15892 World Development Report 1996 FR NI 'LAN T MARKET UBLISHED FOR THE WORLD BANK XFORD UNIVERSITY PRESS Oxford University Press OXFORD NEW YORK TORONTO DELHI BOMBAY CALCUTTA MADRAS KARACHI KUALA LUMPUR SINGAPORE HONG KONG TOKYO NAIROBI DAR ES SALAAM CAPE TOWN MELBOURNE AUCKLAND and associated companies in BERLIN IBADAN O 1996 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW, Washington, D.C. 20433, U.SA. Published by Oxford University Press, Inc. 200 Madison Avenue, New York, N.Y. 10016 Oxford is a registered trademark of Oxford University Press. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, elec- tronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Manufactured in the United States of America First printing June 1996 This volume is a product of the staff of the World Bank, and the judgments made herein do not necessarily reflect the views of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. ISBN 0-19-521108-1 clothbound ISBN 0-19-521107-3 paperback ISSN 0163-5085 S. Text printed on recycled paper that conforms to the American Standard for Permanence of Paper for Printed Library Material Z39.48-1984 Foreword Development Report 1996, the nineteenth economic factors and economic outcomes. Yet it makes a n this annual series, is devoted to the transi- number of general points that provide valuable informa- Wiorld tion of countries with centrally planned econ- tion to all reforming economies and to those who care omiesin particular, Central and Eastern Europe, the about them. It drives home the utter necessity of both lib- newly independent states of the former Soviet Union, eralizing economies through opening trade and market China, and Vietnamto a market orientation. opportunities and stabilizing them through reducing infla- This transition, which affects about one-third of the tion and practicing fiscal disciplineand then of sticking world's population, has been unavoidable. The world is to these policies consistently over time. It discusses the changing rapidly: massive increases in global trade and pri- necessity of reforming enterprises and expanding the pri- vate investment in recent years have created enormous vate sector, while restructuring social safety nets to deal potential for growth in jobs, incomes, and living standards with the social impact of the move to the market. And it through free markets. Yet the state-dominated economic makes the vital point that, in the long run, clear property systems of these countries, weighed down by bureaucratic rights and widespread private ownership are needed for control and inefficiency, largely prevented markets from markets to perform efficiently and equitably. functioning and were therefore incapable of sustaining The Report also makes a major contribution in dis- improvements in human welfare. Although these systems cussing the institutions that make a market-based econo- guaranteed employment and social services, they did so at my work. It describes how public agencies, legal systems, the cost of productivity, overall living standards, and- financial institutions, and education and health systems importantlythe environment, which has been severely can all enhance the success of market economies. These are damaged in some countries by distorted prices, inefficient the institutions that help set and enforce the rules that use of natural resources, and antiquated plant. allow market transactions to proceed in a climate of Necessary as the transition to the market has been, it confidence, that decrease the opportunities for corruption has not been easy. Some countries have been considerably and crime, that mobilize and allocate resources, and that more successful than others in implementing the key ele- build human capital. And it discusses the need for transi- ments of change. Above all, the transition has had and will tion countries to carry through with measures to integrate continue to have a profound impact on people's lives. In themselves further within the global economy. Integration some of the countries undergoing transition there has been into the institutions of the world trading system is an a short-term drop in living standards; in others human important way to help these countries nourish and sustain welfare has improved dramatically. Everywhere it has the reforms they have undertaken. changed the basic economic rules of the game and has irre- Beyond these essential technical and institutional ele- versibly altered the relationship between people and their ments of transition, this Report is about people. It is about political and social, not to mention economic, institutions. how people can be protected from the loss of security and This Report is devoted to exploring the experience of income that can accompany transition, how they can be economies in transition, to identifying which approaches helped to cope with the increased mobility and know-how work and which do not, and to pinpointing the critical required of workers in market economies, and how their elements of success. It does not overgeneralize. It recog- children must receive the education and health care that nizes that the countries it examines represent a diverse will allow them to contribute to the prosperity to which array of national histories, cultures, and political systems; their countries aspire. This brings us back to the very rea- in fact, it explores the linkages between these non- son for transition in the first place, and the reason why this Report is needed. It is about how to unleash the enormous end, we will gauge the success of transition not merely by talents and energies of these countries' populations, and statistical measures of national wealth, investment, or pro- how to help them achieve their vision for a future of ductivity; but also by the quality of life of the people who opportunity and well-being for all their citizens. In the live in these countries. James D. Wolfensohn President The World Bank May 31, 1996 This Report has been prepared by a team led by Alan Gelb with principal authors Nicholas Barr, Stijn Claessens, Cheryl Williamson Gray, Peter Harrold, Francoise Le Gall (IMF), John Nellis, Zhen Kun Wang, and Ulrich Zachau. The team was assisted by Annette Brown, Gregory Kisunko, Tatiana Proskuryakova, Sarbajit Sinha, Stoyan Tenev, and Triinu Tombak. Gilles Alfandari and Laszlo Urban also contributed to the Report. Stephanie Flanders was the principal editor. The work was carried out under the general direction of Michael Bruno. Many others in and outside the World Bank provided helpful comments and contributions (see the Bibliographical Note). The International Economics Department contributed to the data appendix and was responsible for the Selected World Development Indicators. The production staff of the Report included Amy Brooks, Kathryn Kline Dahl, Joyce Gates, Stephanie Gerard, Cathe Kocak, Jeffrey N. Lecksell, Brenda Mejia, Hugh Nees, Beatrice Sito, and Michael Treadway. The design was by the Magazine Group. Rebecca Sugui served as executive assistant to the team, and Daniel Atchison, Elizabeth V. De Lima, and Michael Geller as staff assis- tants. Maria D. Ameal served as administrative officer. Preparation of the Report was greatly aided by background papers and by contributions from participants in the consultation meetings. The names of these participants are listed in the Bibliographical Note. iv WORLD DEVELOPMENT REPORT 1996 DEFINITIONS AND DATA NOTES viii Introduction Understanding Transition 1 PART ONE THE CHALLENGE OF TRANSITION Chapter 1 Patterns of Reform, Progress, and Outcomes 9 Chapter 2 Liberalization, Stabilization, and Growth 22 Chapter 3 Property Rights and Enterprise Reform 44 Chapter 4 People and Transition 66 PART TWO THE CHALLENGE OF CONSOLIDATION 85 Chapter 5 Legal Institutions and the Rule of Law 87 Chapter 6 Building a Financial System 98 Chapter 7 Toward Better and Slimmer Government 110 Chapter 8 Investing in People and Growth 123 Chapter 9 Transition and the World Economy 132 PART THREE CONCLUSIONS 141 Chapter 10 Conclusionsand the Unfinished Agenda 142 BIBLIOGRAPHICAL NOTE 148 APPENDIX: SELECTED INDICATORS FOR ECONOMIES IN TRANSITION 171 SELECTED WORLD DEVELOPMENT INDICATORS 177 BOXES 1 Falling further behind in world markets 3 2 The environmental legacy of planning 4 1.1 East Germany: The instant transition 10 1.2 Initial conditions and institutional reforms 16 1.3 Data problems in transition economies 19 1.4 Vietnam: Bold reforms in an East Asian setting 21 2.1 Pricing energy and other household essentials-a case for phased liberalization, 24 2.2 China's dual-track price reforms 24 2.3 Notes from underground: The growth and costs of unofficial economies 27 2.4 Trade policy and performance: Estonia and Ukraine illustrate how close the link 31 2.5 Transition can help the environment-with the right policies 33 2.6 Redistribution through inflation: The Russian experience 38 2.7 Government's best response to interenterprise arrears? Strengthen financial discipline 40 3.1 Innovative approaches to creditor-led restructuring in Hungary and Poland 46 3.2 Coal restructuring in Ukraine 48 3.3 Locking in the gains of enterprise reform in New Zealand 50 3.4 China's township and village enterprises 51 3.5 Is environmental liability a serious barrier to privatization, 54 3.6 Do's and don'ts in privatizing natural monopolies 57 3.7 The pros and cons of restitution 59 4.1 Why poverty and inequality are hard to measure 67 4.2 Women and work: Has transition helped? 72 4.3 Household coping mechanisms 74 4.4 Reforming income transfers in Hungary and Latvia 79 4.5 Innovative pension delivery in South Africa 81 4.6 Can state property be used to fund pensions? 83 5.1 No loans for movable property, 89 5.2 Protecting investors: Corporate law from scratch 91 5.3 Controlling corruption through overlapping jurisdictions: Examples from the United States 96 6.1 Russia's radical banking reform 100 6.2 Poland's rehabilitation approach to banking reform 101 6.3 Privatizing banks is essential, but difficult 103 6.4 China's new policy banks 105 7.1 Into the lion's den: Taxing Gazprom 119 8.1 Is transition a killer? 128 9.1 Business skills training is good for business-for trainers and trainees 139 TEXT FIGURES 1 Investment and rates of return in Soviet industry 3 1.1 Public attitudes toward political and economic reform in Central and Eastern Europe and in Russia 12 1.2 Economic liberalization by country 14 1.3 Private sector output as a share of GDP 15 1.4 Privatization by type of asset and country group 16 1.5 Institutional and social policy reform by reform type and country group 17 1.6 Labor productivity in industry in selected transition economies 20 2.1 Decline and recovery in GDP in selected transition economies and in comparable historical episodes 26 2.2 Liberalization and growth of GDP 28 2.3 Time profiles of output decline and recovery by country group 29 2.4 Liberalization and cumulative GDP 30 vi 2.5 GDP growth and inflation in China 34 2.6 Bank and nonbank financing of fiscal deficits 37 2.7 Time profiles of inflation by country group 39 2.8 Saving rates and GDP growth during high-growth periods in selected economies 42 3.1 Housing ownership in urban areas in six transition economies 62 3.2 Cumulative foreign direct investment inflows 64 4.1 Gini coefficients in eight transition economies 68 4.2 Changes in income by income quintile in four transition economies 70 4.3 Unemployment and wages in CEE and the NIS 75 4.4 Composition of employment in China 76 5.1 Economic growth per capita and government credibility 94 6.1 Money in circulation 101 6.2 Stock market capitalization and turnover in selected countries 108 7.1 Government reform and liberalization by country group 112 7.2 GDP per capita and ratios of government expenditure to GDP in selected transition economies 114 7.3 Government expenditure by category in selected transition economies 116 7.4 Government revenue by source in selected transition economies 118 8.1 Science and mathematics test performance of children in selected transition and established market economies 125 9.1 Capital flows to developing and transition countries by region 136 9.2 Official development finance to developing and transition economies 137 9.3 Net official capital inflows per capita by country group 138 TEXT TABLES 1 The starting numbers 2 1.1 GDP growth, inflation, and social indicators during transition 18 1.2 Russia and China: Two very different countries 21 2.1 Trade policy and export performance in CEE and the NIS 31 2.2 Liberalization and sectoral restructuring 33 2.3 Inflation and money supply growth 36 3.1 Tradeoffs among privatization routes for large firms 52 3.2 Methods of privatization for medium-size and large enterprises in seven transition economies 53 4.1 Inequality and poverty in selected transition economies 69 4.2 Population structure and contributors per pensioner in selected transition economies 79 8.1 Examples of needed changes in the education package 126 APPENDIX TABLES A.1 Basic socioeconomic indicators 172 A.2 Indicators of economic growth 173 A.3 Inflation 174 A.4 Selected demographic indicators 175 vii Definitions and Data Notes Selected terms used in this Report Stabilization refers to macroeconomic stabilization, or the Corporate governance is the monitoring and control, typ- control and reduction of inflation and the containing ically by owners, of the management and performance of economy-wide imbalances, such as fiscal deficits, of an enterprise. and of external imbalances, such as current account Externalities are costs or benefits resulting from an eco- deficits. nomic activity or transaction that accrue to persons or Township and village enterprises are a form of enterprise entities other than those engaged in it. organization unique to China in which local govern- Gini coefficients are a standard measure of inequality of ment owns all or most of the enterprise but local indi- income distribution, calculated with reference to the viduals hold implicit property rights. departure of an actual distribution from a state of per- fect income equality. Country groups Hard budget constraints are said to exist when managers For operational and analytical purposes the World Bank's of state enterprises know that the budgets set for them main criterion for classifying economies is gross national by central government are fixed and that losses will not product (GNP) per capita. Every economy is classified as be financed out of general revenues or by the central either low-income, middle-income (subdivided into bank. lower-middle and upper-middle), or high-income. Other Informalization is the exit of economic activity from that analytical groups, based on regions, exports, and levels of part of the economy where it is subject to laws, regula- external debt, are also used. tion, and taxation and covered in official economic Because GNP per capita changes with time, the coun- statistics. try composition of each income group may change from Liberalization refers, except where stated otherwise, to one edition to the next. Once the classification is fixed for economic liberalization: the loosening or elimination any edition, all the historical data presented are based on of government restrictions on domestic transactions, the same country grouping. The income-based country prices, and markets; on external transactions and the groupings used in this year's Report are defined as follows. free exchange of domestic currency for foreign and vice versa (convertibility); or on free entry of firms into Low-income economies are those with a GNP per capita of domestic markets. $725 or less in 1994. Market failure is any situation in which markets system- Middle-income economies are those with a GNP per capita atically produce more or less of certain goods or ser- of more than $725 but less than $8,956 in 1994. A vices than is optimal for the society as a whole. further division, at GNP per capita of $2,895 in 1994, Moral hazardis a situation in which the presence of insur- is made between lower-middle-income and upper- ance or the expectation of compensating policy weak- middle-income economies. ens or distorts incentives to prudent behavior. High-income economies are those with a GNP per capita Privatization is used in its strict sense, that of divestiture of $8,956 or more in 1994. by the state of enterprises, land, or other assets, and not Wor/dcomprises all economies, including economies with in the broader sense of any action that moves an enter- sparse data and those with less than 1 million popula- prise or an economy in the direction of private owner- tion; these are not shown separately in the main tables ship or that tends to make the behavior of state enter- but are presented in Table 1 a in the technical notes to prises more like that of private entities. the Selected World Development Indicators. Rent seeking is any manipulation of the law or of govern- ment authority in order to generate or appropriate an Classification by income does not necessarily reflect economic rent. Such rents are earnings from productive development status. (In the Selected World Development factors in excess of the minimum needed to keep that Indicators, high-income economies classified as developing factor at its present use; they can arise through the by the United Nations or regarded as developing by their acquisition of a claim on a resource whose ownership authorities are identified by the symbol t.) The use of the was ambiguous or weakly exercised, or through a change term "countries" to refer to economies implies no judgment in government policy that creates an artificial scarcity. by the Bank about the legal or other status of a territory. viii The table "Classification of economies" at the end of puted with the use of the least-squares method. See the the Selected World Development Indicators lists countries technical notes to the Selected World Development according to income, regional, and analytical classifica- Indicators for details of this method. tions. The symbol I in dates, as in "1990/91," means that the period of time may be less than two years but straddles Other analytical groups two calendar years and refers to a crop year, a survey In the text of the Report, for analytical purposes Central year, or a fiscal year. and Eastern Europe (CEE) comprises Albania, Bulgaria, The symbol .. in tables means not available. Croatia, the Czech Republic, Hungary, the former Yugo- The symbol in tables means not applicable. (In the slav Republic of (FYR) Macedonia, Poland, Romania, the Selected World Development Indicators, a blank is Slovak Republic, and Slovenia. Bosnia and Herzegovina used to mean not applicable.) and the Federal Republic of Yugoslavia are also part of this The number 0 or 0.0 in tables and figures means zero or a group but are not discussed in the Report. quantity less than half the unit shown and not known The newly independent states (NIS) are Armenia, more precisely. Azerbaijan, Belarus, Estonia, Georgia, Kazakstan, the Kyrgyz Republic, Latvia, Lithuania, Moldova, Russia, Tajikistan, The cutoff date for all data in the Selected World Turkmenistan, Ukraine, and Uzbekistan. Development Indicators is April 30, 1996. The set of transition economies used in the analyses Historical data in this Report may differ from those consists of the above two groups plus Mongolia, China, in previous editions because of continual updating as better and Vietnam. data become available, because of a change to a new base The text also makes reference to the following country year for constant price data, or because of changes in coun- subgroups. The Baltic countries are Estonia, Latvia, and try composition in income and analytical groups. Lithuania. The Visegrad countries are the Czech Republic, Other economic and demographic terms are defined in Hungary, Poland, and the Slovak Republic. Countries the technical notes to the Selected World Development whose economies have been severely affected by regional Indicators. tensions are Armenia, Azerbaijan, Croatia, Georgia, FYR Macedonia, and Tajikistan. Acronyms and initials Membership in the Council for Mutual Economic CAP Common Agricultural Policy (of the European Assistance (CMEA), the now-dissolved trading system of Union) the former communist bloc, consisted in 1989 of Bulgaria, CEE Central and Eastern Europe (see "Other analyt- Cuba, Czechoslovakia, the German Democratic Republic, ical groups" above) Hungary, Mongolia, Poland, Romania, the Soviet Union, CMEA Council for Mutual Economic Assistance and Vietnam. (see "Other analytical groups" above) The country members of the Organization for EBRD European Bank for Reconstruction and Economic Cooperation and Development (OECD) as of Development publication are Australia, Austria, Belgium, Canada, the EU European Union Czech Republic, Denmark, Finland, France, Germany, FDI Foreign direct investment Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxem- GATT General Agreement on Tariffs and Trade bourg, Mexico, Netherlands, New Zealand, Norway, GDP Gross domestic product Portugal, Spain, Sweden, Switzerland, Turkey, the United GNP Gross national product Kingdom, and the United States. Data for OECD countries IFC International Finance Corporation for a particular year apply to the organization's membership IMF International Monetary Fund in that year. NGO Nongovernmental organization NIS Newly independent states (see "Other analytical Data notes groups" above) Billion is 1,000 million. OECD Organization for Economic Cooperation and Trillion is 1,000 billion. Development (see "Other analytical Tons are metric tons, equal to 1,000 kilograms, or 2,204.6 groups" above) pounds. PPP Purchasing power parity Dollars are current U.S. dollars unless otherwise specified. TVE Township and village enterprises (see "Selected Growth rates for economic data reported in the Selected terms used in this Reporeabove) World Development Indicators are based on constant VAT Value added tax price data and, unless otherwise noted, have been corn- WTO World Trade Organization ix Unders ding sition 1917 and 1950 countries containing one- many other countries, and the transition experience is third of the world's population seceded from the therefore of interest to them as well. But most of their Betweenmarket economy and launched an experiment in reform programs pale in comparison to the scale and constructing an alternative economic system. First in the intensity of the transition from plan to market. former Russian Empire and Mongolia, then, after World This Report steps back from the bewildering array of War II, in Central and Eastern Europe and the Baltic events and policy changes in twenty-eight countries to ask states, and subsequently in China, northern Korea, and what we have learned about the ingredients of any suc- Vietnam (with offshoots and imitators elsewhere), a mas- cessful transition and how these should be pursued. This sive effort was made to centralize control of production is a transition still very much in progress; many important and allocate all resources through state planning. This vast questions do not yet have definitive answers. The fact experiment transformed the political and the economic that so much remains to be done, however, makes it all map of the world and set the course of much of the twen- the more important to deduce the key lessons of transition tieth century. Now its failure has set in motion just as rad- to date. ical a transformation, as these same countries change The legacy of planning course, seeking to rebuild markets and reintegrate them- selves into the world economy. Karl Marx had reasoned that socialism would replace cap- The Communist Manifesto's portrayal of the turbulent italism first in the most industrialized capitalist countries. arrival of capitalism in the nineteenth century seems a Indeed, the first part of the twentieth century was a period curiously apt depiction of today's transition landscape: of considerable social ferment, notably in Europe. But revolutionary socialism took hold in more agrarian states, Constant revolutionizing of production, uninter- where economic development and the advancement of rupted disturbance of all social conditions, everlast- industry were concerns as important as equitable distri- ing uncertainty and agitation. . . All fixed, fast- . bution. The achievements of the planned system were frozen relations, with their train of ancient and considerable. They included increased output, industrial- venerable prejudices, and opinions, are swept away, ization, the provision of basic education, health care, all new-formed ones become antiquated before they housing, and jobs to entire populations, and a seeming can ossify. All that is solid melts into air. . . . imperviousness to the Great Depression of the 1930s. Incomes were relatively equally distributed, and an exten- The long-term goal of transition is the same as that of sive, if inefficient, welfare state ensured everyone access to economic reforms elsewhere: to build a thriving market basic goods and services (Table 1). But the system was far economy capable of delivering long-term growth in living less stable than it seemed, for the intrinsic inefficiency of standards. What distinguishes transition from reforms in planning was overwhelming. Planners could not get other countries is the systemic change involved: reform enough information to substitute for that supplied by must penetrate to the fundamental rules of the game, to prices in a market economy. Planning became largely a the institutions that shape behavior and guide organiza- personalized bargaining process, with connections (blat or tions. This makes it a profound social transition as well as guanxi) an important element. This proved bad for an economic one. Similar changes have been needed in industry, worse for agriculture. Also, the suppression of 1 2 Table 1 The starting numbers (percent except where stated otherwise) Transition economies Other NIS Comparators and Low- Middle- Indicator CEE Russia Mongolia China. Vietnam. income.' India income OECD Population and income Population, 1989 (millions) 122 149 139 1,102 64 1,002 850 1,105 773 GNP per capita, 1990e (1990 dollars) From World Bank Atlas 2,268 4,110 2,141 404 188 320 380 2,220 20,170 At PPP 4,647 6,440 4,660 1,000 1,086 1,090 4,289 15,615 Growth rate before transitiond 1.5 1.9 2.3 4.9 3.4 5.8 2.9 3.0 Economic structure Urban population as share of total population, 1991 61 74 58 18 19 28 27 62 77 Investment share of GDP, 1989e 34 34 31 35 16 21 24 25 22 Industry share of GDP, 1989 51 50 40 48 23 28 29 36 31 Energy use (kilograms of oil equivalent per dollar of GDP) f 0.81 0.91 0.71 0.38 0.14 0.21 0.41 0.31 Human resources Gini coefficient, 1989g 26 24 24 30 36 46 34 45 33 Life expectancy at birth, 1989 (years)g 71 69 70 70 66 56 60 68 77 Illiteracy rate, 1991 3 2 2 31 12 41 52 17 <5 Monetary and exchange rate indicators M2 as percentage of GDP 53 100 75 25 19 33 46 41 78 Black market exchange rate premium, 1989 331 1,828 1,822 464 87 12 101 ..Not available. Note: All measures for country groups are averages, weighted by population. All data for China are for 1978, and those for Vietnam for 1986, except where specifically noted otherwise (i.e., for GDP growth, energy use, Gini coefficients, and life expectancy). Excluding China and India. Data are for 1991 for NIS and Mongolia. Average annual real GDP growth rate at market prices; data are for 1980-89 for CEE and comparators, 1980-90 for NIS and Mongolia, 1966-78 for China. Gross domestic investment. At PPP using 1992 dollars; data are for 1990 for CEE; 1992 for NIS, Mongolia, and comparators; 1980 for China (staff estimate). Data are for 1980 for China, 1992 for Vietnam. Source: IMF and World Bank data; International Currency Analysis, Inc., data. individual incentives required in their place an intrusive contracted. This trend occurred despite high investment set of controls. At the outset these may have been based ratesreturns to capital formation began a steady and on ideological commitment and a dedicated vanguard rapid descent in the mid-1950s (Figure 1). A similar stag- party, but they frequently degenerated into cults of per- nation infected Eastern Europe. As a major oil exporter, the sonality and abuses of position by nomenklatura elites. Soviet Union benefited from the price increases of 1973 The deep inefficiencies of planning became increasingly and 1979, but severe shortages and the deteriorating qual- evident with time. Heavy industries such as machine build- ity of its manufactured goods relative to those of market ing and metallurgy were emphasized, while development of economies were clear signs of stagnation (Box 1). consumer goods lagged. After posting high annual growth Social indicators began to worsen as well, confirming rates in the 1950s (averaging 10 percent according to offi- the troubled state of the system. After World War II cial estimates), the Soviet economy decelerated: growth health indicators in Russia improved rapidly and began to averaged 7 percent per year in the 1960s, 5 percent in the approach levels in the industrial market economies. In the 1970s, and barely 2 percent in the 1980s, and in 1990 it mid-1960s, however, they began to stagnate, and later 3 mass of centrally planned economies was far from mono- By the 1970s, Soviet investment was yielding lithic. It was composed of countries with different histo- little or no return. ries, cultures, and resource endowments. And whereas political change toward multiparty democracy was a prime objective in the post-1989 reforms in Central and Figure 1 Investment and rates of return in Eastern Europe (CEE) and the newly independent states Soviet industry (NIS) of the former Soviet Union, neither China, which initiated economic reforms in 1978, nor Vietnam has experienced a political transition away from governments dominated by the Communist Party. There is thus tremendous variety in the departure points, strategies, and outcomes of transition across countries. Most of the world's economies, at one time or another, 25 have lifted price controls, opened trade, or privatized state 20 enterpriseswith varying degrees of success. But as noted above, transition is different. It is not simply the adoption 15 or modification of a few policies or programs but a pas- 10 sage from one mode of economic organization to a thor- 5 oughly different one. The underlying habits and rules of an economic system are often so pervasive and ingrained 0 that they are taken for granted; indeed, the better estab- 1950 1960 1970 1980 lished they are, the less they are consciously reflected Source: Easterly and Fischer 1995b. upon. Such institutions as the education system, youth and labor organizations, the organization and supervision of work in firms and on farms, and the availability of information to the public were carefully cultivated to serve the process of bureaucratic allocation and the even to reverse: life expectancy fell by two years between broader objectives of central planning. Paternalistic and 1966 and 1980. This was in marked contrast to the trend restrictive, these institutions delivered goods and services in other industrial countries, which experienced increases to meet basic needs while setting severe limits on individ- of some three to four years over a similar period. Nor were living standards in China's less thoroughly planned economy immune from stagnation. Overall (total Box 1 Falling further behind in world markets factor) productivity declined from 1955 to 1978 despite, or perhaps because of, very high investment in heavy industry. Beginning in the mid-1960s there were unmistak- The famines of the Great Leap Forward (1958-60) and the able signs that GEE and the Soviet Union were ten disastrous years of Cultural Revolution left Chinese falling behind the newly industrializing economies society exhausted by politics and the Communist Party in product quality. By 1985 CEE's engineering ex- ready for change. Many regions had already begun to ex- ports earned less than 30 percent of the average unit periment with local reforms. Peasants in particular felt that value received by all exporters of similar products, collectivist agricultural policies were harming productivity and these exports were often twenty years behind in and living standards. Their views carried weight because the their technology. The quality gap was widest for Party had a strong rural base, so that economic improve- consumer goods, including electronics, reflecting ment became a more urgent goal. The impetus to reform the scant influence that domestic buyers had on was different again in Vietnam, struggling to recover from product quality. One study found that by 1990 forty years of war, and in Mongolia. Unlike China, both Soviet cars commanded a mere third of the price of had deep links with the Soviet Union and depended on similar Western cars in the Finnish market. As with Soviet subsidies. Both needed to break out of isolation. high energy intensity (Table 1), declining quality In response, most of these economies have rejected all reflected the incentives created by the system and its or much of central planning and have embarked on a pas- isolation from world markets and foreign direct sagea transitiontoward decentralized market mecha- investment. Even large imports of Western capital nisms underpinned by widespread private ownership. Not goods proved unable to make a major improvement. all follow the same path. Despite common features, the 4 ual choice and indoctrinating citizens with antimarket negative value; at world prices the costs of their inputs propaganda. Thus, for transition to succeed it must tran- would have exceeded the value of their output. The com- scend economic engineering, restructure the institutional bination of dominant heavy industry, low energy prices, basis of the social system, and develop civil societyan and wasteful use of inputs caused energy intensity to rise enormous agenda that will take many years to complete. to several times its level in market economies (Table 1) The economic challenge of transition is daunting in and had harsh environmental impacts (Box 2). itself. Planned economies were autarkic: some were bound Transition must therefore unleash a complex process to each other through the trade links of the Council for of creation, adaptation, and destruction. Queuing gives Mutual Economic Assistance (CMEA), but none traded way to markets. The shortage economy gives way to an extensively with the world at large. Decades of bureau- economy of vast choice, with repressed sectors and activi- cratic allocation created serious distortions, with some sec- ties growing rapidly and overbuilt sectors contracting or tors (particularly heavy industry) massively overbuilt and adjusting. Property rights are formally established and dis- others (light industry and services) severely repressed; per- tributed, and large amounts of wealth cease to be state haps as much as a quarter of the Soviet economy served owned and controlled. Old institutions and organizations the military alone. Relative prices diverged greatly from evolve, or are replaced, requiring new skills and attitudes. market patterns, and this meant massive explicit or And the relationship between citizens and the state implicit subsidies among sectors. Energy, housing, public changes fundamentally, with greater freedom of choice transport, and staple foods were extraordinarily cheap, but also much greater economic risk. True, changes of a whereas consumer manufactures, if available at all, were similar nature may be needed in many economies around often shoddy. Pervasive shortages allowed firms to operate the world. But in the transition economies the magni- in sellers' markets and reduced incentives to improve tudes are exponentially greater. For example, transition quality. With near-complete state ownership, enterprises economies have privatized more than 30,000 large and lacked the defined property rights that spur work effort medium-size enterprises in five years. In the eleven years and profitmaking in market economies. Firms had little between 1980 and 1991 the rest of the world privatized reason to use inputs efficiently and strong incentives to fewer than 7,000. Countries will have completed their hoard both labor and raw materials. Many firms added transition only when their problems and further reforms Box 2 The environmental legacy of planning For thirty years or more the planned economies lished market economies, poor maintenance and oper- focused on raising output through quantitative pro- ating practices meant that they rarely operated at more duction targets, with little regard for costs and with than a fraction of their design efficiency. Environ- severely underpriced natural resources and capital. mental improvement is likely to be a long process in- Expansion of traditional heavy industries, often using volving changes in managerial culture and enforce- coal as the main source of energy, was a high priority. ment of regulations. Industrial development on such a scale has been disas- The environmental liabilities created by haphazard trous for the environment wherever it has occurred. disposal of wastes are mostly unknown but could be But in the planned economies the pollution effects large. Some environmental damage may be irreversible: were intensified by the underpricing, and therefore the destruction of the Aral Sea is an ecological disaster overuse, of energy and raw material inputs. The system that stemmed from the same desire to raise physical promoted a mindset that saw new investment as the output, in this case of cotton. Pollution of the Black solution to all industrial problems. The philosophy of Sea is another serious problem. An issue of particular implementing many small improvements to increase concern in the NIS is contamination from nuclear efficiency and product qualitythe heart of good waste. Unsafe nuclear reactors and the remnants of the industrial managementwas almost unknown. Visitors destroyed Chernobyl reactor are additional concerns. to industrial plants in transition economies invariably Discussion of these issues has stalled because of differ- see scope for good housekeeping measures to reduce ences over the severity of the risks and the costs of alter- spills, leaks, and wastegood industrial and environ- native measures. Limited steps have been implemented mental performance go hand in hand. Even where to improve controls and safety equipment, operating plants had pollution controls similar to those in estab- procedures, and maintenancebut nothing more. 5 come to resemble those of long-established market Chapter 3 reviews the process of creating an economy economies at similar levels of income. dominated by the private sector. It discusses the role of entry by new private business and, in particular, the priva- Taking stock tization of state-owned firms, farms, housing, and com- This World Development Report tries to distill the lessons mercial real estate. It analyzes why quite different of transition by analyzing two sets of overarching ques- approaches to ownership change and divestiture can be tions in detail. The first set, the subject of Part One, re- associated with positive economic results, and it draws out lates to the initial challenges of transition and how these the policy fundamentals that should prevail. The lessons of have been tackled by different countries and might be transition to date are that new entry is vital, that privatiza- tackled by others. tion is important, and that the way it is done matters. But different countries will launch privatization at different Do differences in transition policies and outcomes re- moments. Moreover, once adopted, privatization should flect different reform strategies, or do they reflect pri- be seen as the beginning, not the end, of a process of reor- marily country-specific factors such as history, the level ganizing the ownership and incentive structure of firms. of development, or, just as important, the impact of political changes taking place at the same time? Must there be a gulf between winners and losers from transition? How can social policies ease the pain of This question deals with the broadest theme of transi- transformation while propelling the process forward? tion. Given the wide range of reform strategies and out- comes across transition countries, it is naturaland Transition produces winnersthe young, the dynamic, importantto ask what accounts for this divergence. The the mobile, the connectedbut it also imposes costs on Report's core message is that firm and persistent applica- visible and vulnerable groups, and in many countries it tion of good policy yields large benefits. But the Report has been accompanied by a surge in measured poverty. shows as well that history and geography matter: that what Chapter 4 considers social policy reforms and, in particu- leaders can accomplish, or even try to accomplish, is lar, the direct measures to alleviate poverty that need to strongly shaped by the inherited structure of the economy, accompany the shift to market-determined wages, by administrative or institutional capacity, and by the increased labor mobility, and the delinking of social ser- ways in which the political system mobilizes and channels vices from enterprises. public opinion. This interplay between choice and cir- The second set of questions considered in the Report cumstance affects not merely the outcomes of the early looks beyond these early reforms to analyze the longer- stages of transition, described in Chapter 1, but also term agenda of their consolidation: developing the insti- approaches to other dilemmas that have dogged reformers. tutions and policies that will help the new system develop and prosper over time. Each transition country is at a dif- Are strong liberalization and stabilization policies ferent stage in the reform process, but nearly all have needed up front, or can other reforms progress equally made a decisive break with central planning. They have an well without them? even greater challenge ahead, that of consolidating the basis for a thriving market economy. There is no unique Chapter 2 surveys the range of macroeconomic reforms blueprint for them to follow; indeed, one of the strengths in transitionliberalized prices and trade regimes, hard of the market economy is its variety and adaptability budgets, and freedom of entry for new businessesand across cultures. Yet essential institutionslegal systems, discusses the interplay of liberalization, stabilization, and financial systems, and governmentsmust be adapted or growth. The chapter concludes that both extensive liberal- created. Also, the human capital base that is so essential ization and determined stabilization are needed for for long-run growth needs to be strengthened, and coun- improved productivity and growth and that sustaining tries must carve out for themselves a fully integrated posi- these policies requires rapid structural change as well as tion in the global economy. These issues are taken up in institutional reform. Part Two of the Report. Must a market economy instantly be a private one? Or How should countries in transition develop and can privatization take a back seat in the early years of strengthen the rule of law? reform? Chapter 5 examines why governments need to be The proper functioning of markets requires clear strong enough to take the lead in defining the new rules incentives, which flow from defined property rights. of the game and creating the tools for their enforcement. 