. Production and employment are dominated by large From 1997 until 2002, the development of the clan and the enterprises, many of which depend on state subsidies. fate of the region were inseparably linked to two names: Viktor Although the regional economy is no longer regulated by Yanukovich and Rinat Akhmetov. Since 1999, Ukrainian and planning, regional and local administrations continuously some international media have increasingly portrayed intervene in economic processes, and personalized networks Akhmetov as the head of the Donetsk Clan. Currently, his constitute the core of the political and corporate alliances. assets are assessed at more than US$3 billion, making him The regional share in national production is steady at 20%; Ukraine's richest man. He is also one of the main social and it accounts for a third of Ukraine's export revenue, due mainly cultural sponsors in the region. to the metalworking industry. The growth of the region's GDP Personalized networks constitute the core of the political and since 1999 has been mostly related to the steel sector, though corporate alliances, some of which have been formalized. The this has so far been due to central policy that has favoured this two leading financial industrial groups (FIGs) are the Industrial sector and to a favourable situation on the world market and Union of Donbass (IUD) and System Capital Management not down to any structural reforms. This one-sided economic (SCM). Both are diversified corporations. They have created ver- development is mirrored by the character of dominant region- tically integrated structures along two production chains, coal- al actors. The region is controlled by a power structure that is coke-metal, and coal-power generation-electricity distribution. normally referred to as the "Donetsk Clan," comprising entre- These closed production cycles serve as low-cost inputs into met- preneurs and public officials. alworking enterprises and enhance the FIGs' competitiveness on Until the mid-1990s, the regional economy did not experi- the international market. The control of the value chain in heavy ence any structural reforms. All relevant companies remained industry is absolute: from the mining of raw materials, their pro- state-owned and "red directors" played a decisive role. cessing, steel production (together with the control of the gas and Gradually, private energy traders took control of key enterpris- electricity supply), sales (via offshore firms), right up to refi- es. The struggle over property redistribution intensified in 1995 nancing via their own banks and laundered money from abroad, and 1996, when privatization was officially promoted. The all elements are united within the FIGs. brutality of this conflict was demonstrated by various contract killings. In the middle of the 1990s, the Donetsk Clan was Hostile Takeovers and Shadow Privatization weakened and subject to interference from the centre and eco- nomic actors from Dnipropetrovsk. But since then, it has Until recently, the flagship of the regional economy was IUD, regained strength. After the appointment of Viktor Yanukovich founded in 1995 with the blessing of the regional authorities. In as governor in 1997 the economic and political struggle took 1996, this conglomerate was uncontrolled and weakened by the more civilized forms. Due to their loyalty to President Leonid inter-regional conflict for the spoils in the division of the gas Kuchma, the regional power elite were allowed to act in the market. Apparently, Akhmetov took over without formally region without much interference from the centre. While the becoming a shareholder. In 2002, the total annual turnover of use of direct force diminished considerably, control over the IUD and its subsidiaries -- allegedly about 600 companies in political infrastructure, over the discourse of regional identity, eastern Ukraine -- totalled more than US$1.7 billion. and over a large part of the regional economy increased. The Rinat Akhmetov's role remained ambiguous for a long clan effectively captured the entire region. time, and he always denied his influence on IUD. In 2000, he founded the holding company SCM, in which he holds a 90% A Hand-Operated Economy stake. He strove to pull out a sizeable share of his assets from IUD's structures and to transfer them to SCM, mostly in a Although the regional economy is no longer regulated by rather opaque matter. These assets included the strategically planning and directives, it has not developed into an institution important Khartsysk Pipe Factory, Azovstal (one of Ukraine's regulated by the free, competitive and rule-bound interplay of biggest steelworks), as well as First Ukraine International supply and demand. Instead of the market's invisible hand, a Bank, several coking plants, and machine building companies. "hand-operated economy" has emerged in which the regional Before acquiring the shares, SCM received the consent of the and local administrations continuously intervene in economic Anti-Monopoly Committee and subsequently brought about processes. Networks based on personal relations and particu- decisive changes in the management in order to officially laristic trust have taken over coordination and set market entry authorize the transfer of shares. and prices. Political power is both a guarantee and a precondi- However, SCM holding is also growing by way of shadow tion for economic success. Official development programmes privatization, including in the energy market and physical infra- The World Bank · 9 structure. When taking over state-owned companies the follow- ing pattern is regularly adhered to: first a front company is founded. This company then, by way of an opaque process, obtains shares in a state-owned enterprise or otherwise gains control over it, usually stripping it of its assets. After a while SCM, normally with the consent of the Anti-Monopoly Committee, becomes the majority shareholder of the front com- pany or takes over its shares. In this way, SCM legally becomes the owner of the formerly state-owned company, while remain- ing unrelated to the dirty business that took place before. This economic empire also incorporates offshore compa- nies, which purchase comparatively low-priced raw materials and semi-finished products on the Ukrainian market and resell them at higher prices on the world market. Consequently the profits never reach Ukrainian territory. This incident reveals one of the problems of the Ukrainian Since the end of the 1990s, the regional FIGs have expand- FIGs. Their insufficient transparency and bad reputation con- ed their activities and ownership relations beyond the adminis- cerning business conduct, has become a stumbling block in trative borders of the Donetsk region, aiming to complete their such institutional settings in which they can not influence state production cycles in heavy industry. The actors' intention to decisions. Such negative experiences might have repercussions completely control the production cycles seems rational as it on the FIGs. allows them to concentrate the profits within the FIGs, to con- The economic sectors controlled by the FIGs, IUD and SCM, ceal them by nontransparent cross ownership and to evade are capital intensive and require high investment. One might taxes. Moreover, closed production cycles render them less de- assume that the FIGs will be forced to forego profits and to pendent on suppliers that are hard to control. The economic attract real foreign investment. In addition, they have expanded expansion within Ukraine, including privatization and hostile into more productive sectors such as food processing and servic- takeovers, was only possible with guarantees from political es. These developments have been interpreted as signs of chang- and/or administrative actors who actively advocate their inter- ing interests as they require stable and enforceable legal rules. So ests. There were several rushed privatizations before the 2004 far however, the FIGs have applied their traditional strategies: presidential elections. Most of them were boring in the sense hostile takeovers and shadow privatization, that both depend on that, as a rule, the winner was known before the announce- clientelistic ties to patrons in key administrative positions. As ment of the results of the tender. The regulations for the tender external incentives continue to play such an important role, the were tailored to a specific bidder, virtually excluding other question remains open whether the FIGs will change due to their viable competitors. Steel mills such as Kryvorizhstal, ore own internal incentives. Ukraine's aspirations towards accession enrichment companies, and major profitable coalmines ended to the World Trade Organization and expansion into EU mar- up in the hands of the Ukrainian oligarchs, and especially in kets (as owners and not as traders) signal a general desire for Akhmetov's. Some of these privatizations are currently under fuller integration into the world market, increasing the pressure review by the new government. to adapt to the international standards of corporate governance and to create more transparency. In addition, the actors in this Going Westward? are exposed to new cultural and institutional settings so that processes of learning and adaptation are to be expected. A relatively new tendency is the expansion into Western Akhmetov himself has realised this in advance. He has hired for- markets. With the enlargement of the EU, Ukrainian steel pro- eign consulting companies to create more transparency in SCM. ducers feared losing markets in Central Europe. Furthermore, His step forward into Western markets, however, has yet to be access to the EU market is hampered by fierce competition and made. preferential treatment towards western producers. In reaction, Much depends on future political developments. Since the some Donetsk actors forced their way into central European Orange Revolution, the new government has attacked power- markets through property acquisition and direct investment. In ful FIGs. Boris Kolesnikov, one of Akhmetov's major allies, 2003, IUD -- in cooperation with its Swiss partner Duferco -- was arrested and Akhmetov's offices were searched. It is not won a tender for 80% of the shares of the Dunaferr steelworks yet clear how far reaching the changes will be and whether the in Hungary, defeating strong competitors from Russia and oligarchs will come to informal agreements with those in India. IUD's endeavours in Poland were more ambiguous. power. After the dismissal of the former Prime Minister Yulia IUD's proposal in a tender for the privatisation of the Huta Tymoshenko's government in September 2005, the chances for Czestochowa steelworks reached the top of the ranking, but such agreements seem to have improved again. the company was not accepted as future owner. This led to diplomatic conflicts between Poland and Ukraine. At the end Kerstin Zimmer is a Research Associate at the Institute of of March 2004, the Polish government temporarily suspended Sociology, Philipps University Marburg, Germany. She has the privatization process. In 2005, IUD won the new tender. contributed this article to BT. 10 · Beyond Transition -- The Newsletter About Reforming Economies Economic Reforms and Productivity Enhancing Reallocation in Ukraine and Russia David Brown, John Earle H ow do economic reforms affect resource reallocation of transitional policies tends to stimulate productivity-enhanc- processes and their contributions to productivity ing reallocation, then Ukraine's gradualist policy is likely to be growth? We study the consequences of enterprise reflected by a slower increase in the contribution of this factor privatization and liberalization of product and labor markets, to productivity growth. Due to the greater levels of inside own- and imports in Russia and Ukraine. ership and less rapid liberalization in Ukraine, the effects of pri- vate ownership and of product and labor market competition Analyzing interfirm reallocation of output, labor, capital, are also likely to be stronger in more rapidly reforming Russia. and an input index with annual industrial census data from Our dataset includes annual observations from 1985 to 1985 to 2001, we find that Soviet Russia displayed low reallo- 2001 for the Russian firms and from 1992 to 2000 for those in cation rates that bore little relationship to relative labor and Ukraine, taken from annual industrial census data. This per- multifactor productivity across firms. Since reforms began, mits us to analyze the effects of reforms on a set of firms both resource flows have increased in both countries, and their con- before and after the policy changes. At the beginning of transi- tributions to aggregate productivity growth have become sub- tion, in 1992, the data account for 90.5% of officially report- stantial both through increased flows from less productive to ed industrial employment in Russia and 94.1% in Ukraine. more productive firms and through higher exits of less produc- Our analysis finds that: tive entities -- i.e. through creative destruction. Among the fac- · Soviet Russia had extremely low rates of interfirm tors relevant to policy that may explain firm-level variation, reallocation and a negligible contribution of reallocation to privatization is estimated to have positive effects on productiv- aggregate productivity growth. While central planning may ity-enhancing reallocation, but there is less evidence of such have functioned adequately in a static environment requiring effects from domestic product market competition, labor mar- little active reallocation of resources, it was much less effective ket competition, or import penetration. in dynamic responsiveness to shocks requiring learning and Well-functioning market economies appear to exhibit rapid selection -- weeding out less efficient activities and promoting rates of resource reallocation across production units, a process those that have become more productive. with the potential to contribute significantly to economic · Liberalizing reforms in Russia and Ukraine have growth. Under central planning, however, most business deci- brought substantial increases in resource reallocation and in sions -- output, product variety, prices, technology, wages, the productivity-enhancing consequences of the reallocation investment, exit and entry -- were either specifically planned process. The overall patterns are quite similar for the two coun- or indirectly controlled. Enterprises had strong incentives to tries, despite the differences in their reform policies. meet planned output targets, but little incentive to contain · After privatization took place, there was a sharp jump costs, to innovate, or to produce goods of value. There was no in the contribution of privatized firms to productivity-enhanc- effective competition, and imports were tightly regulated. Thus, ing reallocation in Russia, but no such effect can be detected in the usual factors that might be supposed to influence realloca- Ukraine, where privatization was carried out much more grad- tion and productivity were largely absent. ually and with a stronger bias towards insider giveaways. During transition, the extent to which enterprises actually · Our examination of the effects of competitive pres- adjust and improve productivity in response to changes in their sures from product and labor markets on overall productivity environment is likely to depend on the strength of competitive shows little contribution from competitive pressure in either pressures, the objectives of the state or new owners, the effec- economy, except possibly from local labor markets. tiveness of corporate governance by the owners, and the infor- Thus, the microeconomic evidence is consistent with the mation conveyed by prices and wages. These factors in turn are view that reforms have stimulated enterprise-level restructuring influenced by the specific policies of liberalization, privatiza- and reallocation in both countries, and that the reallocation tion, and stabilization that were adopted to initiate