6 But the rule of law cannot be created top-down, by 8, the inherited health and education systems need exten- decree. It also requires demand from below, stimulated by sive reform to increase their effectiveness and flexibility. the growth of market activities. Building trust in a new system also means demonstrating that politicians and offi- Why is international integration so vital for transition, cials will themselves abide by its rules and constraints. and what are the implications for trading partners and capital flows? How can external assistance best support How can countries develop effective financial systems? countries in transition? Countries started their transition with weak, passive These topics are considered in Chapter 9. Integration banking systems endowed with little capacity to assess into world markets benefits both the rest of the world and credit risk, and with nonexistent capital markets. As the transition countries themselves, in part by locking in Chapter 6 explains, financial sector reform cannot be pur- their other reforms. The timing and composition of for- sued independently of other reforms, such as macroeco- eign assistance to transition ought to reflect differences nomic stabilization and enterprise reform. However, han- between countries: some face more pressing long-term dling the problems early and decisively can reduce their development needs than others. The challenge for donors impact and plant the seeds of a more effective system. is to provide assistance that encourages and facilitates the move to the market rather than substitutes for it. How must government restructure itself to meet the Chapter 10 distills the key messages of the Report. needs of a market system? The Report's focus is on countries in CEE, the NIS, Mongolia, China, and Vietnam. These countries are now Chapter 7 considers the problem of achieving funda- dispersed across a wide reform spectrum, but only one or mental changes in government, both in terms of how it two of the most advanced reformers are approaching the manages spending and revenue collection, and in terms point at which transition issues are fading into the normal of how it apportions responsibilities among central and problems of established market economies. The countries local authorities. Both the range and the nature of gov- examined are far from being the only ones that have had ernment's activities must change, with the state more extensively nonmarket economies. A comprehensive list often seeking to facilitate private sector activity than to would include Algeria, Cambodia, Cuba, the Lao People's supplant it. Democratic Republic, Nicaragua, the People's Democra- tic Republic of Korea, and Tanzania, among others. Many How can countries preserve and adapt their human other countries have market or mixed economies resting capital base? on weak foundations and have at one time or another adopted parts of the planning model. The process of tran- Countries embark on transition with relatively strong sition is therefore of interest to a wide-ranging set of coun- endowments of human capital. Yet as discussed in Chapter tries and peoples. PART ONE The Challenge of Transition COUNTRIES EMBARKED ON TRANSITION FROM VERY different starting points. This part of the Report first considers the patterns and progress of reform, broad outcomes, and the influence of country-specific factors relative to the choice of policies (Chapter 1). The core reforms in transition include lib- eralizing prices, markets, and new business entry, and imple- menting programs to regain or preserve price stability. But countries cannot ignore their history and geography, and this legacy, together with political developments, profoundly affects both the relative importance of different market reforms and how policymakers approach them. Liberalization and stabilization are closely interrelated (Chapter 2). The freeing of markets is the basic enabling reform from which all the potential benefits of transition flow. But market price signals cannot do their work in an environment of severe macroeconomic imbalances and high inflation. Stabilization is thus a vital complement to liberalization in fostering productivity and growth dur- ing transitionand beyond. Creating property rights and incentives and a mostly private economy is a second challenge (Chapter 3). Here, too, initial conditions matter. Some transition countries will have a much more urgent need to privatize than others. But there can be competing objectives and difficulties in creating an effective and popular program. A third major challengevital for social and political as well as eco- nomic reasonsis to relieve poverty and address the other ill effects of tran- sition on particular groups (Chapter 4). Many gain from transition, and depending again on the starting point and context for reforms, transition can be accompanied by declining poverty from day one. But the vast adjustments involved in a change of economic system can also have adverse implications for many. The losses they suffer need to be addressed through effective social policies and measures that encourage sustained growth. Patterns of Reform, Progress, and Outcomes can governments approach the array of The rationale of this approach is well captured by the reforms required in transition? To pose the issue assertion of President Vidal, Havel of the Czech Repub- How clearly we simplify reality and present two starkly lic that "it is impossible to cross a chasm in two leaps." Reformers wanted to minimize the duration of the in- contrasting, stylized approaches. The first is to launch a rapid, all-out program, undertaking as many reforms as evitable pain and quickly sever the links between the state possible in the shortest possible time. The second is to and the productive system, to guard against backsliding change by way of partial and phased reforms. and stagnation. Each path offers its own distinctive pattern of risks and In line with this reasoning, the ethos of the all-out rewards. But many countries embarked on transition in approach is that wherever rapid change is feasible, it no position to choose between the two. A country's start- should be attempted. Experience in Poland and elsewhere ing circumstances, both economic and political, greatly shows that some changes can indeed occur overnight. affect the range of reform policies and outcomes open to Markets can be liberalized, restrictions on small business it. Within this range, however, the clear lesson of the past lifted, and exchange controls abolishedall with the few years' reforms is that, regardless of the starting point, stroke of a pen. Stabilization measures can also be imple- decisive and consistent reform pays off. mented rapidly, even with a simple range of policy instru- ments. Yet most other reforms are inherently slow. For- Two paths of reform mal privatization may be accomplished in one or two The all-out approach aims to replace central planning with years, but changing the fundamental governance of large the rudiments of a market economy in a single burst of firms almost always takes longer. And developing market- reforms. These include rapid price and trade liberalization, supporting institutions such as legal and financial systems accompanied by a determined stabilization program to takes years, even decades, because it involves such a fun- restore or maintain price stability; a quick move to current damental change in skills, organizations, and attitudes. account convertibility; the immediate opening of markets to Complexity is not always the only reason reforms may be entry by new private businesses; and initiating, at least, a delayed: politics can also impede the process, as often hap- wide range of other changes, such as the privatization of pens in reforming social programs. state-owned companies, the demonopolization of industry, With different reforms moving at different speeds, and the reform of accounting standards, the tax system, the even the fastest reformers will find that the economy is legal system, the financial sector, and the civil service. riddled with inefficiencies at first. Many firms are operat- Poland's rapid reform in 1990 and many of the pro- ing without effective owners; information and legal sys- grams launched elsewhere in GEE and, after 1992, in the tems have not yet adapted to market mechanisms; private NIS have approximated this comprehensive model. East firms and farms have trouble getting bank credit; govern- Germany's exceptional "instant" transition following uni- ments find it difficult to tax emerging sectors to make up fication with West Germany comes closer still (Box 1.1). for lost revenues from declining ones. 9 10 priced, controlled segment of the economy to the high- Box 1.1 East Germany: The instant transition priced, liberalized segment. The government must be able to keep a tight grip on both the macro- and the micro- At the time of unification eastern Germany had a economy, supervising those activities still covered by the quarter of western Germany's population but con- plan and imposing stiff penalties for noncompliance. tributed a mere tenth of its gross domestic product. The phased approachsummarized by Deng Xiao- Unification provided a market-proven institutional ping's phrase, "feeling the stones to cross the river"is and legal framework and a large contingent of expe- essentially the path followed by China. After the death of rienced practitioners. It also made available incred- Mao Zedong and the denunciation of the Cultural Revo- ibly vast resourcesclose to $700 billionto fund lution, China's initial reforms in 1978 opened the door to both investment and social transfers. However, joint ventures and began to liberalize prices, first at the East-West wage differences needed to offset low margin and then more extensively. Most early reforms productivity in the East soon proved socially and focused on the rural economy. The household responsi- politically infeasible. Wage hikes catapulted eastern bility system, initiated locally to decollectivize agriculture, German unit labor costs to the highest in the world. was extended to other regions. The government raised The result was mass unemployment, made politi- rural incomes by increasing agricultural producer prices. cally palatable by social transfers that ensured that It then relaxed restrictions on "nonstate" industrial firms the living standard of the unemployed was higher (those owned by local governments and collectives) and than that of employees before unification. But for permitted new entry into a wide range of businesses. New early retirement and other programs, unemploy- rural township and village enterprises (TVEs) were per- ment would have been over 30 percent. mitted and encouraged to operate on market principles. The former German Democratic Republic is The share of output produced by private and nonstate starting to emerge from the trough of adjustment, enterprises rose sharply. By 1984 reforms had spread to and the firms that have survived constitute a highly the urban economy. Local governments were granted competitive core. But few of the unemployed are greater fiscal autonomy. Management of state enterprises likely to find jobs. Transition has relegated an entire was reformed, as their source of finance moved from the generation to the economic sidelines. state budget to the banking system. Restrictions were pro- gressively eased on trade and foreign investment, and a variety of institutional reforms were begun, including the Is the solution then a go-slow approach? Not necessar- re-creation of a central bank. Meanwhile the role of the ily. Governments need to push through a critical mass of plan was progressively reduced. Reforms accelerated in rapid reforms to build credibility and change the behavior 1994 and 1995, particularly with regard to taxes, com- of people and firms, locking in these reforms and stimu- pany law, and foreign trade. lating new ones. Also, in certain circumstances, reformers need to move quickly to exploit a narrow window of Choices and constraints: Different macroeconomic opportunity for dramatic change. starting points. . . The second model, of piecemeal and phased reform, The fact that there are two model routes from a planned might start with localized experiments, which are ex- economy to the market does not mean that all countries panded as perceived successes emerge. A few repressed sec- are in a position to choose between them. As noted above, tors such as agriculture are liberalized up front. After these to attempt a phased reform, governments need to be fairly first steps, markets are slowly but steadily extended to sure that its initial effects will be positive, and that they are other parts of the economy as the institutional building able to keep control of the economy in its partly liberal- blocks of a market system are put in place. ized state. Policymakers in most of CEE and the NIS were This strategy relies on there being scope to reap large in no position to deliver either. productivity gains from the first, partial reforms. These, in First, earlier attempts at partial reform in these coun- turn, raise incomes, so building momentum for further, tries, including the Soviet Union, had failed to raise effi- more difficult reforms in a self-reinforcing process. Grad- ciency, largely because they were too limited to affect ualist reformers must also be able to sustain the reforms incentives. Perhaps partial measures that shifted authority over an extended period and to contain the side effects of from planners to enterprise managers, such as those pro- liberalizing the economy selectively. Because the market posed in the 1960s, would have succeeded had they been and the plan must coexist for a time, individuals and com- implemented early and decisively enough, when the pro- panies will have a strong incentive to seek economic rents ductivity crisis was just beginning to emerge. But the sev- by shifting goods or financial resources from the low- eral CEE countries that did persistently seek a "third way" 11 between planning and capitalism never found one that led In marked contrast, in the Baltic states and in much of to sustained growth. It is hard to believe that the Soviets GEE, socialist governments were supported from without would have succeeded where the Hungarians could not. and maintained by the Soviet political and military The second, more important reason why gradualism was machine in part through repression. Many people deeply not an option in GEE and the Soviet Union was that by the resented the Soviet presence, and the legacies of democ- second half of the 1980s the Soviet planned economy was racy and markets remained strong. Geography is also disintegrating from within. In 1986 the Soviet Union important: these countries are close to Western Europe, launched glasnost (political relaxation) and perestroika (eco- had been exposed to European political norms and cul- nomic restructuring). Glasnost permitted the resurgence of ture, and want to join the European Union. The "politi- democratic movements and long-repressed nationalism and cal breakthrough" after 1989 was therefore particularly an outpouring of criticism of the government. Perestroika strong in these countries. Political reform largely drove itself involved little reform and was followed by measures to their economic reforms, creating a distinctive linkage that boost investment in the face of shrinking resources. The might not apply more broadly, to countries in different result was inflation and foreign indebtedness rather than circumstances. In 1993, widespread support for political higher productivity. Wages rose sharply relative to official breakthroughs in most GEE countries moderated percep- prices, just as they did in Poland and most other GEE tions that the accompanying economic reforms were hav- countries in the last years of the old regime. With greater ing an adverse impact (Figure 1.1). Russians surveyed a enterprise autonomy and continuing subsidies, the Soviet year later, in contrast, were far more pessimistic about fiscal deficit reached 11 percent of gross domestic product both political and economic progress in their country. (GDP) by 1988. Bank deposits swelled because there were Radical economic reform has proved easier when polit- few goods to buy, creating a monetary overhang. ical change has been rapid and fundamental, as in much of By 1990 deliveries of inputs were falling well short of GEE and the Baltic states. Citizens who supported the new planned levels, and black market prices and exchange rates political systems in these countries also supported market- were many times higher than official ones (Table 1). The oriented economic policies. Traditional bastions of power situation worsened dramatically in 1991, as the deficit in the previous systemsthe state enterprises and the min- soared to an estimated 28 percent of GDP. A monetary istries that ran themwere weakened, and at the outset reform (involving the freezing and confiscation of financial few interest groups were organized to oppose reform. A assets), launched in January 1991, was the last desperate window of opportunitya period of "extraordinary poli- attempt to absorb the monetary overhang without a price tics"opened in which far-reaching changes could be ini- explosion. It failed dismally. The planned trade system dis- tiated with little opposition. But individuals have also solved. And then the Soviet Union collapsed. The volume made their mark. Most decisive reforms have reflected the of trade among CMEA members and between Soviet vision of one leader or a small and committed group. Sim- republics fell 70 percent. This chaotic environment, com- ilar political breakthroughs occurred in a few countries far bining a disintegrating economy with a rapidly weakening from European influence, such as the Kyrgyz Republic and government, allowed no scope for gradual reform. For these Mongolia, where exceptional political leaders came to countries the all-out approach was the only one available. power and pushed through decisive reforms. Not all coun- tries, however, had such a strong political breakthrough, . . . And the role of different political heritages and some new states saw other priorities. Ukraine's first The degree of macroeconomic disequilibrium is not the independent governments, for example, were preoccupied only factor affecting a country's choice of reform path. with asserting a national identity, and reform there accel- Noneconomic factorspolitics, history, culture, and erated only after severe and prolonged economic decline. geographycan also be very important. As extraordinary politics becomes ordinary, the path of Citizens' attitudes and loyalties toward pretransition reform steepens. Political interest groups form, and pres- regimes varied greatly, depending on how their countries sure arises from those who bear the costs of change. As had become socialist. Before the revolutionaries came to structural and institutional reforms unfold, they involve power, Russia had been an empire ruled by an autocratic more decisionmakers and require collaboration from more czar, Mongolia had been a theocracy, Vietnam a colony, people; the number of players multiplies and the process and China had experienced warlordism following the end gets more complicated. But reform also creates winners of the Qing dynasty in 1912. In these countries, govern- and new interest groups with strong pro-market leanings. ments dominated by the Communist Party arose mainly The public must constantly be reminded of the reasons from internal political movements and, in China and for change and informed about progress to date. With the Vietnam, from nationalist efforts to rout Japanese and notable exception of the Czech Republic, few govern- French colonizers. ments have really been effective in this respect. 12 Russians remain more gloomy about the future. Figure 1.1 Public attitudes toward political and economic reform in Central and Eastern Europe and in Russia CEE Russia Percent favorable Percent favorable 100 100 80 80 60 60 40 40 20 20 0 0 Past Present Future Past Present Future 0 Political regime Economic regime Note: Data are results of opinion surveys, taken in seven CEE countries in 1993 and Russia in 1994, seeking views on past (socialist), present, and expected future (five years hence) regimes. Source: Rose 1995a, 1995b. Surveys have shown falling approval of the market econ- for example, managers of state enterprises have used pri- omy in many countries. But it is not clear how much this vatization to transform their control rights into property reflects views about the reforms themselves and how much rights, leaving ordinary citizens out in the cold. This has it was a reaction to the pain of economic dislocation and deepened public cynicism about reform and undermined adjustment. Both radically reforming governments and less the legitimacy of the postreform economic system. Polls radically reforming governments have been turned out of in December 1991 suggested that just over a quarter of office. The return to power of former socialists has some- Russians disagreed with the proposition that ordinary times slowed reforms, but as yet no replacement govern- people would benefit from the introduction of private ment has tried to dismantle the market-oriented approach property. By March 1995 over two-thirds disagreed. of its predecessors. Indeed, late-1995 surveys in GEE Establishing a social consensus will be crucial for the long- showed rising popular support for the currentand ex- term success of transitioncross-country analyses suggest pandingmarket system. In the more advanced reformers that societies that are very unequal in terms of income or the political debate has moved toward entitlement pro- assets tend to be politically and socially less stable and to grams, familiar political terrain in long-established market have lower rates of investment and growth. economies. At least in GEE, politics are becoming normal. Progress and outcomes This is not to say that economics and politics always develop together harmoniously. If economic outcomes How have the varying paths to reformconditioned as benefit only a few, if the return to growth is too long post- they have been by history, politics, and economic and poned, and if corruption comes to be seen as endemic, the institutional starting pointsbeen reflected in progress losers will justifiably react. In many transition economies, and outcomes to date? 13 Progress of reform 1989, but many enterprises counted as state firms are in In assessing progress we look at four broad dimensions: fact joint ventures with private (mainly foreign) partners. liberalization, property rights and private ownership, Both across countries and across types of assets within institutions, and social policies. First, consider liberaliza- countries, large differences are observed in the degree of tion. The full length of each bar in Figure 1.2 estimates privatization and the effectiveness of private ownership the degree to which the country in question was a market (Figure 1.4). These differences reflect a variety of country- economy in 1995. The measure is approximate and cov- specific and historical factors, as well as complex political ers three areas: domestic prices and markets, foreign trade issues that arise as wealth is redistributed. As discussed in and currency convertibility, and openness to new business Chapter 3, successful transition involves initiating a entry. By 1995 many countries in GEE and the NIS were process of change toward an efficient pattern of ownership. essentially market economies, with open trade, current An initial transfer of title is only the beginning of the story. account convertibility, and liberal policies toward new Institutional reforms are also affected by initial condi- entry and private business. A few still retained extensive tions (Box 1.2). Their relative progress across countries is price and export controls and state trading monopolies closely associated with the extent and duration of liberal- in some cases after announcing reform programs that were ization (Figure 1.5), partly because macroeconomic not carried through. With more extensive controls on for- reforms, as well as ownership reform, tend to create eign trade and entry, the East Asian countries were less demand for institutional change. Yet even where policy liberalized than the more advanced reformers in GEE and change is rapid, institutional change is slow, and transi- the NIS. tion will not be complete until institutions effectively However, a snapshot of one year is far too short a underpin markets. There are severe bottlenecks: period to capture the economic impact of a process of liberalization. Some countries started their reforms far All countries have taken steps to reform the legal earlier than others. Therefore the purple segment of each framework, but the extent and coherence of reform bar shows countries' average level of liberalization in the vary. The reform of judicial institutions and enforce- period 1989-95, recognizing that some countries had ment mechanisms lags far behind, and corruption has freed elements of their economies even before 1989. The become an acute concern in some countries. These are CEE countries and the NIS and Mongolia are categorized areas of high priority for the future. into four groups by this measure, reflecting both the More advanced reformers now have some banks capa- extent of liberalization and its longevity. The economies of ble of delivering services at least comparable to those some countries were severely affected by regional tensions, available in middle-income countries, but they also including blockades and in some cases war. These coun- have a substantial share of financial assets in poorly tries are marked by asterisks in Figure 1.2. functioning banks. Serious conflicts of interest plague With their earlier start, the East Asian countries have many financial systems, and in most countries the scope been almost as exposed to market forces as the GEE coun- of market-based finance is limited by poor debt recov- tries, on average, during the last seven years. But within ery mechanisms. Virtually all countries have many non- GEE and the NIS wide variations are seen. Since 1989 performing loans, which pose a major policy dilemma. Russia's economy has had about half the exposure to mar- Most governments have substantially reoriented their ket forces as the leaders in Group 1 in Figure 1.2, and some roles to meet the needs of a market economy, but in other NIS have barely emerged from the planning system. such critical areas as tax administration, public admin- Another dimension of transition is ownership reform istration, and fiscal decentralization, reforms are still (Figures 1.3 and 1.4). Here, too, there has been great at an early stage in many countries. This has hurt the change. In nine countries in GEE and the NIS the private economy and in some cases has adversely affected sector now accounts for over half of economic activity. regional equity. The power and administrative author- Governments still maintain sizable stakes in many firms ity of central governments have diminished in some classified as private, but with plausible allowances for countries with the considerable, and sometimes unmeasured unofficial economies (which Figure 1.3 does chaotic, decentralization of revenues and functions to not account for), most countries have passed the halfway subnational governments. There is frequent confusion mark. The shift to a private economy reflects both the over the roles of the executive, the legislature, and the entry of new firms (often using old assets from the state constitutional courts. sector) and the privatization of state firms. Ownership in China has also diversified substantially toward a wide vari- Institutional development is also crucial for sustaining ety of forms (Chapter 3). Vietnam is the only country in the momentum of reform in the Asian planned econ- the sample where the state sector's share has risen since omies. China's banks, for example, are less market-based 14 Countries have liberalized at different speeds and at different times, but the late starters are catching up. Figure 1.2 Economic liberalization by country Index 0 1 2 3 4 5 6 7 8 9 10 Group 1 Poland Slovenia Hungary Croatia* FYR Macedonia* Czech Republic Slovak Republic Group 2 Estonia Lithuania Bulgaria Latvia Albania Romania Mongolia Group 3 Kyrgyz Republic Russia Moldova Armenia* CEE, NIS, and Georgia* Mongolia Kazakstan Group 4 Uzbekistan Ukraine Belarus Azerbaijan* Tajikistan* Turkmenistan Vietnam NiN4. East Asia China Average extent of liberalization, 1989-95 71 Extent of liberalization in 1995 Note: Bars indicate the extent to which policies supporting liberalized markets and entry of new firms prevailed in 1995 and on average over 1989-95. Asterisks indicate economies severely affected by regional tensions between 1989 and 1995. The index is a weighted average of estimates of liberalization of domestic transactions (price liberalization and abolition of state trading monopolies), external transactions (elimination of export controls and taxes, substitution of low to moderate import duties for import quotas and high tariffs, current account convertibility), and entry of new firms (privatization and private sector, or nonstate, development). The weights on these components are 0.3, 0.3, and 0.4, respectively. Initial estimates for the three components were based on comparative information in World Bank and other reports. These were revised following consultation with country specialists as well as experts with a comparative perspective across a number of countries. For the twenty-five countries in CEE and the NIS the transition indicators and accompanying text in EBRD 1994 and 1995 provided a further basis for calibration. Nevertheless, any such index is judgmental and necessarily approximate. See also the De Melo, Denizer, and Gelb background paper. 15 The private sector has grown rapidly. Figure 1.3 Private sector output as a share of GDP Percent 10 20 30 40 50 60 70 80 Group 1 Poland Slovenia Hungary Croatia* FYR Macedonia* Czech Republic Slovak Republic Group 2 Estonia Lithuania Bulgaria Latvia Albania Romania Mongolia Group 3 Kyrgyz Republic Russia Moldova Armenia* Georgia* Kazakstan Group 4 Uzbekistan Ukraine Belarus Azerbaijan* Tajikistan* Turkmenistan Vietnam nonstate China China nonstate 1111 1990 1995 Note: Firms are considered private if less than 50 percent state owned. For Vietnam, the nonstate sector excludes public-private joint ventures. For China, the nonstate sector includes collectives and TVEs as well as private firms; agriculture is considered private in 1995, although land is held through long-term leases. Asterisks indicate economies severely affected by regional tensions between 1989 and 1995. Source: EBRD, IMF, and World Bank data; official data. than those of GEE, because many loans are still allocated ment benefits, has not typically been a prime focus early through a central credit plan. on. Indeed, where such reform has taken place it has often Reforming social policy is politically difficult in all been reactive, impelled by fiscal shortfalls. Social policy countries and, except for the introduction of unemploy- reform is a high priority for the future (Chapters 4 and 8). ,y 16 Privatization has been uneven. Figure 1.4 Privatization by type of asset and country group Extent of privatization Nearly complete Half or more Significant Little or none Agricultural land Group 1 Small firms Group 2 Group 3 Large and medium-sized firms Group 4 East Asia Note: Data are for 1995 and are simple averages of estimates for the countries in each group (see Figure 1.2). Source: EBRD 1995; World Bank staff estimates. Governments in CEE and the NIS need to develop reformers, which must find ways to respond to an increas- policies to cope with increased labor mobility, and, fre- ingly mobile and industrial rural population that is still quently, increased poverty within relatively tight budget outside the formal system of social benefits. China's urban constraints. Similar considerations apply to the East Asian enterprises still bear the burden of pensions, medical care, Box 1.2 Initial conditions and institutional reforms Institutional legacies differed from country to country times the absence of an institutional legacy can actually at the outset of transition. Some countries retained a be an advantagefor example, Slovenia was free to cadre of people with memories of market rules and in- start from a clean slate as it built new institutions such stitutions. Their skills helped to rebuild institutions as its central bank, and the experience of the Baltic for example, Poland had never lost the knowledge of countries shows that designing new budget or tax laws prewar law, and Polish professors had continued their may be easier while governments are still unencum- interchanges with Western universities. Similarly, GEE bered by entrenched entitlements and interest groups. government agencies dealing in international trade On the other hand, implementing new institutions developed a familiarity with market-based contract law whether they be customs agencies, accounting and that proved useful when the time came to reform auditing practices, or treasury and debt management domestic legislation. systemsrequires large human, technical, and finan- Many new states, however, have had to create mar- cial resources in all transition countries, and in this ket and government institutions from scratch. Some- regard the new states face a massive additional burden. 17 Markets fuel demand for new institutions. Figure 1.5 Institutional and social policy reform by reform type and country group Index 2 1 Social policy Group 1 Role and management of government Note: Data are for 1995 and are simple averages for the countries in each group (see Figure 1.2). The laws and legal institutions index measures the scope and quality of new legislation and development of judicial institutions: 1, little progress on either; 2, some progress on laws, little on institutions; 3, some progress on both; 4, extensive progress on both. The banking sector index measures the independence, skills, and credit allocation practices of the better segment of banks, as well as the functioning of supervision and payments systems: 1, little change; 2, some initial progress; 3, system functioning fairly well but with limitations; 4, system functioning fairly well and with a larger segment of better banks. The role and management of government index measures the market orientation of government and the effectiveness of public sector management (see Figure 7.1 for specific indicators): 1, little change; 2, significant reform; 3, substantial reform; 4, advanced reform. The social policy index measures progress in pension reform, reduction of subsidies, streamlining and targeting of income transfers, and divestiture of social assets: 1, no reform; 2, limited reform; 3, modest reform; 4, substantial reform. Source: EBRD 1994, 1995; World Bank staff estimates. and housingpartly because reforms have yet to resolve addressing the social outcomes of transition requires both many difficult problems of the state sector. economic growth and social policy reform. In GEE and the NIS, liberalization and stabilization Economic and social outcomes policies have produced the main immediate effects. Other Three features stand out in the range of transitional out- reforms take longer to show results, although it is increas- comes to date. The first is the large variance in perfor- ingly clear how important they are to maintaining hard mance among three sets of countries: the more advanced budget constraints and backing up these policiessuccess reformers in GEE and the NIS, the less advanced reform- depends on the interplay of reforms across a number of ers in this region, and the East Asian reformers. Second, areas. Freeing prices rapidly eliminated shortages, and and cutting across these differences, is the clear message phasing out subsidies to rein in overspending subjected that sustained and consistent reform pays off. Third, firms to financial discipline and forced some initial 18 restructuring. But freeing prices also caused a burst of very cases it has fallen substantially from earlier levels. But slower high inflation in all countries except Hungary, where most adjustment has not meant a smaller drop in output. In fact, prices had been liberalized before 1990. CEE and the NIS output has often fallen by more than in the advanced have seen large declines in output, especially in countries reformers, and most of these economies are still contract- exposed to severe regional tensions (Table 1.1). Yet official ing. These countries have not yet managed to achieve the data overstate the output decline. They largely fail to critical policy mass needed for sustained macroeconomic include output from informal sectors, whose growth pro- stability and a resumption of growth (Chapter 2). vides a substantial cushion in some countries against In contrast to the GEE countries and the NIS, both declines in formal sector output and employment. Fur- China and Vietnam have enjoyed spectacular growth thermore, some of the lost output consisted of goods no throughout their reform periods (see Table 1.1). Vietnam longer wanted (Box 1.3), so that measured output changes adjusted to the demise of the CMEA and the loss of are not necessarily good indicators of well-being. Soviet aid-which was not replaced from other sources- Among advanced reformers, vigorous stabilization pro- without a drop in output (Box 1.4). China's growth grams have paved the way for declining inflation and a (although slightly overstated by official measures) was resumption of growth as reforms have taken hold. Thou- propelled by exceptionally high saving rates and by large sands of new, competitive firms have entered the market. gains in productivity that were partly due to reallocations Many state firms have shrunk dramatically, and others of labor from lower- to higher-productivity activities. As have closed altogether. Production has shifted from indus- in GEE and the NIS, much growth in China came from try to services, trade has been reoriented toward world previously repressed sectors, including exports, services, markets, and foreign direct investment (FDI) inflows have and agriculture. risen sharply. By 1995 industrial labor productivity was a The social impact of transition has also varied. In GEE third higher than prereform levels in Poland and Hungary and the NIS many people have gained, and imports of (Figure 1.6). Poland's growth rate of 7 percent in 1995 high-quality consumer goods have boomed. But the com- was led by the 15 percent growth rate of the private sec- bination of falling output and rising income inequality tor; the state sector declined by 3 percent. has led to large increases in poverty and growing insecu- The picture was different for the less advanced, or less rity in many countries. Life expectancy has fallen in many, decisive, reformers in GEE and the NIS, even though the particularly Russia and Ukraine, but has increased in the scale of reforms in many of these countries has been large Group 1 countries (see Table 1.1). Infant mortality rates by conventional standards. Adjustment has been much appear to have declined in many countries, possibly as a slower, and inflation has remained high, although in most consequence of the sharp fall in birthrates in the region. Table 1.1 GDP growth, inflation, and social indicators during transition Average GDP growth Average inflation Change in social indicators, 1989-94a (percent per year) (percent per year) (percent) Country or group 1989-95 1994-95 1989-95 1994-95 Life expectancy Infant mortality GEE, NIS, and Mongolia Group 1 -1.6 4.3 106.0 18.7 0.7 -1.8 Group 2 -4.2 4.0 149.2 59.0 -0.2 -1.8 Group 3 -9.6 -12.5 466.4 406.8 -4.4 0.9 Group 4 -6.7 -11.4 809.6 1,176.5 -1.6 -1.9 Countries severely affected by regional tensionsb -11.7 -7.5 929.7 1,328 0.5 -2.7 Other transition economies China 9.4. 11.0 8.4. 20.6 2.1. -11.1. Vietnam 7.1d 7.9 114.8d 13.2 1.7d -5.4d ..Not available. Note: All data for recent years are subject to revision. See Figure 1.2 for the countries in each group. Data do not take into account a possible rise in measured infant mortality rates due to the shift to international methodology in the NIS around 1993. Social indicators are population-weighted. The countries asterisked in Figure 1.2 are taken out of Groups 1-4 and consolidated. Data are for 1978-95. Data are for 1986-95. Source: IMF and World Bank data. 19 Box 1.3 Data problems in transition economies Many statistical systems in the NIS and CEE have not New goods (including consumer durable imports, adapted to the new economic system. They often fail which have boomed) command high quality premia to capture the emergence of large "second" economies. relative to "comparable" old goods, many of which Technical weaknesses, compounded by the effects of have no market value. Much previous production high inflation, also cause output to be seriously under- was directed toward military procurement, which reported. A recent revision of Russia's national was cut drastically in 1992. These qualitative changes, accounts finds that they had overestimated the cumu- as well as the end of queuing, which previously ab- lative decline in 1990-94 by 12 percentage points. sorbed up to four hours a day for many, make it Reassessments of other countries, especially in the NIS, even more difficult to assess the real welfare effects of are likely to result in comparable revisions. the output changes that accompany a massive shift in In addition, the previous pattern of trade and pro- economic regime. Social data have problems, too (see duction in GEE and the NIS was highly inefficient. Box 4.1). Living standards have risen sharply in the growing Asian Its policymakers did not have to confront some serious reformers: the first stages of reform in China lifted almost obstacles that proved very difficult to turn aside in CEE 200 million people out of absolute poverty, a massive and the NIS. This is not to imply that China's task was achievement. But the rise in urban-rural differences and easy. It had to devise and implement a set of market- increasing regional inequality have now weakened the link oriented reforms that gave growth-promoting incentives to between economic growth and poverty reduction. This farmers and workers while maintaining macroeconomic has led to rising concern about the distribution of gains control and redirecting the interests of the bureaucracy from reforms (Chapter 4). toward supporting reform. These were and remain major achievements. But the transition challenge in China-and Assessmentthe interplay of choice and circumstance policymakers' tools for meeting itwere vastly different. To what extent does the divergence of outcomes across One way to bring this point home is to compare CEE and the NIS reflect initial conditions as opposed to Russia and China (Table 1.2). When its transition began, policythe given rather than the chosen? Some coun- Russia's economy was far more developed than China's, tries, typically in GEE, started with more favorable macro- with income per capita eight times higher. Over 40 percent economic, structural, and institutional conditions. These of the work force was in industry, and the state's social included lower inflationary pressures, less interdepen- security system covered virtually the entire population. An dence with the CMEA system, a more recent history of elaborate and costly system of sectoral cross-subsidies market economy, and a more favorable location for devel- propped up huge state enterprises and agricultural collec- oping new trade links. Countries also differed in their tives. The energy sector played a key role in subsidizing levels of development, industrialization, and income. both: implicit subsidies from energy production to the rest The Central Asian countries and Albania, in particular, of the economy amounted to over 11 percent of GDP. A were less developed and more rural than the others. And large share of Russian industry added negative value: input some countries achieving independence for the first time costs, valued at world prices, exceeded the value of output. needed to construct the basic elements of statehood. Sep- Then trade with the CMEA countries collapsed, prices arating the contributions of initial conditions and policies were liberalized, and demand for military goods declined is difficult. Ongoing research on this group of countries as cold war tensions receded. The shock to the Russian suggests that favorable initial conditions do indeed play a economy was enormous. Shifting large numbers of people significant part in determining cross-country differences into new firms and formerly repressed sectors (including in outcomes but that, regardless of the starting point, con- services) required deep structural adjustment and painful stancy in reforms has been vital for restoring growth and retrenchment in the state sector. Employees and managers containing inflation. exerted enormous pressures to continue subsidies and keep Why has China been able to reform in a partial, phased firms afloat, in part because enterprises had traditionally manner and still grow rapidly, whereas even vigorous re- provided so many social services. The pain was intensified formers in GEE and the NIS have suffered large declines in by the legacy of decades of planning that had resulted in output (but still outperform the slower reformers)? China's extreme regional specialization, with many one-company favorable initial conditions are the first piece of the puzzle. towns. And with price liberalization and the scaling back 20 Labor productivity is at new highs in some reforming countries, while others are behind the curve. Figure 1.6 Labor productivity in industry in selected transition economies Recovered Recovering 1989 = 100 1989 = 100 140 110 130 100 120 110 90 100 80 90 70 80 70 Poland 60 60 50 50 40 40 1989 1990 1991 1992 1993 1994 1995 1989 1990 1991 1992 1993 1994 Still falling Never fell 1989 = 100 1978 or 1986 = 100 110 300 100 250 90 80 200 China 70 150 VietnaX 60 100 50 40 50 1989 1990 1991 1992 1993 1994 1978 1980 1982 1984 1986 1988 1990 1992 Source: Vienna Institute for Comparative Economic Studies 1995; VVorld Bank data. of subsidies, agricultural output shrank by nearly one- firms. The economy was far less centrally planned and fourth between 1990 and 1994. administered than the Soviet economy. Local govern- Despite the industrialization efforts of the 1950s and ments had greater power and developed considerable 1960s, China was very poor and largely rural at the start management capacity, preparing them for a more decen- of its reforms. Agriculture employed 71 percent of the tralized economy. Chinese industry also received subsi- work force and was heavily taxed to support industry. dies, but cross-subsidization was less pervasive. Social safety nets extended only to the state sectorabout Because the agricultural sector had been so heavily 20 percent of the population. Poor infrastructure and an repressed, freeing it up had immediate payoffs. Between emphasis on local self-sufficiency led to low regional spe- 1981 and 1984 agriculture grew on average by 10 percent cialization and large numbers of small and medium-size a year, largely because the shift to family farming im- 21 Box L4 Vietnam: Bo! "Worms in an East Asian setting In the mid-1980s Vietnam's economy was growing slow- leastimposed financial discipline on state enterprises ly and suffering from hyperinflation despite massive Sovi- and laid off hundreds of thousands of redundant workers et assistance. A reform program (doi moi) was launched (see Chapter 3). These measures stabilized the econo- in 1986, starting with limited changes in the rural sector myinflation fell below 10 percent by 1992and re- and accelerating in scope and pace in 1989. In a very stored growth, which has averaged 8 percent since 1991. short time reforms dismantled collectives and returned Exports and investment are growing at double-digit rates. the land to family farming; liberalized most prices; Vietnam's transition is not complete. Industrial pro- allowed and encouraged new private businesses in many duction remains concentrated in state enterprises, and fields; opened the trade and investment regimes; unified administrative controls remain pervasive. But its liberal- the exchange rate and sharply devalued the currency; cut ization and stabilization measures were closer to those of fiscal deficits and the growth rate of domestic credit; Eastern Europe than they were to those of China. Not all raised interest rates to positive real levels; and not East Asian reforms have been phased or gradual. proved incentives. This allowed for the reallocation of were often below inflation (Chapter 2). Prudent macro- surplus agricultural labor to new rural industries, which economic policies were key, holding inflation to modest generated 100 million new jobs between 1978 and 1994 levels and helping maintain confidence in the currency. and encouraged further reform. China thus started transi- Russia's economy, on the other hand, was already highly tion largely as a peasant agrarian economy and with far monetized in 1990, with M2 equal to GDP. The huge greater scope for reallocating labor than Russia. monetary overhang from forced saving represented There were also important differences in financial resources already provided to the planned economy. Lib- development at the outset of transition. China's financial eralization of prices and the monetization of fiscal deficits system was underdeveloped, with the money stock (M2) led to hyperinflation, which rendered these savings worth- equal to only 25 percent of GDP. As markets developed less. By 1994 the Russian money stock had dwindled to and incomes improved, household savings and bank only 16 percent of GDP. deposits grew rapidly. This financed growth and buffered Differences in initial conditions and structural charac- the state sector through bank lending at interest rates that teristics therefore explain a good deal of the divergence of transition outcomes and policies across countries. They do not explain allthe sustained application of market- Table 1.2 Russia and China: Two very different oriented reform policies, within a broadly "right" macro- countries economic environment, has been a crucial ingredient in Russia China success. However, the right reform mix must reflect initial conditions and so cannot simply be transplanted between Indicator 1990 1994 1978 1994 such starkly different countries as China and Russia. Sectoral structure of employment (percent of total) The agenda Industry 42 38 15 18 Agriculture 13 15 71 58 The CEE countries and the NIS have not seen the spectac- Services 45 47 14 25 ular growth of China and Vietnam, but many have turned Total 100 100 100 100 Employment in the the corner and resumed growth, some vigorously. With state sector 90 44 19 18 continued vigilance to sustain hard-won progress and Money and output implement further reforms, these countries can join the M2 as a percentage ranks of the high-growth economies. Other countries in of GDP a 100 16 25 89 the region have the potential to follow in their path. China GDP per capita (dollars) and Vietnam, too, will have to push further in many areas, From World Bank Atlas 4,110 2,650 4045 530 from property rights to institutional development to social At PPP 6,440 4,610 1,000' 2,510 policies, to sustain their rapid growth. In every case what Data are averages of quarterly ratios. matters is the breadth of the policy reforms attempted In 1990 dollars. and the consistency with which they are maintained. The World Bank staff estimate. Source: IMF, various years (b); World Bank data and staff record to date, the challenges ahead, and the lessons these estimates. different groups of countries have to learn from one another are explored in detail in the following chapters. Liberalization, Stabilization, and Growth the transition economies, extensive liberal- more dynamic system of economic coordination that fos- ization and determined stabilization have both ters long-run productivity and output growth. Finally, Across been vital for improving economic performance. liberalization, by depoliticizing resource allocation, helps Liberalization involves freeing prices, trade, and entry governments cut subsidies to firms and thus facilitates eco- from state controls; stabilization means reducing inflation nomic stabilization. and containing domestic and external imbalances. The Stabilization policy is vital for transition because two are intricately linked and can and should be initiated macroeconomic imbalance denies countries the gains of early. In the longer term, institutional reformsestablish- market reforms. Evidence from a wide range of market ing clear property rights, sound legal and financial infra- economies shows that once annual inflation rises above a structure, and effective governmentwill be needed to threshold level around 40 percent, growth deteriorates make markets work efficiently and support growth. But dramatically. High inflation obscures relative price incen- liberalization and stabilization are essential first steps, and tives and creates uncertainty, inhibiting saving and invest- they can achieve a great deal even when other key features ment. Therefore price stabilization always complements of an effective market are lacking. liberalization as a basis for growth; as shown below, some Why is liberalization so important? It decentralizes pro- transition countries have liberalized faster than others, but duction and trading decisions to enterprises and none has registered sustained growth without containing households and directly addresses the two fundamental inflation at moderate levels. weaknesses of central planning: poor incentives and poor There are some important parallels between Asian and information. Liberalization exposes firms to customer European transition economies in the relationships be- demand, the profit motive, and competition, and it lets tween liberalization, stabilization, and growth. In all relative prices adjust in line with true scarcities. Liberalized regions growth has largely resulted from the lifting of markets process information better than central planners, restrictions on new entry and a surge of previously re- and when goods and services are traded freely, the price pressed activities, especially services and export industries mechanismAdam Smith's invisible handmatches de- (and agriculture in Asia). Freeing prices and trade, reduc- mand and supply. In most cases the outcome is efficient ing subsidies, and containing credit can also revitalize (market failure is discussed in Chapter 7). Combined with growth in previously dominant sectors, by increasing the supporting institutions, competitive markets unleash pow- competitive and financial pressure on firms to restructure. erful processes to force technological and organizational However, as outlined in Chapter 1, there are also major change. Whereas planned economies experienced low or differences between countriesin initial conditions, in negative overall productivity growth despite high capital approaches to macroeconomic reforms, and in outcomes. accumulation, at least half of output growth in advanced In China the initial economic structure combined with market economies since World War II has resulted from strong macroeconomic control has so far allowed large productivity gains. Creating markets is an investment in a growth gains from partial liberalization to translate into 22 A N7 AND GROWTH 23 high saving and a rapid buildup of financial assets by ernment intervention. Countries have usually been slower households. This has helped cushion a state sector that to adjust or liberalize housing rents and utility and public remains a drag on the economyeven though its effi- transport prices (Box 2.1). ciency may be improving and its relative size is shrinking Countries' 1989-95 averages on the liberalization index and has underwritten the reform process itself. Gradual, introduced in Chapter 1 (the purple bar segments in Figure partial reforms were not an option for most GEE countries 1.2) provide an aggregate indicator of the combined dura- and NIS. There only broad-based liberalization has tion and intensity of liberalization. They assess the medium allowed governments to cut their links with firms enough exposure of each country during 1989-95 to free market to bring inflation down to levels that would permit eco- forces, including domestic price and trade liberalization, nomic recovery. These countries all suffered a large decline foreign trade liberalization and currency convertibility, and at first. But those that liberalized early and comprehen- new entry and private sector development. It is worth focus- sively were able to stabilize the economy sooner and enjoy ing on liberalization over a period of time, rather than just an earlier, stronger resumption of growth. in 1995, because both past and present reforms influence the behavior of enterprises and households and economic Liberalization and growth: A close link performance today. Of course, progress as measured by this In market economies liberalization usually means elimi- index depends on countries' initial conditions as well as nating price controls and relaxing trade protection in a their reform efforts, and countries such as Hungary and few heavily regulated or protected sectors. Liberalizers in Poland have followed different paths but achieved a similar transition economies face an unprecedented and more degree of overall liberalization by 1995. Country compar- daunting task, that of freeing not only the terms of mar- isons reveal that domestic and foreign liberalization usually ket transactions but the transactions themselves: abolish- advance together, with liberalization of entry lagging some- ing state orders and procurement, state production and what. Advanced reformers, however, have proceeded faster trading monopolies, and the centralized allocation of for- on all three fronts: the Visegrad and Baltic countries, which eign exchange. Liberalization also means freeing entry have undertaken the most radical price reforms, have also into production, services, and trade, including the free- opened the most to external trade and entry. dom to open a new business, to expand or break up an existing business, and to change product mix, suppliers, East Asia: Partial liberalization succeeds under customers, or geographical base. special circumstances The starting point, speed, and scope of free market Apart from small, diamond-rich Botswana, China has been reforms have varied greatly among transition economies, the world's fastest-growing economy since its free market as initial conditions and political developments have con- reforms began in 1978. Vietnam, too, has grown rapidly strained governments' economic policies and influenced since abandoning pure central planning in 1986, especially their reform choices (see Chapter 1). Hungary and China after accelerating reforms in 1989. Both have liberalized began liberalizing gradually in the 1960s and the 1970s, substantially, but not (particularly China) on a scale or at a respectively. Vietnam accelerated its liberalization in 1989 speed comparable to the radically reforming GEE coun- after partial reforms had failed to raise growth rates or to tries. As described in Chapter 1, China has been "feeling stabilize the economy sufficiently. Poland liberalized with the stones to cross the river." In contrast to the single bold one "big bang," freeing 90 percent of prices, eliminating leap of the GEE reformers, China went through several most trade barriers, abolishing state trading monopolies, stages of "combining plan with market" before adopting its and making its currency convertible for current trans- current goal: the "socialist market economy" announced in actions all at once in January 1990. Albania, the Baltic 1992 is the first to contain no reference to either plan or countries, the former Czechoslovakia, and the Kyrgyz regulation. A specifically Chinese dual-track approach was Republic followed this model of rapid and comprehensive used for liberalizing prices, external trade, foreign ex- liberalization. Bulgaria initially did the same, but strong change, and the enterprise sector (Box 2.2). This has interest group pressures for continued protection and state worked well, on balance, especially in agriculture. But it support to enterprises later brought something of a rever- has not been without significant costs, including forgone sal. In Romania price reforms advanced fitfully for three benefits from a faster integration into world trade, rampant years after half of all prices were freed in 1990, but liber- corruption and rent seeking, and, more recently, growing alization has recently accelerated. Russia substantially lib- regional disparities. Partly in recognition of these costs, the eralized prices and imports in January 1992, but extensive government is proposing to unify the country's trade and export restrictions remained in place until 1995 (remain- tax regimes in the near future. Liberalization in Vietnam ing export duties are set to be eliminated by mid-1996), was broader and faster (Box 1.4). But as in China, signifi- and many consumer prices are still subject to local gov- cant restrictions remain, especially on trade and entry, and 24 Box 2.1 Pricing energy and other household essentialsa case for phased liberalization? In most of CEE and the NIS, as well as in urban indeed possible, although Hungary's circumstances dif- China, household energy, rents, and public transport fer from those in most other countries. A study of energy remain the principal products whose prices have not pricing in Poland suggests that an 80 percent price in- been liberalized and are still far below cost. Rents are crease for heat, gas, and electricityroughly to their eco- often below even maintenance costs. Housing and nomic costwould, in the short term, cost the average household energy subsidies amounted to 5 percent of household around 8 percent of its budget. GDP in Russia and 5 to 6 percent in Ukraine in 1995. Ideally, reforms would accelerate price increases in Although these subsidies have played the role of social parallel with compensatory payments targeted to the buffers, blunting households' sudden exposure to mar- poor, administered through the existing social assis- ket forces, the potential economy-wide gains from effi- tance system. But this may not be feasible in all coun- cient energy pricing are huge. In the NIS they could, tries. Lifeline pricing is then often the most practical according to one estimate, rise over ten years to more approach. This involves charging a low, subsidized than 10 percent of GDP annually. price for a fixed, modest energy quota and full price for What combination of energy pricing and compen- consumption above that level. Lifeline pricing is not satory social policies provides the best mix of efficiency perfect, because all consumers (not just the poor) get and protection for poor households? Efficient energy the subsidy, and because those who use less than the pricing would require raising household prices sharply. quota have little incentive to reduce consumption. At Relative to other prices, for example, household electric- the margin, however, the bulk of consumers pay a ity prices would have to rise roughly threefold in price close to economic cost. Lifeline pricing with a Bulgaria, the Czech Republic, and Russia from levels of large increase in the above-quota price therefore tends mid- to late 1995. In Hungary they almost cover eco- to be more efficient than a smaller, across-the-board nomic cost already, and they will be raised further by the increase. Simulations for Poland show that it may also end of 1996, to permit foreign investors in the privatized have better distributional effects, even though a mod- electricity distribution companies an 8 percent return on est, fiscally affordable lifeline may still leave some of capital. This example shows that full-cost pricing is the poor insufficiently protected. Box 2.2 China's dual-track price reforms China's price reforms began in late 1978, implement- Although liberalization remained incomplete, dual- ing a dual-track system in which the share of produc- track price reforms did improve efficiency, because tion subject to state procurement continuously de- the price of the marginal unit reflected economic cost clined, and more and more prices were subjected to and correctly signaled relative scarcity, and because the varying degrees of market guidance. The reforms share of sales at planned prices declined over time. began in agriculture and spread slowly, first to con- Also, the eventual full liberalization of the small share sumer goods and later to intermediate goods indus- of output remaining subject to controls proceeded tries. In each case a free market developed in parallel smoothly. Less than 20 percent of food products were with the controlled market, where state supply was still sold at fixed official prices when the last food price kept unchanged at the (lower) plan price. Supply in the controls were removed in 1992, so the final conver- free market track grew rapidly, so its share in total out- gence of the two tracks caused minimal disruption to put rose steadily. Meanwhile the planned price was the economy as a whole. But dual-track reforms also raised incrementally until it approached the market were costly to implementa vast number of people price. By the end of 1994 this dual-track system had were needed, for example, to administer the rationing led to the decontrol of more than 90 percent of retail and distribution system associated with dual food prices and between 80 and 90 percent of agricultural prices and required strict enforcement to limit the and intermediate product prices, all of which are now diversion of price-controlled products to the free market determined. Only a few prices remain fixed or market and to rein in corruption, with severe penalties negotiable within a band set by the state. for noncompliance. 25 difficult reforms of state enterprises and the financial sector lower than in China. Vietnamese output growth has aver- have yet to be undertaken (Chapters 3 and 6). aged more than 7 percent a year since 1989 and close to 9 How have free market reforms succeeded in promoting percent in 1994 and 1995. In the mid-1980s domestic rapid growth in China and Vietnam? Some argue that, in saving was negative and investment negligible, but both China, gradualism contributed to the reforms' success, as have since increased dramatically. remaining partial controlsbased on the continued As noted in Chapter 1, state industries employ only a authority of the Communist Party and enforced through a moderate share of China's labor force. Also, China's over- dense web of local compliance mechanismscontinued to all production structure has never been as distorted as it serve a coordinating function, limiting disruptions to pro- was in the former Soviet Union, and the defense sector duction and trade during the phased buildup of market has never been as big. This has allowed China to delay institutions. But the key, in both countries, was the deep state industrial reformsemployment in its state reforms themselves, which spurred growth directly by sector grew by 20 million during 1978-94and still improving productivity, and indirectly by raising the record substantial productivity and output growth. Subsi- incomes of large parts of the population and translating dizing unprofitable state enterprises with increasing them into high saving and investment. The design and amounts of cheap credit has had significant costs in terms sequencing of reforms fit the two countries' economic of lost efficiency. But thanks to its high national saving, and political structure and other initial conditions. They China has so far been able to absorb this cost without fun- began by liberalizing agriculture (land tenure, prices, damentally destabilizing the economy (see below). With- and procurement), which had previously been heavily out comparable levels of saving, and with Soviet aid taxed. Because most of the work force was in agriculture, drying up in the late 1980s, Vietnam was forced to cut better incentivesat the margin prices were flexible, subsidies to enterprises as part of its stabilization program. output could be sold freely, and profits accrued to This triggered cuts in the industrial labor force by one- farmersgenerated large productivity, output, and in- third during 1988-92 and a brief recession in the state come gains, lifting many out of poverty (see Chapter 4). sector, followed by adjustment and improved perfor- Labor-intensive technology permitted an easy shift to mance. But industrial restructuring took place without more efficient, family-based production. This in turn economic and social upheaval. One reason was that Viet- freed up a significant share of the labor force to transfer nam's enterprises, unlike China's, did not provide exten- into higher-productivity sectors, especially the new non- sive social benefits, but another was that the newly liber- state industrial and service sectors that were next in line to alized agricultural and private manufacturing and service be liberalized. The labor force in rural Chinese enterprises sectors, which account for 60 percent of GDP and 85 per- increased by 100 million between 1978 and 1994. cent of employment, grew rapidly and were able to absorb China achieved overall (total factor) productivity laid-off public sector workers. growth of more than 3 percent a year during 1985-94, exceptional by international standards. An upward bias in GEE and the NIS: Liberalization boosts recovery from recorded GDP growth may exaggerate this figure some- initial output losses what, but this high growth in productivity signals that Output has fallen dramatically in European and Central China's growth is relatively intensivedriven by more Asian transition economies. Some of the official estimates efficient use of inputs rather than simply more of them shown in Figure 2.1 overstate the decline because of statis- although lower productivity in the still sizable state enter- tical weaknesses (see Box 1.3), not least, in many countries, prise sector raises concerns for the future (see below and the exclusion of a large and growing unofficial economy Chapter 3). Overall, up to one-third of the increase in (Box 2.3). But the data show a substantial decline even Chinese output since 1985 can be attributed to greater after adjusting for these biases; in Russia, for example, out- efficiency. The bulk of the remainder has been due to an put fell by about 40 percent during 1990-95. Estimates unparalleled, growth-promoting investment boom, fueled based on electricity demand are also problematic but pro- by income growth which has translated into high rates of vide perhaps a lower bound to the output decline; they household and enterprise saving. Total saving and total suggest that GDP fell, on average, by around 16 percent in investment both averaged close to 40 percent of GDP dur- five CEE countries between 1989 and 1994, and by ing 1985-94. This would not have been possible had the around 30 percent in eleven NIS. Because of sharp falls in government not been able to stabilize the economy by investment, consumption has declined less than output, directly curtailing demand during boom periods. In Viet- but there is little doubt that living standards fell in the nam, where productivity has grown at comparable rates, early stages of reform in most countries, notwithstanding increased efficiency accounts for an even larger share of improvements in product quality and the elimination of output growth, because investment rates are considerably queues (see Chapter 4). 26 Output has fallen dramatically across CEE and the NIS. Figure 2.1 Decline and recovery in GDP in selected transition economies and in comparable historical episodes GDP as percentage of base-year GDP More 10 20 30 40 50 60 70 80 90 100 liberalized Poland 1991 Hungary 1993 Estonia 1993 Lithuania 1993 Romania 1992 Mongolia 1992 Russia 1_9,5 Moldova 1994 Kazakstan 11111111111111111111111111EM 1995 Ukraine 1995 United States 1933 (Great Depression) Soviet Union (World War II) 1942 El 1995 [71 At low point after base year Note: The base year for the transition economies is 1989; historical base years are 1929 for the United States and 1940 for the Soviet Union. Transition economies are listed according to their average liberalization index scores for 1989-95 (see Figure 1.2). Source: Official data. Total registered employment has also fallen in GEE fell 20 to 25 percent in Bulgaria, Hungary, and Slovenia, and the NIS, although there has not been a clear relation- but only 7 to 8 percent in Russia and Ukraine. ship between employment and output declines. Employ- WHY DID OUTPUT FALL? Some early studies, focusing ment has generally fallen more, and unemployment risen mainly on GEE, blamed overzealous stabilization for the faster, in GEE than in the NIS, because in GEE the labor initial output decline. But the evidence now suggests market adjustment has largely come through layoffs and that it was mainly driven by three factors: demand shifts early retirement, whereas in the NIS the response has gen- due to liberalization, the collapse of the CMEA and the erally been to cut working hours (see Chapter 4). Between Soviet Union, and supply disruptions due to vanishing or 1989-90 and 1994, for example, registered employment absent institutions and distorted incentives. 27 Box 2.3 Notes from underground: The growth and costs of unofficial economies Transition has brought marked growth in countries' unofficially, limit its growth. Informalization also low- unofficial economies. Many commercial and even ers government revenues and encourages capital flight. many productive activities go underground to evade And by its very nature it breeds corruption and under- high and volatile taxes, circumvent restrictive and mines the credibility of formal market and government often unpredictably changing government controls, institutions. Thus, a growing informal economy is no and employ workers flexibly and cheaply. Estimates substitute for a formal, open private sector, but in fact based on electricity consumption suggest that, between eventually impedes its development. 1989 and 1994, the share of unofficial activity in the Latin America presents striking parallels. There, economy grew, on average, from 18 to 22 percent in a too, unofficial activities account for between roughly sample of GEE countries and from 12 to 37 percent in one-fifth and two-thirds of total output. They thrive a sample of NIS. Surveys in Ukraine confirm a very where political freedoms are many and economic large unofficial economy. freedoms few. And where informalization has been Unofficial economies tend to be large where politi- most extensive (Bolivia, Peru), growth has been slow- cal controls have weakened, economic liberalization is est. Measures that have helped in Latin America to lagging, and burdensome regulations and high taxes bring the informal sector back into the economic make the formal environment hostile for the newly mainstream are likely to work in the transition developing private sector. Where the informal economy economies as well. These include extensive price, trade, has grown significantly, it has cushioned the output and foreign exchange liberalization; tight macroeco- decline and provided an outlet for entrepreneurial tal- nomic policies; a sharp reduction of regulatory con- ent. But it is mostly a "survival" economy that focuses straints; and more professional government adminis- on short-term objectives, invests little, and loots state tration (see Chapters 5 and 7). A combination of carrot assets. Firms waste time and money in their efforts to and stickpossibly including a one-time, partial tax get around controls and taxes. These efficiency losses, amnestycan help reduce the costs of returning to the and the difficulty of conducting certain transactions formal economy. Liberalization, combined with stabilization, meant the went to the rest of the Soviet Union and $18 billion to end of the supply-constrained shortage economy, in other CMEA countries. Ending these subsidies raised the which even the shoddiest products could always be sold. cost of imported production inputs, reducing aggregate Now unwanted goods remained on the shelves. Firms and supply and output. Many non-NIS countries suffered consumers drew down their supply stocks as hoarding overall terms-of-trade losses of more than 10 percent of became unnecessaryfalling inventories contributed GDP, and even as high as 15 to 20 percent in the case of about one-third to the output drop in Poland in 1990-91 some highly import-dependent countries. For its part and over half of the 11 percent drop in the Baltic coun- Russia was unable to exploit fully the improvement in its tries in 1993. In Russia military procurement was cut by terms of trade because of collapsing trade volumes and its 70 percent. Of course, the elimination of unwanted pro- own continued export restraints. The collapse in trade was duction and excess inventories did not reduce welfare. compounded by the stupendous inefficiency of the initial But all initial cuts in output had second-round effects on interstate payment system, which usually took about three spending and demand, which may have doubled the over- months to process transactions. all effect on output. Finally, in GEE and the NIS, unlike in China, planning The disintegration of the CMEA and the Soviet institutions had vanished before new market institutions Union, coupled with trade liberalization, led to a collapse could develop. For example, many countries have dis- in trade among GEE countries and the NIS. Buyers sub- carded the old systems for allocating agricultural credit and stituted imports, including consumer durables, from out- distributing farm output, but new wholesale and retail net- side the CMEA, while the shift toward world market works and market-based credit systems are not yet in place. prices and trade in convertible currencies entailed huge The lack of market institutions caused coordination fail- price rises for previously subsidized energy and raw mate- ures throughout the production and trading system rial imports, especially from Russia. According to one many of them related to limited information and to uncer- rough estimate, Russia's price subsidies to other countries tainty. Inadequate incentives, often linked to deficient were worth $58 billion in 1990, of which $40 billion property rights, compounded the shortage of modern 28 technology and skills and created formidable obstacles to are an acute shortage of maintenance and upgrade invest- swiftly redeploying factors of production to emerging sec- ments and an inadequate legal, institutional, and fiscal tors. Uncertainty encouraged capital flight by firms and framework that discourages management improvements, households alike, and many firms became survival- foreign investors, and new technology. oriented, waiting and hoping for better times rather than How HAS LIBERALIZATION SPURRED RECOVERY? Across restructuring actively. To some extent, such problems are CEE and the NIS liberalization has been positively associ- an inevitable result of these countries' dramatic break with ated with growth. In countries where liberalization has the past. But they were exacerbated, in many countries, by been stronger (as measured by average liberalization inconsistent reform policiesincluding a lack of policy scores), output losses have on average been smaller (Figure coordination in the ruble zone (see below). Coordination 2.2). And the difference increases over time: relatively failures, uncertainty, and distorted incentives constrain the stronger liberalization boosted average growth during start-up or expansion of profitable activitieseven as 1989-95, but it boosted average growth in 1994-95 even unprofitable or overbuilt sectors collapse. For example, more. Two other factors have had a strong impact on livestock herds shrank dramatically across the NIS in recent growth. First, output has tended to increase further response to steep increases in fodder prices relative to since 1989, or decline less, in poorer, more agricultural prices for animal products. But Russian oil production has countries than in richer countries with more overbuilt also fallenby almost half since 1988despite a steep industrial sectors. Second, each year a country has been increase in the relative price of energy. The main reasons adversely affected by regional tensions has added 6.5 Stronger, more sustained liberalization spells a smaller output declineand a stronger recovery. Figure 2.2 Liberalization and growth of GDP GDP growth (percent per year) 10 Average GDP growth, A 1994-95 A A AA At 2 -10 A Average GDP growth, 1989-95 -15 -20 1 2 3 4 5 6 7 8 Liberalization index (average, 1989-95) Note: Data are for all twenty-six CEE countries and NIS; results are even stronger if China and Vietnam are included. See Figure 1.2 for details of the liberalization index. Average GDP growth is adjusted to control for the impact of regional tensions in some countries and differences in initial income per capita. Source: De Melo, Denizer, and Gelb, background paper; official data; World Bank staff calculations. 29 percentage points of GDP, on average, to the annual decline in output since 1989. Countries that liberalize rapidly and Countries have typically returned to growth after three extensively turn around more quickly. years of sustained liberalization (Figure 2.3). Countries in Groups 1 and 2those in which liberalization has been more rapid and comprehensive (see Figure 1.2)experi- Figure 2.3 Time profiles of output decline enced an earlier output decline but also an earlier and and recovery by country group stronger recovery. Output in countries in the other groups was still falling in 1994-95, but recent reforms have brought a number of them to the threshold of recovery. GDP growth (percent) Ongoing research provides evidence that these patterns of decline and recovery continue to hold even if one controls 5 Group 1 for differences in countries' initial conditions such as 0 0 geography, sector structure, or initial macroeconomic im- balance (see Chapter 1). 5 How can countries judge whether market reforms have 10 - paid off overall, given that earlier and more vigorous lib- eralization has led to an earlier decline but faster medium- 15 - term growth? One way is to regard the market system as an 20 - Group 3 asset in which countries invest by liberalizing. Countries have invested different amounts at different times, and these 25 1989 1990 1991 1992 1993 1994 1995 investments have generated initial income (GDP) losses and subsequent income gains of different magnitudes. The value of countries' investments as of the end of 1995 is their total Note: Countries in CEE and the NIS are grouped by their GDP accumulated since 1989 (and discounted back to average liberalization index scores for 1989-95 (see Figure 1989 to allow for the fact that people value income today 1.2). Countries severely affected by regional tensions are excluded. Annual growth rates are simple averages for each more than income tomorrow). Figure 2.4 shows that, on group. Source: Official data; World Bank staff calculations. average, liberalization has indeed been a good investment. The least liberalized countries have fared slightly better than moderate reformers. More advanced liberalizers, however, whose cumulative market reforms have now reached a crit- ical mass, have come out far ahead, at least in terms of national income. This does not imply that rapid, all-out lib- eralization is always possibleor preferable. When choos- ing how much and how fast to liberalize, governments are penetrate the "quality barrier" to expanding exports to the constrained by initial conditions, and often the effects of West (trade relations with the European Union and inte- different strategies will be highly uncertain. But as noted in gration into world trade institutions are discussed in Chap- Chapter 1, initial conditions still leave policymakers a fair ter 9). Countries have rapidly diversified their exports, and amount of choicethey influence but by no means prede- some have begun to reverse the trend of falling unit value termine economic performance. The fact that, when these for machinery exportsa sign of rising quality. Exports factors are controlled for, liberalization tends to pay off sug- from countries with more open trade regimes, mostly in gests that, on average, policymakers will maximize people's CEE and the Baltics, declined less with the initial disinte- incomes by liberalizing as much as possible within the range gration of the Soviet Union and the CMEA and recovered left open by country-specific constraints. faster, contributing more to overall output growth (see Table 2.1 and Box 2.4). By contrast, in most NIS, which New growth comes from letting exports and stuck with state trading arrangements and still impose sig- services expand. . . nificant export controls, OECD-oriented exports of man- Exports and services, two previously repressed activities, ufactures have remained marginal and the contribution of have been the major engines of growth in transition econ- exports to growth has been negligible. omies. Overall, the European transition countries have Trade policies in China and Vietnam have combined been strikingly successful at opening their economies and substantial, although partial, liberalization with active ex- reorienting their exports toward world markets (Table port promotion, with Vietnam relying more on the for- 2.1). Despite early skepticism, many have been able to mer and China on the latter. State trading now covers 30 After seven years, aggressive liberalizers in CEE and the NIS have come out ahead. Figure 2.4 Liberalization and cumulative GDP Cumulative GDP, 1989-95 (percentage of 1989 GDP) 525 Croatia 500 Slovenia 475 Czech IUVdC rcep. 0 Poland <>Hungary Belarus FYR Macedonia 450 Bulgaria Uzbekistan Mongolia Estonia Tajikistan Latvia 425 Turkmenistan Romania Azerbaijan Kyrgyz Rep. Armenia Ukraine Russiap 400 Moldova* Albania * 375 Kazakstan Lithuania Georgia p 350 1 2 3 4 5 6 7 8 Liberalization index (average, 1989-95) Note: Data are for all twenty-six CEE countries and NIS. See Figure 1.2 for details of the liberalization index. Cumulative GDP is the normalized net present value of total GDP over 1989-95, discounted at 10 percent per year. It is adjusted to control for the impact of regional tensions in some countries and differences in initial income per capita and the abundance of natural energy resources. Results are robust to changes in the discount rate and to the inclusion of China and Vietnam. Source: Official data; World Bank staff calculations. only a few important products and represents a shrinking China through the creation of special economic zones, the share of trade in both countries. Many exports are liberal- opening of coastal areas, and preferential tax treatment ized completely, and most remaining export controls are and access to foreign exchange for exporters. not binding, but imports remain subject to significant Although China and Vietnam have liberalized trade restrictions, especially in China. Both countries have less than have the Visegrad and Baltic countries, their exempted exporters from import duties on their inputs overall trade performance has been at least as spectacular. and created favorable conditions for export-oriented for- China has sustained export growth of more than 15 per- eign investmentVietnam mainly through deregulation, cent per year on average since 1978; Vietnamese export 31 Table 2.1 Trade policy and export performance in CEE and the NIS Export performance Average annual contribution of export growth Trade policy to GDP (percentage points). Change Mfg. Years of in share exports to Exports to Total Total current of CMEA OECD, OECD only, exports, last exports, State Quantitative account or Soviet 1994 last year before year before first year of trading, restrictions, convertibility exports (percent transition to transition to transition to Country group 1994 1994 by end-1995 (percent)a of GDPV) 1994 1994 1994 Group 1 Very small No 4 -57.2 24.5 2.3 2.1 3.0 Group 2 Very smalld Nod 2 -43.9 18.1 1.4 -3.1 3.7 Group 3 Moderatee Yese 1 -13.6 3.3 0.2 -11.2 0.5 Group 4 Extensive Yes 0 -14.2 4.4 -0.1 -14.4 0.3 Rg. tensions Extensive Yes 0 -20.8 3.7 ..Not available. Mfg., manufacturing. Rg. tensions, group of countries severely affected by regional tensions (see Figure 1.2). Note: Data are simple averages for each country group (see Figure 1.2). For CEE countries, data are for 1989-94 CMEA exports; for NIS they are for 1990-94 Soviet exports. For Albania, Mongolia, and Slovenia, data are for total exports. The last year before transition was 1989 for Poland, 1990 for the other CEE countries, and 1991 for the NIS. Mongolia was the only Group 2 country with significant state trading and quantitative export controls in 1994. The Kyrgyz Republic was the only Group 3 country that had essentially eliminated export restrictions by 1994. Source: Kaminski, Wang, and Winters 1996; IMF 1995a; EBRD 1995; World Bank staff calculations. 1 41 4 Box 2.4 Trade policy and performance: Estonia and Ukraine illustrate how close the link Estonia and Ukraine have pursued diametrically differ- with other NIS and ex-CMEA countries-remained ent trade policies. Their trade performance has varied intact. Administrative controls kept domestic prices accordingly. below world prices. Tight export controls (including Rapid trade liberalization pays off Estonia removed licenses and quotas) sought to prevent producers from virtually all export barriers, eliminated all quantitative selling subsidized goods abroad. Exporters had to sur- import restrictions, kept only a few low import tariffs, render foreign exchange earnings at below-market and made its new currency fully convertible for current exchange rates. The import regime remained liberal, account transactions, all by the end of 1992. Import but domestic buyers lacked foreign exchange to pay liberalization introduced world relative prices for trad- for imports. Ukraine's policies proved counterproduc- ables. And radical export liberalization-a policy that tive. The intergovernmental agreements failed to stem distinguished Estonia from most other NIS-allowed the trade decline with the other NIS and blocked a rapid reorientation of trade, accelerated adjustment trade diversification: Western Europe accounted for to Western quality standards, and boosted hard- less than 20 percent of Ukraine's total trade in 1994. currency export revenues. More than half of Estonia's Isolation from world markets delayed enterprise exports now go to Western Europe, and close to two- adjustment and perpetuated inefficiencies. Exports thirds of its imports come from there. Export growth fell, contributing negatively to output growth during contributed 11 percentage points a year to GDP 1992-94, and large trade deficits contributed to a spi- growth during 1992-94. Even if one corrects for Esto- raling depreciation of the currency and economic nia's special advantages-close ties with Finland, prox- destabilization. Ukraine's reforms in late 1994 in- imity to Western Europe, and Baltic Sea ports that cluded considerable price liberalization and the elimi- have boosted legal and illegal trade-its export perfor- nation of most direct export controls, and exports grew mance has been phenomenal. in 1995. A nontransparent reference price system con- Slow trade liberalization imposes high costs. Ukraine tinues de facto to restrain exports below a minimum maintained many price and trade controls until the price, encouraging rent seeking and corruption, but as fall of 1994. State trade-including state procurement of early 1996 its coverage is limited to a small and and an extensive network of bilateral trade agreements declining share of exports. 32 growth in the shorter period since 1986 has exceeded 25 need to be enforced against strong incentives for both percent per year. Initial conditions played a significant partners in a voluntary transaction to circumvent them. In role in these achievements. China did not suffer a trade transition economies, whose institutional capacity is espe- shock from dissolution of the CMEA, of which it was not cially weak, trade controls therefore tend to be relatively a member, and it was able to draw on its Hong Kong ineffective at protecting firms or raising tariff revenues, connection and a large expatriate community to help and instead breed corruption (see Chapters 5 and 7). develop its export industries. Vietnam enjoyed an oil ex- Finally, worldwide experience has shown that "tempo- port bonanza that partly offset the loss of CMEA markets rary" protection measures all too often become perma- and cushioned the withdrawal of Soviet transfers and an nent, and that frequent changes in trade policy are bad for initial decline in nonoil industries. In addition, both firms that are expanding and developing foreign ties. Both countries were able to exploit their strong comparative problems have particular relevance to those of the transi- advantage in labor-intensive manufactures. Within China tion countries where political conditions are volatile. and Vietnam (just as across CEE and the NIS), exports Services have been the second major source of growth have grown faster in those industries and regions with in transition economies. One study estimated that revers- more open trade and foreign investment regimes, and ing the past repression of services in the NIS could increase higher exports have been associated with faster output national income by more than 10 percent and generate growth. A World Bank study of options for reforming around 6 million additional jobs, substantially compensat- China's trade regime has shown that the remaining export ing for declines in other sectors. Service sector output has and import restrictions carry high efficiency and welfare indeed soared during transition, especially where liberal- costs. These would be reduced by the further liberaliza- ization is more advanced (Table 2.2). In the leading tion measures proposed in support of China's bid to join reformers the initial "service gap" (the shortfall in the ser- the World Trade Organization (V7T0). vice sector share of GDP relative to that in established Some have argued that, whatever the overall speed of market economies) has essentially been closed. Spirited liberalization, foreign trade and exchange transactions entrepreneurs have responded vigorously to improved should be liberalized more slowly than internal markets, incentives, often despite serious obstacles, including to lessen the initial decline in domestic employment and numerous and frequently changing regulations, slow and output. Yet there is powerful evidence from transition often corrupt bureaucracies, and crime, in addition to high economies that the benefits of early external liberaliza- taxes and lack of credit. Services have grown less in coun- tionin parallel with domestic liberalization and stabi- tries such as Belarus, where reforms are not as advanced. lizationfar outweigh the potential costs. Establishing The adjustment from industry toward services has essentially free trade (except, possibly, a modest and uni- meant huge shifts in relative prices. In Russia the price of form import tariff) early on yields a particularly large paid services relative to that of goods in the average con- return in these countries, for several reasons. First, the sumer basket rose fivefold between 1990 and 1994. In legacies of central planningespecially the bias toward parallel, the share of industry in GDP fell 7 percentage autarky and large firmsmagnify the efficiency and out- points and that of agriculture 9 percentage points, while put gains from competing in world markets, and compar- the share of services increased by 16 percentage points. isons of countries' aggregate trade performance bear this Industry's share has declined even more sharply in the out (see above). Firm-level evidence from Bulgaria, advanced reformers. This has contributed to an improved Poland, and Russia also shows that trade liberalization has environmental record across CEE countries and the NIS, indeed spurred enterprise restructuring and helped make whereas rapid industrial growth has led to deteriorating markets competitive. Second, in the early stages of liberal- environmental conditions in the East Asian transition ization, producers in most countries have been shielded economies (Box 2.5). from foreign competition by heavily undervalued curren- Agriculture's share in GDP has fallen somewhat in cies, whether exchange rates are fixed or floating (see most transition economies. In CEE and the NIS, agricul- below). Undervaluation also created a strong incentive to ture was highly inefficient and, in contrast to East Asia, seek export markets. sustained by subsidies on inputs, credit, and retail prices. By contrast, continued trade controls are likely to yield The sector has suffered an unnecessarily severe relative few benefits for transition countries. Import protection is price shockinput prices, especially fuels, rose four times at best a blunt instrument for alleviating the pain of as much as output pricesbecause supply and processing adjustment, since it cushions entire industries, not just the are not yet fully competitive, and governments still inter- weakest firms. Entry promotion, retraining programs, and vene to hold down food prices. Further liberalization targeted social assistance are likely to be much more effec- should allow agricultural producers to retrace some of tive. Furthermore, unlike these measures, trade controls their lost ground. 33 Table 2.2 Liberalization and sectoral restructuring Percentage of Average Change in share of GDP, 1989-94 Share of services in GDP (percent) 1989 services liberalization index, (percentage points) Actual, Normal Gap in gap filled in Country groupa 1989-95a Agriculture Industry Services 1989 share') 1989b 1994 CEE and NIS Group 1 6.9 4 12 16 42 51 9 173 Group 2 4.7 1 11 10 35 51 15 68 Group 3 3.4 0 4 4 33 49 16 25 Group 4 2.0 2 3 -1 34 49 15 7 Rg. tensions 3.9 14 7 7 41 50 9 80 China and Vietnam 5.5 10 5 6 32 41 8 66 Average of all transition economies 4.4 2 6 5 37 49 13 38 Rg. tensions, group of countries severely affected by regional tensions (see Figure 1.2). See Figure 1.2 for details of the liberalization index and the countries in each group. The "normal" services shares of countries are shares predicted from a regression of sectoral shares on income per capita and population size in a sample of 108 developing and industrial economies. The services "gap" is the difference between the actual and the normal share of services in GDP. Source: Syrquin and Chenery 1989; official data; World Bank staff calculations. And from forcing old firms to restructure deteriorated with the move toward international prices. Price and trade liberalization and sharp cuts in fiscal and Instead, industrial restructuring has involved large changes credit subsidies are crucial to forcing firms to adjust and in output and employment at the firm level. Studies show turning the enterprise sector around. Indeed, industrial that enterprise performance varies greatly within an indus- restructuring has turned out to be highly decentralized in try, and past profitability often provides little clue as to transition economies. Output shifts between subsectors which firms will thrive and which succumb. have followed no obvious pattern. Heavy industry, assumed Industries are in flux, with new entry, breakups and to be the most overbuilt, has not contracted relative to light mergers, a sharp rise in the number and share of small industry. Branches have not systematically expanded or firms, and new products and processes. Price and trade contracted as their relative competitiveness has improved or controls, which affect entire industries, impede this kind Box 2.5 Transition can help the environmentwith the right policies Transition has reduced environmental damage in most In all transition economies a combination of further GEE countries and NIS, with pollution dropping as a market reforms and sound environmental policies can consequence of the fall in economic activity, especially improve environmental performance. First, changes in in industry. There are signs that the recovery in indus- relative prices should promote more efficient use of trial output may not be accompanied by equivalent energy and natural resources. Second, privatization and increases in pollution, because of more effective envi- reduced state interference in industrial decisions will ronmental regulation and improved enforcement. encourage management to improve the operating per- China, in contrast, has grown rapidly. This has re- formance of existing plant, while replacing old equip- sulted in higher pollution and worsening environmen- ment with new plants incorporating cleaner production tal conditions. The environmental performance of technologies. Well-designed environmental regulation most heavy industrial enterprises remains poor, and and investments can contribute to this process. Third, a many new light industries generate water pollution and clear institutional separation of enterprise ownership hazardous wastes, which pose a serious threat. In the from environmental regulatory authority should help most polluted large cities a combination of stricter ensure realistic environmental standards. Fourth, foreign environmental policies and economic changes seems to direct investment and international cooperationsuch have stabilized levels of air pollutionthe most imme- as through the Baltic Sea cleanup programscan bring diate environmental threat to human health. in best environmental practices from around the world. 