the transi- process has become productivity-enhancing. In the early transi- tion to a market economy. tion, the reallocation effects served to reduce the magnitude of The pace and design of economic reforms differed substan- productivity decline, and more recently they have accounted tially between Russia and Ukraine. Ukraine has by all accounts for a major fraction of productivity growth. followed a more gradualist path of slower liberalization, priva- tization, and stabilization than its larger neighbor for most of the period since the end of 1991. In the late 1990s, policy David Brown is a Senior Lecturer in finance at Heriot-Watt reforms in Ukraine appear to have been catching up with University in Edinburgh. John Earle is a Senior Economist at Russia's, according to the aggregate statistics and the evalua- the Upjohn Institute of Employment Research and Professor of tions of international organizations. The clearly different pat- economics at Central European University in Budapest. The tern of policy choices in the two countries suggests an interest- full text of the paper can be viewed at http://www.upjohninsti- ing comparison. If a quicker and more effective implementation tute.org/publications/wp/04-98.pdf. The World Bank· 11 Productivity and Efficiency in Ukraine Valentin Zelenyuk A series of studies on the patterns of productivity and (divided by the Dnipro river) and the industrial and the agri- efficiency in Ukraine has shown that of all transi cultural regions in their levels of economic performance? tion countries, Ukraine has had the largest drop in average labor productivity. This has been attributed to Cross-Regional Comparison: East vs. West deterioration in efficiency. On the regional level, the pos session of valuable natural resources, levels of capital and Despite significant differences in worker income between foreign direct investment (FDI) are all factors that put a the East and West of Ukraine, as well as agricultural and indus- region among the better performers. An abundance of trial Ukraine, our analysis (Demchuk and Zelenyuk, 2005) labor, and alcohol and tobacco consumption are associated concludes that in terms of distribution and average efficiency with lower efficiency. At the firm level, local private compa levels, the difference between the performance of these groups nies, on average, are unsurprisingly more efficient than was insignificant. That is, although there are more or less effi- state owned firms but also more efficient than firms with foreign owned shares. cient regions in both groups, on average these groups utilize their given resources on a similar level of efficiency. Cross-Country Comparison: Ukraine vs. Other Countries Econometrically, we were also able to identify the most impor- tant factors determining the level of efficiency. Among the pos- An analysis of economic growth and its sources for 85 itive determinants of efficiency was the level of capital, FDI per countries, including Ukraine, for the period 1992-2000 capita in the region and the wealth of the region in the base (Badunenko, Henderson and Zelenyuk, 2005) shows that period. Among the negative determinants of efficiency levels while Ukraine experienced both technical change and capital we found such indicators as the size of the labor force and the deepening on a level similar to most of its neighbors (about consumption of alcohol and tobacco. 30% and 6%, respectively), it had the largest drop in average What about from a microeconomics perspective? How did labor productivity, with a 42% decrease (see Table 1). This firms -- state and private, local and foreign -- perform during drop was mainly due to deterioration in efficiency -- the the bumpy road to a market economy? increase of the gap between real GDP and its projection onto the estimated world `best-practice score.' Almost all transition Cross-Firm Comparison: State-Owned vs. Private, Local vs. countries have experienced efficiency deterioration, which led Foreign to massive underutilization of existing capacities, however, effi- ciency change was the largest in Ukraine, sliding by about In another recent work (Zelenyuk and Zheka, 2005) we find 58%! In 1992, Ukraine was only about 25% efficient relative that local private companies are, on average, the most efficient, to the world's 'best-practice score'. By 2000, its efficiency score while state ownership of a company is positively and signifi- dropped further to about 11% and was the lowest among its cantly correlated with levels of inefficiency. neighbors. Somewhat unexpectedly, we also found that the level of for- What about the economic performance of regions within eign ownership in a firm was positively correlated with levels of Ukraine? How different are the East and the West of Ukraine inefficiency. This result is quite intriguing. Indeed, a common perception is that foreign com- Table 1. Changes in income per worker and its sources in select transitional countries panies are likely to be superior in terms of efficiency to the Country Efficiency Efficiency Income per Efficiency Technical Capital local ones. Possible explana- in 1992, % in 2000, % worker change, % change, % deepening, % tions for this could be that change, % despite having more advanced technologies, some foreign Belarus 28 23 17 -20 34 10 companies might not be as effi- cient as local ones in dealing Czech Republic 40 31 9 -22 32 7 with the hidden obstacles of a poor business climate in a tran- Estonia 33 38 58 14.8 10 26 sition economy. In addition, politically powerful local busi- Hungary 45 40 37 -11 26 22 ness groups may find it benefi- cial to create artificial entry Russia 33 22 -9 -34 33 3 barriers for FDI through exces- Ukraine 25 11 -42 -58 31 6 sive bureaucracy and political instability. The scandals around Source: selected from tables in Badunenko et al. (2005). 12 · BeyondTransition -- The Newsletter About Reforming Economies the privatization of Kryvorizhstal steel plant and other gigantic come from offshore zones, mostly Cyprus (but with Ukrainian state industries might be good examples of this. origin), as well as from Russia, and therefore has not had such a spillover effect on productivity as western FDI is expected to Concluding Remarks bring. So while the "miracle" of productivity growth in the last five years was driven mostly by local capital, the miracle of Before the collapse of the Soviet Union, Ukraine was one of productivity growth in the next 5 years should be driven sig- its richest republics. The economic disorganization following nificantly by FDI inflow from the West and by its spillover the collapse, the lack of important economic reforms during the effect, unless the political climate frightens this FDI away to first years of transition and slow reform progress afterwards, other countries. In fact, the recent radical change in the made Ukraine stagnate for almost an entire decade. The recent Ukrainian banking industry is preparation by foreign financial "miracle" of rapid economic growth (12.1% in 2004 and on institutions to accommodate such increase of FDI inflow from average, about 8.4% annually in the past five years) is just a the West. The recent acquisition of the largest Ukrainian enter- normal recovery that, coming on the back of a huge economic prise, Kryvorizhstal, by a foreign owner is the first big leap in downturn, might look enormous. In fact, it is often forgotten FDI influencing Ukrainian economic performance. that the recovery is quite far from complete: the official real GDP, capital investment and real wage in 2004 relative to that Valentin Zelenyuk is a Senior Economist at Kyiv Economics in 1990, are only about 61%, 56% and 50%, respectively! This Institute, Founder and Director of UPEG (Ukrainian means that just in order to reach the GDP level of 1990 by Productivity and Efficiency Group) at EERC-Kiev, Ukraine. 2010, Ukraine's real GDP should grow at the rate of more than He has contributed this article to BT. The article draws on the 10% annually. This requires enormous productivity growth. author's papers cited in the Bibliography at the end of the vol- In conclusion it might be worth noting that in the past 15 ume.The author would like to thank T. Coupe, P. Demchuk, N. years Ukraine has had one of the lowest inflows of FDI per Dushkevych, P. Kennedy, O. Skyba and Y. Yevdokimov for capita among the transitional economies. A large portion has fruitful comments. Doing Business 2006 in Ukraine In the World Bank survey Doing Business-2006, Protecting investors is an important condition for busi- Ukraine ranked 124 out of 155 countries on ease of doing ness development. For this factor, the indices vary between business, significantly below Russia (79), Moldova (83), 0 and 10, with higher values indicating greater disclosure, Kyrgyzstan (84), and Kazakhstan (86). While the country greater liability of directors, greater powers of sharehold- faired well on enforcing contracts (39), getting credit (75), ers to challenge the transaction, and better investor pro- and trading across borders (79), it lagged behind in the tection. On this last index, Ukraine compares unfavorably areas of property registration, investor protection, and tax to all other Commonwealth of Independent States (CIS) payment procedure. countries, including Kyrgyzstan (5.7), Russia, and In fact, in terms of paying taxes Ukraine ranks 151. Kazakhstan (both 5). Ukrainian firms must make 84 payments, spend 2,185 In enforcing commercial contracts, Ukraine compares hours to comply with tax requirements, and pay 51% of fairly well with its peers in Central and Eastern Europe the firm's gross profit in taxes (see table). While the total and the CIS. It takes fewer days to resolve a dispute than tax payable is similar to the average paid in countries in in Bulgaria, Czech Republic, Hungary, and Kazakhstan. the European and Central Asian region (50.2%), the Costs in court and attorney fees, or the costs of an admin- number of payments and hours far exceeds the region's istrative debt recovery procedure in Ukraine are much averages. lower than in Russia, Slovenia, and Kyrgyzstan. Doing business in Ukraine, selected indicators, 2005 Starting a Business Protecting Investors Paying Taxes Enforcing Contracts Country Procedures Time Cost (% of Min. capital Disclosure Investor Payments Time Procedures Time Cost (% (number) (days) income per (% of income Index Protection (number) (hours) (number) (days) of debt) capita) per capita) Index Ukraine 15 34 10.6 183 1 2.7 84 2,185 28 269 11 Region's 9.7 36.5 13.5 49.1 4.5 4.8 46.9 431.5 29.6 393 17.4 average Source: World Bank, Doing Business, http://www.doingbusiness.org The World Bank · 13 Reform Scenarios Having inherited a Soviet framework that was ill-suited to the needs of a market economy, Ukraine has been slow in estab- Our results suggest that the proposed series of reforms lishing the market-enhancing institutions needed to use its could materially boost Ukraine's sustainable growth rate. The resources more efficiently. IMF staff's current baseline scenario, which envisages a medi- However, the new authorities appear to be poised to tackle um-term annual growth rate of about 5%, assumes a moder- the lag in institutional development, and have articulated a ately successful reform effort so that, by 2015, Ukraine will wide-ranging program of reforms. This program has been have the institutional quality enjoyed by current EU candidate anchored operationally within a broader strategy of greater countries such as Romania. In a low-case scenario, however, an integration with the EU and global markets. ineffective or incomplete reform effort would allow efficiency Our results suggest that this approach is both timely and levels to improve only slightly over the next decade, resulting appropriate, and that a successful reform drive could bring in an average growth rate as low as 2% per year. about a significant boost in living standards over the next In a high-case scenario, on the other hand, full implemen- decade. Given the size of the gap between Ukraine's current tation of the authorities' EU-centered reform agenda is output and its long-term potential, and given the experience of assumed. In this scenario, we assume that by 2015 Ukraine will other countries, a successful effort could well boost Ukraine's have met all the chief requirements for EU membership and so trend growth rate to about 8.5% per year. By raising Ukraine's have the institutional quality and efficiency currently enjoyed overall efficiency, successful reform might thus allow a dou- by recent accession countries such as Poland and Hungary. bling of per capita income within a decade -- perhaps placing This corresponds to an effective doubling of efficiency, which Ukraine alongside recent "growth miracle" countries. in turn implies an average annual growth rate of about 8.5% over the coming decade. Andrew Tiffin is an economist at the International Monetary Fund.The article is based on the chapter "The Efficiency Cost of Conclusions Weak Institutions," forthcoming in Ukraine--Selected Issues (IMF, 2005). The views expressed in this article are those of the Despite Ukraine's enviable resources and relatively well- author and should not be attributed to the International developed infrastructure, per capita income remains very low. Monetary Fund, its Executive Board, or its management. Ukraine's Accession to WTO Ukraine has been seeking membership of the World pose obstacles to completing accession negotiations. Export Trade Organization (WTO) for over a decade and now restrictions represent a second market access dispute. appears to be reaching the end of accession negotiations. Ukraine employs export taxes, outright bans, minimum A lot has been done but still there's a long way to go and prices, and customs fees that act as additional export taxes. some obstacles remaining. It should be kept in mind that WTO membership is not · Ukraine has already introduced many changes to an end itself and institutional reforms should be imple- bring its trade regime into conformity with WTO norms. mented for Ukraine to benefit economically from WTO Over 200 existing and draft laws relevant to WTO acces- membership. What will it take to exploit these benefits? sion can be listed. However, to complete accession negoti- · Ukraine must increase its capacity to conduct ations, Ukraine will need to concentrate on completing effective commercial diplomacy, including improved trade legal and institutional reforms. The major ones remaining policy coordination across ministries, better communica- are standards, intellectual property rights and agricultural tion between the executive and legislative branches, and subsidies. institutionalized public management. · Passing the remaining legislation will require the · Ukraine will need to preserve the trade liberaliza- direct involvement of Ukraine's top political leadership. tion accomplished during the accession process. Mobilizing political constituencies behind these legal · Ukraine will need to undertake substantial reforms and providing stronger internal support for the administrative and institutional improvements to benefit negotiation team are the key ingredients to completing from WTO regulatory obligations, such as codes on intel- accession negotiations. lectual property rights, standards and customs. · Ukraine has reportedly addressed most members' concerns about tariffs and other market access barriers. Based on the World Bank's Ukraine Trade Policy About 95% of proposed tariffs on Ukraine's goods have Study: http://web.worldbank.org/WBSITE/EXTER- been accepted by other WTO members. Nevertheless, inter- NAL/COUNTRIES/ECAEXT/UKRAINEEXTN/0,,conte ventions in the sugar trade and export duties on metal ntMDK:20555497~pagePK:141137~piPK:141127~theSit scrap, hides, and certain agricultural products continue to ePK:328533,00.html 14 · Beyond Transition -- The Newsletter About Reforming Economies After the Orange Revolution Investment Climate in Ukraine in the First Half of 2005: Reasons for Concern Irina Akimova C ontrary to the expectations raised by the Orange As a