34 of decentralized enterprise adjustment and market-led dif- ferentiation of enterprises by performance. Governments China has oscillated between boom and bust. worldwide have tried to pick winners and target support only to viable firms. This is risky business at the best of times; in the volatile environment of transition it is im- Figure 2.5 GDP growth and inflation possible. Even firm-specific, performance-linked credits in China and subsidies will inevitably assist many nonviable firms. Such support wastes resources and discourages viable firms from adjusting. Moreover, subsidies tend to go to state enterprises. This tilts the playing field against new private entrants, the main source of new jobs. Experience across GEE and the NIS supports these arguments. Hungary and Poland have sustained strong liberalization and reduced enterprise subsidies, from 7 to 10 percent of GDP in the late 1980s to 2 to 3 percent in the early 1990s. Enterprises there have adjusted, and their performance has improved much more than that of their counterparts in Bulgaria and Russia, where liberalization has been less consistent and budgetary and central bank subsidies to enterprises still averaged 6 to 7 percent of 1979 1983 1987 1991 1995 GDP in 1993-94. Chinese state enterprise reforms in- Source: World Bank 1995e, 1996a. cluded decentralized, although partial, liberalization from the beginning; not coincidentally, enterprise productivity and output growth have been higher in the more liberal- ized regions and sectors, where competition has been stronger, and in the less regulated nonstate segments of expansion (mainly to finance investment projects) and a the economy (see Chapter 3). sharp rise in inflation. This has been followed by a Restructuring of production and output has involved strengthening of financial policies, especially through direct extensive adjustment in labor markets. Although regis- administrative controls, including ceilings on bank lend- tered unemployment has remained low in some countries, ing, direct prohibitions on investment, and price reregula- especially in the NIS (see Chapter 4), analysis of econ- tion. Macroeconomic imbalances widened when reform omy-wide and sectoral labor flows reveals that total began in 1978 but were effectively controlled by govern- turnover rates (hires plus fires) probably averaged around ment policy. The boom cycles have been triggered by 20 to 25 percent in the NIS during 1991-93. Such high reform initiatives. In 1984 enterprise and trade reforms turnover rates are comparable to those in middle-income gave increased freedom and expansionary incentives to developing countries such as Chile and Colombia and firms. After a cooling-off period in 1986-87 a new round exceed those in Canada and the United States. Between of trade, price, and wage reforms and the introduction of 70 and 80 percent of hired and fired workers moved the contract responsibility system for enterprises (under within the same sector rather than to other sectors. which multiyear contracts specify the profits and output to be turned over to the state) gave another boost to demand. Stabilization: A vital ingredient in transition And in January 1992 reforms designed to encourage invest- Stabilization policy is an essential complement to liberal- ment and enterprise autonomy through locally driven ization in transition. Policies to contain inflation and im- incentives set off another round of inflationary pressures. pose hard budget constraints on firms are necessary for This pattern largely reflects the incompleteness of market economies to grow and firms to restructure. But Chinese reforms, especially in the enterprise and financial the interaction between macroeconomic policies and other sectors. With soft budget constraints and with interest reforms, including liberalization, is greatly affected by ini- rates on bank loans frequently set below inflation, enter- tial conditions. In this respect, China is a distinctive case. prises and powerful local governments have sought to cap- ture the benefits of increased credit in the form of higher China: A cyclical pattern of moderate inflation local investment, incomes, and employment, expecting Throughout its reform period China has experienced mod- that any inflationary costs would be dissipated through erate inflation, with boom-and-bust cycles in prices and the entire economy. Partial price reforms have increased output (Figure 2.5). Each boom has featured rapid credit the need for government subsidies, to cover the losses of 35 enterprises whose prices remained fixed at artificially low such as bankruptcy and liquidation, layoffs, state bank levels. Meanwhile, fiscal decentralization and difficulties restructuring, social assets of enterprises, and a social safety in developing effective tax administration have contri- net for urban employees (Chapters 3, 4, and 6). buted to large declines in government revenues (Chapter 7). As a result, the government shifted more and more of CEE and the NIS: A tortuous path of inflation its fiscal responsibilities to the banking system. The net Inflation in CEE and the NIS has broadly followed three flow of resources from banks to enterprises has been large, stages, each corresponding to a phase of reform. The first, amounting to 7 to 8 percent of GDP in the late 1980s and during the early months of liberalization, involved the early 1990s. About half of this was refinanced by the cen- release of the monetary overhang (excess money supply) tral bank through quasi-fiscal operations. Moreover, bank that had accumulated under central planning. The sec- loans to enterprises and central bank loans to banks have ond, spanning years two and three of liberalization (in both involved large implicit subsidies (equivalent to some cases longer), has been linked mostly to the speed around 3 to 4 percent of GDP), in the form of negative with which subsidies to enterprises were phased out and real lending rates and noncollection of bad debts (bad prices not previously freed were decontrolled. The third enterprise debts are now estimated to account for at least stage, usually reached once inflation has fallen below 20 percent of banks' portfolios). 40 percent a year, concerns mainly the more advanced In most other countries such conditions would have reformers and involves exchange rate policy and capital led to high inflation. But China has not been like most flows. The essence of the inflation story in most CEE other countries. This rapidly growing economy has countries and NIS is that free market reforms first turned avoided high inflation because of a seemingly insatiable high, repressed inflation into high, open inflation, and demand for cash and bank deposits by enterprises and then further liberalization and tight financial policies households, whose bank deposits increased more than brought inflation down by containing persistent domestic threefold in real terms between 1984 and 1993. The subsidy pressures. This is in stark contrast with the story resources raised through money creationseigniorage- in China, and somewhat different from that in Vietnam, have been exceptional, peaking at almost 11 percent of which experienced high, open inflation already under cen- GDP in 1993 (1 to 2 percent is typical in market tral planning but since then has sustained sharp cuts in economies). In this environment China's central authori- subsidies to enterprises (see Box 1.4). ties have so far been able to contain inflation by periodi- THE FIRST STAGE: AN INFLATION THAT CAME IN FROM cally stepping in with administrative controls; these will THE COLD. In CEE and the NIS inflation came into the become less effective as reforms progress. opensuddenly in most countriesand prices soared Demand for money is likely to grow more slowly in when they were freed. Money in circulation and in banks China in the future, for three reasons: money balances are exceeded the value of goods and services that firms and already high, close to GDP in 1994; alternatives to bank households wanted to buy, and this monetary overhang depositsequities, enterprise bonds, foreign currency, and flooded the market, driving up prices. The price stability real assetsare increasingly available; and capital move- of the planning system had become untenable, because ments are becoming de facto more open. Bank financing inflation had been repressed. By late 1991 many black of public sector deficits will then more readily translate market prices in Russia were five times higher than official into inflation. This adds to the urgency of reducing these prices, the black market exchange rate reached more than deficitsnot by administrative fiat but by addressing their forty times the official level, and grain hoarding had structural rootsand expanding the scope for noninfla- become so widespread that supplies for large urban areas tionary deficit financing through domestic bond issues. were in jeopardy. Administrative controls still played their part in cooling This burst of inflation in the first year of liberalization off an overheated economy in 1994-95. But at the same was associated with huge currency depreciations in many time central bank credit to the banking system was reduced, economies in CEE and the NIS, regardless of the and the consolidated public sector deficit has begun falling. exchange rate regime. Equilibrium exchange rates are dif- To consolidate these gains, China will need to accelerate ficult to determine, especially in transition economies, reforms in the state sector. Improving the effectiveness of and, in general, when economies with deep inefficiencies indirect instruments of monetary policy requires hardening open up to world trade some initial depreciation is to be budget constraints on both enterprises (to increase their expected. But the data suggest that the initial devaluations interest rate sensitivity) and banks (to strengthen risk con- in Poland and the former Czechoslovakia were four times siderations in loan decisions and pricing). This will entail larger than what would have been necessary to maintain deepening reforms in a number of difficult areas that gov- purchasing power parity for Polish and Czech goods; the ernments in CEE and the NIS have been grappling with, Bulgarian lev fell to one-seventh its purchasing power 36 parity (PPP) value, and the Russian ruble to about one- Generous central bank credits were the main cause tenth a "normal" level. Capital flight and long-repressed of inflationary money supply growth in this stage. Over demand for foreign goods placed continued pressure on the three years 1992-94 net domestic credit in Poland exchange rates, and this accelerated domestic inflation roughly tripled in nominal terms, and the money supply through rising import prices. roughly tripled in parallel. By contrast, in Russia both In the NIS the lack of monetary policy coordination in grew roughly 150-fold during the same period. Much the ruble zone (the common currency area on the territory domestic credit went to support the budget, in response to of the Soviet Union after its disintegration) exacerbated severe fiscal problems associated with the onset of reforms. inflation and created severe payments problems for inter- For the NIS in particular, transition meant a precipitous state trade. At the start of 1992 fifteen national banks, act- fall in government revenues. Receipts from the state enter- ing as new central banks, tried to outbid each other in prise sector fell sharply, and the new tax administrations emitting credit, because the proceeds would accrue proved unable to tax the emerging sectors (Chapter 7). At domestically while the costs, in higher inflation, would be the same time pressures grew to maintain expenditure at dispersed throughout the ruble zone. The National Bank high levels, especially for social purposes. Price liberaliza- of Ukraine was especially active in this. In June 1992 the tion also exposed the extensive systems of cross-subsidies Russian central bank stopped the automatic clearing inherent in the planned economy, shifting all or most of between bank deposits in other NIS and those in Russia, the cost onto the budget. Fiscal deficits were fairly large but then it began to issue large amounts of "technical" during 1990-94, averaging 6 to 7 percent of GDP in Bul- credits to many NIS to be used to purchase Russian garia, Hungary (which had substantial interest payments), goods. In Uzbekistan such credits amounted to 60 percent and Uzbekistan. They were even higher in Russia, averag- of GDP in 1992. These problems set the stage for the ing 12 percent of GDP. introduction of new currencies throughout the NIS. To ease budget pressures, many governments man- THE SECOND STAGE: THE STRUGGLE TO REGAIN CON- dated that the banking system undertake quasi-fiscal TROL. The main culprit in prolonging high inflation was activities, most often by extending highly subsidized cred- rapid monetary expansion (Table 2.3). Slow reformers its to state enterprises to shore up past patterns of pro- permitted rapid growth in the money supply and thereby duction and employment. Many enterprises found that ended up with the highest inflation rates; the more their cash balances had been severely devalued, and they advanced reformers, by contrast, posted the smallest demanded additional credits. They received the backing money supply growth on the way to recording the lowest of officials who believed that a shortage of real money bal- rates of inflation. In the NIS inflation followed growth in ances was largely responsible for the output drop. For broadly defined money with a rather short lag of four example, in Russia in mid-1992 these officials argued that months. In contrast to developments in China, demand the money supply had to "catch up" with the price for real money balances in the NIS declined, further rais- increases that had occurred since the beginning of the ing inflation. Households and firms began to adjust to year. Among slower reformers in CEE and the NIS, credit high inflation; in Belarus, for example, the real money subsidies from the central bank were often around three stock fell by half in a two-year period. times the size of the fiscal deficit. Table 2.3 Inflation and money supply growth (percentages per year) Average inflation Growth in money supply, broadly defined. Country group 1992 1993 1994 1992 1993 1994 CEE and NISb Group 1 58 27 19 60 31 28 Group 2 554 169 78 110 65 Group 3 1,273 1,163 723 473 276 170 Group 4 829 2,390 1,547 1,171 1,112 China and Vietnam 11 9 15 33 25 28 ..Not available. Note: Data are simple averages for the countries in each group (see Figure 1.2). The definition of the money supply used for each country is the one that most closely approximates M2; its growth is measured from end- year to end-year. Countries severely affected by regional tensions have been excluded. Source: IMF and World Bank data. 37 Financing these fiscal and quasi-fiscal deficits in a non- inflationary manner was not easy, and most ended up Governments running larger deficits rely more on being funded through seigniorageput simply, by print- the printing press. ing money (Figure 2.6). Inflation, fueled by excessive money supply growth, levied an implicit "inflation tax" Figure 2.6 Bank and nonbank financing of on individuals by reducing the real value of their money fiscal deficits holdings. This caused huge transfers of income and wealth among households, enterprises, and banks (Box 2.6). Seigniorage averaged more than 16 percent of GDP in Countries with smaller deficits Russia during 1992-93, about the same as total central government revenues. In GEE it was more modest, aver- aging 5 to 6 percent of GDP in Poland and Hungary in Nonbank Domestic bank 1990-92. Seigniorage in leading reformers has since financing financing stabilized at "normal" levelsabout 1.5 percent of GDP. 84% 16% Bringing inflation under control required a sustained reduction in money supply growth. Especially in the NIS, Average deficit: 1.4 percent of GDP the combination of tightening monetary policy and shrink- ing money demand meant that, in stark contrast to the Chi- nese situation, banks could not make net resource transfers Countries with larger deficits to the enterprise sector for any length of time. Monetary rigor had to be supported by sharp cuts in subsidies, espe- cially those provided to enterprises through cheap central bank credits. This, in turn, required sustained liberalization Domestic Nonbank to eliminate the losses due to price controls and other gov- bank financing financing ernment interventions and to break the close link between 29% 71% enterprises and governments. The experience of successful stabilizers also suggests that positive real interest rates con- tributed to remonetizing the economy (by raising the demand for money) and stemming currency depreciation. These developments, together with greater central bank Average deficit: 9.3 percent of GDP independence, bolstered confidence in stabilization pro- grams. By 1993-94 reformers in Group 1the Czech and Slovak Republics, Hungary, Poland, and Slovenia (see Fig- Note: Data are simple averages for six transition countries ure 1.2)had achieved moderate rates of inflation, averag- with deficit-GDP ratios smaller than 5 percent (Croatia, ing 23 percent a year. Annual inflation averaged roughly Estonia, Latvia, Lithuania, Poland, and Slovenia) and eight with ratios greater than 5 percent (Albania, Belarus, Bulgaria, 120 percent in the Group 2 countries, about 930 percent Hungary, Kazakstan, Moldova, Russia, and Slovak Republic). in Group 3, and almost 2,000 percent in Group 4 (Figure The ratio for each country is the annual average for 1992-94. 2.7). Even late or hesitant reformers had begun substantial Source: IMF and World Bank data. monetary and fiscal adjustment (for example, Bulgaria's budget deficit was cut by 7 percentage points in 1994). Inflation has now started to come down in all the GEE countries and NIS and remains extreme only in Tajikistan and Turkmenistan, where liberalization was least advanced. THE THIRD STAGE: INFLATION AS A PRICE OF SUCCESS? tion below 40 percent. Governments need to build confi- Cross-country studies of market and transition economies dence in their currencies (in many cases new ones) and alike suggest that bringing inflation down from high to credibility for their policies. Relatively high levels of infla- moderate levels (around 40 percent a year) is unambigu- tion make this more difficult, by raising the probability ously good for growth; the direct effects of reducing it fur- that inflation will spiral out of control in the future. ther are less clear. Growth resumed in the Czech Repub- Countries should also note that the seigniorage revenues lic and Latvia at annual inflation rates of 10 percent and they can now earn at moderate rates of inflation are likely 26 percent, respectively, and in Poland, Estonia, and to evaporate as financial systems adjust. Lithuania at rates of 42 to 45 percent. However, transi- One major obstacle to bringing inflation down further tion economies have good reasons to try to reduce infla- is incomplete price reform. In many transition economies 38 the prices of energy and some services are still far below Box 2.6 Redistribution through inflation: world levels and will therefore increase substantially in The Russian experience coming years. A recent World Bank study on Russia indi- cates that prices for housing, transport, and telecommuni- Inflation in the presence of low nominal interest cations (relative to those for manufactured goods) would rates redistributes wealth from savers to borrowers have to increase roughly sixfold from their 1994 levels just by eroding the real value of savings and debt. In to reach 60 to 75 percent of their relative values in indus- 1992 an enormous inflation tax of 30 percent of trial market economies. GDP was levied on financial assets in Russia (see Large inflows of foreign capital, including some reversal table). Households lost the equivalent of 12 percent of capital flight, also frustrate the lowering of inflation, of GDP. Some enterprises also lost, but others because they add to the money supply and put pressure gained, as did the financial sector (including the on prices. This has been a particular problem for more central bank). Large enterprises and financial con- advanced reformers. In a sense it is indeed a price of glomerates were the main winners. success, since investors are attracted to the large growth The inflation tax took a quarter of household potential and high returns on investment that stem income, further depressing consumption. It was from liberalization and moving to a market economy. But also probably regressive, falling on the poor more extremely devalued currencies have also been a factor than on the rich. Moving into dollars or real assets (Latvian prices were around 7 percent of Swedish levels in usually involves a transaction of a certain minimum size, which lower-income households can seldom July 1992). The capital account in GEE went from net muster a phenomenon that is well documented in outflows of $8 billion in 1991 to net inflows of $13 billion Latin America. Surveys of Russian households con- in 1993; inflows also rose sharply in Russia and Vietnam firm that those with higher incomes hold most for- in 1995. eign exchange, and that those with lower incomes Domestic prices will inevitably have to rise relative to in particular express great concern about inflation. foreign prices, in response to these inflows. But opinion Because inflation wiped out personal savings, it differs over whether advanced reformers should allow this disproportionately affected those who had saved the to occur through inflation or through nominal currency most. The elderly, increasingly seen selling flowers appreciation. How long should they allow the inflows to or family heirlooms on the street, are one such feed through to domestic prices, without adjusting the group. But there are others. Under the Soviet sys- exchange rate? There is no unambiguous answer. Consid- tem, generous wage and pension benefits had been erations of the size of the current account deficit and used to encourage people to move to remote loca- the sustainability of capital inflows aside, transition coun- tionsthe hope being that after a few years' work tries can have strong reasons to keep the exchange rate they would have enough money to buy a house in unchanged. In particular, they may fear that an early ex- central or southern Russia. Most Russians who now change rate adjustment will tarnish their hard-won credi- live in Vorkuta, in the extreme north, went there to bility with financial markets and, just as important politi- work in the coal mines for exactly that purpose. cally, deprive exporters of the partial shelter of an Now, however, their supposed retirement savings undervalued currency. The trouble is that most of the will not even buy airfare back to central Russia, and alternatives to a nominal appreciation carry other costs. the people of the city find themselves stranded just Some countries that have put off changing the exchange when the coal mines are about to close. rate have tried to limit the inflationary impact of inflows through tight fiscal policy, or by requiring commercial Gainers and losers from inflation in Russia banks to increase reserves. Others have issued bonds in an (percentages of GDP) attempt to mop up surplus cash. Yet such sterilization is Category Losses Gains Net gain expensive, especially in transition economies with under- Households 12 0 12 developed capital markets, because the central bank pays Enterprises 18 16 2 far more on the bonds than it receives on its foreign Financial sector 0 8 +8 reserves. It also puts upward pressure on interest rates, Government 0 4 +4 which can hurt domestic borrowers while actually fueling Other NIS 0 2 +2 Total 30 30 0 the problem it is trying to address, by attracting yet more foreign capital. Placing controls on foreign capital flows is Note: Data are for the period from February 1992 to January 1993. no solution: experience in Asia and Latin America sug- Source: Easterly and Vieira da Cunha 1994. gests that such controls increase the cost of capital in the short term and are ineffective in the long term. 39 Stabilization pegsand chronic arrears Like market economies undergoing adjustment, transition Progress with liberalization brings down inflation. economies have faced a variety of issues related to the design of a stabilization program. The experience of dif- ferent transition countries has afforded tentative answers to at least some of these dilemmas. Figure 2.7 Time profiles of inflation by One key question is whether a fixed or a flexible country group exchange rate is more effective, and less costly, in bringing down inflation. Experience in transition economies shows that inflation has been reduced significantly under both Percent per year fixed exchange rates (Croatia, the Czech and Slovak Group 4 Republics, Estonia, Hungary, Poland during most of 1990-91) and flexible arrangements (Albania, Latvia, 1,000 Moldova, Slovenia, Vietnam). However, studies suggest that although reducing fiscal deficits is crucial for disinfla- 100 tion under both arrangements, a fixed exchange rate can Group 2 help to bring high inflation down more rapidly and at lower cost to growth. One reason is that the automatic exchange 10 Group 1 of foreign for local currency by central banks at a fixed rate lets enterprises and households rebuild their real money balances more easily. Also, with flexible rather than fixed 0 exchange rates, domestic authorities have complete discre- 1989 1990 1991 1992 1993 1994 1995 tion over monetary policy, so they have to tighten credit further to make their commitment to stabilization credible. Note: Countries in CEE and the NIS are grouped by their Early in the stabilization process, a fixed rate may thus be a average liberalization index scores for 1989-95 (see Figure 1.2). Countries severely affected by regional tensions are useful policy instrument. Over the medium term the choice excluded. Annual inflation rates are simple averages for of exchange rate regime remains an open question. each group. Inflation is plotted on a logarithmic scale. Can incomes policies also help restrain inflation? In Source: IMF and World Bank data. market economies, incomes policies (for example, penalty taxes on "excess" wages) have a decidedly mixed record at controlling wage increases and promoting price stability. But many analysts consider temporary wage controls an essential component of macroeconomic policy in tran- sition economies, particularly as a substitute for strong want to borrow more, not less, when interest rates rise. owners where unions are powerful, to limit cost-push This distress borrowing can result in an extended period inflation from rising wages. A study of Poland found that of very high real interest rates followed by financial crisis. wage controls did inhibit pay increases, although wages Experience indicates some ways to limit the problem. beyond the ceiling were paid. By and large, wage controls First, the authorities can enhance the pace and scope of seem rarely to have been binding during the early stages of interest rate liberalization by taking steps to increase com- price liberalization, and they have not in themselves been petition in financial markets as well as to deal with insol- sufficient to restrain wages in countries without support- vent banks and enterprises. Second, they can exclude ing fiscal and monetary restraint. unsound banks from credit auctions (as most countries When should countries move toward flexible interest already do). And as in the Kyrgyz Republic and Poland, rates? As market forces gain strength in transition econ- they can prohibit banks from making new loans to firms omies, indirect monetary controls become more effective in severe difficulty before the start of bank and enterprise than direct ones. They do not encourage the growth of restructuring (see Chapters 3 and 6). informal financial markets, which erodes the share of How should pervasive arrears be handled? Particularly credit that the authorities control directly, and they help in transition economies, stabilization policy is complicated depoliticize the allocation of credit. But the particular by the arrears that enterprises run up with one another, problem facing transition economies is that the wide- with banks, or with government (in the form of tax and spread insolvency of banks and enterprises, together with social security arrears). But one lesson of the past few years the legacy of passive creditors and the absence of strong is that growth in arrears to unsustainable levels is not an owners, means that a broad spectrum of borrowers will inevitable by-product of stabilization. Cross-country expe- 40 rience shows that credible stabilization, including a consis- Moldova, and Ukraine, where energy debts reached be- tent refusal to inject new credit, is the best way to combat tween 5 and 8 percent of GDP by early 1995. increases in arrears. Where fiscal and monetary policies As stabilization proceeds and enterprise budgets have been tightas in the Visegrad countries, the Baltics, harden, interenterprise arrears decline and tax arrears rise. and the Kyrgyz Republiccreditors have learned quickly Many governments have been unable to enforce tax pay- the consequences of not being paid and begin cutting off ment even where legally their claims have top priority, defaulting debtors. By contrast, irresolute stabilization ahead of secured creditors (in Poland and the Czech policies reinforce expectations that government will bail Republic). Tax arrears (including interest and rescheduled out firms. Complex, centralized programs of netting or overdue taxes) were estimated at 8 to 10 percent of GDP clearing arrears tend to fail for precisely this reason, espe- in Poland and Hungary by the end of 1993 and at almost cially when combined with credit injection. Instead of half that in the Czech and Slovak Republics. In the NIS reducing arrears, they weaken financial discipline and tax arrears are lower, but rising sharply. To address the encourage more arrears among enterprises, and the result- problem, government first needs to clear any arrears for ing high arrears equilibrium further undermines the cred- which it may itself be responsible. In Russia, for example, ibility and effectiveness of macroeconomic stabilization two-thirds of the amounts due to enterprises from gov- (Box 2.7). Similarly, the secret of Estonia's success in curb- ernment were in arrears in mid-1994. Such a stance ing energy arrears (which have plagued many NIS) has undermines discipline in the rest of the economy and, as been its strictly enforced policy of disconnecting nonpay- was seen in 1995, can have serious social consequences ing enterprises, which has proved a powerful deterrent. and fuel political opposition when it prevents workers By contrast, a reluctance to cut customers off was a key from being paid. In most transition countries more than factor behind the buildup of energy arrears in Lithuania, 95 percent of taxes due are still being paid, so the integrity Box 2.7 Government's best response to interenterprise arrears? Strengthen financial discipline Interenterprise credit typically rises rapidly in the debtors and careless creditors would be bailed out. early stages of transition. This partly reflects an adjust- Enterprises responded with business as usual, and ment to levels of trade credit common in established arrears rose further. market economies. But often interenterprise credit Poland's firm stance on stabilization convinced enter- rises further and turns into arrears, as sellers, used to prises that they would not be bailed out, and they be- getting paid, continue shipping goods to buyers who came cautious before shipping goods to buyers. Changed have increasing difficulty paying. Afraid that the liqui- expectations reinforced hard budget constraints and dation of some firms could ripple through the econ- eventually stopped the growth of arrears. Poland has also omy in a domino effect and force the liquidation of experimented with an alternative method for clearing others, governments often look for measures to reduce arrears. Creditors can sell their claims on a secondary exploding interenterprise arrears. But experience shows market. Because the sale is at a discount, the creditor that interventions can easily backfire and undermine loses value and learns to be more careful. Buyers of financial discipline. claims can use them to pay for goods and services pur- Kazakstan, Romania, and Russia all implemented a chased from the debtor firms. In principle, such markets centralized netting out of arrears between firms. In the- in secondary debt can help impose financial discipline ory such netting can reduce the stock of gross arrears and reduce arrears without direct government involve- without changing the net position of firms. In practice, ment. Their volume and effectiveness in Poland, how- however, netting exercises are technically complex. ever, have so far been limited by high transaction costs, Some firms owe others more than they are owed them- by difficulties in resolving disputed claims, by banks' selves. The Kazak, Romanian, and Russian programs hesitation to sell the bad debt of longstanding customers, did not differentiate adequately between enterprises and by the legal requirement that debtors consent to the with net credit and those with net debt. Firms were use of claims as payment. Thus, in Poland as elsewhere, issued new credits sufficient to pay off outstanding conventional debt collection methodsreputation, debts over and beyond what they were owed them- informal cajoling, debt contract enforcement, foreclo- selves. The result was an inflationary net expansion of sure on collateral, and bankruptcy (Chapter 5)remain credit, and the message to enterprises was that both the principal recourse for aggrieved creditors. 5 41 of the tax system is not in jeopardy. Heroic efforts to col- after a severe economic crisis. In addition to having large lect taxes from severely distressed firms are unlikely to agriculture sectors that could serve as a springboard for yield much additional revenue. But tax forgiveness across growth, these countries owed their success mostly to get- the board should be avoided since it encourages further ting the policy basics right. Consistently good macroeco- increases in arrears. Governments should instead handle nomic management, banking reforms that promoted sav- tax arrears through case-by-case debt workout schemes. ing, and a strong focus on education and a suitable skill These should be accompanied by improved accounting mix provided the framework for high and rising private and auditing, the selective use of bankruptcy, and seizure investment. And in all the rapidly growing Asian of commercial receivables and other liquid assets to pre- economies favorable trade policies have allowed exports to vent the problem from recurring. The difficult task, be a major engine of growth. which no country has mastered, is to design a support sys- tem that credibly targets subsidies to the most difficult . . . And encourage strong saving and investment cases, such as distressed enterprises in one-company As was shown all too clearly under central planning, high towns, and keeps subsidies limited, temporary, and fis- investment alone does not guarantee fast growth. The cally affordable (Chapter 3). composition and quality of investment, as well as human capital and technological know-how, are also critical. Into the future: What is needed to sustain growth However, sustained rapid growth has been associated with and stability? exceptionally high saving and investment rates worldwide. Strong liberalization and stabilization help transition Saving generally averages at least 25 percent of GDP and economies correct their inherited inefficiencies and investment at least 30 percent in fast-growth periods macroeconomic imbalances and move to a path of secure (Figure 2.8). In CEE and the NIS both the rate of capital and rapid growth. But what can transition economies do accumulation and the efficiency of investment are to stay on that path? presently inadequate to sustain rapid long-run growth. In CEE in 1994, saving averaged about 15 percent of Lessons from abroad: Get policies right GDP and investment 17 to 18 percent; average saving and stick with them . . . and investment rates in the NIS were close to 20 per- What can transition economies learn from periods of sus- cent. Capital productivity, historically very low in both tained rapid growth elsewhere? One key lesson is that regions, has recently begun to recover in the leading both sound policies and consistency matter. Liberal, pro- reformers, but continued improvements will be critical for competition policies create the potential for enhanced sustaining growth. domestic growth, external trade, and access to financing. In contrast, saving and investment rates are now But countries will only fully exploit this potential by being approaching a very high plateau in China and are still ris- consistent over time. ing from already respectable levels in Vietnam. Productiv- Consider postwar Western Europe. Germany's fast ity gains will become an increasingly important source of recovery and subsequent growth explosion have often growth in years to come, particularly in China, where sav- been described as an economic miracleGDP growth ingand thus investmentrates are likely to decline over averaged 9 percent between 1948 and 1960. Closer exam- the medium term. Given the shrinking scope for improv- ination dispels much of the miracle explanation. Part of ing efficiency through further shifts in resources, achiev- the very strong expansion in the initial period was due to ing these gains will increasingly depend on broadening catch-up; Germany also benefited from Marshall Plan aid, enterprise and financial sector reforms that boost effi- increased human capital through migration, improvement ciency at the firm and the industry level. These are likely in the terms of trade, and a strong expansion in foreign to include reforms in ownership and allocation of invest- markets. But the key to Germany's sustained rapid growth ment. In China, for example, overall productivity in the was its consistently market-friendly growth strategy, nonstate sector has been increasing at 4 to 5 percent a which included price and trade liberalization, currency year, more than double the rate in the state sector, which reform, tax reductions, and the establishment of strong continues to absorb the bulk of investment credit. It enabling institutions such as the Bundesbank. Transition would be preferable for the government to take the great- economies, like established market economies, benefit est possible advantage of current rapid economic growth from consistent rather than stop-go policies. to implement difficult but necessary state sector reforms. Growth averaged 9 percent in Japan during 1948-60, What role is there for foreign saving and investment? close to 7 percent in Indonesia during 1970-93, and 8 High investment can be financed externally for some percent (with a rising trend) in the Republic of Korea dur- time, but it is funded overwhelmingly by domestic saving ing 1956-87. In each case growth recovered and surged in the long run. This is due to a home bias in saving and 42 Sustained, rapid growth depends on high rates of saving. Figure 2.8 Saving rates and GDP growth during high-growth periods in selected economies GDP growth (percent per year) 10 China *1978-94 Japan Fed. Rep. of 1961-73 Germany Botswana 1951-55 9 1979-94 Rep. of Korea Thailand 1983-94 1987-94 Singapore Vietnam 1961-94 1991-94 Greece *Hong Kong 8 1961-94 1961-73 Malaysia Indonesia 1987-94 0 1968-94 Chile Portugal 7 1987-94 0 1965-73 Mauritius 00 COte d'Ivoire 1985-94 1968-78 6 I I i 0 15 20 25 30 35 40 Gross national saving (percent of GDP) Note: Data are annual averages for the periods indicated. Source: IMF, various years (c); official data; World Bank staff estimates. investment decisions, limited international capital mobil- checking capital flight are critical, and both require most ity, the dominant role of retained earnings in funding of all ensuring macroeconomic stability. Fiscal reform is corporate investment (accounting for the bulk of pri- crucial: higher public saving, through reduced government vate investment in industrial countries), and lending deficits and spending, directly increases total saving and constraints imposed by world capital markets. In transi- means less crowding out of private investment. This is par- tion economies, with their weak domestic capital markets ticularly important in those transition economies where and still generally poor credit ratings, promoting domes- government is still large (as in the Visegrad countries; see tic saving is especially important. Foreign investment, Chapter 7) or has pursued loose fiscal policies (as in Bul- despite its many benefits, cannot be a substitute for garia and Tajikistan). A liberal foreign exchange regime domestic investment. and market-determined interest rates are also important, as How can governments promote domestic saving and are sound and stable legal, banking, and government insti- effective investment? Mitigating economic uncertainty and tutions. Progress in these directions, particularly the last, 43 will be difficult for transition economieseven in eastern teen years to reach that in Thailand. For the Visegrad Germany, where western German institutions have been countries and Slovenia they suggest that it would take adopted wholesale, firms single out legal uncertainty and about twenty more years at present growth rates to reach administrative problems as the key obstacles to investment. the average income level of the EU countries in 1994. Prudent fiscal policies also support growth by prevent- Actually catching up with EU average incomes would ing the government from running up an unsustainably require much faster growth (around 8 percent a year) or high debt burden. Most GEE countries and NIS, with the significantly more time (around forty rather than twenty notable exceptions of Bulgaria, Hungary, Poland, and years). Most estimates based on actual conditions in Ger- Russia, started with little debt, but many have since run many place the catch-up period for eastern Germany at large fiscal deficits, leading to a sharp rise in public indebt- between ten and twenty years; by implication, the catch- edness. The long-term costs of government living beyond up period for the GEE countries and the NIS would be its means are well illustrated by Hungary, which has the longer, because they lack eastern Germany's favorable largest foreign debt per capita among transition countries. initial conditions and rich "big brother." Recent empir- Unlike some other heavily indebted reforming countries, ical work assesses the prospects for faster GEE catch-up Hungary has continued to service its foreign debt without through sustained high growth rates. To make this sce- debt reduction or rescheduling. Repayments and interest nario a reality, GEE countries would need to adopt more have largely been financed by more borrowing, both market-friendly fiscal policies, including lower marginal domestically and externally, resulting in rapid growth in tax rates and current government expenditures, an over- the public debt stock. But financing this debt has become haul of government-funded pensions (Chapter 4), and hugely expensive. High and rising interest payments efforts to strengthen government investmentin addition increasingly eat into other government spending, because to completing enterprise and financial sector reforms (see revenues are at a plateau yet budget deficits need to be Chapters 3 and 6). reduced to keep the debt burden sustainable. The govern- The agenda ment has therefore decided to use part of the one-off rev- enues from privatization in 1995 to retire some of its The clear lesson of transition in both Europe and Asia is high-interest domestic debt. This may well turn out to be that countries that liberalize markets and preserve economic a good investment for the future. stability are rewarded with resumed or accelerated growth in output and productivity. China's contrasting initial condi- How long will it take to catch up? tions and strong macroeconomic control enabled it to take Popular wisdom in early postwar Germany was that it a more gradual and phased approach to transition. But the would take decades before the average person would own main engines of rapid growth in China have been the same a second pair of shoes. It took five years. When Germany as in the successful GEE countries and NIS: rapid entry of was unified, politicians promised and people hoped that new firms, including in the service sector, and growth in the eastern Lander would catch up with their western exports. China's major challenge for the future is to exploit counterparts in less than five years. By all accounts it will the large potential efficiency gains from further enterprise take much longer. So how long might it take for the more and banking reforms and, as the supply of low-cost savings advanced GEE and Baltic reformers to reach income levels falls with continuing reforms, to enable these funds to be comparable to those in European market economies? And reallocated to more productive sectors. Advanced reformers how long for most of the NIS, China, and Vietnam to in GEE and the NIS also have to consolidate their gains, join the East Asian newly industrializing economies? through continued sound macroeconomic policies, and to Arithmetic catch-up calculations, with all their limita- encourage higher saving and investment by avoiding over- tions, do provide a sobering perspective on the magnitude regulation and by slimming and reorienting government. of the tasks ahead. For China they suggest that it would Less advanced reformers still face the more urgent task of take five or six years of growth at present rates to reach the freeing their economies from the macroeconomic instability current income level in Indonesia and between ten and fif- and remaining state controls that impede recovery. Property Rights and Enterprise Refo the heart of transition lies a change in incentives, does not always arise: smaller assets are easy to privatize, At none more important than those for managers of enterprises. Managers in centrally planned economies faced distorted incentives that sooner or later and the outcomes are generally good. But larger transac- tions are more problematic on both counts, and the trade- offs among the different ends and means of privatizing led to poor enterprise performance. Transition requires these assets are intricate and intensely political. Some of changes that introduce financial discipline and increase the forms of ownership first produced by privatization do entry of new firms, exit of unviable firms, and competi- not and should not last. The way to think of privatization, tion. These spur needed restructuring, even in state enter- therefore, is not as a once-and-for-all transformation, but prises. Ownership change, preferably to private owner- as the start of a process of reorganizing ownership, shifting ship, in a large share of the economy is also important. over time to respond to the needs of the market economy. Once markets have been liberalized, governments cannot The legacy of central planning indefinitely control large parts of a dynamic, changing economy. Decentralizing ownership is the best way to The principal objective of the "socialist firm"developed increase competition and improve performance. in the Soviet Union and later emulated throughout the There are two ways to move to an economy dominated transition economieswas to meet physical production by the private sector: through privatization of existing state targets set by central planners. Under central planning, assets and through the entry of new private businesses. The firms did not emphasize profits, quality, variety, or cus- two are equally important. New private firms, spurred by tomer service, still less innovation. They were protected liberalization, give quick returns and can accomplish a great from competitive pressures and operated in shortage deal by themselves; but the mass of state assets in transition economies, where everything they produced was snapped economies makes some degree of privatization unavoidable. up instantly. Managers, most of them production engi- The question is not merely how much to privatize, but neers, were judged in terms of output rather than client how and when. Transition economies all experience prob- satisfaction. Financial performance was irrelevant because lems in managing state-owned firms. In some countries, profits and losses were redistributed among firms. Lacking market-oriented reforms short of a massive shift in owner- a bottom line, managers combated frequent input short- ship can bring improvements, even though these may be ages by hoarding labor and inventories. The plan allocated difficult to sustain over the longer term. In others, rapid output targets, inputs, and investment. It typically and widespread privatization is the only feasible course. emphasized heavy industry, energy, and investment goods All, however, face a dilemma: privatization done incor- at the expense of consumption goods and services. rectly can produce negative outcomes. Is "bad" privatiza- For a time the combination of massive investment and tion then better than none at all? There is no simple ideological commitment forced industrial growth in many answer; it depends on the strength of the state and the centrally planned economies. In the late 1950s, however, capacity of its administrative institutions. The dilemma evidence of declining Soviet productivity became more 44 45 apparent (see Figure 1 in the Introduction). Productivity percent, respectively, between 1989 and 1993 as their sales also lagged in China's state enterprises; output growth fell by 40 to 60 percent on average. In addition to layoffs, through the 1960s and 1970s depended on extensive the more advanced reformers have also seen sales of large investment. Many countriesHungary, Poland, the amounts of excess inventory and surplus assets. Thousands Soviet Union, and Yugoslavia in the past, China and Viet- of trucks sold from state firms, for example, formed the nam still todaytried to improve enterprise performance basis of Poland's large private transport fleet. Enterprises without resorting to privatization. "Reform socialism" subjected to financial discipline show more aggressive col- aimed to decentralize decisionmaking to the enterprise lection of receivables, a closer link between profitability level and to create incentives for improved technical and and investment, and a reorientation of goals from output financial performance. Such reforms often yielded tempo- targets to profits. Transition forces managers, for the first rary improvements in productivity, but the Soviet Union time, to focus on marketing and product quality. and all the CEE countries