result, the government's investment policy was incon- Revolution, the business climate in Ukraine remains sistent, contradictory and unpredictable. Good intentions to unattractive for foreign investors. Despite some improve the investment climate were not supported by action, progress in economic policy, including the strengthening of and declared liberal goals clashed with illiberal methods of European integration efforts and improvements in regula implementation. tion, much remains to be done in the areas of macroeconom ic and financial legislation, as well as in securing property Some Progress Achieved rights, fighting corruption, and safeguarding against state intervention in market mechanisms. However, the strengthening of European integration efforts is, among other things, one recent positive development in eco- Although foreign direct investment has continued to grow nomic policy, and has signaled Ukraine's willingness to do in 2005 and reached US$192 per capita, its share of GDP business according to international standards. Ukraine has decreased from 2.6% in 2003 to 2.1% in the first half of 2005 signed an action plan with the EU, and made considerable (see Table 1). The major part of FDI comes from Cyprus, the progress towards accession to the World Trade Organization. Virgin Islands and the Russian Federation, while investors Ukraine's accession to NATO has also become a firmer policy from the EU countries remain cautious. Ukraine's demand for aim. Furthermore, Ukraine has reconsidered its strategy investment is mainly satisfied by domestic sources, whose share towards participation in the Common Economic Space (in in gross capital investment increased from 87.2% in 2003 to which Belarus, Russia and Kazakhstan are members) in accor- 89.6% in the first half of 2005. dance with the European integration requirements. Three main factors influenced the government's investment In its efforts to improve regulation the state authorities policy in the first half of 2005: have revised over 6,000 rules, examining their compliance with · A pre-election mood. Parliamentary elections, sched- state regulatory policy. A draft law on the simplification of uled for March 2006, reduced opportunities for undertaking enterprise registration procedures has been approved. This, serious structural reforms and provoked an outburst of eco- together with the successful implementation of "one-stop" reg- nomic populism incoherent with a good investment policy. istration will contribute to lowering the entry barriers and · Fiscal issues dominating the economic policy agenda. administrative costs of doing business in Ukraine. A huge pension bill equal to 16% of GDP was inherited from the previous government. Additional social obligations taken Significant Investment Risks Remain on by the government contributed to a further growth of budg- et expenditures in 2005. There remain, however, many investment risks. These pri- · Lack of a comprehensive strategic reform program. marily include persistent corruption, a worsened macroeco- Former Prime Minister Yulia Timoshenko's government often nomic situation, insecurity of property rights, direct state inter- acted like a fire brigade. A wide diversity of interests within the vention in the economy, a problematic tax policy, and delays in government made reaching consensus on economic policy dif- adopting modern financial legislation. ficult. Differences in economic ideology between President The dismissal of the Ukrainian government in September Victor Yushchenko and the former prime minister were among of 2005 signaled the failure of the anti-corruption campaign the reasons that led to a political crisis and the dismissal of the that had been launched by the president after the Orange Ukrainian government in September 2005. Revolution. Anti-corruption measures included replace- Table 1. Investment indicators for Ukraine, 2001-2005 ment of thousands of civil ser- 1st half 1st half vants at the central and 2001 2002 2003 2004 2004 2005 regional level and a signifi- cant increase in public sector Growth of gross capital salaries. However, little atten- investment, % year-on-year 20.8 8.9 31.3 32.2 28.0 8.5 tion was given to solving the FDI inflow, mln USD 680.3 916.5 1,322.6 667.2 1,559.5 707.5 conflict of interests of civil FDI growth, % year-on-year 14.7 34.7 44.3 -6.2 17.9 33.4 servants, many of whom con- FDI as % of GDP 1.8 2.2 2.6 2.5 2.4 2.1 tinued to be heavily involved FDI as % of gross capital in business activities. The investment 9.1 11.3 12.8 13.0 11.9 10.4 court system still lacks trans- The World Bank · 15 Table 2. Select macroeconomic indicators for Ukraine, 2001-2005 1st half 2005 Macroeconomic indicators 2001 2002 2003 2004 2005 (forecast)* GDP growth, % year-on-year 9.2 5.2 9.6 12.1 4.0 5.5 Industrial output growth, % year-on-year 14.2 7 15.8 12.5 5.0 ... CPI inflation, % year-on-year 6.1 -0.6 8.2 12.3 6.4 12.5 Public sector debt to GDP ratio, % 36.6 33.6 29 24.7 22.9 ... Current account balance, % of GDP 3.7 7.5 5.8 10.5 ... 7.2 Consolidated budget deficit, % of GDP 0.3 -0.7 0.2 3.4 -1** 2.5 Notes: *Based on the IMF's forecast updated in August. **The IMF concluded that the consolidated budget including off-budget funds performed with a deficit equal to 1% of GDP in the first half of the year. parency and independence from political and business interest abolished tax privileges in free economic zones and attempted groups. to move away from a simplified system of taxation for small The current macroeconomic situation in Ukraine looks less businesses though this was later reversed. favorable than a year ago (see Table 2). GDP growth slowed to 4%, and the low inflation of 2001-2002 has shot up into dou- Difficult Tasks Ahead ble figures. According to the International Monetary Fund, in 2005 Ukraine's GDP is expected to grow by only 5.5% while The new government has a difficult task in restoring the Corruption Perceptions Index will reach 12.5%. Attempts Ukraine's image in the international investor community and to combat inflation by revaluing the national currency have in laying down a basis for future reforms. not been very successful so far, as they have not been support- · Firstly, the reprivatization campaign should be ed by a significant fiscal adjustment. Most likely, Ukraine's fis- stopped and the majority of privatization deals granted cal deficit will reach 2.5% of GDP in 2005, higher than the amnesty, leaving only a few cases for court consideration. expected 1.7%. Ensuring transparency and the political independence of courts The area of greatest concern is the security of property is of crucial importance. Development of a convincing privati- rights. Reprivatization of enterprises has become a hot political zation strategy in the medium term is another step necessary topic.Though the president has backed away considerably from for gaining investors' confidence. the former prime minister's initial intentions to revise the results · Secondly, all remaining legislation needed for the WTO of about 3,000 privatization deals, the issue is far from settled. accession should be passed by the Parliament as soon as possible. Despite adopting a memorandum on the security of property · Thirdly, abolishing or changing over 3,600 regulatory rights, signed by the president, former prime minister, and the acts is vital for the improvement of the business environment. speaker of parliament in June 2005, and declaring an intention This should be followed up by ensuring easy access to regula- to announce an amnesty for most privatization deals, no law on tory information across sectors conducting regulatory impact this has been adopted so far. This leaves the question as to the analyses of new legislation. number of potential revisions open. At the same time, contra- · Fourth, macroeconomic stabilization needs a prudent dictory court decisions on the privatization of Kryvorizhstal, fiscal policy. Therefore, the 2006 budget should be based on Siverodonetsk's "Azot" plant and Nikopol Ferroalloy Plant realistic macroeconomic assumptions and contain modest raise doubts about the transparency of court procedures and social expenditures. Although the development of new tax pro- negatively affect investors' perceptions of Ukraine. posals for lowering the tax burden is important, a good tax Other illiberal economic policy measures have included system also requires stability. Past practices of making numer- state interference in the market price for meat, sugar and gaso- ous amendments to tax laws after the adoption of the Budget line, which has resulted in product shortages. Though these Law are to be halted. measures were criticized by the president and later abolished, · Fifth, direct state intervention in market prices should they delayed Ukraine in being granted market economy status. be ruled out. A sound competition policy has to become a gov- Developments in tax policy and financial legislation have ernment priority. also been rather disappointing. No attempts have been made to · Finally, pushing forward the adoption of long pre- address the conflicting provisions of the Commercial and the pared financial and corporate legislation will lay the founda- Civil Codes, or to push forward the adoption of long awaited tion for resuming growth in the future. corporate legislation that is of crucial importance for creating a favorable business climate. Contrary to government promis- Irina Akimova is Director of Blue Ribbon Analytical and es, the tax burden increased from 18.3% of GDP in 2004 to Advisory Centre, UNDP Ukraine. She has contributed this 22.1% in 2005. To ease the tax burden the government has article to BT. 16 · BeyondTransition -- The Newsletter About Reforming Economies The Rise and Decline of Economic Populism after the Orange Revolution Anders Aslund U kraine's Orange Revolution was an exhilarating and government collapsed in early September after less than eight joyful event. It was a classical liberal revolution for months. democracy and freedom and against corruption. The parliament was even more diverse and disorganized, More than a million people gathered in Kyiv's cold winter. with 14 loose party factions trading a few parliamentarians Viktor Yushchenko became the democratically elected presi every week. Reputedly, two-thirds of the 450 deputies are dol- dent, promising freedom from fear and corruption. Since lar millionaires. Most are businessmen pursuing their interests Yushchenko was sworn in as president on January 23, 2005, in parliament. Such an amorphous and self-interested parlia- foreign policy has turned to the West, aimed at integration ment can hardly be serious about legislating reforms. For now, into the European Union and the World Trade Organization; any politically sensitive legislation is out of bounds until the and domestic policy has been characterized by democratiza parliamentary elections in March 2006, when Ukraine will tion and freedom. Economic policy, however, has been little move to fully proportional elections. short of disastrous. Economic policy could hardly have been worse. Prime The victors from Independence Square entered government Minister Tymoshenko surprisingly opted for a populist and not keen on listening to advice. The Orange Revolution was statist approach to the economy. The results have been imme- carried out by a broad alliance, rendering the government diate and devastating. In 2004, Ukraine enjoyed economic chaotic and disunited. The big political aim was to perform growth of 12.1%; in the first eight months of 2005, the well in the parliamentary elections in March 2006, and the growth rate plunged to a mere 2.8%. Moreover, the growth conventional wisdom was that the voters would favor populist rate fell significantly almost every month, from 6.5% in measures. January (over January 2004) to 1.6% in August (over August An extraordinary administrative chaos erupted. No fewer 2004). It is quite an achievement to bring an economic boom than 18,000 officials were appointed within four months, to stagnation in just half a year. How could things turn so sour while a large number of state agencies were abolished or so fast? merged. The number of deputy ministers was reduced from about ten in each ministry to about three. As the deputy min- Reprivatization Plans a Blow to the Economy isters had formed the brain trust of the government, their exclusion weakened its intellectual capacity. Furthermore, the The biggest blow to the economy has been the new gov- regional governors, who in Ukraine are appointed, have all ernment's foggy plans for reprivatization. During the election been replaced. Many new governors were ousted immediately, campaign, Yushchenko advocated the renationalization of as various crimes were uncovered, showing how difficult it is Ukraine's biggest steel mill, Kryvorizhstal, to be followed by a to find qualified and reasonably honest staff in pervasively cor- new privatization. The goal was to undo the sale of the mill to rupt Ukraine. Ukraine's two biggest oligarchs in a sweetheart deal made last year. For months, top Ukrainian officials publicly discussed Government and Parliament Too Politically Diverse the number of flawed privatization deals to be reversed, rang- ing from half a dozen to 3,000, and how this would be done. The work of the government was complicated by the The government has tried to recover many enterprises through breadth of the coalition in the Orange Revolution. Prime the courts, and has drafted a broad law that could undo much Minister Yulia Tymoshenko, perhaps the foremost revolution- of Ukraine's privatization. The new acting prime minister, ary leader, became prime minister and dominated government Yuriy Yekhanurov, wants to end the Kryvorihstal dispute and policy. The second most important group in the cabinet was get on with the re-privatization of the plant. Meanwhile, the the socialists, who obtained four portfolios, including the property rights of thousands of enterprises are in limbo. In State Property Fund, the Ministry of Agricultural Policy and Kyiv, rumors abound that oligarchs connected to the old the Ministry of the Interior. A third group consisted of big regime are trying to sell their enterprises to Russian business businessmen allied with Yushchenko, notably Petro executives and are preparing to escape the country. Naturally, Poroshenko, who became Secretary of the National Security executives have cut investment, and economic growth has and Defense Council. A fourth group of true Yushchenko loy- come to a screeching halt. alists focused mainly on foreign affairs. Finally, a sprinkling of To make matters even worse, the new socialist minister of industrialists was present, notably First Deputy Prime privatization opposed privatization in principle, asking rhetor- Minister Anatoly Kinakh. This government was too diverse to ically: "What is so bad about renationalization?" Tymoshenko work, and the prime minister developed a habit of attacking concurred in a recent newspaper interview: "The biggest enter- ministers ad hominem in public. Little surprise then that the prises, which can easily be efficiently managed, must not be The World Bank · 17 privatized, and they can give the state wonderful profits as an a stark reorientation to the West. Ukraine has indicated that it owner." This sounds like state capitalism. is only interested in that part of the Common Economic Space In the election campaign, the old regime doubled pensions, (CES, formed in 2003 together with Russia, Kazakhstan and saddling Ukraine with the highest pension costs in the world as Belarus) that concerns free trade, while the CES aims for much a share of national income. The new Ukrainian government more, including a customs union and a monetary union, as in has added to this excessive burden by raising minimum salaries the EU. One of the most immediate international ambitions of sharply and state wages by no less than 57%. To finance these the new Ukrainian government is to accede to the WTO this and other huge social expenditures, the government is scram- year. Late in the day, the Tymoshenko government started bling to find more revenue. A lot of discrete tax exemptions pushing through a score of draft laws needed for WTO entry, have, sensibly, been abolished, but the overall tax pressure has but it managed to only get just over half of them through par- risen dramatically, from 36% of GDP last year to probably liament in July. The question is whether the government will be 42% of GDP this year. Meanwhile, Yushchenko continues to able to push through the rest this year so that Ukraine can talk about his plans for sharp tax cuts. Notably, he wants to finally join the WTO. Ukraine has also concluded an action reduce the high social taxes from 37.5% of the payroll to 20% plan with the EU as a part of the new EU European over five years. Neighborhood Policy. It contains many concrete steps to be Incredibly, this new regime, brought to power by the mid- taken both by the EU and Ukraine. The demands on Ukraine dle class and small entrepreneurs, has abolished the simplified amount to sensible reforms to which few would object. The EU taxation that served those segments of society so well. The offers might not be very generous, but they do foresee improve- obvious result would have been that tens of thousands of small ments in market access and substantial exchanges in the sphere entrepreneurs would have had to close their businesses or flee of education and science. into the underground economy. Fortunately, strong public The contrast between the declarations of the Orange opinion forced the reversal of this decision. What is more, in Revolution and Tymoshenko's government policy could hard- the election campaign, Yushchenko demanded that the lawless ly be greater. In an editorial on Yushchenko's first 100 days, tax police be abolished and that the tax administration be the Kyiv Post points out that "while Yushchenko is making forced to obey the law. But Tymoshenko cheered the tax police grand statements abroad, the rest of the government does not on and declared that the performance of the regional gover- seem to follow his lead." nors would be judged by their ability to collect taxes. The economic affects of this policy are evident, with During the populist presidential campaign last fall, infla- growth falling month by month. The investment and construc- tion surged to 15% a year with increasing public expenditures, tion boom has been succeeded by real decline, which has driv- loose monetary policy and an inherited large current account en the economic contraction. Foreign trade has done compar- surplus. Fortunately, a relatively tight fiscal policy kept infla- atively well, but for the last few months the previously solid tion at this level. The predominantly Russian oil companies trade surplus has been eliminated as imports have risen have increased their prices as world market prices have risen. sharply, while exports are growing more moderately. Ukraine's Tymoshenko imposed strict price controls on gasoline and current economic problems are caused by domestic economic forced the remaining state oil companies to supply it at below policy, even if falling prices for steel exports and rising prices market price. Not surprisingly, oil supplies declined, and gaso- for Ukraine's energy imports are aggravating the problem. line shortages ensued. Fortunately, President Yushchenko Fortunately, this populism is now over at least for the time refused to tolerate these policy malpractices and on May 19 being, though the big question is what the voters will say next liberalized gasoline prices. March. Yekhanurov has his work cut out. In a short period, he Tymoshenko also tried to control the price of meat for needs to accomplish many things. First of all, he is strongly some time. The price controls were accompanied by abuse of committed to putting an end to the harmful reprivatization private producers and praise of state companies. But when campaign. Second, a long prepared draft omnibus law abolish- Yushchenko stopped the price control for gasoline, the state ing some 3,600 regulations is ready to be sent to parliament. interference in the meat market also ceased. The prime minis- Third, the remaining WTO legislation needs to be acted on. ter, however, did not stop her state interventions. During the Fourth, a reasonable budget for next year must be passed. summer she insisted on a minimum state procurement price Finally, Yekhanurov might be able to push through some finan- and maximum sale price for grain and bolstering state trade in cial legislation prepared long ago and lying waiting in parlia- grain. Instead of talking about reforming state monopolies, ment. Although world market prices for Ukraine's main export Tymoshenko talked about their reinforcement. In an addition- product, steel, have declined substantially, there is still hope for al effort to squeeze business profits and boost state revenue, a resumption of sound economic growth. she wanted to boost railway tariffs for metals by 100%, but No doubt, Ukraine's economic policy will improve with the settled magnanimously for a hike of only 50%. change of government, but the verdict of the voters in the par- liamentary elections in March is difficult to predict. Orientation to the West Anders Aslund is Director of the Russian and Eurasian Ukraine's foreign economic policy has been somewhat Program at the Carnegie Endowment for International Peace. shielded from this populism, and it has been characterized by He has contributed this article to BT. 18 · Beyond Transition -- The Newsletter About Reforming Economies New Findings Formation of Social Capital in Central and Eastern Europe Jan Fidrmuc and Klarita Gerxhani S ocial capital is important for the economic, social, and our study are those one can rely on in need, e.g. to find a job, political development of a country. A study of social to borrow money, or generally when one is feeling depressed capital in 28 European countries shows that social cap (the Table below only provides measures for this last aspect). ital in Central and Eastern Europe lags behind that in 3. Philanthropic generosity, or altruism, i.e. giving Western Europe. The gap should gradually disappear as money or goods or giving up one's time to help the poor and these countries catch up with the West in economic develop socially excluded. ment and quality of institutions. Trust is the most commonly used empirical measure of Social capital is defined as trust, cooperative behavior, and social capital. Typically, trust is defined as the extent to which networks between groups. Developed countries, such as the EU people find strangers trustworthy. This measure is not used in member states, are generally characterized by a high density of our study due to the unavailability of relevant data. economic transactions among different groups, well-estab- All the indicators, except altruism, show the EU member lished institutions, a high level of generalized trust and partici- countries have on average a higher stock of social capital than pation in civil associations, and a bottom-up structure of eco- the candidate countries (see Table). Given that the vast majori- nomic transactions. On the other hand, developing countries, ty of the candidate countries are post-communist countries, this including the EU candidate countries, have a larger under- observation seems to confirm the assertion that communism ground economy, more corruption and state weakness, a low destroyed social capital by discouraging social interactions out- level of generalized trust and participation in civil associations, side one's immediate network of friends and family. and a top-down structure of economic transactions. Our measures of social capital utilize Eurobarometer sur- Social and Human Capital are Complementary veys carried out between 1998 and 2001 in 15 EU member states and in 13 countries that were all candidates for EU mem- Social capital is a productive asset that takes time, effort and bership at the time.The latter group included Bulgaria, Cyprus, often a financial outlay to accumulate. As a first step, we relate Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, the individual stock of social capital to various individual-level Poland, Romania, Slovakia, Slovenia, and Turkey. Ten of these socio-demographic characteristics: gender, age, marital status, countries became members of the EU in May 2004. education, occupation, residency in urban vs. rural areas, and With the exception of Cyprus, Malta and Turkey, the can- income. We also account for country-specific factors. didate countries were all post-communist countries. According · The individual-level determinants of civic participa- to the recent theory of missing social capital, "positive" social tion appear similar in the candidate and member countries of capital was destroyed by the communist dictatorship and "neg- the EU. Education is particularly important: respondents with ative" social capital was built up. This negative social capital secondary or university education or current students are more took the form of underground activities, corruption, or organ- likely to actively participate in voluntary organizations than ized crime. The gap created by the sudden destruction of old those with primary education. Civic participation also increas- institutions and the creation of new ones provided a favorable es with income, and seems to follow a hump-shaped path over environment for the persistence or even further accumulation an individual's lifetime. Thus, in the EU member countries it of negative social capital throughout transition. peaks around the age of 50, and subsequently declines. The unemployed, retirees, housepersons, and females tend to dis- Higher Stock of Social Capital in the West play significantly lower levels of overall civic participation. · The results are very similar as regards access to social The Eurobarometer surveys feature questions that can be networks. The most notable difference is the effect of age. In used to gauge three aspects of social capital: both member states and candidate countries, older individuals 1. Civic participation, captured by membership in vol- tend to have more limited access to social networks. Women untary organizations, where one learns to interact with other have an easier time finding consolation when depressed and people in a cooperative manner to achieve a shared objective. financial relief when in need of money, but are less likely than 2. Density of social networks, or ties between individu- men to find a job using their social contacts. als. Formal networks (such as alumni associations) may par- In summary, most of our findings show not only consistency tially overlap with membership in voluntary organizations. across our two measures of social capital, but also similarity in Informal networks embody informal relations among friends, the candidate and EU member countries. The positive relation- family members, colleagues, and the like. Social networks in ship between education and the stock of social capital may indi- The World Bank · 19 cate that social and human capital are complementary -- indi- The impact of country-specific economic and institutional viduals who acquire a high stock of one also invest in the other. conditions is in line with expectations. Higher per-capita income is associated with more frequent civic participation. Individuals EU Member and Candidate States Similar in countries with high income inequality and especially wide- spread corruption tend to acquire less social capital. Economic In addition, we also consider aggregate determinants of freedom seems to encourage investment in social capital. social capital such as economic development and the quality of These patterns are very intuitive. Income inequality reflects institutions. Individuals in countries with poor institutions may the intensity of social conflict in a country. Socially polarized be discouraged from investing and, in turn, will acquire less countries, unsurprisingly, end up with lower investment in gen- generalized social capital than their counterparts in countries eralized social capital. Rampant corruption and extensive reg- with a better institutional environment. ulation of the economy reduce the returns on any kind of Thus, we take account of aggregate indicators of economic investment, whether it is in social capital or in other productive development and institutional quality. These include: GDP per capacities. Therefore, both formal (economic freedom) and capita, the Gini coefficient of income inequality, the informal (corruption) institutions matter for individual acqui- Transparency International corruption-perception index, the sition of generalized social capital. average of indexes of political freedom and civil liberties report- The results thus reveal that while the stock of social capital ed by Freedom House, the economic freedom index compiled by at the individual level is affected by very similar factors in both the Frasier Institute, and average economic growth over the pre- groups of countries, the differences in individual-level determi- ceding three years. To account for the gap in the average stock of nants cannot fully account for the gap at the aggregate level. social capital in the candidate countries relative to EU members, Once we also include aggregate measures of economic devel- we also include a candidate country dummy in the regressions. opment and quality of institutions, however, the gap disap- The most interesting finding is that once aggregate econom- pears. This indicates that the low average stock of social capi- ic development and institutional quality are controlled for, the tal in Central and Eastern European countries can be attrib- candidate countries are no longer different from the EU mem- uted to the lower level of economic development and the lower bers with respect to their stock of social capital. In fact, the can- quality of institutions in candidate countries. The effect of cor- didate countries even display significantly higher active partici- ruption seems to be particularly important. pation in voluntary organizations than one would expect given their level of economic development and institutional quality. Conclusion Measures of social capital (selected) in some countries Although convergence in formal institutions between the EU member states and the candidate countries has to a Average Participation Network: Depressed Altruism: Money large extent been accomplished, there remains a mismatch between the quality of formal institutions and the existing Sweden 2.00 Ireland 0.93 N. Ireland 1.29 informal institutions in the candidate countries. This lack Denmark 1.78 Netherlands 0.92 of correspondence, embodied in the form of corruption Netherlands 1.70 Spain 0.92 Malta 1.22 and other predatory activities, may be the underlying rea- Czech Rep. 0.94 Slovakia 0.90 Netherlands 1.09 son of the persisting significant gap with respect to social EU Average 0.91 Czech Rep. 0.86 Romania 1.08 capital. Great Britain 0.88 EU Average 0.86 Great Britain 0.92 Slovakia 0.86 Poland 0.83 Poland 0.89 The expectation is that EU enlargement will foster Slovenia 0.70 Belgium 0.81 Lithuania 0.89 greater openness and encourage the adoption of sound CC Average 0.55 Hungary 0.80 EU Average 0.84 economic policies in the candidate countries. This will, in Germany East 0.54 Slovenia 0.78 CC Average 0.73 turn, discourage rent-seeking, create rewards for leadership Italy 0.49 CC Average 0.78 Hungary 0.65 based on performance, enhance public trust in the state's Lithuania 0.48 Estonia 0.77 Germany East 0.60 actions, and promote civic spirit. Thus, once Central and Latvia 0.47 Romania 0.73 Latvia 0.59 Eastern European countries catch up with the West in Turkey 0.43 Turkey 0.71 Germany West 0.57 terms of economic development and institutions, they are Poland 0.35 Bulgaria 0.70 Czech Rep. 0.45 very likely to close the gap in social capital as well. For this Romania 0.29 Cyprus 0.70 Estonia 0.41 to be possible, however, a gradual harmonization of formal Bulgaria 0.18 Greece 0.69 Bulgaria 0.32 rules and informal norms between the two groups of coun- tries should be of primary importance. Note: Average participation is the average number of voluntary organizations in which respondents actively participate. The maximum possible value is 11. Jan Fidrmuc is a Lecturer in Economics at Brunel Network: Depressed variable takes the value of 1 if the respondents feel she has Business School, U.K.; Klarita Gerxhani is Assistant someone (besides the members of her immediate household) to rely on when feel- Professor at the Faculty of Social and Behavioural Sciences, ing depressed, and 0 otherwise. Altruism: Money variable measures whether the respondent contributed money during the preceding 12 months to help poor or University of Amsterdam. Full text of the paper can be socially excluded people. It takes values of 0 (never), 1 (less than once a month) viewed at http://www.cepr.org/Pubs/new-dps/dplist.asp? and 2 (more than once a month). dpno=5068. 