eventually suffered reversals. Whether enterprises actually adjust will thus depend Nor, as discussed below, are Chinese officials today satis- on government policies and, most important, the credi- fied with the results of their enterprise reform programs. bility of government's commitment to reform. Strong and Deeper reforms were required to increase competition, credible macroeconomic stabilizations in the Czech enforce financial discipline, and open capital markets Republic and Poland, for example, stimulated adjustment that is, to fundamentally reorient enterprises and their in many firms. Polish subsidies to enterprises and house- incentive systems. Thorough reform was also needed in holds shrank rapidly, from more than 16 percent of GDP the agricultural sector, which was particularly burdened in 1986 to 5 percent in 1992. Polish managers inter- with inefficient structures and distorted incentives. How- viewed in 1990 had little doubt that if they failed to make ever, the structure of agriculture and the problems it faced their firms competitive, the firms would closeand in the planned East Asian economies were quite different indeed many Polish state enterprises that had existed in from those in CEE and the NIS, as discussed later in this 1989 had disappeared by the end of 1995. Banks still had chapter. large and rather concentrated bad loan portfolios, but cleanup began in 1993 through a combination of enter- The first step: Imposing financial discipline prise liquidations, debt sales, and a new bank-led concili- and competition ation process (Box 3.1). Tax arrears, however, remain a The first step in transition is to move from the centrally problem. In Poland, as elsewhere, these have proved the planned regime of transfers and subsidies to one that most difficult "subsidy" to eliminate, in part because tax allows for risk, ensures financial discipline, and creates administration is weak (see Chapter 7). strong, profit-oriented incentives. This requires opening Russian reforms, although extensive, were neither as markets to competition and sharply cutting direct govern- coherent nor as credible. Total federal subsidies to enter- ment subsidies. It also requires removing two other cush- prises (including directed credits) fell from 32 percent of ions: bank credits on easy terms and arrears on payments GDP in 1992 to about 6 percent in 1994, but tax arrears due to government for taxes, customs duties, and social and ad hoc tax exemptions increased significantly. Also, security (see Chapter 2). Interenterprise arrears are local government subsidies to enterprises have increased. another form of soft finance. Some governments have Russian firms have begun to adjust, but less than those in implemented complex programs for netting and clearing Central Europe and in a somewhat different mode. Formal these arrears, but the best advice is to let market forces layoffs have been fewer. Employees remain on the books work out the problem (see Box 2.7). and continue to draw benefits, but they have accepted large cuts in hours and cash compensation and have pro- Financial discipline spurs restructuring gressively shifted to informal activities (see Chapter 4). regardless of ownership Governments in the East Asian planned economies Extensive empirical evidence from CEE and elsewhere approached the problem differently, but even there indicates that most firms, whether state owned or pri- reforms have sometimes been radical. Vietnam undertook vateor in between, as in the case of China's "nonstate" swift and far-reaching state enterprise reforms in 1989. enterprises (see Box 3.4)make efforts to restructure if The government eliminated all budget subsidies, cut the their avenues for rescue close and competition increases. number of firms by 5,000 (of which 3,000 were merged Shrinking subsidies combined with more open markets into other state firms, but 2,000 actually closed), and have universally resulted in labor shedding or falling real exposed some state firms to limited competition from a wages, or some combination of the two. For example, the new private sector. Almost 900,000 workers (a third of largest 150 to 200 firms in the Czech Republic, Hungary, the total) were dismissed without any promise of other and Poland reduced their work forces by 32, 47, and 33 public sector jobs. In response to this drastic surgery, the 46 Box 3.1 Innovative approaches to creditor-led restructuring in Hungary and Poland Who should restructure problem firms in transition decentralized negotiations. Although the Hungarian economies? In established market economies creditors reorganizations begin with a court filing, the courts are important agents of restructuring. Getting creditors have relatively little involvement thereafter. The Polish to play that role takes financial incentives, adequate process is out of court, although courts may get information, and strong legal powers in debt collec- involved in approving final agreements or handling tion, debt workout, and liquidation processes. appeals. Poland and Hungary are reforming their banking The new rules have had a significant impact in both sectors and implementing creditor-led workout pro- countries. Hungarian reorganization cases have been grams to help spur enterprise restructuring. In 1993 concluded surprisingly quickly, with more than 90 Poland adopted a bank-led "conciliation" process that percent of filings in 1992-93 completed during that empowers banks to negotiate workout agreements with period. The liquidation cases take much longer; most of problem debtors. An agreement reached among credi- those filed in 1992 and 1993 are still pending. Strong tors holding more than half the value of a firm's out- firms are more likely to enter and emerge successfully standing debt is sufficient to bind all creditors. More from reorganization, whereas weak firms are more likely than 400 such agreements have been successfully nego- to fail in reorganization or to file directly for liquida- tiated, involving primarily the nine large commercial tion. The same is true in Poland: firms entering con- banks and large state-owned firms. ciliation have higher average operating profits than Hungary took a somewhat different route. Its 1992 firms entering bankruptcy or liquidation. Equally im- bankruptcy law required managers of firms with portant, both processes have stimulated critical institu- arrears of ninety days or more to file for reorganization tion building in the banks (particularly their debt or liquidation. Managers opting for the former workout departments), and the Hungarian scheme has retained their jobs and were given first right to present helped build the capacity of the courts and the trustee- a reorganization plan to creditors. If creditors did not liquidator profession. approve it unanimously, the firm was liquidated. The There is, however, considerable room for improve- law led to 22,000 filings-17,000 liquidations and ment. Weak collateral laws (see Chapter 5), poor finan- 5,000 reorganizationsin 1992 and 1993. The law cial information, and (particularly in Hungary) succes- was amended in late 1993 to eliminate the automatic sive bank recapitalizations have undermined incentives ninety-day trigger and to reduce the creditor approval for creditors to use the new procedures to impose requirement to two-thirds of outstanding claims. strong financial discipline on firms. The reorganization The two approaches have much in common. Both plans that have emerged from the reforms have pro- require management to put forward a reorganization vided relief from debt service but contain few if any plan (which should contain both financial and opera- conditions on operational restructuring. Although a tional conditions) for creditors to negotiate and vote good start, it will be some time before the new regimes on, and the plan is binding on dissenting creditors if stimulate as much creditor-led restructuring as their enough of the others approve. Both procedures rely on equivalents in established market economies. output of state enterprises rose and revenues from enter- der free entry and competition and bias state firms toward prises climbed from 6 to 11 percent of GDP in just three capital-intensive production. years. State enterprisesa category that includes joint China has not taken equally dramatic steps to end the ventures with private foreign or domestic partnersnow flow of subsidies to state-owned firms, but officials are provide about half of total government revenue. Managers increasingly concerned with their poor performance rela- and workers went along with this rapid reform for three tive to the nonstate sector. State enterprises remain impor- reasons: firms retain their after-tax profits, distributing tant financial and economic actors in China. Although much of it in bonuses and higher wages; most of the dis- their share of industrial output has declined considerably missed workers were absorbed into the rapidly growing since the early 1980s, they still accounted for three- private sector; and state firms had never provided exten- quarters of investment and 70 percent of bank credit in sive social benefits. In contrast to most GEE countries and 1994. Efforts to improve state enterprise performance the NIS, however, Vietnam's state firms still benefit from have focused on improving corporate governance and a wide array of protective and distortionary measures management through contracts for managers, new (exchange controls and land policy, for example) that hin- accounting standards, the shifting of supervisory control 47 to the provinces, leasing, corporatization, and the selling involvement in infrastructure provision. Rather the con- of minority shares on domestic and foreign stock cern is with cases where governments extend their reach exchanges. Hundreds of smaller, unprofitable state enter- far beyond infrastructure firms to engage in so-called prises have been closed or merged with other firms. The industrial policy, arguing that transition justifies direct efficiency of some state enterprises has risen, although by government intervention to give industrial enterprises, how much is hotly debated. What is not disputed is that public or private, the time, protection, and resources to the benefits have been largest where enterprises are most become competitive. exposed to competition and market incentives. Advocates claim that without state direction and assis- Overall, however, the number of unprofitable state tance many high-potential firms and thousands of jobs enterprises in China has been growing steadily, because will be swept away by the imperfect functioning of half- these firms invest too much and earn too little. They face developed markets. In some cases the explicit goal is to onerous problems of excessive employment, unfunded improve performance without changing state ownership. pensions, and obligations to provide social services they For private (usually privatized) firms the typical goal is to cannot afford. Forty percent of state firms reported losses select companies with good prospects and improve their in 1995, despite paying interest on their borrowings at chances of survival. Proposed interventions include free or rates well below inflation. To the extent that they result subsidized technical assistance in preparing business plans from increased financial discipline, losses could be a mark and bankable projects, management training, loans at of progress. But losses cannot be allowed to continue below-market interest rates, debt forgiveness, and protec- indefinitely; persistent money-losers must be forced to tion from import competition. Similar policies have been restructure or close. The frequency with which the gov- associated with good results in several high-growth Asian ernment has announced new state enterprise reform pro- economies, and it is natural for officials and observers in grams suggests how difficult reform really is. This is not depressed transition economies to look longingly at surprising; a wealth of international experience, from activist measures that might offer hope. However, the economies as diverse as Japan, New Zealand, Pakistan, countries that have had some success with this approach and the Republic of Korea, indicates that state enterprise possess advantages that some CEE countries and most performance can indeed be improved, but improvement is NIS lack: disciplined and well-trained bureaucracies, sta- hard to accomplish and even harder to sustain. ble and prudent macroeconomic policies, and a long- In sum, one of the strongest messages to emerge from standing emphasis on export promotion and international transition to date is that governments that enforce finan- competitiveness. In their absence, a proactive industrial cial discipline and foster competition will stimulate policy runs the risk of continuing the costly subsidization restructuring in enterprises, regardless of ownership. But of those firms with political clout while shutting out many firms get stuck in the early stages. Most adjustments others with greater potential to succeed. have involved downsizingof output, employment, and For some enterprises the objective of government assets. Managers have been survival-oriented; like turn- intervention is to restructure and add value, to raise the around managers everywhere, they have focused on sus- price they can command upon sale. Few would disagree taining current cash flow. It will take time, and in many that the state in transition economies can play a legitimate cases a clarification and reallocation of property rights, to role in breaking up large state enterprises prior to sale, in move from this defensive reaction to a deeper strategic assisting enterprises and communities in dealing with restructuring that involves new and innovative business "social" assets (schools, clinics, housing, day care centers), strategies and investment. and in helping fund severance pay. But going beyond this is likely to be wasteful if not counterproductive. New Direct government intervention: Alluring but risky physical investments under public ownership almost In addition toor sometimes instead ofpolicies to never raise the sale price by the cost of the investment. introduce competition and increase financial discipline, And a continuation of straight subsidies to cover wage some transition governments intervene directly to carry bills and working capital compounds the pain and height- out targeted, top-down programs to restructure enter- ens the severity of the eventual cure. prises. The problem here is not with the near-universal A number of transition economies have developed practice of partial or complete public ownership of certain what are termed isolation exercises for problem enter- firms in infrastructure industries with natural monopoly prises. A set of poor performers, often the biggest money- characteristics. Transition economies' interventions in losers, are put into a "jail" and examined to determine these sectors are generally in line with those in industrial which are potentially competitive and which merit liqui- market economies, and indeed in some cases ahead of dation. Early experience with jails was not promising. them: Estonia and Hungary, for example, have sought to Inmates tended to view their isolation units more as rest exploit the new wave of opportunities for private sector homes than as prisons, since they provided both relief 48 OR D DEVELOP from creditors and exceptional resources to meet the wage to the key problem with direct government involvement: bill. More-recent isolation exercises, for example in Arme- the difficulty of picking winners based on past perfor- nia, the Kyrgyz Republic, the former Yugoslav Republic mance. Variation in performance among firms in transi- of (FYR) Macedonia, and Uzbekistan, have tried to over- tion economies is much greater than that in established come these problems by assuring prisoners that govern- market economies, and as Chapter 2 noted, neither the ments are indeed committed to their sale or closure, and past performance of a firm nor its inherited debt structure are not simply using the device to delay the day of reck- is a good guide to future viability. Even more than else- oning. For example, of twenty-nine firms assigned to the where, transition governments that try to pick winners are Kyrgyz "restructuring agency," over a twenty-four-month likely to choose poorly. period eight have been liquidated (including a 5,000- In sum, avoiding direct government intervention is employee agricultural machinery plant that the govern- likely to be the best approach in most cases. Tight, sustained ment had regarded as strategic), two have been sold, six macroeconomic policies can significantly reduce the scale of more are for sale, eleven are being downsized in hopes of enterprise losses without direct intervention. They force rendering them salable, and two are still in the diagnostic money-losers to downsize and redundant workers to seek stage. So far the exercise has cost around $20 million, of jobs in new private firms. To the extent that governments which half went to cover arrears on energy payments and must subsidizefor political or other reasonssubsidies much of the remainder to provide severance payments for should be targeted and transparent. The key is to avoid the more than 40,000 dismissed workers. Proponents argue perception that persistent poor performance is somehow that both the information supplied by external consul- socially justified and entails no painful consequences. tants and the provision of money to pay for severance The second step: Creating and allocating costs have been crucial in persuading the Kyrgyz authori- property rights ties to act. As always, however, the deciding factor is the government's willingness to accept the painful reality that Property rights are at the heart of the incentive structure downsizing and closures must occur (Box 3.2). of market economies. They determine who bears risk and A 1995 study of the 400 to 500 largest firms in Bul- who gains or loses from transactions. In so doing they garia, the Czech and Slovak Republics, and Poland points spur worthwhile investment, encourage careful monitor- Box 3.2 Coal restructuring in Ukraine Ukraine's coal industry, which employs about 800,000 agers to transfer workers from unproductive to produc- people, is in deep crisis. Output has fallen by over 40 tive mines rather than having layoffs at one mine and percent in the past five years. A Ukrainian miner pro- new hires at another, and thus would allow natural duces an average of 112 tons of coal a year, compared attrition to take care of a substantial part of downsizing. with 250 tons in Russia, 420 tons in Poland, 2,000 Fiscal support would be needed to fund closing costs, tons in the United Kingdom, and 4,000 to 6,000 tons but all new investment would be financed from re- in the United States. Up to half of Ukraine's 250 tained earnings and bank loans. A second element of mines need to be closed in the next decade if the indus- the plan would involve divesting social assets. Some can try is to regain competitiveness. Coal enterprises pro- be privatized, but others would have to be turned vide a wide variety of social services, including kinder- over to municipalities, which, to smooth the transition, gartens and housing. These are often overstaffed as would need support, as cost recovery ratios are in- well: kindergartens, for example, often have one creased from their present levels of less than 20 percent. employee for every three children. Mine closures can yield significant fiscal savings. A Any plan to restructure the coal industry will need four-year program would require about $250 million to to use market incentives, minimize social costs, and support local governments, $150 million for severance have a well-defined role for fiscal support. One ap- pay, retraining, and temporary employment assistance, proach would involve corporatizing existing mines, and $300 million for closures and environmental costs. excluding those identified as uneconomic, into joint- But closing uneconomic mines would save $200 million stock companies as a first step toward privatization or a year, and the benefits of restructuring would be even liquidation. Profit-oriented managers rather than the greater if the remaining mines could reinvest profits to government would decide on the reallocation of invest- increase productivity. It is cheaper to close uneconomic ments. Resulting mergers would make it easier for man- mines than to cover their losses indefinitely. 49 ing and supervision, promote work effort, and create a that private ownership is a significant determinant of eco- constituency for enforceable contracts. In short, fully nomic performance. specified property rights reward effort and good judg- Because most privatizations in CEE and the NIS are ment, thereby assisting economic growth and wealth cre- quite recent, judgments on their impact are just beginning ation. In addition, a wide distribution of property rights to emerge. The first signs are encouraging in many cases, can counteract any concentration of power in the political less so in others. A recent study of Hungarian firms found system and contribute to social stability. that new private companies in the sample were quicker than state firms to adjust their labor forces as demand What are property rights? changed. Privatized firms at first resembled state firms, Property rights include the right to use an asset, to permit but, encouragingly, after a year or two their behavior or exclude its use by others, to collect the income gener- looked more like that of new private firms. Enterprise sur- ated by the asset, and to sell or otherwise dispose of the veys in Poland in 1993 and Russia in 1994 concur that asset. In market economies these rights are defined in law, new private firms behave differently from, and better usually in great detail (see Chapter 5). Ownership rights than, state firms, exhibiting more dynamism and generat- to an asset may be splitfor example, a widow may have ing higher profits. In the Polish survey (and a similar one rights to the income from property left by her deceased in Slovenia) privatized firms also outperformed state com- spouse to her childrenbut this division is also clearly panies, although this may in part reflect the fact that the specified. In transition economies these rights are not at better state firms were the first to be privatized. first clearly defined or allocated. Indeed, often such dis- Other research supports the positive effects of privati- tinctions are not even recognized. zation but suggests that these vary by type of private In mature market economies the distribution of prop- owner. In Russia and Ukraine owners who had bought erty rights across the population and the legal forms their small business units at competitive auctions invested through which they are exercised are relatively stable, hav- more and realized better performance than insiders who ing evolved over centuries. In most transition economies had obtained their shops at near-giveaway prices (although the initial assignment of property rights is both rapid and even the insider-owned firms did better than state-owned partial; it could well be inefficient. Many buildings and shops). The likely impact of the mode of privatization and plots of land, for example, have been restored to precom- of the identity of the new owner is discussed further below. munist owners who are neither willing nor able to care for Poland has been slower to privatize than many other them. Similarly, most former state farms in Russia were transition economies. Some argue that its 6 percent aver- privatized as large joint-stock corporationstypically not age annual growth since 1994 shows that privatization is the most efficient ownership form for agriculture. Thus, unnecessary. But this assessment is incomplete; what for property rights to become fully effective, it is especially Poland's experience illustrates is rather the importance of important that they be tradable and free to evolve. determined macroeconomic reforms imposing financial discipline on companies, the emergence of large numbers Is privatization necessag? of new private firms, and managerial expectations of even- Does it matter whether property is public, private, or tual privatization in state firms themselves. Most of something in between? The first obvious test is whether Poland's growth has been fueled by expansion of the new privatization improves performance. An extensive empiri- private sector, not by well-performing state firms. Also, cal literature (mainly from the 1980s) comparing public the turnaround in some Polish state firms in the early and private enterprises in industrial market economies 1990s was stimulated in part by managers' belief that pri- concludes generally, but not uniformly, that private firms vatization was just around the corner. New Zealand's exhibit higher productivity and better performance than experience (Box 3.3) applies in transition economies: a public enterprises. More recent analyses of performance state with the will to impose a hard budget and expose its before and after privatization in industrial and developing enterprises to competition can expect performance in countries reach stronger conclusions in favor of private some firms to improve without changing ownership. But ownership. For example, an analysis of sixty-one priva- the gains from hard budget constraints will be larger and tized companies in eighteen countries (six developing and more likely to endure if ownership change accompanies or twelve industrial) showed, in at least two-thirds of the closely follows these reforms. divestitures, postprivatization increases in profitability, Widespread formal privatization of majority stakes in sales, operating efficiency, and capital investmentall the larger state firms is not presently on China's agenda. this, surprisingly, with no evidence of falling employ- Still, much of the Chinese economy has moved away from ment. In established market economies and middle- to state ownership, some into private hands but most into high-income developing economies there is little doubt intermediate forms of ownership. The nonstate sector has 50 Box 3.3 Locking in the gains of enterprise reform in New Zealand In 1986 the government of New Zealand launched a Results were impressive. After four years sales, major reform of its poorly performing public corpora- profits, and output per employee had increased in tions. Commercial profitability was set as the main ten of eleven companies examined. Even so, succes- goal; any remaining social objectives had to be agreed sive governments went on to privatize a number of by parliament and paid for from the government bud- the companies and contemplated privatizing several get. State-owned firms were placed on the same legal others. Why, if the reformed state firms were so footing as private companies, exposed to competition successful? wherever possible, and required to seek any new They did so because they recognized the intense dif- financing on commercial capital markets without gov- ficulty of sustaining reforms over time. In time of cri- ernment guarantees. A new Ministry of State Enter- sis governments admit the priority of commercial prises shared the ownership function with the Trea- objectives, impose harder budgets, and grant managers sury, replacing the involvement of line ministries. autonomy. But as the crisis fades or a major political Together they appointed each firm's board of direc- claim arises, commitment to managerial autonomy tors, drawing almost exclusively from the private sec- also fades. For example, the postal service was pres- tor. The board, in turn, appointed the top manage- sured to reopen small, rural post offices, and the elec- ment of the firm and set and administered annual tric power company was pushed to buy locally pro- performance targets. Managers who achieved their duced coal despite its higher cost. The conclusion of objectives were rewarded; those who did not were sub- many in New Zealand, both in the firms and in the ject to sanctions, possibly including dismissal. If the government, was that privatization was required, not government owners were dissatisfied, they could and necessarily to improve performance in the short run sometimes did--dismiss the board of directors. but to lock in the gains of earlier reforms. grown much faster than China's state enterprises despite approach than because continued state ownership pre- an imprecise property rights framework that is quite alien serves the ambiguous property rights that allow profit to Western legal traditions. What accounts for the differ- shifting, tax evasion, and asset looting, largely for the ben- ences in performance? Box 3.4 offers an answer. efit of incumbent managers. Ownership matters. But the need to privatize is not Bulgaria's experience illustrates the point. A coalition equally urgent in all settings. Slower privatization is viable government liberalized extensively and early and imple- (although not necessarily optimal) if the government, or mented a determined stabilization program. Swift privati- workers themselves, are strong enough to assert control zation was anticipated. But a new administration in 1991 over enterprises and prevent managers from stealing assets, diluted the emphasis on reform and blocked adoption of a and if saving and growth in the nonstate sector are high. privatization program until mid-1995. During these four But where governments are weak and enterprise managers years the Bulgarian state lost much of its capacity to mon- strong, or where restructuring needs dwarf available funds, itor enterprise performance and management. Managers privatization is urgent. Indeed, in these settings the likely channeled enterprise assets and cash flow to themselves, and less desirable alternative is "spontaneous" privatiza- leaving little to the state but liabilities. Losses of Bulgarian tion, in which managers purchase assets cheaply or seize state enterprises, which averaged more than 12 percent of them outright, often in collusion with the political elite. In GDP between 1992 and 1994, were covered by loans many countries before the privatization process is formal- from an increasingly insolvent banking system. Bulgarian ized (such as Hungary and Russia in 1988-91), in several observers concluded that "unclear property rights [are] where privatization has been accepted in theory but stalled turning from a legal to a major macroeconomic problem." in practice (Belarus, Bulgaria, Ukraine), and even to some Privatizing larger enterprises extent in the East Asian transition economies that have eschewed formal privatization, assets or income flows have Privatizing large and medium-size enterprises has proved slipped out of state hands and into private control, if not far more difficult than originally thought. Policymakers outright ownership, through a variety of methods. These have to weigh complex and often competing goals, satisfy transfers are often illegal and widely resented. Indeed, in a multitude of competing stakeholders, and cope with the some cases privatization has been delayed less because of administrative difficulty of privatizing thousands of firms political philosophy or uncertainty about the optimal in a relatively short time and without mature, functioning 51 Box 3.4 China's township and village enterprises China has developed several halfway forms of indus- group: a traditionally stable local community and, trial enterprise that are neither state owned in the clas- in particular, its government and I'VE managers. sic sense nor privately owned in the capitalist sense. Studies show the enormous importance of TVE One important configuration is the township and vil- profits in local budgets and the close links between lage enterprise (TVE), owned by local governments local economic performance and the status, income, and citizens. These mainly produce consumer goods and career prospects of local officials. for domestic and international markets. TVEs are Decentralization plus financial discipline. The 1984 generally of two types. The first, owned by the local decentralization of fiscal power in China allowed government, acts like a holding company, reinvesting subnational governments to retain locally generated profits in existing or new ventures as well as in local revenues, creating powerful incentives for the devel- infrastructure. The second, more recently developed opment of local industry. Under this system a non- type is much closer to private enterprise in that most performing TVE becomes an unaffordable drain on are effectively controlled if not formally owned by an a limited local budget. In the end persistent money- individual. Still, they too maintain close fiscal ties to losers are closed and the work force is shifted to more the local government. profitable lines. The growth and performance of TVEs have been Competition. Studies also show intense competition extraordinary. Their share in GDP rose from 13 per- for investment (including foreign investment) cent in 1985 to 31 percent in 1994. Output has grown among communities with TVEs. Success in attract- by about 25 percent a year since the mid-1980s; TVEs ing investment is affected by reputation and local now account for a third of total industrial growth in economic performance. China. The nonstate share of industrial output in Market opportunities and rural saving. A past bias China climbed from 22 percent in 1978 to a startling against light industry and services has created vast 66 percent in 1995. TVEs have created 95 million jobs market opportunities, buttressed by high rural sav- in the past fifteen years. Capital-labor ratios in collec- ing and demand following the agricultural reforms tive industry in China are only 25 percent of those in of 1978 and by the limited scope for emigration the state sector. Yet labor productivity (output per from rural areas. capita) is close to 80 percent of the level in state enter- Links with the state enterprise sector. The large state- prisesand rising at more than 10 percent a year. owned industrial sector provides a natural source of Total factor productivity in TVEs is higher than in the demand, technology, and raw materials for many state sector and is growing at 5 percent a year, more TVEs. Foreign investment from Hong Kong and than twice the rate in state enterprises. Taiwan (China) plays the same role for many others. Several factors explain this remarkable growth and superior record of efficiency: TVEs will continue to grow, but they must also evolve. As their demands for finance increase and ex- Kinship and implicit property rights. Strong kinship tend beyond their communities, and as people become links among rural Chinese villagers encourage more mobile, the TVEs' limited and implicit property responsibility in entrepreneurs. The sharing of im- rights will need to be better defined and made more plicit, if fuzzy, property rights leads to a productive transferable. Aspects of the TVE phenomenon are spe- combination of risk and reward sharing between cific to China, but the experience holds important entrepreneurs and local governments. Nonetheless, lessons for other transition economies: the importance incentives facing TVEs are more like those of private of liberal entry, competition, hard budget constraints, firms in that the residual profits accrue to a limited and appropriate fiscal incentives for local governments. capital markets. Approaches to privatization abound, from smaller programs of debt-equity conversion or public extensive efforts at sales to strategic owners, to insider offering of shares on newly emerging stock markets. buyouts, to innovative voucher programs involving the Each approach to privatization creates tradeoffs among creation of large and powerful new financial intermedi- various goals (Table 3.1). Privatizing countries typically aries. These efforts are often complemented by extensive want many things: to increase efficiency of asset use by programs of restitution to pretransition owners and by improving corporate governance; to depoliticize firms by 52 Table 3.1 Tradeoffs among privatization routes for large firms Objective Better Speed Better access More corporate and to capital government Greater governance feasibility and skills revenue fairness Method Sale to outside owners .1111.11 Management-employee buyout Equal-access voucher privatization Spontaneous privatization cutting links to the state; to move quickly to create own- long run if it promotes the development of capital markets ers who will support further reform; to increase firms' (and subsequent rearrangements of ownership) and of access to capital and expertise; to bolster government intermediary monitoring institutions for the economy as revenues; and to ensure a fair distribution of benefits. a whole. Within this range countries have different priorities, and What is effective corporate governance? A primary eco- some want to proceed more quickly than others. Hun- nomic rationale behind privatization is to create owners gary, with its large foreign debt, has always viewed rev- who are motivated to use resources efficiently. But enues as critical, the Czechs and the Romanians less so. changes in ownership will not change managerial behav- To Russian reformers a speedy break with the past was ior if the new owners lack the power, incentives, and capa- paramount, while the Poles have forgone speed and bility to monitor the managers and ensure that they act in entered into long debates over fairness. The Czechs have the firm's best interest. Owners must also have the power consistently stressed privatization's depoliticizing role, to change managers, since it often takes a shake-up at the while Estonia's privatization program sought out "real" top to spur deep restructuring. For small firms such cor- owners capable of bringing new money and management porate governance is straightforward: usually the owners skills to bear. are themselves the managers. It is with large firms that the Table 3.1 presents only a partial view of these trade- separation of ownership and management creates a need offs. A key additional objective in all transition settings is for monitoring. Direct monitoring by shareholders is one long-term institution building. Privatization can spur way to supervise managers. Another is to sell shares development of such fundamental market institutions as when performance is weak and let falling stock prices dis- capital markets, legal systems, and business-related profes- cipline managers. In the early stages of transition, direct sions. By the same token, each approach to privatization monitoring is likely to be particularly important, because sets off a complex process of institutional and ownership markets for capital and managerial labor are not suffi- change whose long-run results may differ considerably ciently developed to exert strong competitive pressures on from the shorter-run picture. For example, mass privati- managers. zation may not produce the best owners in the short run, Political feasibility is a sine qua non of any privatization but it might lead to better corporate governance in the program. There is a profound tension between the need to 53 reward stakeholdersmanagers, workers, officials in the middle class. The various routes and illustrative country former branch ministriesand the desire for good eco- experiences are outlined below and in Table 3.2. nomic outcomes that contribute to economic restructur- ing and institution building and reinforce the benefits of Sales to outsiders reform in the public eye. Competition among stakehold- In the early days of transition most CEE countries hoped ers has affected the design of most privatization programs. to privatize by selling state enterprises case by case as The former Czechoslovakia and the former East Ger- going concerns. This was the best-known model, which many, with their centralized power structures and well- had been very successful in established market economies developed administrative capacity, could design and like the United Kingdom and in middle-income develop- implement top-down privatization programs. Poland, ing countries like Chile. Sales to outside "strategic" or Slovenia, and Russia, with more decentralized power "core" investors were also favored because they would structures, well-organized employees (in Poland and bring in revenue and turn the firm over to "real" owners Slovenia), and strong managers (in Russia), had no such possessing the knowledge and incentives to govern the option. Yet accommodating stakeholder interests is risky company efficiently and the capital to restructure it. and often conflicts with longer-run economic and politi- Sales to outside investors have largely fulfilled expecta- cal goals. Newly privatized entities may fail to restructure tions about performance improvements. But they have because of inappropriate corporate governance. Poorly proved costly and slow, far more difficult to implement managed privatization, even if it delivers short-term rev- than anticipated, and most important, few in number. enue or performance gains, may be seen as corrupt or One reason is the limited amount of domestic capital, highly inequitable, concentrating economic and political combined with the political tensions that can accompany power in the hands of a domestic elite or foreign investors a large dependence on foreign capital. Even where domes- rather than expanding an independent and decentralized tic capital is sufficient, insiders (managers and other Table 3.2 Methods of privatization for medium-size and large enterprises in seven transition economies (percentages of total) Management-Equal-access Sale to outside employee voucher Still in Country owners buyout privatization Restitution Othera state hands Czech Republic By number') 32 0 22c 9 28 10 By valued 5 50 2 3 40 Estoniae By number 64 30 0 0 2 4 By value 60 12 3 10 0 15 Hungary By number 38 7 0 33 22 By value 40 2 0 4 12 42 Lithuania By number <1 5 70 0 0 25 By value <1 5 60 0 0 35 Mongolia By number 0 0 70 0 0 30 By value 0 0 55 0 0 45 Poland By number 3 14 6 0 23 54 Russiac By number 0 551 11 0 0 34 Note: Boxed numbers show the dominant method in each country. Data are as of the end of 1995. Includes transfers to municipalities or social insurance organizations, debt-equity swaps, and sales through insolvency proceedings. Number of privatized firms as a share of all formerly state-owned firms. Includes parts of firms restructured prior to privatization. Includes assets sold for cash as part of the voucher privatization program through June 1994. Value of firms privatized as a share of the value of all formerly state-owned firms. Data for Poland and Russia are unavailable. Does not include some infrastructure firms. All management buyouts were part of competitive, open tenders. In thirteen cases citizens could exchange vouchers for minority shares in firms sold to a core investor. Source: Gray, background paper; World Bank data. 54 4,0A employees) in some countries have been able to block progress: five years of effort by various administrations has sales. More generally, the process is held back by the sheer produced about 200 sales. The conclusion is that sales, magnitude of the job of evaluating and negotiating deals although a useful element in the privatization process, one by one, and then of following up to be sure that the cannot in most circumstances be the sole or even the pri- buyers fulfill contract provisions. For example, in Ger- mary method. many it is reported that 20 percent of the thousands of A second form of sale to outsiders involves floating privatization contracts signed by the Treuhandanstalt (the shares on public stock exchanges. The infancy of stock privatization agency) are in dispute. exchanges (see Chapter 6) limits this approach in all the Placing a value on firms to be offered for sale is partic- transition economies. Furthermore, the method works ularly problematic. The issue is only partly one of inade- only for firms with good financial prospects and strong quate accounting. Economic and political turbulence reputations. Even Poland, which has had the most success often make it impossible to estimate a firm's eventual with this approach, has privatized fewer than thirty firms value. Appraising and assigning responsibility for past in this manner. Hungary has had no greater success. Ini- environmental damage is also a thorny issue (Box 3.5). tial public offerings are clearly not the answer to the need Governments that insist on high minimum prices (as has for rapid, large-scale privatization, although at the margin occurred in Hungary and more recently in Ukraine) may they can help develop capital markets and share trading. find no takers. A final disadvantage of the sales approach is its perceived unfairness. Many ordinary citizens cannot Management-employee buyouts participate and find the process nontransparent and arbi- Management-employee buyouts are a widely used alterna- trary, if not corrupt. tive to sales, notably in Croatia, Poland, Romania, and These obstacles have been even more debilitating than Slovenia. Many of the firms privatized through Lithuania's expected. The German Treuhandanstalt was able to pri- and Mongolia's voucher programs effectively became man- vatize (or liquidate) its 8,500 state enterprises relatively agement-employee buyouts as employees and their families quickly, but at an enormous cost in terms of both skilled used vouchers and cash to buy major stakes in their own personnel and explicit or implicit subsidies to buyers. firms. In addition, several voucher-based programs, such as Among other transition economies, only Hungary and those of Georgia and Russia, gave such large preferences to Estonia have privatized a significant share of their state insiders that most privatized firms were initially owned pri- enterprises through direct sales. No other country has marily by managers and employees. even come close to these achievements. In Poland the Buyouts are relatively fast and easy to implement, both power of workers to block privatization has slowed politically and technically. In theory they might also be Box 3.5 Is environmental liability a serious barrier to privatization? A prospective investor sizing up an industrial plant in were unable to assess environmental liabilities properly a transition economy wants clear agreement in advance because of insufficient time or information, or because on how responsibility for environmental damage regulators have since tightened the relevant standards. caused by the plant will be allocated. Without such an The result is often a prolonged period of conflict. In agreement, the assumption is that the environmental the Czech case it is increasingly clear that the strict authorities will impose hefty cleanup costs on the com- transfers of environmental liabilities to companies dur- pany down the line. The Treuhandanstalt's sales pro- ing the early rounds of voucher privatization will not cedures included an assessment of environmental lia- stick. Discussions are under way to come up with ways bilities, followed by an agreement on corrective for the state and the new owners to share cleanup costs. measures, whose cost was taken into account in the An alternative approach is for the state to retain final sale price. Other countries, however, lack the responsibility for some or all environmental liabilities, skills, financial resources, and even the desire to imitate usually defined on the basis of an environmental audit the German model. Environmental liabilities have usu- prior to sale. But it can be difficult to make the agree- ally been ignored. Transferring them with the plant ment credible: what prevents the government from the philosophy underpinning Czech and Polish legisla- later reneging? Setting up a special cleanup fund to dis- tion is one solution. But after a sale the new owners charge the government's commitments might be one may claim, often with some justification, that they way to make them more believable. 