20 · Beyond Transition -- The Newsletter About Reforming Economies Believe but Verify? Russian Views and the Market D. Andrew Austin, Tatyana Kosyaeva, Nathaniel Wilcox W hat are the attitudes of Russian students towards and demand theory would predict double-auction results in a the market mechanism? To what extent do they hypothetical future session using questions phrased in the same believe markets work? Russians, like Americans, way as those asked before the double-auction. become more willing to believe that markets operate Our approach measured the extent to which the subjects according to economic principles once they see evidence believed markets work and how attitudes changed after seeing from a market experiment. Popular support for market a market-like experiment. Seeing the double-auction in action reform is probably based on a complex set of views and had a strong effect on beliefs, leading to much less skepticism judgments. Russian social attitudes play their own role. about economic theory's ability to predict outcomes. These changes were broadly similar to changes in attitudes among US Market-oriented policy is hard to sustain unless citizens subjects, who also become less skeptical about economic theo- believe market outcomes are efficient and market processes are ry after seeing the double-auction work. more than random fluctuations. Citizens who doubt that the However, the patterns of changes for Russian and US sub- market follows the predictable patterns set out in economic jects were different. While on average subjects became more theory are unlikely to welcome reforms based on this theory. willing to believe that economic predictions were likely to be For example, Marshall Goldman argues that Russians, because correct, the change in beliefs were not uniform. of their history, are not "economic men," and treating them as · Russians from entrepreneurial or Orthodox house- such could only lead to poorly designed economic policy. He holds started out relatively more skeptical of economic theory, also attributes flaws in Russian privatization and economic but became relatively more likely to think that economic pre- reform in large part to a historic mistrust among Russians of dictions would be correct. Perhaps those who have seen the market institutions. By contrast, Shiller, Boycko and Korobov marketplace from the vantage point of their family's firm find claim, "Soviet and American respondents were basically simi- it hard to believe that markets are governed by simple eco- lar in some very important dimensions" including, "their nomic principles. understanding of the working of markets." For example, 90% · Russian women, like American women, began with of Russians and 86% of New Yorkers surveyed agreed that greater skepticism than men about economic theory. After see- "people work better if their pay is directly tied to the quantity ing the double-auction, the difference between Russian women and quality of their work." and men disappear. By contrast, American women remained To find out if Russians believe markets work as economists more skeptical than men. say they do we investigated the attitudes of Russian students · Those who graduated from general secondary schools towards the market using a classroom market experiment and were relatively more skeptical of economic theory, relative to a set of survey instruments. Young Russians in Novosibirsk those who graduated from a more selective school such as a and St. Petersburg were asked about their views on a specific lyceum, gymnasium or special language school. market institution, the double auction, rather than about hypo- Other factors, which might have been expected to affect thetical situations. The double-auction is a simplified version attitudes about how markets work, had little measurable of trading rules used by open-outcry trading pits such as the effect. For example, measures of family income and political Chicago Mercantile Exchange and is widely used in experi- orientation had little or no effect, implying that differing views mental economics. about markets do not simply fall along lines of rich vs. poor. The experimental protocol was simple. After a brief intro- Instead of asking about cash income, we used the market value duction we handed out a sociodemographic survey. The rules of the best family car and the type and destination of family of the double-auction were then explained to students and a vacations, as many Russians still receive important in-kind "no-money" practice round was played. One student was benefits, such as subsidized housing. Subjects described their handed a sealed envelope with predictions drawn from supply family's economic situation using five categories ranging from, and demand theory. A second survey was distributed, asking "We barely make ends meet; there isn't enough money for students to say how likely it was that the predictions for aver- daily necessities" to, "We can buy really expensive goods: age price, quantity traded, and total trading profits would apartments, dachas, SUVs, etc." However, none of these meas- match the results for the double-auction's last round. For ures of income had a measurable effect on attitudes. example, students were asked "How likely is it, in your opin- In the US, we found conservative students were significant- ion, that the theory of supply and demand will predict, within ly more willing to believe that economic theory could predict an interval of 30 rubles, the average trading price in the last outcomes. However, what the terms "right" and "left" or trading round?" Possible responses were: "100%," "Very "conservative" and "liberal" mean in Russian politics is usual- Likely," "Likely," "Unlikely," "Very Unlikely," and "0%." ly far from clear. Therefore we developed two new scales of After the last round, predictions and trading results were com- political orientation from a battery of questions drawn from pared. Finally, we asked students how likely it was that supply political science research, which were constructed using sur- The World Bank· 21 veys we collected from Tomsk, Ekaterinburg, Novosibirsk, · Popular support for market reform is probably based Slaviansk-na-Kubani, and St. Petersburg. One scale measured on a complex set of views and judgments. Russian social atti- probusiness attitudes. A typical question used in this scale was: tudes play their own role. The Soviet-era catchphrase "whoev- "Most businessmen do important work and therefore, deserve er doesn't steal from his employer steals from his family" high payment for it." The other scale captured views concern- reflected a rational response to communism. However, that ing fairness and workplace relationships. A typical question view of stealing is profoundly unhelpful in the development of used in this scale was: "Workers and managers have conflict- well-functioning markets. Regardless of whether these atti- ing interests and are essentially enemies." While both scales tudes stem from the Soviet experience or from the preindustri- had reasonable psychometric properties, neither was strongly al past that Goldman stresses, mistrust or contempt of public related to views about how markets work. Those who cared institutions and the strong reliance on friends and family ties more about fairness and identified more with workers than hinder the expansion of the role of markets. with managers were slightly more skeptical of economic theo- · Both the "Russians are different" and "Russians are ry before seeing the double-auction, but this effect disappeared just like Westerners" camps should agree that deep and irre- in the post-auction results. These results suggest that even versible public support for market reforms must include a though young Russians may orient themselves along political clearer understanding of how markets work. If the costs of dimensions in orderly ways, differences in political orientation public misunderstandings of the market are high, then so are are just not strongly correlated with other views. the policy benefits of better public understanding. If Russians · The results of this research suggest any differences in can be persuaded that markets work according to well-under- attitudes towards markets between Russians and Westerners stood principles and deliver efficient outcomes, as our results probably stem from divergent issues associated with markets, suggest, then the potential exists for creating greater public not from divergent views about how the market works. support for a wider role for the market. Russians, like Americans, become more willing to believe that markets operate according to economic principles once they see D. Andrew Austin is Altria Professor at CERGE-EI, evidence from an experimental market. However, not all Prague; Tatyana Kosyaeva is Senior Researcher at the Russians or all Americans change their views to the same extent, Economics Institute, Prague, and Senior Researcher at the with some subgroups showing more willingness to change their Institute of Economics, Siberian Branch of Russian Academy views. Of course, while this classroom experiment changed of Science, Novosibirsk, Russia; Nathaniel Wilcox is Professor views about the market mechanism, whether or not it changed of Economics at University of Houston. This research was views of the real world or the probability that imperfections, dis- made possible by a grant from the Global Development tortions or manipulations prevent real markets from reaching Network. Full text of the paper can be viewed at competitive market outcomes is not easy to determine. http://www.cerge-ei.cz/publications/working_papers Too Much of a Good Thing? Credit Booms in Bulgaria, Romania, and Ukraine Christoph Duenwald, Nikolay Gueorguiev, and Andrea Schaechter R apid private sector credit growth, as experienced in GDP. Foreign ownership dominates in Bulgaria and Romania. In Bulgaria, Romania and Ukraine, represents a wel Ukraine the share of foreign-owned banks is much smaller, come expansion from initially low levels, and may be reflecting the difficult business environment. State ownership is beneficial for growth and efficiency. However, it also brings limited to two or three banks in each country. the risks of macroeconomic and financial crises. Policymakers face the dilemma of how to minimize those risks while still allowing bank lending to contribute to higher growth and Macroeconomic Stability and Growth behind Credit efficiency. Booms The banking sector in all three countries is still relatively The common factors behind the sharp credit acceleration in small despite the large number of banks and rapid asset growth all three countries are successful postcrisis macroeconomic sta- over the past four years. Relative to GDP, Bulgaria's banking sys- bilization (including single-digit or near-single-digit inflation) tem -- consisting of 29 domestic banks and 6 foreign branches and robust growth (between 5 and 8% in the past five years), -- is the largest, with total assets of 46% of GDP. The assets of restoration of confidence in the banking sector, and sizable for- Ukraine's 158 banks amount to 37% of GDP. However, many of eign exchange inflows. the banks are small, and most are affiliated with corporations. The ongoing credit boom reflects a significant lift from the Romania has 32 banks and 7 branches, with assets of 35% of depressed levels of postcrisis bank lending and is thus part of a 22 · Beyond Transition -- The Newsletter About Reforming Economies process of financial deepening. The following factors are espe- improving the allocation of capital, sharing risk, and pooling cially important: savings and raising the efficiency of financial intermediation. · The newly privatized banks have been keen to boost Indeed, by easing financing constraints, increased bank lending profitability and market share. With high capital adequacy can contribute to higher investment and consumption, and, ratios, banks managed to increase profitability by shifting the ultimately, a higher standard of living. From a structural per- composition of their assets toward loans. In Bulgaria and spective, the increase in financial intermediation in the three Romania, this has been actively encouraged by the banks' for- countries can therefore be considered beneficial. eign parents, which are domiciled in less profitable mature markets. In Ukraine, the lack of other investment opportunities ...but Also Poses Macroeconomic Risks... has forced banks to expand their loan portfolios in pursuit of higher profits. At the same time, rapid bank lending also entails risks for · The ability of banks to fund loan expansion has been macroeconomic and banking sector stability. When they materi- boosted by strong capital inflows, mostly through the banking alize, these two risks are typically mutually reinforcing, creating system, amid high global liquidity, low interest rates, and boom-bust cycles in credit and asset markets and large swings in increased confidence associated with Bulgaria's and Romania's macroeconomic fundamentals. Moreover, these risks may also prospective European Union (EU) accession and Ukraine's be causally linked. Abrupt corrections of macroeconomic imbal- large current account surpluses. ances have in some instances triggered financial sector distress, · The greater supply of credit has been matched by while the latter has caused economic disruptions. increased demand from both businesses and households. For If left unchecked, a rapid increase in credit can boost domes- businesses, a newfound confidence in the future has boosted tic prices and wages - which at an unchanged nominal exchange investment intentions and demand for credit. Household rate could reduce international competitiveness -- and height- demand for durables and real estate has increased from previ- en external vulnerabilities. Indeed, in characterizing emerging ously depressed levels due mainly to more household confidence market credit booms, the IMF (2004) notes that there is almost in the ability to service debt, and partly to more flexible terms a 70% probability that a credit boom will coincide with either for bank offers on new products. In Bulgaria and Romania, the a consumption or investment boom, and that credit booms are share of household loans has surged to one-third of total loans often associated with banking and currency crises. while it is still much lower in Ukraine (16%) (see Table 1). Both Bulgaria and Romania have seen widening trade · Bank credit to the public sector has declined substan- deficits, owing to a rapid growth in imports. These shifts have tially, reflecting small general government fiscal deficits or even coincided with the rapid increase in bank lending. Consumer surpluses and the availability of ample external financing and price inflation has remained relatively tame in both countries, privatization revenue. partly reflecting lower food prices, and nominal effective exchange rate appreciation in Bulgaria has offset the impact of Rapid Bank Lending Contributes to Growth... higher oil prices. The results of our econometric analysis suggest that each There are various channels through which financial devel- percentage point of GDP of additional credit leads to a deteri- opment can contribute to economic growth. These include oration in the balance of goods and nonfactor services (with a one-quarter lag) of about 0.4 percentage point of Table 1. Selected Credit Indicators, 2000 and 2004 GDP for Bulgaria and 0.7 percentage point of GDP for Romania. Bulgaria Romania Ukraine* 2000 2004 2000 2004 2000 2004 ...and Risks for Banking Sector Stability Real credit growth 4.5 40.4 7.9 40.5 28.6 16.9 Rapid credit growth can trigger banking sector (in %, year-on-year, distress through macroeconomic imbalances and deflated by CPI) deterioration of loan quality. Numerous studies have Credit flows, in % 1.7 11.5 0.6 5.6 4.7 6.7 found that periods of significant and accelerating of GDP credit growth often preceded banking crises. The like- Credit stock, in % 12.2 35.4 9.3 17.9 12.3 27.1 lihood of a banking crisis following a lending boom is of GDP (year-end) estimated to be as high as 20%. Prominent examples · households 2.3 11.5 0.5 5.1 0.6 4.4 include the Scandinavian banking crises in the early · private companies 9.3 23.2 7.5 11.5 10.6 21.9 1990s, Mexico's banking crisis in 1994, and the Asian · state-owned enter- 0.6 0.7 1.4 1.3 1.1 1.9 financial crisis in 1997-98. prises While the level of credit in all three countries is still much below that of many of these prominent cri- Sources: Bulgarian National Bank; National Bank of Romania; National sis countries, the speed of credit expansion in Bulgaria Bank of Ukraine; and IMF staff estimates. and Ukraine has reached levels comparable to them. *During the tumultuous presidential elections in late 2004, the banking sec- tor lost substantial amounts of deposits and had to temporarily reduce lending. Calculating an equilibrium level of credit, based on a The World Bank · 23 country's economic and institutional fundamentals and com- titative restrictions on credit have been imposed. The tighten- paring it with the current level of credit shows that in the case ing of reserve requirements last year does not appear to have of Bulgaria, the gap between the estimated equilibrium ratio reduced credit growth, although such growth may have been and the actual has been narrowing very rapidly. In 2001, before even higher otherwise. It is too early to assess the impact of the the credit boom got into full swing, the credit-to-GDP ratio quantitative limits on credit expansion that took effect on April was 14.5%, by the end of 2004 it had reached about 35.5%. 1, 2005, but a significant diversion to other forms of financing Thus, the credit-to-GDP ratio rose by about 7 percentage (nonbank/cross border) is likely. Looking ahead, it is possible points on average per year, a pace that has been associated with that further fiscal tightening will be necessary should the mon- banking crises in other countries. In Romania and Ukraine, the etary measures prove ineffective in preventing a further widen- credit-to-GDP ratio has risen more slowly, at 2.5 and 4.25 per- ing of external imbalances. centage points, respectively, on average during the same period. · In Romania, a combination of fiscal policy, monetary However, despite the ongoing credit acceleration, banks in policy, and prudential measures has been used to both moder- Bulgaria and Romania are well capitalized and liquid. In con- ate and offset credit growth. Fiscal policy has been consistent- trast, Ukrainian banks suffer from large shares of related-party ly tightened, with the general government deficit narrowing lending and NPLs, while profitability has remained low (Table from 3.2% of GDP in 2001 to 1.1% in 2004. The National 2). Another concern is poor asset diversification due to the lack Bank of Romania (NBR) tried interest rate hikes in 2003 but of other investment opportunities - about two-thirds of banks' had to reverse course in 2004, as falling inflation and large cap- total assets in Ukraine are loans, higher than in Bulgaria (56% ital inflows made high real interest rates both unjustifiable and of total assets), Romania (47%). untenable. Moreover, these hikes merely changed the composi- tion of credit in favor of foreign currency loans without reduc- Policy Options ing the overall credit flow. As the boom occurred mostly in loans to households, the NBR tightened households' eligibility The menu of available policy options includes macroeco- for credit by lowering the ceiling on the maximum monthly nomic policies, regulatory and supervisory policies, administra- payment-to-net income ratios, standardizing the downpayment tive measures (such as controls on capital inflows), and market for mortgage loans at 25%, and strengthening the required development measures, or a combination of the above policies. guarantees/collateral. Finally, the reserve requirement on for- The authorities in the three countries understand the risks asso- eign currency-denominated bank liabilities was increased and ciated with the credit booms and have responded in varying ways extended to liabilities with residual maturity longer than two and degrees to both offset and moderate rapid credit growth. years. These measures did reduce credit growth somewhat, but · In Bulgaria, policy options are constrained by the cur- a further fiscal tightening is likely to be necessary in the period rency board arrangement. The main response has been a tight- ahead to support efforts on the monetary side. ening of fiscal policy, both through higher revenue and expen- · In Ukraine, the focus was on bank regulatory and diture restraint. A host of monetary measures have been imple- supervisory measures. The National Bank of Ukraine (NBU) mented -- notably moral suasion, a tightening of reserve raised the minimum capital adequacy ratio, strengthened the def- requirements, and prudential supervision. Most recently, quan- inition of capital, tightened loan classification rules, raised pro- visioning requirements for foreign currency-denomi- Table 2. Prudential Indicators of the Banking Sector, 2000 and 2004 nated loans, tightened related-party lending regula- (percent) tions, and put in place a new risk assessment method- ology for its supervisors. These measures were aimed Bulgaria Romania Ukraine at strengthening bank resilience to shocks. Credit 2000 2004 2000 2004 2000 2004 growth decelerated during 2004 (even excluding the sharp drop during the political crisis), but it is Capital adequacy 35.6 16.1 23.8 418.8 15.5 16.8 unclear to what extent this can be attributed to the ratios NBU's responses. Looking ahead, further progress in Nonperforming 17.3 6.9 6.4 8.1 29.6 30.0 strengthening bank regulation and supervision, as loans / total loans 1/ well as the institutional environment, is needed, with Return on assets 3.1 2.1 1.5 2.5 -0.1 1.1 particular focus on related-party lending. Return on equity 22.5 20.6 12.5 19.3 -0.5 8.4 Liquid assets / total 26.0 31.6 - 63.6 20.8 16.7 Christoph Duenwald, Nikolay Gueorguiev, and assets 2/ Andrea Schaechter are economists in the European Department of the International Monetary Fund. Sources: Bulgarian National Bank; National Bank of Romania; National Bank of Full text of their paper can be viewed at Ukraine; and IMF staff estimates. 1/ http://www.imf.org/external/pubs/ft/wp/2005 Loan classification rules were tightened between 2000 and 2004. Moreover, the National Bank of Ukraine estimates that about 94% of loans classified as substandard, /wp05128.pdf. The views expressed in this paper and included in NPLs, are being serviced. are those of the authors and should not be attrib- 2/ Liquid assets are assets with residual maturity of up to three months. uted to the International Monetary Fund, its Executive Board, or its management. 24 · Beyond Transition -- The Newsletter About Reforming Economies Voice Greenfield Academics Jody Lanfrey Ono F or transition and developing countries, new research One of the main benefits of greenfield academics is the set of environments can signal reform and innovation. clearly defined objectives and shared values among returning graduates. Because they subscribe to largely the same interna- From an investor's perspective, building research-based tional standards of selection and review (e.g. common recruit- think tanks has turned out to be one of the most low-risk, ment practices and refereed journal publication), the new gener- high-return forms of capacity-building. A new research insti- ation of academics finds cross-border communication easier and tute can start up on about a half a million dollars per year, bases for collaboration more natural. Shared systems of review sometimes less. Even if institutions need to be able to offer simplify efforts to measure progress, and introduce constructive recruits contracts of at least three years to be able to recruit forms of competition for institutional and research funding. internationally, as in the West, the sums involved are still not Another big benefit is the observable effects of academic high. When the group produces good work and interesting evi- startup packages. There are top research centers around the dence, project funding can begin to offset a good part of the world, beyond the West, with their own goals and aspirations. seminal investment very quickly. Long-term financial stability They need not be islands of excellence, but can set examples of is often more elusive, and strategies for how to develop part- the principles and incentives involved in building research nerships, integration with other initiatives, or contributions to environments for other initiatives. endowments must be in place early on. Young researchers based in emerging economies are publish- Still, the critical factor in building successful new research ing more in international journals and the academic and policy institutes is not money, but people. With more and more young dialogues between and among these countries are picking up. At talent from transition countries joining top PhD programs in the a Global Institute* conference in Beijing this December, leading U.S. and Europe, it is getting easier to find those who want to young Chinese and Russian scholars will present new work on return to their home countries to create good environments to key bilateral issues such as migration, trade, politics, the invest- do research. The make-or-break issue for the startup is the com- ment climate, and more, in academic sessions and in roundtables mitment of the researchers to stay and build something unique with top government reformers from both countries. for the long-term. While they may be willing to make an initial By now, most are able to make concrete associations with commitment, the institute builders and the work environment the terms "capacity-building", "institution-building", and the must provide incentives to stay, and to remain in research. Very catch-all "technical assistance". For the past 15 years at least, a soon the recruits will need colleagues, local partners, and a visi- host of programs has funded a proliferation of activities aimed ble career path; all of which they must be able to value on an at upgrading skills in emerging economies. The quality of these equal level as the hard work they put into educating themselves. interventions has been uneven, and the lasting effects hard to Academic entrepreneurs have created such conditions, for measure. In particular, for middle-income countries like the new example, in Prague (CERGE-EI and Charles University), in EU member states, India, Russia, Brazil or China, development Moscow (CEFIR and the New Economic School), and in Beijing needs and the effects of growth have been changing. And, more- (CCWE and Tsinghua University). In Ukraine, thanks to semi- over, changes in Western development policies will mean that nal funding from the Swedish International Development soon these countries will not qualify, or more importantly not Agency and working with the Economic Education and desire, to participate in traditional assistance programs. Research Consortium Ukraine, the Kyiv Economics Institute There are clear signs that academia, as much as other parts has a core faculty in place and is looking to expand it through of society, can help make reforms sustainable and produce inno- the international job market this year. In these settings, young vation. For transitional and developing countries, as in the West, academics are building a professional future that includes it can make the link between research and economic develop- research, teaching, and mentorship; all of the options they ment come alive. These countries need to harness the positive would have at Western institutions. And though it has not come effects of development assistance and foreign investment, espe- automatically, they have been able to make an impact on policy cially those that can contribute to shaping continued economic by accurately interpreting the local demand for and receptive- development. Providing domestic, unconditioned support that ness to advanced research on specific reform issues. secures the financial stability and political independence of Greenfield academics are sparking reform in academia in homegrown, world-class research centers could be one such transitional and developing countries. In these countries, but effect. Or even better, governments could encourage the role of sometimes also in the West, academia has had the role of pro- the corporate sector in funding independent research. posing economic or political reforms without going through much reform itself. Bringing back young, highly trained talent for Jody Lanfrey Ono is Executive Officer of SITE in Stockholm. academic careers helps build up the skill base in these countries She has contributed this article to BT. *In partnership with the in advanced analysis and original research. Strengthening the skill Brookings Institution, SITE is developing The Global Institute, base in turn makes it easier to attract more talent to the country. an alliance of top think tanks in emerging economies. The World Bank · 25 World Bank\IMF Agenda Millennium Development Goals Publication Gives Mixed Poverty Report Brings Mostly Good News for ECA Report for ECA Some 40 million people were lifted out of poverty in A new World Bank report, "Millennium Development Central and South Eastern Europe and the countries of the for- Goals: Progress and Prospects in Europe and Central Asia," mer Soviet Union during 1998-2003 as a result of rapid growth measures how far countries of the region have come toward and narrowing inequality, according to a new World Bank attaining such internationally agreed goals as halving extreme report entitled "Growth, Poverty, and Inequality in Eastern poverty by 2015, reducing maternal mortality, achieving uni- Europe and the Former Soviet Union." Yet most of the poor versal primary education, and arresting the spread of and vulnerable in the transition countries of the region are in HIV/AIDS. While Europe and Central Asia's (ECA) progress large middle income countries such as Kazakhstan, Poland, toward attaining the Millennium Development Goals (MDGs) Russia, and Ukraine. Those most at risk are the young, resi- is generally promising, it is also uneven. Growth in ECA since dents in rural areas and in secondary cities. The unemployed, 2000 has raised the likelihood that some countries will meet people with little education, and those belonging to underpriv- several MDG targets, but health targets are the least likely to ileged minorities, such as the Roma are also at great risk. Most be met. The full report can be downloaded at http://web.world- of the poor are working poor. The authors provide several pre- bank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/0,,c scriptions to ensure that continued growth works for the poor. ontentMDK:20635333~pagePK:146736~piPK:146830~theSit The report can be downloaded, along with multimedia con- ePK:258599,00.html tent, at http://www.worldbank.org/eca/ecapovertyreport Second Annual ECA Education Conference Held in Croatia President Wolfowitz Visits Russia The Second ECA Education Conference was organized by World