55 better for corporate governance if insiders have better and the inability to install procedures to protect minority access than outsiders to the information needed to moni- shareholder rights and to promote secondary trading, are tor managers. In the early stages of privatization in Slove- now proving costly. Managers control their insider-owned nia, for example, insiders voluntarily purchased a number firms with little if any employee-shareholder influence. of successful firms, which have generally continued to per- Some managers have tried, often illegally, to prohibit form quite well. workers from selling their shares to outsiders. Some have However, the risks and disadvantages are many, partic- used even less transparent means to block participation by ularly in large-scale buyout programs that include many either employees or outsiders or to transfer assets or prof- unprofitable firms in need of restructuring. One disad- its to other firms they control. Given the weakness of laws vantage is that the benefits are unevenly distributed: and institutions, the scarcity of information, and in some employees in good firms get valuable assets while those in cases the laxity of competitive pressures (due in part to the money-losers get little or nothing of value. Another is that incomplete macroeconomic stabilization before 1995), governments typically charge low prices to insiders and few if any outside controls existed to thwart such behavior. thus realize little revenue. Most important, management- This is as much a problem of efficiency as of transparency: employee buyouts may weaken corporate governance, par- behavior of privatized Russian firms is so far hard to dis- ticularly in transition economies, where controls on man- tinguish from that of state firms. agers are less developed than in a fully fledged market This kind of insider ownership has not been stable on economy and product and capital markets cannot be such a large scale elsewhere in the world and almost cer- counted on to enforce discipline. Insiders are generally tainly will not be in Russia. It is likely eventually to evolve unable to bring in new skills and new capital, yet may deter at least in part into ownership by outside investors (banks, outsiders who can from investing. Managers or employees investment funds, or other domestic or foreign investors), may simply prevent outsiders from buying shares. Or out- although an intermediate stage is likely to see increased siders may hesitate to invest in firms with significant insider ownership by managers as they buy up employee shares or ownershiplegally or illegally acquiredbecause of divert assets to other companies they own. How long this potential conflicts of interest between inside and outside evolution will take, however, depends largely on the gov- owners. For example, inside shareholders may vote to pay ernment. If enterprises cannot rely on either open or hid- themselves higher salaries even if doing so reduces profits den subsidies to cover their losses, and if price and trade and share value. The bottom line is that management- liberalization intensifies competition, some managers will employee buyouts can lead to managerial and worker be forced to turn outside for financing. Some evidence entrenchment that blocks further reform. indicates that outsiders are finding ways to acquire signif- Russia's mass privatization program of 1992-94, icant stakes in some privatized firms. A recent survey although it used vouchers, was basically a management- found that insider ownership in a sample of 142 firms fell employee buyout program because of its preferential treat- from 65 percent in 1993 to 56 percent in 1995a mod- ment of managers and workers. These insiders could est move in the right direction. choose between receiving a minority of shares at no cost On the other hand, lax Russian macroeconomic and and purchasing a majority of shares at a large discount. competition policies could combine with deficiencies in They chose the second option in about 70 percent of law enforcement to prolong insider control, further delay cases. These transfers were handled in "closed subscrip- restructuring, and permit unfair and fraudulent transac- tions" in advance of open voucher auctions, at which tions. In some of the largest and richest firmsin the oil managers and workers could use their vouchers to add to and gas sectors, for exampleinitial privatizations were their ownership. In the end insiders acquired about two- particularly murky, and sales of remaining shares have thirds of the shares in the 15,000 privatized firms. Out- been far from regular. And the "shares for loans" schemes siders obtained 20 to 30 percent (about 10 to 15 percent carried out in 1995 generated less revenue than expected each went to investment funds and individual investors), and were decidedly opaque. Overall, many Russians and the rest remained in government hands. resent the way privatization has been conducted, feeling In many respects Russia's mass privatization was a they have received a pittance while some managersand major achievement, particularly in light of the political their high-placed political supportersgained fortunes. and economic turmoil that confronted Russian policy- One study estimated that the 19 percent of adult Russians makers in the early 1990s. But the program well illustrates employed in privatized firms obtained 56 percent of the drawbacks of management-employee buyouts and, equity sold through June 1994; the remaining 81 percent more broadly, the serious tensions between political feasi- who received only vouchers ended up with 15 percent of bility and economic desirability. The extensive preferences the divested assets. Transactions in 1995 almost certainly given to managers and workers to garner their support, added to the disparity. 56 Ukraine presents another case of insider entrenchment. stark contrast to the experience of Mongolia, which for- Although generally slow to privatize, the government has bade the entry of intermediary funds and ended up with implemented some management-employee buyouts. It heavy insider ownership. introduced a voucher privatization program in 1994-95 Are the Czech funds active owners, capable of exercis- but has so far failed to carry it through effectively. Macro- ing good corporate governance? Although it is too early to economic reforms have been slower than in Russia, and judge definitively, some funds are developing both hands- some firms still have ready access to state subsidies. A on shareholder monitoring (as practiced in Germany and recent survey of privatized companies in both countries Japan) and active share trading (more common in the indicated that Russian insider-owners, facing somewhat United States) as tools for monitoring managerial perfor- greater financial discipline, had taken more steps to mance. These funds are putting representatives on com- improve efficiency and were less hostile to outsiders than pany boards, demanding better financial information, and their Ukrainian counterparts. These results point once imposing financial discipline on the firms they own. They again to the importance of financial discipline in promot- are trading large blocks of shares among themselves or ing restructuring and ownership change in firms priva- selling them to new strategic investors, and a moderately tized through management-employee buyouts. active share market has developed, on the Prague Stock Exchange and in the much larger over-the-counter sys- Equal-access voucher privatization tem. Clearly, however, patterns of ownership in the Czech A third form of privatization distributes vouchers across Republic are still in flux. Some observers hope that the the population and attempts to allocate assets approxi- funds, together with banks or in place of them, will mately evenly among voucher holders. Such programs become the cornerstone of the financial infrastructure excel in speed and fairness. But they raise no revenue for essential for capital allocation and corporate governance the government, and they have unclear implications for in a market economy. Others expect the funds' influence corporate governance. Mongolia, Lithuania, and the for- to dwindle rapidly as strategic investors pick up control- mer Czechoslovakia were the first to implement this form ling blocks of shares. In either case the goal of institution of privatization. Albania, Armenia, Kazakstan, Moldova, building appears to be well served by this approach. Poland, Romania (in its 1995 program), and Ukraine The Czech experience illustrates how a well-designed have followed, and Bulgaria is now preparing such a pro- voucher privatization program can overcome many prob- gram. Some countries (such as Georgia and Russia) have lems. It can depoliticize restructuring, stimulate develop- used vouchers but given strong preference to insiders, as ment of capital markets, and quickly create new stakehold- discussed above. A few countries (Estonia and Romania in ers with an interest in reform. But plenty of obstacles lie its 1991 program) have used vouchers to transfer only along the road from mass privatization to efficient minority stakes in certain firms. Hungary, FYR Macedo- capitalism. Governments need to implement complemen- nia, and Uzbekistan are among the few privatizing transi- tary reformsfor example, regarding the supervision of tion economies that have specifically rejected vouchers, financial intermediaries and the regulation of natural arguing that shares given away are perceived by recipients monopolies (Box 3.6). The former Czechoslovakia and to have no value, and that voucher programs merely delay Russia allowed free entry of investment funds, whereas the arrival of "real" owners. Poland and Romania called for the top-down creation by The Czech Republic's mass privatization program has government of a predetermined number of funds. Each been the most successful to date. In two successive waves approach has its risks. A particularly vexing question is: (the first while part of Czechoslovakia), the Czechs trans- who monitors the monitors? Supervising financial agents, ferred more than half the assets of state enterprises into difficult enough in established market economies, is even private hands. Citizens were free to invest their vouchers more problematic in transition economies, where norms of directly in the firms being auctioned. However, to en- disclosure and fiduciary responsibility are weak, and watch- courage more concentrated ownership and so create dog institutions and oversight mechanisms are in their incentives for more active corporate governance, the pro- infancy. Policymakers need to think carefully about how to gram allowed the free entry of intermediary investment regulate funds to protect individual investors in the funds funds to pool vouchers and invest them on the original and other minority shareholders in firms partly owned by holders' behalf. More than two-thirds of voucher holders the funds. chose to place their vouchers with these competing funds. Privatizing small firms The ten largest obtained more than 40 percent of all vouchers in both waves (about 72 percent of all vouchers Small firms have proved much easier to privatize than held by such funds), leading to concentrated ownership of large ones. Most small firms were engaged in trade and the Czech industrial sector in these large funds. This is in services, activities with simple technology and easy entry. 57 Box 3.6 Do's and don'ts in privatizing natural monopolies Privatizing public utilities and infrastructure industries, Russiaare joining the worldwide trend toward infra- such as electricity, telecommunications, natural gas, oil structure privatization. Others are considering doing pipelines, water supply, ports, airports, and railroads, so. In the energy sector Hungary has gone the furthest raises complex issues that do not apply to other indus- in privatizing through sales. It has adopted a regulatory tries. These industries are typically large and capital- framework, raised average prices to near world levels, intensive. They are critical to the functioning of the and split companies into smaller entities. It has sold economy and hence often viewed as strategic. Parts of majority stakes in its oil and gas production company some of them are natural monopolies in which compe- and several power generation and gas and power distri- tition is technically impossible. And for largely political bution companies to strategic investors. This desire to reasons they often charge low, controlled prices that sell firms for cash, motivated in part by the need result in financial losses. Privatizing them involves at to raise revenues, has spurred price and regulatory least four steps: reforms because prospective buyers need the assurance these reforms provide. Hungary has learned from its Introducing competition by separating the monop- 1992 and 1993 attempts to sell electric power and gas oly parts from the competitive parts, allowing new distribution companies, which failed because of a lack firms to enter the competitive parts, and possibly of proper pricing and regulatory policies. restructuring the monopoly parts The Czech Republic and Russia provide an inter- Establishing laws and institutions to regulate price esting contrast to Hungary's sales approach. They and quality in the monopoly parts included partial stakes in their large, integrated energy "Commercializing" the enterprises and companies (such as 30 percent of the Czech power Attracting private sector participation through con- company and 50 percent of Russian power and gas cession arrangements or privatization (whether sales companies) in their voucher privatizations. These to strategic investors, mass privatization, or a mixture stakes were essentially given away, and so generated no of both). demand for price and regulatory reform. Household Commercialization involves creating enterprises energy prices remain low, and neither country has that, although still public, are similar in structure and made much progress in developing effective regula- operation to private enterprises. Enterprises should be tory systems. Any future increases in government- removed from the control of ministries and converted controlled prices will generate huge windfalls for the into joint-stock companies reporting to a board of new owners. Because of their low initial levels of directors. Prices should be increased to efficient levels debt, the companies are building large cash surpluses as and subsidies reduced and targeted (see Chapter 2). industrial energy prices approach world levels. In the The financial structure of these enterprises should be meantime there is little corporate governance from similar to that of private companies: assets may need to outside owners, creditors, or government. Although in be revalued and debt (initially owed to the government) other ways these voucher privatization programs (par- may need to be added to the balance sheet as a liability. ticularly the Czech one) were impressive, the govern- A growing number of transition economiesmost ment's lack of attention to complementary reforms in notably the Czech Republic, Estonia, Hungary, and the area of natural monopolies is problematic. None of the major obstacles to privatizing larger entities minimum prices, for example, or by forcing buyers to stay high capital requirements, major restructuring needs, in the same line of business. and regulatory and governance weaknessesapply to Small sales are also easier politically. Organized oppo- small firms. Local authorities can take charge of transfer- sition has been weak. Services had been neglected under ring small units, and because they are easier to value, central planning, resulting in shortages, queuing, drab many parties can gain access to enough information for stores, and limited variety. Privatization has led to quick open auctions to succeed. Even where insiders are given improvements in quantity and quality. Progress in this strong preference (as in Russia), assets can be quickly area can also provide an impetus for reforms elsewhere in transferred to higher-value uses through secondary mar- the economy. Privatized small businesses can serve as kets. Governments, however, must resist the temptation schools for entrepreneurs and investors and can absorb to impose artificial limits on property transfers, by setting labor being shed from large-scale enterprises. 58 The former Czechoslovakia, Hungary, and Poland were too large to be managed effectively. Like large state- were the first countries to achieve widespread ownership of owned industrial firms, they were kept alive through easy small businesses, using very different approaches. The access to bank credit and extensive subsidies to both farms Czechs implemented a centrally conceived but locally ad- and consumers. Coexisting with these large farms was a ministered system of open, competitive auctions. Poland's stunted private sector of small, individually owned farms program, like its large-scale privatization program, was and household plots. This dual structure deprived the somewhat ad hoc and gave large concessions to employees. state sector of efficient labor and the private sector of effi- Hungary had a reasonably sized trade and services sector cient technology. Reforms in the early 1990s cut con- even under central planning, with strong, decentralized sumer subsidies and other transfers to agriculture. The managerial control through leasehold. This sector grew less demise of the protected markets of the CMEA was an through widespread privatization than through the entry additional severe blow. Demand plummeted, particularly of private competitors. Following these leaders, most other for meat and milk, and overall agricultural output fell by transition economies have carried out substantial small- a quarter to a third. Some governments then squeezed scale privatization, and Albania, the Baltic states, Croatia, agriculture even harder by retaining partial price controls Russia, and Slovenia have caught up with the early starters on output while easing controls on inputs. Agriculture in terms of the percentage of small firms divested. suffered a sharp fall in profitability. Russia has divested most of its small units, but as was Clear property rights, assigned to people rather than true of large-scale privatization, insiders have ended up collectives, are as important in agriculture as in industry. with much of the ownership. This is worrisome. Studies Much of China's success can be attributed to its move of small privatization in Central Europe, Russia, and toward more individualized land rights through explicit or Ukraine show the need to bring in outsiders, who tend to implicit long-term leases. Commitment to full private invest more and supply services better. Czech-style auc- ownership of agricultural land has been strong in Central tions result in a more competitive structure of ownership Europe but partial in Belarus, Moldova, Russia, Ukraine, than other privatization methods and bring in the largest and the Transcaucasus. In Central Asia Turkmenistan number of outside investors. But political realities cannot allows private land ownershipwith no right of transfer. be ignored. Where insiders are strong enough to block (The constitutions of some other Central Asian republics outsider participation, privatization to insiders is still bet- forbid private landholding.) Where memory and docu- ter than keeping the assets under state ownership, espe- mentation of prior ownership are strong, as in much of cially in the case of small firms, where competition can CEE and the Baltics, restitution of land has prevailed (Box quite easily force subsequent restructuring and reshuffling 3.7). Elsewhere land rights have been distributed to of ownership. employees of state farms and other rural residents through in-kind transfers, as in Albania and Armenia, or through Privatizing and restructuring farms paper entitlements (legal recognition that the holder owns Chinese agriculture was collectivized in the 1950s, effec- a part of a cooperatively farmed unit), as in Belarus, tively stifling individual incentive. Agriculture was then Moldova, Russia, and Ukraine. heavily taxed through price and marketing controls until Privatizing farms is different from privatizing indus- 1978, when the household responsibility system was tries. For two reasons, reorganizingor restructuring introduced. This broke up collective farms and vested has to be an integral part of the privatization program. households with use rights over the land they worked. It The first relates to economies of scale: these are limited in also relaxed discriminatory price policies and controls over farming, and supervising large numbers of workers is marketing. The result was a dramatic increase in agricul- costly. Yet central planning left farms that are gigantic by tural production. Higher rural incomes followed, raising world standards. Russian farms still average 6,000 local demand for food, while the government continued hectares; in 1987 only 3 percent of U.S. farms exceeded to subsidize food in urban areas. The boom in agriculture 840 hectares. Russia has corporatized many former collec- helped propel growth throughout the economy. Vietnam tive farms and divided ownership shares among members, went through a similar process in the mid-1980s, passing but this does little to improve labor incentives. On the from importing to exporting rice in a very few years. In other hand, restitution and distribution in kind have in both countries market forces now mainly determine agri- some cases gone too far in the other direction, creating cultural prices and production. many new owners of small holdings (often less than 2 Agricultural reform has been harder in CEE and espe- hectares) that may be too fragmented to take full advan- cially the NIS. In contrast to China, agriculture in these tage of the limited economies of scale that do exist. countries was both highly mechanized and heavily subsi- The second reason why reorganization needs to accom- dized under central planning. Collective and state farms pany privatization is that farms are poorly suited to the 59 Box 3.7 The pros and cons of restitution Most communist regimes seized large amounts of pri- arbitrary, creating uncertainty that may interfere with vate property. Restitution of this property to precom- other privatization methods and clog the judicial sys- munist owners or their heirs is appealingbut fraught tem. In the Czech Republic, for example, tenants in with difficulties. The Baltic countries and most of the restituted apartments have clashed with new owners CEE countries have taken steps to reverse earlier over rights and responsibilities. Some interested private confiscations by paying compensation or returning parties have been afraid to purchase businesses for fear property to former owners. Among the most aggressive of restitution claims. In Romania land often could not efforts (besides those in the former East Germany) be returned to its former owners because it had been have been those of Bulgaria, the former Czechoslova- converted to nonagricultural uses; the allocation of kia, and Slovenia. All three passed laws providing for alternative plots resulted in more than 300,000 court extensive restitution of land, housing, and enterprises, actions. Restitution of agricultural land was compli- either in kind (if possible) or through substitute prop- cated and slowed in the Czech Republic by lack of erty, securities, or money. Estonia, Latvia, and Lithua- proper title documentation. nia passed laws providing for restitution of urban and Hungary's program of compensation coupons has rural land; about 1 million people have filed claims been less disruptive but also less far-reaching. Privati- in the three countries. Romania has aggressively pur- zation transactions have not been burdened by the sued in-kind restitution of agricultural land, through uncertainty of potential compensation claims, and which about 2.4 million private farms have been conflicts between competing claimants have not over- created. Hungary is one of the few holdouts: it has burdened the courts. Compensation coupons are opted against in-kind restitution in favor of coupons traded on the Budapest Stock Exchange and provide a that can be used to purchase privatized property useful source of domestic capital to purchase privatized (including land). firms. From an economic perspective Hungary's Restitution in kind can certainly contribute to pri- approach appears sensible, although some see it as less vate sector development, particularly in retail trade and fair, and it contributes less to privatization and private services. However, it can be complex and sometimes sector development in the short run. corporate form. Most corporate farms in North America, nization through share allotment brings little or no for example, are family farms incorporated for tax pur- change to traditional farms. Shareholders need a mecha- poses, not companies with many shareholders. Secondary nism for converting their stock into real assets such as markets in shares of farm corporations are virtually land, farm equipment, and buildings. One of the few spe- unheard of. Corporatizing collective and state farms cific mechanisms that has been implemented (on a pilot therefore creates farm structures with no counterpart in scale in Nizhniy Novgorod, Russia) is the internal auction. market economies and no ready mechanism for their After an initial period of share distribution, public educa- evolution and reorganization, since share trading on sec- tion, and asset valuation, participants bid their shares ondary markets is unlikely to develop. in auctions against the farm's real assets. The farm is The reorganization of farmholdings should concen- then liquidated, and the new enterprises created through trate on establishing and documenting individual owner- the auction are registered. By mid-1995 sixty-eight farm ship of land and nonland assets and on creating markets enterprises had gone through this process. Out of five through which owners can adjust farm size and capital farms in the earliest stage of the program (1993-94), intensity. Where owners choose to farm jointly, they twenty collective enterprises, seventeen family farms, and should retain individual ownership of their parcels and six individual businesses were created. This is a promising not be required to transfer title to the group or enterprise beginning. in common. Nonetheless, over sixty years of nonprivate Whatever mechanism of initial privatization is farming in parts of the NIS has instilled a view that land adopted, the critical need is for freely functioning land is not a commodity like any other, and that land markets markets. Such markets provide flexible mechanisms for should be highly constrained. This has created consider- reorganization, preventing resources from being locked able resistance to change. into the forms created in the early stages of reform. Until Varying share systems for farmland and other farm late 1992, for example, Hungary allowed shareholders to assets have been adopted in much of the NIS. But reorga- propose a package of assets to trade for their shares and 60 then to withdraw to form a new unit. If the remaining Slovak Republics, and Slovenia local governments still shareholders did not agree, the entire farm underwent an own large amounts of retail and office space and vacant internal auction against shares. Although a natural tension land. Hungary has managed to free up the commercial exists between the stability needed for operation and the rental market even though it has neither privatized exten- ease of exit needed for flexible evolution, the latter is crit- sively nor raised rents to market-clearing levels. Occu- ical in the transition environment. pants (generally with long-term lease rights at below- market rents) are assured the right to sublet, provided they Privatizing commercial real estate pay 20 percent of the "profit" (the difference between the Commercial real estate was considered to have no pro- rent they charge and the rent they pay) to local authori- ductive value under central planning. In market econ- ties. A large part of the market for commercial space oper- omies, however, commercial real estate is a vast store of ates in this manner. The Baltic countries and Poland, wealth, often larger than industrial plant and equipment. despite advances in adopting commercial management Real estate is also a critical factor in new business entry; practices, have not transferred much commercial real start-ups need access to premises or, equally important estate to private hands. Other NIS and Romania have (given the poor state of many existing buildings), access to made little progress on paper or in practice, although vacant land and permits to construct new buildings. Both some cities and regions are clearly ahead of others. are hard to come by in many cities in transition econ- A major reason for the slow pace of privatization and omies; the result is a severe shortage of commercial space, new private construction is the conflicting incentives of which is blocking private sector development. local governments that control most commercial real Reformers had have meager success in privatizing com- estate. The more progressive and honest local govern- mercial real estate: no transition economy has yet em- ments realize that allocating this real estate efficiently can barked on a systematic program. What progress some spur rapid private sector growth and increase their rev- countries and cities have achieved has come as a side effect enues. But other local governments hold on to their of other privatization initiatives. Bulgaria, the Czech and monopoly power to allocate scarce space (often at below- Slovak Republics, and Slovenia included substantial market rents) and to develop new space, to some extent amounts of commercial real estate in their restitution pro- because of the irregular income that can be derived. Own- grams (see Box 3.7). Many countries have transferred ership is not their only source of power. Local govern- rights to commercial real estatebut often only lease ments also provide the services that make commercial rightsto occupants or to the highest bidders through space usable, including power, water, sanitation, and fire small privatization programs. In both restitutions and protection. They also regulate development. Some gov- small privatizations new owners have had to deal with the ernments enter into direct competition with private busi- strong tenancy rights of current occupants. For example, nesses by developing land themselves or by setting up one external investor gave up efforts to purchase a hotel joint ventures in commercial activities, using real estate as site in Prague in 1994 when it could not reach agreement their contribution. The conflicts of interest among these with the site's three tenants. In Bulgaria owners by resti- many public roles lead to the creation and maintenance tution must continue to rent to the current tenants for of artificial monopolies, complex regulations, arbitrary three years. These conflicts between former occupiers and enforcement, and high costs for new private firms. Strug- new owners are unavoidable. The key is to establish clear gles among municipal agencies to play the lucrative role of rules so that transactions can proceed and markets can owner-manager are commonplace. Some districts of War- develop. Some countries have included the real estate saw have been very progressive in making land and com- occupied by large state firms in enterprise privatization mercial real estate available to private investors, while oth- programs. (Poland and Russia are notable exceptions.) ers have been slow. The difference is clearly evident in the Furthermore, state enterprises in almost all transition distribution of commercial activity in the city today. economies have leased or otherwise transferred unneeded These deficiencies of commercial real estate markets land and buildings when squeezed by hardening budget are a major barrier to private sector development. The constraints or when tempted by opportunities for "spon- problems will not solve themselves, and they invite cor- taneous" privatization. However, because state enterprises ruption. Local governments must act forcefully (or be typically hold only use rights, such transfers are often not prodded into action by reformers at other levels of gov- legally valid. ernment) to privatize, loosen regulatory and zoning con- The result of these partial efforts to privatize commer- straints on new development, and open up infrastructure cial real estate in most transition economies is a patch- and service provision to private competition. For build- work of confused property rights and continued wide- ings that remain in state hands, local governments should spread public ownership. Even in Bulgaria, the Czech and promote commercial management practices, including 61 leasing with transparent rules and at market rents, and cigarettes. This underpricing encouraged waste of energy respect for contractual obligations. National governments and much else, discouraged proper maintenance, and led may be able to spur the reform of local governments by to high demand, long waiting lists, and a flourishing financially rewarding those that make the most efficient shadow economy. and transparent use of their assets. The other high economic cost of these housing policies was the crushing effect on interregional labor mobility. Privatizing housing Workers had little hope of finding housing if they took a Patterns of housing ownership differed greatly among the job in another city. Developing housing markets is an centrally planned economies (Figure 3.1). In China and essential adjunct to enterprise restructuring in transition Vietnam most urban housing was and is still owned by economies, both to free firms to focus on productive enterprises, whereas rural residents were responsible for activities and to facilitate labor mobility. This is particu- their own housing and had informal property rightsbut larly true in countries such as China, where enterprises no formal title. In CEE private ownership of housing was own much urban housing. never entirely eliminated, and it expanded considerably Several NIS have been at the forefront of housing pri- during the reform initiatives of the 1970s and 1980s. vatization. Lithuania, the most successful, has reduced state More than half the housing stock in most CEE countries ownership of housing from two-thirds of the total to less (even more in rural areas) was already privately owned at than one-tenth through a combination of voucher sales and the start of transition; local governments owned most of restitution. Estonia started more slowly, but its program the rest. In the NIS local governments or enterprises picked up speed as the end-1995 deadline for using vouch- owned most urban housing, although private housing was ers approached. Seventy percent of its housing is now in not uncommon, particularly in rural areas. private hands. Armenia and Moldova have been privatizing Privatizing housing is a high priority in transition econ- rapidly, too. Most CEE countries, initially in the vanguard, omies, for social and economic reasons. Housing accounts have moved more slowly since 1990, in part because they for about 30 percent of wealth in market economies. had much less public housing left to privatizeonly Alba- Transferring housing to individuals and households and nia has matched the dramatic ownership changes of the developing housing markets to realize its value can help leading NIS privatizers (Figure 3.1). Slovenia's program of compensate citizens for the loss of savings many have suf- low-cost sales in 1992 was instrumental in drawing foreign fered due to hyperinflation. Because housing was relatively exchange from under the mattress (or from foreign bank equally distributed under central planning (more so in accounts) and into the central bank's coffers. These grow- terms of space than with regard to quality or location), ing foreign exchange reserves helped support the introduc- converting tenancy rights into ownership rights is a simple tion of Slovenia's new currency, the tolar. On this score and equitable way to privatize. Nearly all housing privati- China and Vietnam are lagging; they have done little to zation to date has taken the form of giveaways or low-cost separate housing from enterprises. In China enterprises sales to current tenants, often subject to space limits. The own and manage about 75 percent of urban housing, and Baltic states have issued vouchers to all citizens (the this share has actually increased in recent years as local gov- amount varying with age), one use of which is to purchase ernments have transferred housing to enterprises. It may be their apartments. Belarus gives away a set square footage. possible in the future to swap some of these assets against Privatization can relieve governments and enterprises pension liabilities (see Box 4.6). of the costly burden of subsidies, but only if responsibili- Building a strong housing market requires numerous ties for utilities and maintenance are also shifted to the reforms in addition to changing ownership. Tenant new owners. Giving away housing and the costs associated charges for rents, utilities, and maintenance in remaining with it actually improves the fiscal position of govern- state housing must be steadily increased. Tenancy rights ments. Rents for public housing were extremely low inherited from central planning are much stronger than under central planning, and governments and enterprises lease rights in some established market economies, and are bore most of the costs of construction, maintenance, and de facto inheritable property rights. Moving from these to utilities. Soviet local governments typically spent up to 15 full ownership may have no meaning whatsoever unless percent of their budgets maintaining the municipal hous- the previous allocation of subsidies and responsibilities is ing stock. By 1993 this had risen to 25 percent. From altered as well. 1927 to 1992 the basic monthly rent charged to house- Shifting the full economic costs of housing to house- holds in the Soviet Union was frozen at 0.132 ruble per holds may not be possible overnight, particularly in square meter. By the end of the Soviet era, households economies that have suffered sharp drops in GDP and devoted just 2.4 percent of their cash income to housing employment and sharp increases in poverty. To offset the (rent plus utilities)less than they spent on liquor and short-term impact of higher rents in public housing and 62 Transition economies have contrasting patterns of housing ownership. Figure 3.1 Housing ownership in urban areas in six transition economies Percentage of total Albania China Lithuania Poland Russia Ukraine 100 80 60 40 20 1989 1995 1985 1995 1991 1995 1989 1995 1990 1995 1992 1995 ElPrivate III Cooperative MEnterprise 71 Local government Note: "Enterprise" includes housing owned by government agencies other than local government, as well as state enterprise housing. Source: Official data; World Bank 1995n; World Bank data. higher maintenance and utility costs in all housing, gov- velop efficient property tax regimes and condominium- ernments might consider offering housing allowances to type laws, needed to allocate responsibility for common those hurt most by reforms, while at the same time raising areas of buildings. New owners will not appreciate the cash wages to replace forgone subsidies. The critical point value of their homes without active housing markets is that the true costs of housingonce hidden in through which to measure and realize that value. And repressed wages, budget deficits, inflation, and undersup- these markets will not develop unless owners have clear plyneed to be made explicit. Furthermore, new modes and readily tradable rights to both structures and underly- of finance are needed to help new private owners pay for ing land. Finally, an often overlooked issue in housing pri- housing as governments withdraw from housing con- vatization is the distribution of ownership rights within struction and maintenance. households. Ensuring that husbands and wives have equal Local governments must also clarify property rights rights to privatized housing is an important step toward and zoning rules, improve real estate registries, and de- gender equality in transition. 63 Properly privatized housing opens the way to a host of must, along with freedom from overregulation. New pri- new products and services, including property insurance, vate firms must be able to set prices for outputs, search for real estate brokerage, housing maintenance, mortgage the best prices for inputs, change product lines, hire and finance, and property development. These create new jobs fire workers, and get the foreign exchange they need if they and make private housing markets work by spreading risk, are to adjust efficiently to changing market conditions. supplying information to buyers and sellers, and provid- And they need clear and stable rules of the game that can ing needed financing. be enforced at reasonable cost, as well as freedom from crime and corruption (see Chapter 5). New firms and foreign investment These preconditions have generally been met in Cen- Privatizing state enterprises is crucial to the long-term tral Europe and to a somewhat lesser extent in Eastern development of transition economies. But just as impor- Europe and the Baltics, where new private firms are free tant is promoting the entry of new firms. Given the delays to operate in response to market forces (although they in divesting larger firms, the quickest returns have come remain subject to high taxes, which many evade, and have from new private entrants. The return to growth of some difficulty getting access to premises, as discussed Poland and Romania in 1993 and 1994, for example, can- above). Entrepreneurial freedom and access to inputs not be attributed to their formal privatization programs, are more restricted in Russia and other non-Baltic NIS, which have been slow, but rather to their strong record on yet many private firms manage to thrive in previously new entry. Owners and investors in new firms bring new repressed sectors, such as trade and services, where pent- ideas and techniques, and they are less constrained by up demand is high. Entrepreneurs' biggest complaint in established routines and personnel. Throughout history Poland in a 1992 survey was lack of financing, whereas in more technical progress and improvements in productiv- St. Petersburg and throughout Ukraine macroeconomic ity have come from new firms replacing old firmsfrom uncertainty, legal instability, and in many cases crime and "creative destruction"than from reforms in old firms. corruption troubled entrepreneurs most, followed by high Most new firms in CEE and the NIS are privately owned; taxes and lack of finance. in the planned East Asian economies new entrants have Although domestic firms drive growth in all market been both private and "nonstate" in nature (see Box 3.4). economies, foreign investment also makes a highly valu- New entry and privatization are not entirely separable. able contribution. Foreigners bring capital, technology, Privatized small enterprises can be almost indistinguish- management expertise, and access to marketsall critical able from new entrants, particularly when the privatized to enterprise restructuring in transition economies. The firm's only "asset" of any value is its access to commercial less tangible effects of foreign investment, including the real estate. New private firms are often built on assets or importation of new ideas and practices both through labor released from downsizing state enterprises. Indeed, improved performance and support of policy change, are "asset privatization" has proceeded much faster than particularly important in transition settings. China has enterprise privatization in most transition economies. enjoyed rapid growth and has been a leader in foreign This helps explain, for example, why Poland's private sec- investment inflows, although much of this is thought to tor now produces some 60 percent of GDP (up from 30 be domestic money recycled through Hong Kong, to take percent in 1990) despite the slow official privatization advantage of incentives offered only to foreign investors. program. Economic reforms lead to rapid growth in legal Hungary shares the leadership title with China in foreign private businesses. But even where reforms are slow, infor- investment as a share of GDP (Figure 3.2). mal shadow economies of private firms will emergewith Foreign investors can make an enormous difference. help from spontaneous privatization. The shadow econ- Consider the case of a Polish lighting company purchased omy in Ukraine may account for as much as 40 percent of by a Dutch businessman in 1991. The new owner in- economic output, despite the slow pace of economic vested heavily in technical and managerial training in such reform and privatization. Certainly, formal private sector areas as cost accounting, computers, marketing, total qual- growth is preferable to the growth of shadow economies, ity management, and English-language training. He pro- but either is preferable to no growth at all (see Chapter 2). vided the Polish firm with technical know-how and state- What does the new formal private sector need to suc- of-the-art equipment that not only increased productivity ceed and grow? Macroeconomic stability is vital. Countries but also reduced environmentally harmful emissions. He with large budget deficits have trouble resisting the confis- then modernized the company's offices and facilities. The catory taxation that tends to quash an emerging private results were startling. In three years the struggling com- sector, and firms find it hard to set prices, negotiate con- pany became a profitable and internationally competitive tracts, and estimate investment needs in an environment of enterprise. Sales per employee almost doubled from 1991 high inflation. Price and market liberalization is another to 1994 and are expected to double again by 2000. Polish 64 Some transition economies have proved much more attractive to foreign investment. Figure 3.2 Cumulative foreign direct investment inflows Percentage of 1994 GDP 0 5 10 15 20 25 30 35 40 1 Group 1 Poland 6,459 4-- Millions of dollars Slovenia 438 Hungary 10,634 Croatia* FYR Macedonia* 36 Czech Republic 3,996 Slovak Republic 483 Group 2 Estonia 646 Lithuania 73 Bulgaria 397 Latvia 323 Albania 186 Romania 1,101 Mongolia 38 Group 3 Kyrgyz Republic 25 Russia 3,900 Moldova 86 Armenia* CEE, NIS, and Georgia* Mongolia Kazakstan 719 Group 4 Uzbekistan 250 Ukraine 950 Belarus 52 Azerbaijan* 110 Tajikistan* 25 Turkmenistan Vietnam 351 East China 121,704 Asia Note: Data are the sum of inflows during 1989-95; those for Croatia, Georgia, and Turkmenistan are unavailable. Data for 1995 are preliminary. Countries are ranked as in Figure 1.2. Asterisks indicate economies severely affected by regional tensions between 1989 and 1995. Source: World Bank 1996b; IMF and World Bank staff estimates. consumers are paying 25 percent less for standard lighting All foreign investors have the same concerns: political products. Employment is stable at about 3,000, and and economic stability and openness, laws and regulations salaries have risen by 10 percent a year. The company's that are fairly and transparently enforced, ready access to operations have stimulated additional private employment inputs at reasonable prices. All of these are heavily influ- within the community, engaged in transporting finished enced by policy choices. Investors also look to the size and goods to domestic and foreign markets. growth of domestic markets, which economic policy can AD NTERPR SE REFORM 65 influence, and closeness to major international markets, The patterns of ownership immediately resulting which it cannot. Foreign investment in natural resources either from a shift to "nonstate" forms of enterprises or is dictated by locationhence the interest of foreign from privatization are unlikely to be optimal. This is energy companies in Kazakstan and Russia. Unique his- particularly true for large firms and farms, but it may torical and cultural factors, such as the presence of a large also apply to smaller firms, commercial real estate, and diaspora, are also influential: Estonia has benefited from housing. Initial ownership may be too dispersed, as it close ties with Finland and other Scandinavian countries, was in Lithuania's mass privatization programs, or too and most "foreign" investment in China has been made entrenched in the hands of insiders, as in Russia's first- by overseas Chinese. But strong overseas ties are not phase privatizations. Winners in the asset allocation enough. Armenia, Poland, Russia, and Vietnam have large process may try to construct barriers to secondary trading. emigre communities but have attracted relatively little Ownership can end up concentrated in entities that are investment from them, in part because of policies or pri- either too large, like Russia's corporate farms, or too vatization programs that are less than friendly to foreign small, like Romania's fragmented landholdings. Owner- investors (and in Armenia's case, because of blockade). ship may be vested in entities, such as investment funds or The design of privatization programs heavily influences absentee landlords, that are unable or unwilling to exer- the amount of foreign involvement in privatized firms. cise efficient monitoring. A critical determinant of the Hungary and Estonia have both attracted foreign invest- longer-run success of any reform program is the extent to ment through sales of state enterprises, whereas Russia's which ownership rights can evolve into more efficient insider privatization approach has kept foreign participa- forms. Programs that spur the growth of capital and asset tion to just 2 percent of privatized equity. markets, such as the Czech Republic's privatization pro- Special foreign investment regimes create enclaves that gram, have a distinct advantage. In all transition environ- benefit the rest of the economy