Bank Group President Paul Wolfowitz visited Russia the World Bank and cohosted by Croatia's Ministry of Science, from October 18 to 20 as an official guest of the Russian Education and Sports and the University of Zagreb, in Government. It was his first visit to the country since becom- Dubrovnik, from October 2 to 4. There were 160 representa- ing president. Mr. Wolfowitz's trip was focused on the coun- tives from 30 ECA countries present at the conference, includ- try's role in the global economy and its contribution to the ing ministers from participating countries and international development agenda as the country prepares to chair the experts in tertiary education. Group of Eight next year. He also took the opportunity to learn The main topics of the conference were Quality Assurance about the challenges the country is facing and how the part- in Tertiary Education, Financing Higher Education, and nership with the World Bank Group is helping to address them. Linkages between Higher Education, Research, and Industry. The focal point of his trip was a meeting with Russian At the conference, Croatian ministers presented an overview of President Vladimir Putin, and Mr. Wolfowitz also met with pri- tertiary education in Croatia and the initial findings of the vate sector representatives, regional government leaders, and Organization for Economic Co-operation and Development's people who have benefited from World Bank projects. For in- Thematic Review of the Tertiary Education Country Report for depth information on Mr. Wolfowitz's visit, go to Croatia. http://www.worldbank.org.ru European Union Opens Membership Negotiations with World Bank Helps Turkey Prepare for Future Earthquakes Turkey In the wake of the deadly Pakistan earthquake, the World The Turkey Country Office issued the following statement Bank signed a EUR 310 million loan with Turkey on Seismic on October 3 after the official opening of negotiations Risk Mitigation and Emergency Preparedness. The objective between the European Union and Turkey: "Turkey has today of the project is to improve the city of Istanbul's preparedness crossed the bridge to Europe. This date will go down as one for a potential earthquake by enhancing the institutional and of the most important days in Turkey's history. The opening technical capacity for disaster management and emergency of accession negotiations with the EU represents an historic response, strengthening critical public facilities for earthquake moment for Turkey and the EU. The negotiations will be long resistance, and supporting measures for better enforcement of and cover many difficult subjects; however the end result will building codes and land-use plans. The project follows previ- bring great benefits to Turkey, the EU, and the wider world. ous World Bank assistance to Turkey in response to the dev- The World Bank applauds the decision of the EU Council of astating 1999 Marmara earthquake, in which over 17,100 Ministers to approve the Framework Agreement and looks people died. The current project aims to be proactive rather forward to supporting Turkey and the EU during the acces- than reactive. For more information, visit http://www.world- sion process." bank.org/projects. 26 · Beyond Transition -- The Newsletter About Reforming Economies Public Information Centers Celebrate United Nations Day tems. However, few countries have yet done enough to fully mitigate the risks stemming from prospective population aging. Country Offices around ECA held events commemorating The full report can be downloaded at the 60th anniversary of the United Nations (UN), in the run up http://web.worldbank.org/WBSITE/EXTERNAL/COUN- to October 24, United Nations Day. The events emphasized the TRIES/ECAEXT/0,,contentMDK:20268176~pagePK:146736 respective countries' cooperation with the UN, as well as the ~piPK:146830~theSitePK:258599,00.html World Bank's work with the UN to reduce poverty. World Bank Responds to Avian Flu Fears World Bank Supports European Union's SEE Energy Agreement After the initial outbreaks of avian flu in South East Asia spread into Europe, the World Bank and other donors met in The EU and Balkan states signed a treaty on October 25 Geneva from November 7 to 9, where they agreed on action extending energy liberalization to South Eastern Europe, in a steps and financing. The meeting supported an urgent resource move to encourage greater investment in the region's infra- request for US$35 million to fund high-priority actions by the structure. The agreement is the first multilateral treaty to cover World Health Organization, the Food and Agriculture all countries in South Eastern Europe, including Albania and Organization of the United Nations, and the World the former Yugoslav states, minus Slovenia. It aims to bring Organization for Animal Health over the next six months. down energy bills by encouraging increased competition and to Surveillance, control and preparation work requires urgent attract more investment to a region where blackouts are still funding. Additionally, funds from a new World Bank US$300- common after infrastructure was damaged during the Balkan $500 million avian flu program are expected to start flowing to war in the 1990s. The World Bank has agreed to provide a bil- countries within weeks to help them combat the deadly virus. lion dollars in fast-track loans to assist investments throughout The funding mechanism -- similar to that used by the Bank for the region, which will provide new opportunities for companies funding its AIDS programs in Africa -- would allow low- in the EU. Implementation of the treaty will result in the coun- income countries immediate access to grants and soft loans tries of the region becoming part of the EU's internal market in from the Bank's lending arm, the International Development a key economic sector before their accession to the EU. Association. For more information, visit http://www.world- bank.org/avianflu Job Opportunities Report Points to Persistent Unemployment Roma Decade Moves Forward at November Meeting A new report by the World Bank, "Enhancing Job The Romanian government is hosting its first meeting as the Opportunities in Eastern Europe and the Former Soviet chair of the International Steering Committee of the Decade of Union," analyzes employment outcomes in 27 transition coun- Roma Inclusion on November 17 in Bucharest. The eight tries since the fall of communism. It reveals that most transition Decade countries and donors such as the Open Society Institute countries lack job opportunities, and employment can be and the World Bank will meet to assess progress since the spurred only by policies that enable enterprise restructuring Decade's launch in February and put forward concrete propos- and improve the investment climate. The report urges countries als for moving forward on the four Decade priority areas of to boost their investment climates in ways that stimulate firms education, housing, health, and employment. At a meeting of to invest and create productive jobs. It also calls for steps to Decade Finance Ministers and donors at the World Bank on lower the cost of labor mobility by developing the housing and September 23, European Commissioner for Regional Policy mortgage markets as well as improving access to lifelong learn- Danuta Huebner promised Structural Funds for the three ing opportunities. Sub-regional recommendations are also pro- Decade countries that have joined the EU, as well as Pre- vided. The report can be downloaded, along with multimedia Accession Funds for the other five countries. For further infor- content, at http://www.worldbank.org/eca/laborstudy mation, visit the Decade of Roma Inclusion's website at http://www.romadecade.org EU8 Quarterly Report Indicates Continued Favorable Growth Firms Report Improved Business Environment The October issue of the EU8 Quarterly Economic Report A new survey (the Business Environment and Enterprise indicated that economic performance remained broadly favor- Performance Survey, known as BEEPS) jointly conducted by able in the eight Central and Eastern European countries that the World Bank and the EBRD, shows that business conditions joined the European Union in May 2004. The Baltic countries in Eastern Europe and the former Soviet Union have improved. and Slovakia continued growing strongly with domestic According to a new survey of over 9,500 firms in 27 countries, demand contributing importantly, while Poland fell somewhat the countries of Central and Eastern Europe and the former off the pace. The report emphasizes that Central Europe and Soviet Union have made important strides in improving their the Baltic States have taken important steps in recent years to business environments, although challenges remain. For more strengthen the efficiency and sustainability of their pension sys- information, visit http://www.worldbank.org/eca The World Bank· 27 New Books and Working Papers World Bank Publications ities are considered: Concept 1 inequality, which is inequality between mean incomes (GDP per capita) of states/provinces, and Concept 2 inequality, which is inequality between popula- Information and orders: the World Bank, P.O. Box 960, tion-weighted regional mean incomes. Herndon, VA 20172, U.S.; tel.: +1-703-661-1580, fax.: 703- 661-1501, email: books@worldbank.org, www.worldbank.org Lev Freinkman, Alexander Plekhanov /publications, or visit the World Bank InfoShop at 701 18th What Determines the Extent of Fiscal Decentralization? The Street, N.W., Washington, D.C., tel.: +1-202-458-5454. Russian Paradox WPS3710, September 2005 Doing Business in 2006: Creating Jobs September 2005, ISBN: 0-8213-5749-2 SKU: 15749 The paper provides an empirical analysis of the determinants of fiscal decentralization within Russian regions in 1994- This is the third in a series of annual reports investigating reg- 2001. The conventional view that more decentralized govern- ulations that ease doing business and those that constrain ments are found in regions and countries with higher income, doing it. This edition focuses on job creation. New quantitative higher ethnolinguistic fractionalization, and higher levels of indicators on business regulations and their enforcement can democracy is not supported by the data. A more refined analy- be compared across 150 countries and over time. The report sis points to the link between decentralization and the struc- updates the indicators presented in previous reports and adds ture of regional government revenue: access to windfall rev- three new sets of measures: paying taxes, getting licenses, and enues leads to a more centralized governance structure. The trading across borders. The indicators are used to analyze eco- degree of decentralization also depends positively on the level nomic and social outcomes, such as productivity, investment, of urbanization and regional size and negatively on income informality, corruption, unemployment and poverty, and iden- and general regional development indicators such as the edu- tify what reforms have worked, where and why. cation level. Felix Eschenbach, Bernard Hoekman World Bank Working Papers Services Policy Reform and Economic Growth in Transition http://econ.worldbank.org/ Economies, 1990-2004 WPS3663, July 2005 Thomas Rutherford, David Tarr, Oleksandr Shepotylo The Impact on Russia of World Trade Organization (WTO) The authors find that reforms in policies in former centrally Accession and the Doha Agenda: the Importance of the planned economies toward financial and infrastructure serv- Liberalization of Barriers against Foreign Direct Investment in ices, including telecommunications, power, and transport, are Service Industries for Growth and Poverty Reduction highly correlated with inward foreign direct investment. WPS3725, October 2005 Controlling for regressions commonly used in the economic growth literature, they find that measures of services policy Taking price changes from the Global Trade Analysis Project reform are statistically significant explanatory variables for (GTAP) model of world trade, the authors use a general equi- the post-1990 economic performance of transition librium comparative static model, which is computable for a economies. These findings suggest services policies should be small open economy, to assess the impact of global free trade considered more generally in empirical analyses of economic and successful completion of the Doha Agenda on the Russian growth. economy, and especially on the poor. They compare those results with the impact of Russian accession to the WTO on Thorsten Beck, Luc Laeven income distribution and the poor. Institution Building and Growth in Transition Economies WPS3657, July 2005 Branko Milanovic Half the World: Regional Inequality in Five Large Federations Drawing on the recent literature on economic institutions and WPS3699, September 2005 the origins of economic development, the authors offer an explanation of the political economy of variations in institu- The paper studies regional (spatial) inequality in the five most tion building across transition economies. They identify populous countries in the world: China, India, the United dependence on natural resources and the historical experience States, Indonesia, and Brazil in the period 1980-2000. They are of these countries during socialism as major determinants of all federations or quasi-federations composed of entities with institution building during transition by influencing the politi- substantial economic autonomy. Two types of regional inequal- cal structure and process during the initial transition years. 28 · Beyond Transition -- The Newsletter About Reforming Economies William Davidson Institute Working Papers Radim Bohacek, Michal Kejak http://www.wdi.bus.umich.edu/ Optimal Government Policies in Models with Heterogeneous Agents Nauro F. Campos, Francesco Giovannoni Working Paper 272, September 2005 The Determinants of Asset Stripping: Theory and Evidence from the Transition Economies Paul J.J. Welfens, Anna Wziatek-Kubiak (Eds.) WP No. 786, August 2005 Structural Change and Exchange Rate Dynamics: The Economics of EU Eastern Enlargement During the transition from a planned to a market economy, September 2005, 288 pages managers and politicians succeeded in maintaining control of large parts of the stock of physical capital. This paper applies Edward M. Graham, Nina Oding, Paul J.J. Welfens (Eds.) models, measures, and investigates this process empirically. The Internationalization and Economic Policy Reforms in authors argue that asset stripping is driven by the interplay Transition Countries between a firm's potential profitability and its ability to influ- September 2005, 341 pages ence law enforcement. Econometric results for about 950 firms in five transition economies provide support for this argument. Michael McFaul, Kathryn Stoner-Weiss (Eds.) After the Collapse of Communism: Comparative Lessons of Margaret Maurer-Fazio, James Hughes, Dandan Zhang Transition Economic Reform and Changing Patterns of Labor Force September 2005, 272 pages Participation in Urban and Rural China WP No. 787, August 2005 Emilio Colombo, Luca Stanca Financial Market Imperfections and Corporate Decisions: The authors employ data from the Chinese population census- Lessons from the Transition Process in Hungary es of 1982, 1990, and 2000 to examine reform era changes in August 2005, 174 pages the patterns of male and female labor force participation and in the distribution of men's and women's occupational attain- ment. Very marked patterns of change in labor force participa- CASE Studies and Analyses tion emerge when the data are disaggregated by age group, www.case.com.pl marital status, sex, and rural/urban location. Women have decreased their labor force participation more than men, and Olga Pavlova, Oleksandr Rohozynsky urban women much more than rural women. Single young Labor Markets in CIS Countries people in urban areas have decreased their labor force partici- No. 311, October 2005 pation to continue their education to a much greater extent than single young people in rural areas. The urban elderly have Inna Golodniuk decreased their rates of labor force participation while the rural Financial Systems and Financial Reforms in CIS Countries elderly have increased theirs. No. 306, September 2005 Vladimir Dubrovskiy, Oleg Ustenko CERGE EI Working Papers Business Climate in CIS Countries http://www.cerge-ei.cz/publications/working_papers/ No. 307, September 2005 Eugen Kovac Speculation and Survival in Financial Markets LICOS: Center for Transitional Economies at Working Paper 276, September 2005 Katholieke Universiteit, Leuven http://www.econ.kuleuven.be/LICOS/DP/DP2005.htm Yan Chen, Peter Katuscak, Emre Ozdenoren Why Can't a Woman Bid More Like a Man? Joze P. Damijan, Andreja Jaklic and Matija Rojec Working Paper 275, September 2005 Does External Knowledge Induce Firms' Innovations? Evidence from Slovenia Jakub Steiner Discussion Paper No. 156/2005 Coordination Cycles Working Paper 274, September 2005 The paper analyzes whether, and to what extent, a firm's abil- ity to innovate is induced by the firm's own R&D activity or Frantisek Brazdik, Viliam Druska by factors external to the firm. The paper finds that, firstly a Too Large or Too Small? Returns to Scale in a Retail Network firm's own R&D expenditures as well as external knowledge Working Paper 273, September 2005 transfer, such as national and international public R&D subsi- The World Bank · 29 dies, foreign ownership and intrasector innovation circulation Center for Global Development Publication, October 2005 enhance its ability to innovate. Secondly, innovations as a result http://www.cgdev.org of the firm's R&D contribute substantially to the firm's over- all productivity growth. And third, foreign ownership has a This new edited volume brings together a comprehensive set of double impact on the firm's TFP growth -- it first enhances the country studies on the effects of privatization on people. It firm's ability to innovate and then it additionally contributes to answers the overarching question: who are the winners and the firm's TFP growth via superior organizational techniques losers of the wave of privatizations that swept across the devel- and other channels of knowledge diffusion. oping world in the 1980s and 1990s? Etleva Germenji and Johan F. Swinnen Claude Merand and Mary M. Shirley (eds.) Human Capital, Market Imperfections, Poverty and Migration: Handbook of New Institutional Economics Evidence from Albania 2005 Springer, pp. 884 Discussion Paper No. 157/2005 New Institutional Economics (NIE) has skyrocketed over The paper analyzes the determinants of Albanian migration the last three decades. Since the term was first coined by Oliver based on a survey of rural households. The study confirms that Williamson in 1975, the subject has exerted increasing influ- migrants are mostly young, male, and single. Regional varia- ence over scholarly research. NIE studies institutions and how tions in migration reflect a combination of cultural and eco- institutions interact with organizational arrangements. nomic factors, including migration costs. However, migrants According to Douglass North's definition, new institutionalists are not found to come from the poorest rural households. aim to understand the process of economic change, as well as social or political change, by understanding human incentives Pavel Ciaian and Johan F. Swinnen and intentions and the beliefs, norms and rules that they create Labor Market Imperfections and Agricultural Policy Impacts in in pursuit of their goals. For new institutionalists, the perform- the New EU Member States: A Partial Equilibrium Analysis ance of a market economy depends upon formal and informal Discussion Paper No. 158/2005 institutions and modes of organization that facilitate private transactions and cooperative behavior. NIE focuses on how Crt Kostevc such institutions emerge, operate and evolve, and how they Performance of Exporters: Scale Effects or Continuous shape the different arrangements that support production and Productivity Improvements exchange, as well as how these arrangements act in turn to Discussion Paper No. 159/2005 change the rules of the game. This first handbook of NIE provides an overview of recent This paper asks whether, in addition to good firms self-select- developments and broad orientations. One branch of NIE, ing themselves into export activity, multinational production covered in this handbook, focuses on the macro institutions exporting further improves their performance compared with that shape the functioning of markets, firms and other modes non-exporters. The estimations performed on the Slovenian of organization: the state and the legal system. Another sample indicate that more productive firms tend to self-select branch concentrates on the micro institutions that govern into more competitive markets, while there is no conclusive firms and their contractual relations. New institutionalists evidence of learning by exporting. are also very much concerned with the interactions between the state and the firm. Increasingly, institutional economics has also focused on how institutions, both macro and micro, Other publications change; how they emerge, evolve and die. Because NIE is addressing new questions or new aspects of old questions and Samuel Fankhauser, Sladjana Tepic does not give new answers to the traditional questions of eco- Can Poor Consumers Pay for Energy and Water? nomics -- resource allocation and the degree of utilization -- EBRD Working Paper No.92, August 2005 its future is being shaped by new methodologies and a multi- http://www.ebrd.org/pubs/econo/WP0092.htm disciplinary approach. This handbook will be of interest to economists, political scientists, legal scholars, management This paper takes a detailed look at the affordability of electric- specialists, sociologists, and others wishing to learn more and ity, district heating and water for low-income consumers in gain insight into progress made by institutionalists from other transition countries. It finds that affordability is particularly a disciplines. problem in the Commonwealth of Independent States and in This compendium of analyses by some of the foremost NIE the water sector. The paper also found that delays to tariff specialists -- including Ronald Coase, Douglass North, Elinor reform have little impact on affordability. Ostrom, and Oliver Williamson -- summarizes the develop- ments in the subfields of New Institutional Economics, and John Nellis and Nancy Birdsall (eds.) raises questions that leaders in the field consider crucial, and Reality Check: The Distributional Impact of Privatization in supplies scholars with tools for exploring answers to these Developing Countries questions. 30 · Beyond Transition -- The Newsletter About Reforming Economies Conference Diary Allied Social Science Associations Annual Meeting Foundations in the General Context of Development," Matthew January 6-8, 2006, Boston, USA Stephenson, Harvard University; "Judiciary Foundations in Transition Countries," Cheryl Gray, World Bank. The American Economic Association (AEA), in conjunction with approximately 50 associations in related disciplines, is Information: http://www.worldbank.org/research/abcde. For holding a three-day meeting to present papers on general eco- sessions contact Boris Pleskovic, Research Manager, nomic subjects. Over 450 scholarly sessions are to be held. In Development Economics, World Bank, tel.: 202 473 1062, fax: 2006, for the second time, the AEA is posting conference papers 202 522 0304, email: bpleskovic@worldbank.org; for logistical presented at the 2006 ASSA Conference on the AEA website. information contact Leita Jones, Program Assistant, tel.: 202 473 5030; fax: 202 522 0304; email: Ljones2@worldbank.org. Information: http://www.vanderbilt.edu/AEA/anmt.htm VII International Scientific Conference "The Modernization of Conference on Public Services and Management: Designs, the Economy and the State" Issues and Implications for Local Governance April 4-6, 2006, State University - Higher School of Economics January 13-14, 2006, Toulouse, France (SU-HSE), Moscow, Russia The conference aims to gather researchers in a field which lies at The conference is organized by SU-HSE with the participation the boundaries of economics, management and policy studies, as of the World Bank and the IMF. Topics of the workshops and well as practitioners involved in the day-to-day management of round tables will include: public services.Topics to be addressed by the conference include: · The state, public governance and civil society · Public versus private ownership of infrastructure · Institutions and the demand for law; effectiveness, · Local governments and their relationships with the efficiency and the modernization of state institutions private sector · Education, science, innovations and the moderniza- · Public-private partnerships in developing countries tion of economy · Design of and bidding for concession contracts · Social processes and social policy · Private finance initiatives: issues and perspectives · The Political Economy of Reforms; economic and social cooperation between business and the public authorities. Information: http://idei.fr/conference/ppp_2006.html Information: http://www.hse.ru/temp/2006/04_0406_conf.shtml. Annual Bank Conference on Development Economics (ABCDE) Please send an application for presentations by December 10, January 18-19, 2006, St. Petersburg, Russia 2005 at: interconf@hse.ru. Application form: www.hse.ru/ic7. Opening Address: Francois Bourguignon, Senior Vice President Promoting Democratic Values in an Enlarged Europe: The and Chief Economist, World Bank Changing Role of the Baltic States from Importers to Exporters Keynote Addresses: Anders Aslund, Carnegie Endowment for May 5-6, 2006, Tartu, Estonia International Peace; Yegor Gaidar, Institute for the Economy in Transition The conference aims to facilitate the learning of transition Lunch Speaker: Gur Ofer, Hebrew University processes, using the experience gained in the Baltic states of · Growth After Transition: Is Rising Inequality Inevitable? applying European democratic principles to a democratic tran- "Inequality and Growth in Transition," Pradeep Mitra and sition and integration with Europe. Four panels are planned: Ruslan Yemtsov, World Bank; "The Opening of Latin America: · Exporting democratic values to the Baltic states: Consequences for Inequality," Guillermo Perry, World Bank; external influence on the democratic transition in the Baltic · Economic Space. "Can Economic Policy Overcome states, and the EU's role in democracy building ; Geographic Disadvantage in Eastern Europe and the FSU?" · Internalizing and consolidating imported values: the Karolina Ekholm, Stockholm School of Economics; "Similar impact of externally guided democratization principles upon Patterns of Convergence and Divergence in India and China," nation building; Xiaobo Zhang, Kiran Gajwani, Ravi Kanbur, International Food · Transforming from a importer to an exporter of Policy and Research Institute; democracy: defining the role, the capability and the interests of · Governance. "State vs. Market in Latin America and the the Baltic states in the democratization of the Newly World", Mariano Tommasi, LACEA; "Public and Private Independent States (NIS); Responses to Government and Market Failures," Erik Berglof, · Analyzing expectations and needs in the target coun- EBRD; "Privatization: What Have We Learned?" Sergei Guriev, tries (NIS). NES, Moscow, and Bill Megginson, University of Oklahoma; · Judiciary Foundations of a Market System. "Judiciary Information: http://www.ec.ut.ee/conf06/callforpapers.htm The World Bank· 31 Bibliography "The Role of Institutions and Efficiency in Ukraine" by Andrew Tiffin Zelenyuk, V., and V. Zheka. 2005. "Corporate Governance and Baier, Scott L., Gerald P. Dwyer, Jr. and Robert Tamura. 2004. Efficiency: The Case of Ukraine." Journal of Productivity Analysis, "How important are capital and total factor productivity for econom- forthcoming. ic growth?"Working Paper 2004-2a, Federal Reserve Bank of Atlanta. Battese, G. E, and T. J. 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"The "Formation of social capital in Central and Eastern Europe" by Effects of Privatization on Workers: Evidence from Ukraine." forth- Jan Fidrmuc and Klarita Gerxhani coming IZA discussion paper. Coleman, J.S. 1988. "Social Capital in the Creation of Human Ganguli, Ina and Katherine Terrell. 2005a. "Wage Ceilings and Capital." The American Journal of Sociology 94: 95-120. Floors: The Gender Gap in Ukraine's Transition." IZA Discussion Feige, E.L. 1997. "Underground Activity and Institutional Change: Paper No. 1776, Bonn, September. Productive, Protective and Predatory Behavior in Transition Ganguli, Ina and Katherine Terrell. 2005b. "Institutions, Markets Economies," in Nelson, Joan M., Charles Tilley and Lee Walker (eds.) and Men's and Women's Wage Inequality: Evidence from Ukraine." Transforming Post-communist Political Economies,. Washington, IZA Discussion Paper no. 1724, Bonn. D.C.: National Academy Press. Gorodnichenko, Yuriy and Klara Sabirianova Peter. 2005. Greif, A. 1994. "Cultural Beliefs and the Organization of Society: "Returns to Schooling in Russia and Ukraine: A Semiparametric A Historical and Theoretical Reflection on Collectivist and Approach to Cross-Country Comparative Analysis." Journal of Individualist Societies." Journal of Political Economy 102(5): 912-50. Comparative Economics, 33(2): 324-350. Knack, S., and P. Keefer. 1997. "Does Social Capital Have an Kupets, Olga. 2005. "What is behind Stagnant Unemployment in Economic Payoff? A Cross-Country Investigation." Quarterly Journal Ukraine: The Role of the Informal Sector." IZA Discussion Paper No. of Economics 112(4): 1251-1288. 1738, Bonn. North, D.C. 1990. Institutions, Institutional Change and Lehmann, Hartmut, Norberto Pignatti, and Jonathan Wadsworth. Economic Performance. Cambridge: Cambridge University Press. 2005. "The Incidence and Cost of Job Loss in the Ukrainian Labor." Putnam, R. 2001. "Social Capital: Measurement and IZA Discussion Paper No. 1770, Bonn. Consequences." 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"Frontier Efficiency of Cottarelli, Carlo, Giovanni Dell'Ariccia, and Ivanna Vladkova- Regions in Ukraine", work in progress. Hollar. 2005. "Early Birds, Late Risers, and Sleeping Beauties: Bank Fare, R., S. Grosskopf, M. Norris, and Z. Zhang. 1994. Credit Growth to the Private Sector in Central and Eastern Europe and "Productivity Growth, Technical Progress, and Efficiency Change in in the Balkans," Journal of Banking and Finance 29 pp.83-104. Industrialized Countries." American Economic Review, 84, 66-83. Gourinchas, Pierre-Olivier, Rodrigo Valdes, and Oscar Kumar, S., and R.R. Russell. 2002. "Technological Change, Landerretche. 2001. "Lending Booms: Latin America and the World", Technological Catch-up, and Capital Deepening: Relative NBER Working Paper No. 8249. Contributions to Growth and Convergence." American Economic Hilbers, Paul, Inci Otker-Robe, Ceyla Pazarbasioglu, and Gudrun Review, 92/3, 527-548. Johnsen. 2005. "Assessing and Managing Rapid Credit Growth and the Leibenstein, H. 1966. "Allocative Efficiency vs. "X-Efficiency." Role of Supervisory and Prudential Policies." IMF Working Paper 05/151. American Economic Review 56/3, 392-415. International Monetary Fund. 2004. World Economic Outlook: Simar L., and P. Wilson. 2005. "Estimation and Inference in Two- Advancing Structural Reforms. World Economic and Financial Stage, Semiparametric Models of Production Processes." Journal of Surveys. Washington. Econometrics, forthcoming. 32 · BeyondTransition -- The Newsletter About Reforming Economies Order Form Beyond Transition The Beyond Transition Newsletter is FREE of charge. Please fill in the order form below if you would like to receive a complementary subscrip- tion to the English version. Please indicate if you would like to receive an Managing Editor: Erik Berglof (SITE) electronic version (a .pdf file) or a printed copy. 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