little. These may be useful ments the evolution of ownership will also depend on at the beginning of transition if they send the message that tight macroeconomic policies, which force firms not only the country is serious about reform. But special tax breaks, to restructure internally but also to turn to capital markets exemptions from customs duties, and other incentives for to raise needed finance. foreigners can put domestic investors at a disadvantage But restructuring of the economy goes well beyond and cost governments much-needed revenue. As quickly reform of existing enterprises. Entry and investment by as possible, transition economies should dismantle these new firms, both domestic and foreign, are at least as enclaves and put domestic and foreign investors on an important for growth. Here the reformers in East Asia, equal footing. The Czech Republic took this step in 1992, GEE, and the NIS can learn from each other. China is for example, when it abolished specific foreign investment increasingly concerned with the need to reform its state legislation in favor of a broad commercial code covering enterprises, which lag nonstate firms in financial perfor- all investors. mance and productivity growth but still consume the lion's share of investment resources. Reformers in GEE The agenda and the NIS have shown the importance of, and effective The lessons of experience from enterprise reform are quite methods for, imposing financial discipline on state firms, clear and applicable across the range of transition allowing their downsizing and exit, developing debt economies, from the Czech Republic to China. Firms and workout mechanisms, and divesting housing, commercial farms surviving from central planning need major restruc- real estate, and assets or shares of enterprises that the state turing of their production and reorientation of their incen- no longer needs to own. In turn, some governments in tives. Entities that face strict financial discipline and com- GEE and the NIS can learn from China about the impor- petition and have clear owners are most likely to undertake tance for growth and productivity of unrestricted new the needed restructuring or to exit, leaving room for new entry, the unleashing of competitive forces, and farm and better firms. In the short run financial discipline can be restructuring. In all transition economies the continued fostered through the stabilization and liberalization mea- growth of new nonstate sectors, as well as the continued sures outlined in Chapter 2. But in the longer run decen- reform of enterprises that will stay in state hands, will tralizedpreferably privateproperty rights and support- depend on the development of institutions that sustain ing institutions are needed to sustain financial discipline, to and deepen the reforms achieved to date. These include, respond to market-oriented incentives, and to provide among others, reforms in legal, financial, and government alternative forms of corporate finance and governance. institutions. These are the subject of Part Two. People and Transition the end what matters is people. In the end a country's vates the uncertainty associated with a dramatic change of transition will be judged by whether its citizens live system. As tax revenues fall sharply with the decline in /n better than they did before. Equityhow people share output, governments face fiscal pressures to spend less the benefits and the pains of transitionis important. But and, simultaneously, political pressures to spend more. To how people fare during transition is not just an equity escape this dilemma, policymakers must restore growth issue. Labor productivity, critical for economic growth, through effective reforms (Chapter 2). They must also depends on workers' knowledge, skills, motivation, and ensure that losses early in transition are indeed transitional health. Therefore relieving extreme poverty, maintaining and not transmitted from one generation to the next. By human capital, and adapting it to the needs of a market contrastand this is central to the East Asian story system support growth as well as social justice and political where growth has been rapid and broadly based, poverty sustainability. This is especially true in transition coun- has declined sharply. As China and Vietnam show, some tries, where policymakers may be unable to sustain vital, transitions can reduce poverty even in the short run. growth-enhancing reforms if large parts of the population Mobilitythe freedom of individuals to seek better feel that transition has left them behind. options elsewhereis the third factor. As Chapter 2 How has transition affected living standards, and what showed, moving to a market system involves a vast reallo- do these changes mean for employment and for redesign- cation of labor across firms, sectors, and regions. Yet the ing income transfers? (The corresponding questions relat- labor markets inherited from central planning, at least for ing to investment in skills and health are taken up in movement between different skills, effectively sacrificed Chapter 8.) The answers vary by country and depend on labor mobility for greater individual security. For working the interplay of four factors: the widening distribution of people, security largely took the form of a guaranteed job income and wealth, economic growth or the lack of it, the or, in rural China, guaranteed land. In a market system mobility of labor, and age. employees move between employers, between types of Greater disparity of wages, income, and wealth isup work, and between placesand they may experience to a pointa necessary part of transition, because allow- unemployment. Income transfers (for example, unem- ing wages to be determined by the market creates incen- ployment benefits) in transition countries therefore need tives for efficiency that are essential for successful reform. reform, not only to reduce poverty and contain costs but More-efficient workers must be rewarded for their contri- also to assist mobility. This means, in particular, support- bution to growth. But increased inequality can raise ing the unemployed and getting enterprises out of the poverty in the short run, because some people or (espe- business of delivering social benefits. Otherwise labor will cially in China and Russia) some regions inevitably bene- remain immobile, raising the costs of transition by creat- fit more than others. But the "losers" will not necessarily ing pockets of poverty in declining regions, and by pres- be forced into poverty; it depends on whether the econ- suring enterprises and governments to defer necessary omy is growingthe second factorand on whether restructuring. governments restructure social safety nets to provide effec- Older people have also been affected by the fall in out- tive poverty relief. put in CEE and the NIS. Like the rest of the population, Negative growth, especially when as severe as that in they have experienced a fall in their average living stan- CEE and the NIS, contributes to rising poverty and aggra- dard. Unlike the young, they will reap few of the long- 66 67 term gains of reform, and many have also lost savings clear patterns emerge. As the GEE countries and the NIS because of inflation. This poses important questions for went through a simultaneous decline in output and pensions. There is a case for being generous to today's increase in inequality, poverty rose sharply. Inequality has elderly, and in many countries they have been relatively risen throughout the region: because of wage liberalization; well protected. But the cost of pensions can create major because of increasing income earned in the private sector, problems at a time when government revenues are fall- where incomes vary greatly; and because of increased indi- ing sharply. vidual wealth. Evidence from Poland shows that, as growth resumed, poverty rates tended to stabilize; however, it is How does transition affect people's well-being? too early to assess how rapidly they will decline. In contrast, People's well-being depends on their income, on their in later reformers in the NIS (such as Belarus) output con- wealthpossession of a house or land, for exampleand tinues to fall and poverty to rise. As Figure 4.1 shows, on less tangible factors, such as a fair degree of security. It income inequality is not out of line with that in compara- also depends on access to public goods and social services. tor market economies and therefore may not fall signifi- This section looks at the well-being of different groups, cantly. The key to containing and reducing poverty, there- focusing mainly on changes in income. fore, is resumed growth. However, for some people, such as those with outdated skills, the elderly, or children in large Poverty, growth, and inequalitythe unfolding story families, growth is not a complete solution. For such Although many of their people have experienced material groups explicit remedial programs are needed. Even for the and nonmaterial gains (some of which are hard to quantify; rest of the population, growth will need to be sustained to see below), the CEE countries and the NIS have experi- have a major impact on living standards. enced an increase in poverty. Comparisons across countries In China the interactions between growth, inequality, and over time are very approximate (Box 4.1), but some and poverty produced very different results. The initial Box 4.1 Why poverty and inequality are hard to measure Measuring poverty is difficult because of conceptual observers to exaggerate the effects of transition, if they problems and data deficiencies and because all defini- are comparing the latest data with highly incomplete tions of poverty involve social judgments. Measuring figures from prereform years. For all these reasons, inequality involves parallel difficulties. comparisons of living standards before and after tran- How is poverty defined? Absolute poverty is defined sition will be very approximateat best. by comparing personal or household income (or expen- Even where a definition of poverty has been agreed, diture) with the cost of buying a given quantity of goods measurement is problematic because poverty has sev- and services, relative poverty by comparing that income eral dimensions. Policymakers are interested in how with the incomes of others, and subjective poverty by many people are poor (the head count), how far below comparing actual income against the income earner's the poverty line their incomes fall (the poverty gap), expectations and perceptions. There is no scientific, and for how long they are poorin other words, unequivocal definition of who is and is not poor. whether their poverty is transient or long run. Measuring poverty is difficult enough even in a sta- These are not just technical issues but inescapably ble economy with regular and continuous statistics. involve social judgments. The figures in Table 4.1, Transition economies pose additional major measure- except those for Estonia, are based on income per ment problems. Many data on income and consump- capita. If instead children were given a lower weight, tion are highly questionable, not least because of seri- the poverty line for a household of five, three of whom ous deficiencies in the conduct of household surveys are children, might be (say) three times that for a single and because of growing informal activity, which goes person. Investigation using income per capita will find unrecorded. Interpretation is further complicated by more poor children and fewer old people than with a huge changes in relative prices and by the increased poverty line in which children receive a lower weight. availability of goods that accompanies a shift to the Similarly, the choice of a household definition of market. Improving the quality of data can itself create income assumes that older people share the resources of problems. Just as better reporting of crimes may result younger family members and thus finds fewer poor old in a rising measured crime rate, so efforts to improve people. The findings on poverty in this chapter should the collection of poverty and income data may lead be interpreted with these issues in mind. 68 Inequality in transition economies is rising toward market economy levels. Figure 4.1 Gini coefficients in eight transition economies Gini coefficient 50 45 40 35 30 25 20 15 10 5 0 Hungary Czech Slovenia Poland Bulgaria Estonia Russia Kyrgyz Republic Republic Note: For the NIS no reliable data exist for 1987-88 that would allow consistent comparison of income distributions over transition. Levels for middle-income and OECD countries are simple averages. Source: Milanovic, forthcoming. phase of rural reform led to both increased growth and How does transition increase inequality and why? reduced inequality, lifting 200 million people out of The most frequently used measure of income inequality is poverty. But after 1985, as reforms centered on the indus- the Gini coefficient, which ranges from zero (meaning trial sector, inequality rose markedly, mainly because of that everyone has the same income) to 100 (one person increased urban-rural disparity (see below), and the num- receives all the income). By this measure, inequality has ber of poor stopped falling. Rural poverty is a continuing increased in Bulgaria, the Baltic countries, and the Slavic problem. In Vietnam strong growth, due to the combined countries of the former Soviet Union, to levels broadly effects of land reform, stabilization, and liberalization, similar to those in the less-equal industrial market helped reduce the poor from 75 to 55 percent of the pop- economies, such as the United States (Table 4.1 and Fig- ulation between 1984 and 1993. ure 4.1). Russia's Gini now appears similar to the average 69 Table 4.1 Inequality and poverty in selected transition economies Gini coefficient Poverty head count. Change from Income') Expenditure Country 1993 1987-88 1987-88 (1993) (1993) Central and Eastern Europe Bulgaria 34 11 2 33 Czech Republic 27 8 0 1 1 Hungary 23 2 1 2 6 Poland 30 5 6 12 12 Slovenia 28 4 1 1 Newly independent statesc Estonia 39d 16" 23d' 21d, Kyrgyz Republic about 50 9-33g 76 57 Russia 48 14-24g 38 35 Change in poverty head count (percentage points) 1978-85 1985-93 East Asia China 38h 24 +1' Vietnam 34 .. Not available. Note: All data, and especially those for the NIS, are subject to major statistical difficulties; changes in Gini coefficients and poverty head counts should be regarded as only indicative. Any differences in Gini coefficients between this table and Table 5 in the World Development Indicators are due to differences in samples, time periods, definitions, or other technical assumptions. Percentage of population below the poverty line. Poverty estimates for CEE and the NIS are based on a common poverty line of $120 at 1990 international prices per capita per month for CEE and the NIS. This is high for the poorer NIS, such as the Kyrgyz Republic. Estimates for the East Asian countries use much lower, country-specific poverty lines: $18 per capita per month for China, and for Vietnam a World Bankdetermined poverty line based on a daily diet of 2,100 calories plus nonfood essentials. Calculated from household survey data, adjusted upward where necessary to ensure compatibility with national income data. For the NIS, no data exist that allow consistent comparison of income distributions over transition, and pretransition estimates of poverty head counts are unreliable because of data deficiencies. Data are for 1995. Based on Goskomstat data for the beginning and household survey data for the end of the period (Goskomstat end-of-period data are not available). Calculated from 1993 PPP data for household size adjusted for equivalent adults. The lower figure is based on Goskomstat data for both beginning and end of the period; the higher figure is based on Goskomstat data for the beginning and household survey data for the end of the period. Figure is for 1992. Datum is for 1985 to 1990. Based on backward extrapolation from a 1993 household survey. Source: Dollar, Glewwe, and Litvack, forthcoming; Milanovic, forthcoming; World Bank 1992; World Bank data. for middle-income countries, although data for Russia (as increase in the relative share of the very richest but also for many other countries) probably do not take adequate because of increasing wage dispersion. Income dispersion account of the highest incomes. Inequality has increased between sectors in Russia has also risen. The energy, less dramatically in some GEE countries, to levels similar banking, and related sectors all made major gains, with to those in many Western European countries. the biggest losers being agricultural workers, followed by What have these overall changes in inequality meant workers in culture, education, and health. for people of different incomes? Hungary made strenu- China's rise in inequality has largely been driven by a ousand costlyefforts to offset rising inequality and different mechanism, one that has also been important has seen little change in income shares by population in Russia, namely, differences in growth between regions quintile, from that of the poorest 20 percent to that of the and (critically in the case of China) between urban and richest (Figure 4.2). The change was greater in Slovenia rural areas. Income disparities within regions and cities in and greater still in Bulgaria and Ukraine. In Russia, where China remain relatively low. But the southeastern coastal inequality rose sharply, the top quintile in 1993 received area, for example, has been growing at an annual rate of fully 20 percentage points more of total income than the over 13 percent, compared with the national average of top quintile in 1988, mainly because of an explosive 8.5 percent; meanwhile growth in populous central 70 has reinforced its central revenue capacity with the 1994 Increasing income inequality is mostly at the tax reforms, opening up the possibility of increased trans- upper end. fers to poor areas. But given China's outward-oriented economic strategy, the natural advantages of the south remain, and unofficial migration has already responded. Figure 4.2 Changes in income by income Regional inequality, significant even before the re- quintile in four transition economies forms, increased in Russia, with poverty rates of 70 per- cent in the Altai territory of Russian Central Asia but less than 10 percent in Moscow, St. Petersburg, and Mur- mansk. In June 1995 the richest 20 percent of territories Percentage change (predominantly areas rich in natural resources, plus 25 Moscow) received 44 percent of total income, compared with only 5 percent for the poorest 20 percent (largely 20 ethnic republics in the North Caucasus and the Volga region). Regional inequality is almost inevitable in a coun- 15 try as large as Russia, but it has been exacerbated by the economically irrational siting of industries prior to reform 10 and by constraints on mobility, which are less a matter of legal restrictions than of deficient housing markets. Lim- ited mobility will remain a major source of inequality for the foreseeable future. How does transition affect poverty? The poverty estimates in Table 4.1 are based on a com- mon poverty line for CEE and the NIS. This approach allows comparison across countriesalthough results are 10 sensitive to a range of factors such as exchange rate fluc- Poorest Second Middle Fourth Richest tuationsbut means that fewer people will be counted as poor in better-off countries like Slovenia than in poorer Note: Data represent the percentage change in the share of countries like the Kyrgyz Republic. The Visegrad coun- each income quintile in total income from 1988 to 1993. Source: Milanovic, forthcoming. tries, apart from Poland, experienced the smallest rise in poverty, but this does not mean that nobody in the Czech Republic has become poorermerely that few Czechs fall below the common poverty line. Nor does it mean that there are no poor people; there are pockets of deep poverty in Hungary, for example. The Balkan countries, China has been around 6 percent. By 1992, household except Slovenia, experienced larger increases in poverty, expenditure by urban families in the south was 75 percent and the NIS larger still. In the Kyrgyz Republic poverty is higher than that in the north. A similar picture has less high when measured in terms of expenditure; if one emerged in Vietnam, where the area around Ho Chi uses a lower, country-specific poverty line, its poverty Minh City, whose market memory helps it respond to head count is in the 30 to 45 percent range. Although all reforms, is growing about 40 percent faster than the these results are subject to the strong cautions in Box 4.1, national average. in the early transition poverty undoubtedly increasedin In addition to the emergence of previously suppressed many countries substantially; however, as mentioned ear- comparative advantage, trade and investment policies lier, poverty levels have tended to stabilize in countries have overwhelmingly favored China's coastal provinces, where growth has resumed. and the radical decentralization of the budget has reduced In China and Vietnam the story is very different. They transfers from wealthier to poorer areas. The smaller are much poorer countries, and their poverty line is there- transfers, higher foreign investment, and faster TVE de- fore much lower. Both countries embarked on reform velopment (Box 3.4) in the coastal provinces have all con- with large numbers of poor but experienced significant tributed to investment rates four times higher than in reductions in poverty over the course of reform. In both, poorer regions. In response, the Chinese government has the improvements resulted from rapid growth and a shift moved to equalize the treatment of different regions and in policy favoring agriculture. Most people in China and PEOPLE AND TRANSITION 71 Vietnam are farmers, who were taxed under the old sys- In China and Vietnam, both predominantly rural, the tem but now benefit from price liberalization. risk factors are very different. Most of the poor (about 9 How deep is poverty in transition, and is it transient or percent of the rural population in China) are concentrated enduring? Most poverty in CEE and the NIS is shallow. in remote, resource-deficient areas, primarily in upland In 1993 the average income of those below the common regions of interior provinces, where they typically make poverty line fell roughly 25 to 30 percent below that level; up entire communities. Although poor people in these relative to country-specific poverty lines the poverty gap regionsoften populated by minoritieshave land use was smaller, perhaps 10 to 15 percent. Even the higher rights, the land is of such low quality that even subsistence figure is less than the average shortfall in many Latin production is generally impossible. Furthermore, since the American countries, relative to the same poverty line. land is some of China's most ecologically fragile, the poor Much poverty in GEE and the NIS is also transient: peo- are often both the perpetrators and the victims of upland ple often move repeatedly into and out of poverty. The environmental destruction. In the face of these problems, same is true in rural China. provision of social services has stagnated in China's poor- Which groups are most likely to be poor? In GEE and est regions. For example, about half the children of house- the NIS the risk factors include: holds at or below the absolute poverty line are at least mildly malnourished. Belonging to a large or single-parent family. In 1993 about 60 percent of families with three or more chil- Nonmonetag gains and losses dren were poor in Russia, and a similar proportion of Transition's effects on well-being go far beyond those mea- single-parent families were poor in Belarus. As else- sured by income. People now have a vastly wider array of where, single parents are predominantly women. goods to choose from, especially imports and high-quality Being out of work. In Russia in 1993, 63 percent of consumer durables, and no longer must wait hours in line households headed by an unemployed person were to buy them. In Poland, for example, between 1990 and poor. In Hungary, with higher unemployment bene- 1993, ownership of videocassette recorders rose from 5 to fits, only 17.5 percent of such households are poor. 53 percent of working households, and ownership of Lacking education. The effect of education is striking. A durables has risen throughout the region. Liberalization has person with little formal education in Poland is nine created individual wealth in the form of vouchers, enterprise times (and one in Romania fifty times) as likely to be shares, small businesses, land, and housingalthough capi- poor as someone with a college education. tal, credit, and other markets are needed to realize their Being old. Here experience has differed. Because of value. Private land has been particularly important to well- political pressures, governments have tried to minimize being during transition. Survey evidence suggests that home the decline in real pensions. In some countries, such food production has increased in many countries, boosting as Poland, pensioners have been relatively protected. household consumption and sometimes income as well. Nevertheless, in most their living standards have Political reforms have brought dramatic social liberal- declined sharply. Poverty in old age disproportionately ization in many transition economies. New laws and affects womenin 1990 four out of five Russians over revised constitutions grant wide-ranging civil liberties, a 80 were women. Very old people living alone are par- fact that people clearly recognize. In fourteen European ticularly at risk. transition economies an overwhelming majority of survey Lacking access to assets. In particular, access to plots of respondents believe that their country's current system is land has been a critical safety net for many households, better than the old regime at allowing people to choose for example in Armenia and Ukraine. their religion, and a similarly high share perceive greater freedom to join organizations, to say what they think, and The number of poor in a country depends also on how to choose their political affiliation. Large majorities also many people are in each high-risk group. Although only a say that their country's current system is better at allow- modest fraction of pensioners are poor, there are many ing people to travel and live where they want (68 percent) pensioners and thus many poor pensioners. For the same and in ending fear of unlawful arrest (59 percent). reason, in the Kyrgyz Republic and Russia about 65 per- But drastic change, wherever it occurs, also brings stress cent of the poor are workers, and in Poland 60 percent. and insecurity. It is well known that major upheavals in Children stand out as a group that is both at high risk and people's liveseven happy events such as marriage or a large, and they constitute an increasing share of the poor new jobare stressful. The stress is much greater when in transition economies. Rising child poverty is manifest, the entire structure of society is in flux, when attitudes and for example, in a decline in infants' nutritional status in values are changing, and when people in great numbers Russia between 1992 and 1993. face actual or potential poverty and great uncertainty. 72 0R EV A study of displaced U.S. steelworkers in the 1980s ple's security. Finally, there has been the stress of adapting shows that four years after the first plant closures, many to a new culture. Women in the Kyrgyz Republic report steelworkersstill without a new jobreported continu- that selling home-grown produce is stressful: in their cul- ing depression and anger and a growing sense of futility; ture a household with extra food always gavenot sold these problems led to alcoholism, deteriorating family rela- food to neighbors in need. tions, and domestic violence. In many transition econ- As reforms take hold, poverty, uncertainty, and stress omies the uncertainty of life after central planning is asso- will decline, but in many countries neither quickly nor ciated with an even broader range of ill effects. There is easily. Progress for most peopleas the rest of this increased familial stress as incomes fall and food prices rise. chapter discusseswill come through growth or better- Women are especially affected (Box 4.2), working long targeted transfers. hours in paid employment and performing the bulk of Reforming labor markets: Helping people domestic chores. Partly as a result, divorce rates have risen help themselves (in Belarus, for example, from 35 percent of marriages in 1990 to 55 percent in 1994). Birthrates fell in all the Euro- Although people were both hired and paid wages under pean transition economies, including eastern Germany, central planning, labor markets did not work anything and birthrates and marriage rates declined in every region like those in market economies. In CEE and the Soviet in Russia between 1990 and 1993. Alcoholism and illegal Union, firms faced incentives to employ as many as possi- drug use are also on the rise. As discussed in Chapter 8, ble, so labor shortage, rather than unemployment, was the health deteriorated in many of the NIS, although not in norm. Wages bore little relation to individual perfor- the Visegrad countries, and poor health is itself a source of mance: "Work was somewhere we went, not something stress for the families affected. Crime and corruption have we did" Wage structures were rigid and varied little from increased, as discussed in Chapter 5, further reducing peo- top to bottom; as much as half the compensation package Box 4.2 Women and work: Has transition helped? Transition affects women much differently in some of women before men and open discrimination in ways than it does men. In considering whether transi- job advertisements. tion has increased welfare for women, the real test is Many women have dropped out of the labor force. whether it has left them freer than before, or more con- Nevertheless, in most transition economies women strained. So far, at least, the answer in many transition account for a disproportionate share of the unem- countries appears to be the latter. ployed. Part of the drop in labor force participation Under the previous regime women were expected reflects women's free choice. But much of the decline to work full-time, but the state provided day care and represents women being forced to stay home by more health care. Women are no longer seen as having a burdensome domestic responsibilities or becoming dis- social duty to work, but reform has also brought a couraged workers. Survey data for several CEE coun- dramatic decline in affordable child care facilities tries show that the vast majority of women prefer to and a deterioration in health care systems. In addition, work outside the home. Besides the personal satisfac- economic hardship and uncertainty during transition tion and social interaction it provides, work gives them make it more difficult to feed and clothe the family connections to the informal economy, vital for coping responsibilities that have always fallen predominantly during transition. In some countries the social pres- to women in these countries although women have sures restricting women's choices have merely changed clearly gained from having to spend less time stand- direction: previously expected to work, women are ing in shopping lines. These changes can constrain now expected to stay at home. Russia's labor minister women's choices in two ways: women who would made this clear by asking, "Why should we employ choose to work may be forced to stay at home be- women when men are out of work? It's better that men cause they cannot afford child care, whereas women work and women take care of children and do house- who would choose not to work may have to because work." Policy should focus on increasing choices for their families need the income. Moreover, women's women so that they can contribute to productivity employment choices may be constrained by increased growth. It should also increase choices for menfor labor market discrimination, as evidenced by layoffs example, by allowing paternity leave. 73 came in the form of benefits, including housing. To move in several sectors, adjusting is less a simple choice between toward well-functioning labor markets requires that peo- employment and unemployment than a matter of chang- ple be paid at least broadly in line with efficiency. And it ing the mix of household members' activities (Box 4.3). requires that people be free to move across types of work Transition labor markets show three broad patterns of and, at least to some extent, geographically. How far have adjustment. In the first, that typical of the GEE countries, wages and employment adjusted to the requirements of a employment in the state sector declined sharply. In the market system, and what policies can assist labor mobility leading reformers labor shedding continued through the while offering workers some protection against falling turnaround in output, leading to a recovery of labor wages, exploitation, and job loss? productivity (see Figure 1.6). In Poland, Hungary, and the Czech Republic the private sector expanded strongly, Adjusting to market forces whereas in Bulgaria and the Slovak Republic the state sec- At the start of transition many doubted the ability of labor tor's decline was sharp and private sector growth weaker. in GEE and the NIS to adjust rapidly to the enormous In almost all the GEE countries registered unemployment structural and macroeconomic changes. But labor has rose sharply very early. It later declined, partly because of responded, in a variety of ways. Labor market adjustment resumed growth and, more important, because people has had three elements: changing wage levels and struc- took early retirement or stopped registering as unem- tures, changing sectoral and regional employment pat- ployed once their unemployment benefits expired. By the terns (including increased work in the informal sector), end of 1994 registered unemployment exceeded 10 per- and adjustment through unemployment. cent in all of GEE except the Czech Republic. WAGE ADJUSTMENT. Wages are starting to assist Female employment has been hit particularly hard in reform by creating incentives to work hard and acquire GEE (and many of the NIS). Women were laid off in skills. Almost everywhere in GEE and the NIS in the early much larger numbers than men in the early transition, years of transition, wages fell relative to official consumer because their tasks were considered nonessential, because prices, often substantially. Initially there was little change inherited social legislation like generous maternity leave in relative wages. But in GEE the distribution of wages is made women more costly to employ, and sometimes beginning to resemble that of a market economy. Evi- because of outright discrimination see (see Box 4.2). dence from Poland and the Czech Republic suggests an Long-term unemployment (that persisting for a year or increase in the wage premium for white-collar skills and a more) increased rapidly in GEE with transition, as did significant increase in returns to education. In Russia, too, youth unemployment. Geographical mismatches between differentials based on skills have increased. In urban China jobs and workers produced large and persistent regional wages are moving toward market patterns, with a shift differences in unemployment. All three problems derive from basic wages plus benefits (often in kind) to wages from the inherited industrial structure, the mismatch plus bonuses related to productivity or profitability. Rela- between workers' skills and those demanded in a market tively higher wages are also making jobs in joint ventures economy, inadequate housing markets, and inadequate more attractive than those in Chinese state enterprises. job information. Although wages in areas with high Transition has affected women's wages differently unemployment have fallen relative to the average, the across countries. In Russia greater wage dispersion has decline has been insufficient to stimulate much move- meant that women, always disproportionately employed ment of labor. For all these reasons the pool of the unem- in low-wage jobs, now earn even less relative to men than ployed shows little turnover. The private sector draws before transition. In contrast, the earnings gap between most new employees directly from the state sector rather men and women has narrowed in several countries, than from the mass of unemployed. A key conclusion for including Poland and Slovenia. policymakers is that unemployment, by itself, has not ADJUSTMENT THROUGH CHANGES IN EMPLOYMENT been a major contributor to restructuring. AND UNEMPLOYMENT. As earlier chapters have shown, the The second pattern of adjustmentthat in Russia, inherited distortions and the steep output decline in GEE Ukraine, and many other NISis very different. There and the NIS made labor shedding from the state sector employment has so far fallen much less than output; unavoidable. Workers face four potential outcomes: stay- instead wages have borne the burden of adjustment (Fig- ing in the state sector, moving to the new private sector, ure 4.3). Because firms were reluctant to resort to mass becoming unemployed (and possibly undergoing train- layoffs, workers remained formally attached to their firms, ing), or dropping out of the labor force altogether (for receiving low or zero wages but continuing to enjoy some example, through early retirement). But the employment enterprise benefits while working increasingly in the story is complicated, particularly in the NIS, by the ten- informal sector. At least in their formal sector activities dency toward informal activity. Where a household works these workers are only marginally employed. Would it 74 Box 4.3 Household coping mechanisms Households have a variety of ways of coping with the and 12 percent of total income, respectively, and more hardships of transition. Many produce food; others than 25 percent of the incomes of recipients. sell family possessions through personal contacts or Private transfers are most likely to go to households at bazaars (in Hungary such sales doubled between that are poor, have experienced a debilitating event 1989 and 1995). Car owners often supplement such as illness or job loss, or are headed by the young, their incomes by giving taxi rides. And some families the very old, or womenin short, the very households rent out their summer homes or extra rooms in their that are the main target of safety nets. Could these pri- apartments. vate transfers reliably substitute in part for some pub- Households also cope by relying on private in- lic transfers? Simulations for Russia indicate that if come transfers. In Poland and Vietnam about two- public pensions were eliminated, private transfers thirds of households either give or receive transfers would replace about 19 percent of their amount. The (see table). The amounts can be large: in the Kyrgyz converse is also true: increasing pensions would not Republic and Vietnam private transfers were 7 percent cause a ruble-for-ruble reduction in private support. Private transfers in selected transition economies and the United States (percentages of total) Kyrgyz Rep. Poland Russia Vietnam United States (1993) (1992) (1993) (1993) (1979) Households giving or receiving 21.0 65.0 36.0 68.0 30 Transfers as a share of total income 7.4 3.2 4.4 11.9 2 Transfers as a share of recipient income 41.1 7.2 20.1 27.0 6 Source; Cox, Eser, and Jimenez, forthcoming; Cox, Fetzer, and Jimenez, forthcoming; Cox, Jimenez, and Jordan 1994; Cox, Jimenez, and Okrasa 1995; Cox and Raines 1985; Gale and Scholz 1994. speed transition in the NIS if such workers became explic- exceeded about 15 percent of total employment. The key itly unemployed, as in the CEE countries? Keeping peo- to creating additional employment will be continued ple on the payroll may reduce pressures to restructure. But trade liberalization and other policies to encourage labor- if labor is immobile, as in Russia, increased unemploy- intensive industries. ment does little to help match workers with jobs. Thus the argument that the NIS should follow the CEE pattern Policy directions is not entirely clear-cut. An important lesson of reform to date, both economic In the third pattern, that of China, state sector and political, is that market forces alone cannot always employment continued to grow until 1993, declining very drive the restructuring process forward. Greater market slightly thereafter. During the first phase of urban reform, determination of wages and employment must be sup- in 1985-90, the state sector provided about 70 percent of ported by policies to minimize adverse incentives, all new jobs, but by 1993 it provided only 9 percent of improve occupational and geographical mobility, and new urban employment. The engine of employment protect workers, both through labor market regulation growth is the TVEs, where employment grew ten times and through policies to combat unemployment. faster than in the public sector (Figure 4.4). But growing MINIMIZING ADVERSE INCENTIVES. As discussed in the nonstate employment will not be enough to pull labor out next section, income transfers have an important redis- of the state sector. Including benefits, pay in the state tributive role. But their structure, in terms both of bene- sector is about 60 percent higher than in the nonstate fits and of contributions, has important implications for sector, and because of continued migration from poor the efficient operation of labor markets. In the early tran- (particularly rural) regions into nonstate employment, the sition unemployment benefits were a large fraction of the gap is unlikely to narrow. Policymakers will therefore have recipient's previous wage (often up to 75 percent, and in to find ways to deal with redundant state labor, estimated Ukraine and Belarus 100 percent), and some countries set at some 20 percent of state sector employment. no time limit on benefits. Not surprisingly, this reduced Employment adjustment in Vietnam has followed the incentives to find work. By 1995 benefits in all countries GEE pattern, although state sector employment never were low, largely for fiscal reasons, and some countries, 75 Wages have fallen further in the NIS than in CEE, but more workers have kept their jobs. Figure 4.3 Unemployment and wages in CEE and the NIS Percent 1989 = 100 25 20 Czech Rep. 15 Russia Latvia Ukraine Belarus Estonia 10 Kazakstan .1'.(` \C\ 4," c, e2. p ; \2, 6 (6,.\ 6 `),0 o<6. e e \\k- <2,e' <6' \%''' .(z9 co} Unemployment (left scale): Wage index (right scale): CEE II NIS CEE NIS Note: Data are for 1994. Unemployment is measured by the registered unemployment rate; nominal wage data are deflated by the country's consumer price index. Because of the ending of shortages and improvements in the quality of goods, changes in deflated wages may not be a good index of changes in real purchasing power. The regression line is that for the regression of the wage index on countries' rank by unemployment level. Source: Official data. including Hungary and Poland, paid benefits at the same workers must rely on poverty relief. The result is a high flat rate to all recipients. Such an approach simultaneously incidence of poverty among the unemployed in countries improves work incentives, minimizes costs, and eases where poverty relief is patchy. administration. All countries now limit the period for Incentives on the contributions side are also impor- which unemployment benefits are paid, generally to a year tant. In GEE and the NIS payroll contributions that or less. Once their entitlement has expired, unemployed finance income transfers (including unemployment bene- 76 to who actually ends up paying it. But it has the great China's TVEs have produced most of the advantage that workers immediately see a larger deduction new jobs. on their pay slip if benefits increase; this helps reduce pressure for higher benefits. Separately, governments also need to spread the tax net to include new private firms; otherwise the burden on larger firms increases and, with Figure 4.4 Composition of employment increased evasion, the tax base shrinks further. In all these in China areas progress has been scant. IMPROVING LABOR MOBILITY. Many of the ingredients of a more mobile labor market in transition countries are Millions of people more or less universal: well-designed unemployment ben- 700 efits, improved job information, labor exchange services, adequate transport systems, andeven more important 600 an active housing market. But transition countries face a unique challenge in creating a labor market that frees workers to move from job to job and place to place, 500 namely, how to dismantle structures of social support that tie workers to a single enterprise while simultaneously 400 building a new system to replace them. Decoupling delivery of a wide range of services from 300 enterpriseshousing and day care are particular prob- lemswill be vital to allow workers to move readily. But 200 the pitfalls are many, and progress has varied. If divesting of services is slow, reform is impeded; if rapid, it can lead to a breakdown in service provision. In the short run, 100 therefore, municipalities have an important role in ensur- ing continued provision of key services, perhaps through underwriting part of enterprises' cost of provision. A 1978 1986 1993 longer-term approach has three steps. First, require enter- prises to separate their general accounts from those for 71 Urban state sector social services. Second, for tax purposes allow enterprises to offset the costs of social services against the income El Other urban those services generate, but not against income earned El TVEs from the enterprises' main activities. This gives enterprises strong incentives to charge for services and might encour- Other rural age the spinoff of new service firms. Third, help families meet those charges through higher wages (in place of non- monetary compensation) and through targeted income Source: China Statistical Publishing House 1995. transfers such as family allowances. Over time, service- providing entities could become freestanding providers, could be taken over by the municipality, or could disap- pear. With finance decoupled from the enterprise, the last fits) are high, hindering new employment, encouraging outcome would not be a problem, at least in urban areas workers and employers to collude in fraud, and creating with multiple providers, because provision would no incentives for unofficial employment (Chapter 7). The longer be exclusively for enterprise employees. Indeed, employer contribution can be reduced in three ways: by providers would face incentives to attract new customers. reducing benefits, by financing through general taxation Migration, another aspect of mobility, is an important benefits that do not relate to any insurable risk (such as issue, particularly in China where enterprises provide pen- benefits for children), and by dividing the contribution sions and health care on the assumption that people keep between worker and employer (under the old system the the same job for life. Legal controls on where people can employer paid the entire contribution, a fact regarded as live have been eased, and price reform, market develop- one of the victories of socialism). "Sharing" contributions ment, and high urban demand for labor have led to enor- between worker and employer may make little difference mous migration in search of employment. This "floating 77 population," mostly single men and young women, makes the working poor disproportionately affects families with up 20 to 25 percent of the population in most cities. But children, a family allowance (discussed in the next sec- this migration remains temporary, in large part because tion) might be a more effective way of combining employ- migrants are not eligible for education, health care, or ment opportunities with poverty relief. subsidized housing. Both restricted mobility and com- ADDRESSING UNEMPLOYMENT. Two questions are of pletely free movement have costs: the former in lost particular relevance to GEE and the NIS regarding unem- opportunities for beneficial migration, the latter in strains ployment. Should governments continue to assist enter- on urban infrastructure, the breakdown of rural commu- prises? And what should be the role of active labor market nities, and the risk of creating an urban underclass. But policies (policies aimed at improving work opportunities)? the present situation in China is unambiguously bad: The speed and effectiveness of transition depend on the mobility exists in practice, but institutions are based on pace of restructuring in state and privatized firms. Where the assumption that it does not. local unemployment is high and labor mobility severely PROTECTING WORKERS THROUGH REGULATION. Gov- constrained, a case can be made for temporary employ- ernments have a distinct role in setting the legal and reg- ment subsidies for firms that may survive in the long run ulatory frameworks within which trade unions and firms or whose closure would devastate a region. But govern- can operate and in ensuring that those frameworks ments should ensure that such support is phased down on encourage their positive contributions to growth. Govern- an established schedule (Chapter 3) and that financing is ments also need to define minimum standards and pre- concentrated on employment. Finally, where explicit vent exploitation and discrimination. Successful labor employment subsidies are provided, governments should policies are those that work in harmony with the market also work to increase labor mobility and give workers and avoid providing special protection and privileges to information on job opportunities elsewhere. some labor groups at the expense of the poorest. Active labor market policies are of three broad types: GEE and the NIS have inherited heavily unionized employment services (placement, counseling) to "recycle" labor markets. Under the old regime, trade unions were in existing skills more effectively, training to increase human essence part of the government apparatus (as they are still capital, and direct job creation. The usefulness of such poli- in China and Vietnam). Their role needs to change if they cies during a general collapse in output is severely circum- are to support a market system in the ways explained in scribed, however. Except on a small scale and very selec- World Development Report 1995. Encouraging the benefi- tively, they are likely to be beyond the means of GEE cial side of trade unions in transition countries will be no countries and the NIS, even though they can be an effective easy matter, and the precise policies needed will vary con- response to industrial decline and the corrosive effects of siderably across countries. But there are two constants. long-run unemployment. The Czech government instituted The first is free competition in product markets, so that a package of labor market reforms in 1990-92 with three unions cannot capture economic rents. The second is elements: a computerized job information system, reduced ensuring that parties engaged in bargaining face the costs unemployment benefits, and job creation programs. The of its outcome. In Poland, for example, legislation in the reduced unemployment benefits and the country's low ini- early 1990s required that workers be paid even when on tial level of unemployment made the job creation programs strikea clear disincentive to compromise. financially feasible, and the evidence suggests that they Another thorny issue is whether to have a minimum helped reduce the spread of long-term unemployment. wage. This is a hotly debated question worldwide. But However, the main driving force behind continuing low whatever the balance of general arguments for or against, unemployment in the Czech Republic has not been specific a minimum wage could be particularly problematic for labor policies but strong private sector growth. transition economies. Limited government capacity, Reforming income transfers: What redistributive aggravated by the tendency toward undeclared employ- role for the state? ment, makes it very difficult to enforce. Moreover, the difference between subsistence and the average wage is In all middle- and high-income countries the state has an much smaller than in rich countries, creating a tension important role in organizing income transfers. These have between a minimum wage high enough to avert poverty several purposes: to redistribute income, to maintain polit- but low enough not to reduce employment. In Russia, ical stability, to promote efficient labor markets, and to in- where the minimum wage is the basis of the entire public sure against important risks where private markets cannot. sector wage structure, the government, to reduce infla- The specific objectives of income transfers include tionary pressures, has exerted downward pressure on the insurance, protecting people against risks such as unem- minimum wage. As a result it no longer protects the ployment; income smoothing, allowing people to protect lowest-paid workers. To the extent that poverty among their living standards in old age by redistributing income 78 from their younger years; and poverty relief ensuring at The multitude of pensioners can create a vicious circle in least a minimum standard of living. The changes in labor which high pension spending (16 percent of GDP in Poland markets that transition brings require a fundamental in 1994) leads to high payroll contributions, to incentives reform in the old system of income transfers: a widening not to declare employment, and thus to still higher contri- wage and income distribution means that transfers must bution rates (Box 4.4). Yet pensions in most countries be targeted in ways that take more account of differences remain low because there are so many pensioners. The com- in circumstances; the loss of job security makes develop- bined effects of unemployment, widespread informal activ- ing unemployment benefits urgent and means that trans- ity, low pensionable age, and, in some countries, lack of rural fers can no longer be administered by enterprises. Both coverage have led to low ratios of contributors to pensioners these changes call for strengthening the administration of (Table 4.2). Poland, for example, has 4.6 people of work- income transfers. ing age for each person aged sixty or more, but only 1.9 of them contribute. Bulgaria has little more than one contribu- Inherited transfer systems tor per pensioner. Medium-term projections in many coun- Inherited systems of income transfers in transition econ- tries show that present arrangements are not sustainable. omies differ greatly but share some common tendencies: Breaking this vicious circle is one of social policy's support is poorly targeted, much administration is devolved main challenges. So far there has been much debate but to enterprises, and some rural populations are neglected. little change in policy (the Czech Republic and Latvia are GEE AND THE NIS. Although relatively well adapted among the few exceptions). In fact, the average age at to the old regime, the system of income transfers in these which a pension is first paid has declined in most coun- countries failed in important ways to accord with the tries. Making the political economy of pension reform needs of a market economy. It distributed roughly equal more difficult is the fact that employers pay the bulk of benefits to all in the urban population rather than focus- pension contributions, whereas pensioners as a group have ing them on the poor. In most countries poverty relief was the power to swing elections. rudimentary, and because officially unemployment did CHINA. Social protection in China differs from that in not exist, neither did unemployment benefits. Enterprises GEE and the NIS in several important ways: the country's had a major role in benefit administration (for example, population is still young (although the average age will paying contributions en bloc for their workers, with the rise rapidly over the next thirty years), its urban system of result that governments have no individual records), and social protection is a series of enterprise-based islands no distinction existed between risk-related benefits (such rather than a unified system, and it has a large rural pop- as unemployment benefits) and others (for example, fam- ulation (80 percent of the total population) with very ily allowances). A single social insurance contribution limited social protection. financed the whole gamut. Administrative capabilities, The urban system of income transfers (labor insurance) moreover, were limited. Pensions, for example, were paid faces many problems parallel to those of the GEE coun- in cash through the postal system. tries and the NIS. Pensionable age, for example, is low There has been some progress. All the GEE countries and the social insurance system excessively fragmented. and the NIS now have working systems of unemployment Workers in government agencies and state enterprises benefits, and many have established a broadly based, enjoy comprehensive benefits, while a parallel, less gener- income-tested benefit of last resort, usually at low levels. ous system serves employees in collective enterprises. By Benefits, nevertheless, remain badly targeted. In Russia in contrast with GEE and the NIS, Chinese enterprises have 1992 only about 19 percent of transfers served to reduce been responsible for administering and financing benefits. poverty directly, compared with an average of 35 percent This arrangement ties workersand pensionerseven in the OECD countries and 50 percent in Australia. more closely to the enterprise and slows enterprise reform. High spending on benefits, particularly pensions, has Furthermore, the generosity of benefits depends on the been a central issue. The core of the problem is that pen- enterprise's financial capacity and on its age (newer en- sioners are numerous. Pensionable age in GEE and the terprises have fewer pensioners). Some income pooling NIS is generally five years lower than in the West, and between enterprises has been introduced at the municipal large groups such as miners and teachers were able to level, but this is only a partial solution. retire even earlier. As a result, the typical woman pen- China's rural labor force remains outside the system of sioner in the Czech Republic enjoys five more years of labor insurance, creating two sets of problems. First, more retirement than her American counterpart, and seven than 100 million people working in rural industry have years more than her German counterpart. For men the only patchy access to health care and no pension rights difference is closer to one year. The comparison for Hun- unless they buy them privately. The huge rural population gary, Poland, and Russia is broadly similar. has relied on the extended family for old age support and 79 Box 4.4 Reforming income transfers in Hungary and Latvia Hungary illustrates the potential vicious circle in be reduced by abolishing favorable treatment for financing income transfers. In 1992 about 90 percent special groups and by paying lower benefits to people of households received some sort of transfer, and trans- who retire earlier and higher benefits to people fers made up over 40 percent of household income. who defer retirement and continue to contribute. It is The problem arises in part because pensionable age is estimated that, if the reforms are successfully followed low and because registered employment fell by 20 per- through, the savings by 2000 will equal roughly a cent between 1990 and 1995. High social spending quarter of expected contributions. Those savings will may have helped prevent change in the income distri- be channeled to a second, funded system in which bution (Figure 4.2), but it led to high contribution the contributions will be held in reserve or invested rates. These, coupled with limited enforcement capac- by private managers. In essence, Latvia's older and ity, increase incentives for evasion and informalization, younger generations have made a deal. Pensioners thus reducing the number of contributors. Despite have agreed not to press for larger benefits, and work- high spending, benefits are often inadequate, and addi- ers have accepted the burden of higher contribu- tional, undeclared earning is becoming the norm. tions in the hope of greater security for themselves in Reform is politically contentious, but the potential old age. payoff to reduced informalization is huge: if 100,000 If successfully followed through, the reforms will workers (about 1.9 percent of the labor force in 1990) bring major benefits. They will reduce public pension moved from registered unemployment to registered spending. They will do away with arguments about the employment, the fiscal balance would improve by age of retirement, because workers can choose when to about 0.5 percent of GDP. retire. And because pensions bear a direct relation to Latvia has introduced major reform intended to contributions, they will encourage people to come out break the vicious circle. State pension spending is to of the informal economy. poverty relief, but with a trend to smaller families and increasing labor mobility, these ties are weakening. The 30 Table 4.2 Population structure and million to 40 million absolute rural poor are on the mar- contributors per pensioner in selected gin of subsistence. Many would face starvation were it not transition economies for China's highly effective grain relief system, which pro- Persons of vides them with just enough grain to live on. It is essential working age per Contributors per that this system survive transition. Beyond this, sustained Country person over 60 pensioner economic growth should continue to aid poverty reduc- Central and Eastern Europe tion. And because the poor make up a relatively small Albania 7.9 1.0 share of the rural population, the government should be Bulgaria 2.9 1.2 able to target relief to the very poorest communities. Czech Republic 3.5 2.0 The second set of problems relates to a blurring of the Hungary 3.2 1.5 distinction between urban and rural workers and the Poland 4.6 1.9 Romania 3.6 2.0 emergence of a growing migrant rural labor force. The social insurance system, still based on the assumption of Newly independent states Russia 2.9 1.9 low labor mobility, has yet to recognize that workers move Kyrgyz Republic 5.0 2.6 between types of employment and between locations. One Turkmenistan 6.6 3.6 quarter of rural workers are now wage earners, yet still lack Uzbekistan 6.3 3.0 the labor insurance coverage of their urban counterparts. Memorandum: Likewise the growing "floating population" of migrant OECD average, 1990 3.6 2.6 workers remains largely without coverage. Although most Note: Data are for 1993. migrants do well, some do not, and they may represent the Source: World Bank Social Challenges of Transition data base; first of an emerging group of poor in areas that have not World Bank 1995k. traditionally had large poor populations. 80 Policy directions treatment? In much of CEE and the NIS inflation Broadly, social safety nets can take two forms: transfers, destroyed the financial savings of the elderly. Unlike the whether in cash or in kind; and programs that give people young, they will not have the opportunity to recoup their earning opportunities. There is a strong presumption that, losses in the market economy. A case can therefore be where transfers are paid, they should be in cash wherever made on equity grounds for special treatment. In part this possible: cash payments leave buying decisions to the has already happened: many people have been allowed to recipient, they are more transparent in budgeting, and retire early, and pensioners in many countries have held they do not interfere with market prices. In some circum- their ground relative to wage earners. Another possibility stances, however, benefits in kind have advantages: they is to favor the elderly in distributing such assets as shares, usually maintain their value during inflation, and in spe- vouchers, and housing. Wealth can empower the older cific casessome of which are discussed belowthey generation: an elderly pensioner who owns her house can may be well targeted. Transition economies have very dif- leave it to her children, trade it for regular income trans- ferent incomes, administrative capacities, family struc- fers from her children, or use her house as security for a tures, and social priorities. Some have much larger infor- loan or an annuity. mal sectors than others, and some remain substantially However, the inherited pension systems in CEE and rural. Their systems of income transfers will therefore dif- the NIS need major reform. Benefit spending, like public fer widely. spending generally, must be made compatible with a PRIVATE INSURANCE. Many people are poor only for smaller public sector, to create room for private sectorled particular periods in their livesfor example, while growth. In many countries spending on pensions has to be unemployed. Should the state leave coverage of such risks cut, either by reducing individual benefits or by reducing to private insurance? The answer, as discussed in Chapter the number of pensionersfor instance, by raising pen- 7, is usually no. Private insurance deals badly, if at all, sionable age and stemming abuse of disability pensions. In with certain risks, including unemployment. It may be an the short run poverty relief should take precedence over option for some risks (such as health-related absence from other objectives; in some countries this may mean paying work) and for some people (the urban middle class). But flat-rate benefits. This cuts spending but may create dis- even in the West, where the institutional framework is content. As always, policymakers have to strike a balance stronger, private insurance is no more than a supplemen- between what they cannot afford to doand what they tal source of income support. cannot afford not to do. SOCIAL INSURANCE. Social insurance benefits are paid In the medium term, as fiscal and administrative con- on the basis of a worker's contributions (usually a fraction straints start to relax, the system can evolve toward one of his or her wages) and on the occurrence of a specified that more explicitly relates contributions to benefits. This event, such as becoming unemployed or reaching a given will strengthen incentives to contributeindeed, to the age. Because participation is compulsory, social insurance extent that it reduces perceptions that the contributions can protect against risks that the private market cannot are a tax, it may also improve the incentive to work in the cover and can redistribute from rich to poor. Although all formal sector. Special arrangements for the current elderly the CEE countries and the NIS have well-established sys- should not be carried over to the younger generation, who tems that would be politically difficult to withdraw, social have time to build up pension entitlements and other insurance may not be the way forward for all countries. forms of wealth. Political difficulties notwithstanding, Whether it is depends on the answers to several questions. gradually raising the retirement age is inescapable, and this Are the causes of income loss relatively clear-cut and in has started in a number of countries. Reform of state pen- principle insurable? Is administrative capacity adequate? sions should be accompanied by development of a com- Can income be accurately measured for purposes of cal- plementary system of private pensions (discussed below). culating contributions? And is it possible to enforce con- In China there is broad agreement that a unified sys- tributions and calculate benefits? In countries such as the tem, including rules for adjusting benefits for inflation, Czech Republic, Hungary, and Poland the answer to these should cover all urban enterprises, state and private. For questions is yes. In some of the NIS, particularly the the same reasons as in CEE and the NIS, benefit admin- poorer Central Asian economies, it is probably no. istration and delivery should be shifted away from enter- Because much employment is informal, enforcing con- prises, and the retirement age should be raised. Contribu- tributions is virtually impossible, and low administra- tions by employers and the different levels of government tive capacity makes enforcement problematic even in the should be clearly delineated and, for the same reasons as formal sector. elsewhere, worker contributions introduced. Pensions pose special and difficult problems. Should Countries will need additional ways to relieve poverty, members of the current older generation receive special but that requires first identifying who is poor. There are 81 three broad ways to do so: by measuring income (that is, by using an income test); by using an indicator of poverty, Box 4.5 Innovative pension delivery in such as age or illness; or by devising programs with incen- South Africa tive properties that induce only poor people to participate. INCOME-TESTED SOCIAL ASSISTANCE. Assistance to Each month on pension day in Kangwane, a former individuals or families with incomes below a specified black homeland in South Africa, a thin line of level is appropriate for the lifetime poor and where con- grandparents walk across the rural wilderness tributions cannot be calculated or enforced. But broadly clutching banknotes dispensed by some of the most based, income-tested social assistance presents several sophisticated cash machines in the world. The cash problems: it creates important disincentives against work, machines arrive mounted on unmarked trucks and the necessary tax rates are unsustainable for poor coun- escorted by armed guards. Under makeshift awn- tries, determining eligibility is administratively demand- ings, each pensioner swipes a plastic card through ing and costly even in wealthier countries, and income the machine, then rolls a finger across a tiny scan- testing can be stigmatizing and intrusive and thus politi- ner that checks the fingerprint against a digital tem- cally contentious. These problems are serious for many plate and then dispenses the monthly pension. The transition economies, especially where poverty is transient service now pays pensions to about 400,000 South and often shallow, so that many people move into and out African senior citizens. of poverty. The system works well in both social and admin- One alternative is to organize poverty relief locally and istrative terms. It empowers the elderly, usually allow local officials some discretion in administering it. women, and it can be a good way, through a grand- Uzbekistan has introduced a scheme of this sort. The mother's discretion, of offering family support. And smaller the locality, the better the information on appli- when a person dies and is therefore unable to collect cants, which assists targeting. Localities can be given a the pension, payments cease automatically. fixed budget, so that spending can be controlled. Discre- tion, however, is administratively demanding at both the central and the local level. A mechanism is needed to unemployment benefits only if they perform eighty hours ensure that the neediest localities receive greater resources of public service a month. Such "workfare" has advan- than less needy ones. This requires both the technical tages: the only people who participate are those for whom capacity to make informed decisions and the ability to it is genuinely the least-bad option, and it may allow avoid discrimination and corruption. recipients to preserve their dignity by working. Broader TARGETED RELIEF USING POVERTY INDICATORS. It is benefits may accrue where the work creates useful infra- sometimes possible to identify the poor through an indi- structure such as roads. But the approach is hard to imple- cator of poverty that is easier to measure than income. ment, and it may face political opposition. With services such as child care being withdrawn, family CONCLUSION. The experience even of the advanced allowances are likely to be particularly well targeted in the reformers highlights the difficulties of targeting poverty European transition economies. An income test for all relief effectively and shows the importance of devising families with children is administratively costly, and the simple eligibility criteria, of devolving initiatives to the larger the informal sector, the less accurate it would be. community level, and of engaging a wide range of inter- Family allowancesa fixed amount per child per ested parties, including disadvantaged groups and com- monthare paid without income tests throughout West- munity leaders in partnership. In this context nongovern- ern Europe and in several Latin American countries. mental organizations (NG0s) can have a valuable role, for Other uses of indicator targeting include help for preg- example by providing shelter for the homeless. To encour- nant women and infants through nutrition programs and age these activities, however, governments must first make medical checkups, and for schoolchildren through free them explicitly legal where they are not already, and pos- meals and health checks. Old age, particularly in single- sibly provide them with tax advantages or some explicit person households, is another good indicator of poverty funding. NGOs can often relieve poverty and provide ser- and is administratively relatively undemanding (Box 4.5). vices more efficiently than state institutions, as well as SELF-TARGETED POVERTY RELIEF. Some countries try encourage local participation and generally promote the to subsidize goods consumed mainly by the poor. But development of civil society. such commodities are few, and the list of subsidized com- modities can be "hijacked" by the middle class. Another Pension reformand the role of private schemes approach is to offer subsistence cash payments in return State pensions, as discussed earlier, require fundamental for work. In Estonia able-bodied people are eligible for reform in every transition country. Many of the less 82 advanced reformers should probably focus solely on get- this might in some cases be speeded by endowing pension ting their state systems in order. But some transition funds with privatized assets (Box 4.6). economies are developing private pensions or considering POLICY OPTIONS. Eventually, transition governments their introduction. Most state pensions operate on a pay- are likely to settle on a pension system that combines three as-you-go basis (current pensions are paid out of current elements: a state component, normally pay-as-you-go; contributions), whereas most private schemes (whether a funded component, normally private; and, where the compulsory or voluntary) are funded by the savings peo- funded component is compulsory, a third component ple accumulate during their working lives. Some elements consisting of funded schemes to which individuals can are essential to any pension reform. Beyond these, policy- make voluntary additional contributions. Within this makers in each country face a range of options. These, framework, every country will have some strategic choices however, will be subject to the interplay between choice to make about the relative size of the three components and initial circumstances highlighted in Chapter 1. and the design of each. ESSENTIAL COMPONENTS OF REFORM. The first and How large and how redistributive should the state central element of pension reform in transition economies pension be? Poor countries cannot afford to spend much on is ensuring that public pension spending is compatible pensions. The cheapest way to maximize poverty relief in with economic growth. Problems with public spending such cases is through flat-rate pensions. As fiscal constraints must be addressed directly; private pensions are no solu- relax, other policy options become possible, including a tion to excessive state spending, especially when the pub- higher flat-rate pension (as in the Netherlands) or a pension lic schemes are as overextended as they are in most transi- that is at least partly related to previous contributions (as in tion countries. Second, any pension reform needs to be the United Kingdom and the United States). financed in some way. Adding a funded scheme to an How should private, funded pensions be organized: existing scheme requires building up capital to pay future through individual accounts (as in Argentina and Chile), pensions while continuing to pay current pensions. This or should it also be possible for employers to organize is rather like asking people to pay mortgages on two schemes, as in many European countries? The choice housestheir own and their parents'at the same time. depends in part on how broadly policymakers want risks If the parents' home is small and the children's income ris- to be shared. As a separate issue, how and how far should ing (as in Chile and China), the added payment is not a pensioners be protected against loss and high inflation major problem. But if the parents' home is largeand particularly salient risks in an economy undergoing major mortgaged to the hiltand the children's income low or reform? The state might underwrite at least some of the shrinking (as in CEE and the NIS), the parents' home will inflation riskpensioners should not face substantially have to be financed in some other way. Alternative ways more risk than wage earners, and the collapse of private of funding pensions include taxation, asset sales, or bor- pension schemes during the infancy of a market economy rowing. Introducing private pensions therefore needs to could undermine the political consensus underpinning be part of a strategy that also embraces public pension economic reform. spending (see the discussion of Latvia in Box 4.4). Indeed, Should membership be compulsory? Pay-as-you-go as noted above, controlling public pension spending schemes are so by their nature. Some experts argue for ought to be the driving priority for many less advanced small public pensions and compulsory membership in pri- reformers for the time being, since they are still some way vate schemes. But requiring membership raises tricky from acquiring either the economic or the institutional issues. The Czech Republic has an above-subsistence pub- basis for more ambitious, long-term reforms. lic pension and is bringing spending under control, in A third essential element is regulation and enforcement part through funded schemes, with tax advantages to to protect contributors and pensioners; this in turn encourage contributions. But the Czechs did not consider requires effective government. In many transition it politically feasible to take the further step of mandating economies the necessary financial market regulation, contributions to the new private schemes. Many other including agreed and enforced accounting standards, is transition countries will also find this difficult, given that not yet in place. Putting it in place is a large task, but an inflation has so recently all but wiped out private savings. essential first step in building private pensions. Especially PENSION PACKAGES. How should transition countries where there are large pension funds, government also choose which mix of pension schemes is right for them? A must be barred from trying to politicize the allocation of typical system in Europe and North America has a state investment. Finally, funded pensions need time to pay-as-you-go pension covering more than subsistence, mature; it takes up to forty years for workers to accumu- complemented by a variety of regulated, privately managed, late enough to support themselves in old age, although funded pensions. Where these are compulsory, individuals 83 Box 4.6 Can state property be used to fund pensions? Governments enter transition with large obligations the housing to pay the pensions. On the death of the but also with considerable property. In market eco- pensioners the housing would be auctioned. nomies the total value of wealth is roughly four times Although attractive in principle, these schemes are GDP: land, housing, and other structures (including not easy to implement. The first problem is that not all commercial buildings) are each about equal to GDP; state wealth is controlled by central governments. Sub- equipment, inventories, consumer durables, and live- national or municipal governments control much com- stock make up the remainder. Can transition govern- mercial real estate. Tenants often have strong presump- ments use some of this wealth to fund obligations such tive rights to their homes, even if they are owned by as pensions? government or state enterprises. A second problem is Experience elsewhere suggests that it is possible. In that funded pension schemes require regulatory over- Bolivia government shares in majority privatized com- sight, liquid asset markets, and a pool of independent panies will be placed in privately managed pension professional managers, and all take time to develop. funds. In theory governments in transition economies But the alternatives are not necessarily easier. Govern- could do the same. And enterprise shares are not the ments could instead sell the property for revenue, but only asset they could use. Bonds placed on the books this is difficult if buyers with capital are scarce (see of some enterprises (with the government as benefi- Chapter 3). Governments may sell property quickly ciary) are another available asset. Bonds have a steady and cheaply, hoping to collect property or capital gains payback, are more secure than equity shares, and may taxes from the new owners; in practice, however, tax subject firms to creditor monitoring. Real estate could administration also takes time to develop, particularly also be used to fund pensions. For example, some Chi- for these complex taxes. Given the difficulties of any nese enterprises unable to pay pensions have consid- course of action, using state assets to fund pensions ered transferring the housing they own to a property may be worth considering, but any scheme requires management subsidiary, which could borrow against careful attention to both design and implementation. may also make voluntary additional contributions to ing Asian economies gave priority to economic growth and funded schemes. The three components address different therefore adopted more individualistic systems that encour- purposes: the state scheme is concerned mainly with aged high saving. Some transition economies face tighter poverty relief and (often imperfectly) with redistribution, constraintseconomic, political, and socialthan these the second tier helps people redistribute their income across countries, which have long-established market systems, rel- their lifetimes, and the third allows for differences in indi- atively sophisticated banking systems and capital markets, vidual preferences. This approach accords a significant role and relatively stable prices (and Chile introduced its reform to social solidarity and shares risks fairly broadly, but it can at a time of budgetary surplus). Moreover, government come under severe financial pressure from the twin threat capacity in those countries is high. Social constraints also of a slowly growing economy and a rapidly aging popula- differ. The extended family is still important in the high- tion. An alternative approach, used in Chile and Singapore, performing Asian economies, and strong family support has a smaller public component. In Chile the state pension structures also exist in the Central Asian republics; they are is a minimum guarantee for private pensions; people whose weaker in CEE and the other NIS. In the Kyrgyz Republic, benefits are above the minimum receive no state pension. for example, elderly ethnic Russians are worse off than For most, pensions are provided by one or more funded, elderly Kyrgyz, for whom the extended family support net- regulated, individual schemes. Individuals can make volun- work still exists. Most of these constraints, and others else- tary additional contributions. This approach does not redis- where in the economy, can be overcome through consistent tribute from rich to poor or between generations other than reformindeed, that is one of the major purposes of through the minimum pension guarantee. Recent reforms reform. But they cannot be ignored in the short run. in Latin America (Argentina, Colombia, and Peru) adopt The agenda something of a middle ground between the European North American and the Chilean approaches. Some widening of the gap between rich and poor is an The precise choice depends on a country's objectives inescapable part of transition. Especially where rising and its constraints. Chile and several of the high-perform- inequality has also involved rising poverty, governments 84 have come under pressure to narrow the gap once again. nize the true extent to which large numbers of people are Over the long haul the only way to reduce poverty is to suffering from poverty, insecurity, or both. Policymakers foster economic growth, largely by pursuing the pro- have to find a meeting ground between fiscal pressures market policiesincluding lower public spending and political and social imperatives. People left behind described in Chapter 2. Tackling chronic labor immobil- even after growth rebounds and labor markets become ity would encourage growth and reduce poverty at the more flexible should be able to count on continued gov- same time. But freeing workers to respond to market sig- ernment support, including well-targeted social benefits. nals will be tougher than freeing the markets themselves. The elderly in transition countries stand much less chance It will involve not merely market-determined wages, but of recovering their losses, and this generation presents a governments taking on the other hindrances that keep strong case for special treatment. But runaway spending workers from freely changing jobsin particular, the cou- on pensions in transition countries cannot be allowed to pling of social benefits to enterprises and the lack of a continue. Governments can address the problem now, by functioning housing market. Growth and greater mobility raising the age at which the next generations can retire, would help most of the present losers from reform to and over the long term, by building a pension system that make up their recent losses. However, policy must recog- can sustainably support the many generations to come. PART Two The allen of Consolidatio LIBERALIZATION, STABILIZATION, PRIVATIZATION, and poverty relief are intrinsic to transition. But they are not enough to create vibrant market economies. Building on the early gains of transition will require major consolidating reforms, to develop strong market-supporting institutions, a skilled and adaptable work force, and full integration into the global economy. The many institutions that support market exchange and shape ownership in advanced market economiesboth con- crete organizations and abstract rules of the gamelargely dis- appeared under central planning. As Part One showed, even in this weak institutional setting, favorable policy reforms have been able to spur economic growth. But a growing body of evi- dence on market economies suggests that, for the longer term, if transition economies are to join the ranks of the advanced market economies, they will need not just good economic poli- cies but strong and accountable institutions to support and implement them. Which institutions are most critical? First are good laws and effective means for their enforcement (Chapter 5). These establish and apply the rules of the game, lower transaction costs, increase commercial certainty, create incen- tives for efficiency, and control crime and corruption so that businesses can focus on productive activities. Second are strong financial institutions (Chapter to encourage saving and channel it to its most productive uses. Financial institutions also play an important role in corporate governance, complement- ing that of enterprise owners, by imposing financial discipline and overseeing the activities of borrowers. A third essential institution is government (Chapter but the all-powerful, all-encompassing governments of the planning era need to be completely reoriented toward a smaller, more selective set of activi- ties that support and complement, rather than stifle, private enterprise. Institutions do not develop in a vacuum. Reformers' top-down efforts to develop strong legal and financial institutions and to change government behavior must be complemented by bottom-up demand for such reform. This demand will not spring up overnight, and it will often require deep changes in incentives, attitudes, and experience. But it will emerge faster if policymakers are vigilant in pursuing macroeconomic stability, open markets, and private sector development. An extensive body of research shows the importance of human capital for the sustained growth and adaptation of market economies. Many countries enter transition with a strong human capital base, and their rising returns to education already show the importance of skills in the new economy. Never- theless, thorough reform of education and health systems is needed, both to pre- serve past achievements and to adapt to the needs of the market (Chapter 8). Finally, openness to trade and foreign investment has proved an equally robust predictor of strong economic performance across countries. Indeed, both have already had a large positive impact in transition economies. Deeper inte- gration into the institutions of the global economy carries obligations as well as rights, and these can help integration serve a broader purpose: that of locking in reforms against the emergence of pressure groups (Chapter 9). Legal Institutions and the Rule of Law central planning, law was first and foremost do not take local legal culture into account, they may be an instrument of state control. Law in market inappropriate or may not take root. An intermediate Under economies is fundamentally different; it defines approachborrowing ideas from best-practice models the rules of the game and gives individuals the rights and abroad, then adapting them through indigenous legal tools to enforce them. Where the rule of law is in force, drafting and political debateusually works best. laws are applied fairly, transparently, and evenhandedly to Many countries have good laws that are ignored, but all; individuals can assert and defend their rights; and the the centrally planned economies brought this dichotomy state's powers are defined and limited by law. People in between law and its application to an extreme. Many laws countries with a well-established rule of law rarely stop to were put on the bookssuch as constitutional provisions wonder where it comes from. But transition economies guaranteeing basic freedomsthat were never meant to need to start over, to replace arbitrary rule by powerful be applied in practice. Transition economies thus need to individuals or institutions with a rule of law that inspires develop effective supporting institutions to move their the public trust and respect that will enable it to endure. new laws from theory to practice. One obvious example is the court system. Although, as discussed below, most con- Developing the rule of law tract enforcement is and should be informal, countries The rule of law requires good laws, demand for those still need formal enforcement mechanisms at the margin. laws, and institutions to bring them to life. Good laws are For these to work, however, litigants must be confident not easy to design or to enact even in the best of circum- that courts have the power and the capacity to judge stances; the task is harder still in transition economies, objectively and to get their judgments enforced. where policy debates still rage over fundamentals, political The administrative-command system of central plan- pressures are intense, and experience with market mecha- ning marginalized law within the economy, and all formal nisms remains scant. Yet failure to pass good laws imposes judicial institutions atrophied in the economic sphere. In costs that go beyond the mistakes in individual laws to the most of CEE and the NIS, economic disputes between integrity of the legal system itself. Laws passed with major enterprises were removed from the courts' jurisdiction inconsistencies and uncertainties, or with clear avenues for altogether and instead decided by special arbitration bod- abuse, simply deepen public cynicism and mistrust. ies. Even then, if a trading partner reneged, managers Where do new laws come from? Transition economies would generally turn to ministerial or party officials for can turn to two sources: "home-grown" law, drawn up redress rather than pursue administrative remedies. Min- either from scratch or from legislation enacted before cen- istries could order delivery of key inputs, whereas admin- tral planning, or law transplanted from established market istrative bodies might only award money damages or economies. The CEE and Baltic countries, with their impose finescold comfort to enterprise managers seek- shorter history of central planning, have tended to draw ing to fulfill the plan. from prewar legislation where possible, but this source is With transition, independent courts and alternative dis- largely unavailable to most of the NIS or to China. The pute resolution and enforcement mechanisms need to play alternative, imported laws, has the advantage of experi- the remedial role formerly assigned to the bureaucracy. But ence, but importing is risky. Differing histories and cul- to say that the state must withdraw from administrative tural traditions shape the way legal systems work. If laws control is not to say it should give up enforcing the law. 87 88 Transition economies struggle with a constant tension As noted in Chapter 9, a strong commitment to inter- between, on the one hand, the need for a strong state to national integration can also stimulate demand for law enforce laws and impose order and, on the other, the need and provide market-friendly models of legislation. The for constraints on state power to make room for individ- desire of many European transition economies to join the ual rights. Sorting out where state power is legitimate European Union has motivated them to adopt economic and where it is not is a constant task of governments laws that meet EU requirements in such areas as taxation, everywhere. But whereas established market economies trade, and competition policy. Trade agreements with the argue these questions at the margin, transition govern- United States and eventual membership in the WTO and ments are completely refiguring the enforcement functions other international bodies can also encourage legal re- of public institutions. form, as can a strong commitment to foreign direct in- Formal legal systems place judges, prosecutors, arbitra- vestment. The point here is not that integration will push tors, court functionaries (for example, bailiffs and bank- transition countries into precisely replicating foreign laws, ruptcy trustees), and the private legal profession in the but that it will fuel demand for certain types of law and role of primary interpreters and enforcers of laws. But the help policymakers design laws that foster links with the frill cast of characters underpinning the rule of law in outside world. any country runs much longer. Equally important are Creating legal frameworks for private those who produce and distribute information and moni- sector development tor market participants: among these "watchdog" institu- tions are accounting firms, credit rating services, securities Economic laws in market economies have at least four regulators, investigators, and other elements of civil soci- functions: defining and protecting property rights; setting etyincluding a free press. Like the courts themselves, rules for exchanging those rights; establishing rules for these institutions were neglected under central planning entry into and exit out of productive activities; and pro- and must now be rebuilt, essentially from the ground moting competition by overseeing market structure and up. And of course none of them can work well if peo- behavior and correcting market failures. Many transition ple do not know what the law is, because it is constantly economies are well along in drafting and enacting legisla- changing and they have no definitive and accessible tion in the fundamental areas of property, contracts, compilation to turn to. Transition governments need to company organization, bankruptcy, and competition, as make sure that laws, decrees, and important court deci- well as other, more specialized topics. Inconsistencies and sions are quickly published in an official and widely omissions remain, however, and many laws are only now circulated text. beginning to be implemented. Governments are often Finally, the rule of law can take hold only if good laws hesitant to relinquish control, citizens are slow to assert and competent institutions are supplemented by demand their new rights, judicial and other enforcement institu- for them. This will vary across countries, depending on tions are still severely underdeveloped, and a body of legal their history and culture, but economics also plays a role. interpretation to help guide practice in specific areas must Individuals and companies have strong economic incen- be created, largely from scratch. tives to claim their legal rights and abide by legal respon- sibilities only to the extent that they depend on the Property rights marketand their reputation in it. Banks and other cred- Property rights in successful market economies are com- itors, for example, will not take seriously their new rights plex things. They form a rich, intricately defined array under collateral, debt collection, and bankruptcy laws extending from full ownership through partial use rights unless convinced that state bailouts are unavailable. They (such as leaseholds and easements) to rights contingent on have to see that aggressive debt collection is necessary for specific events (such as inheritance rights and collateral survival. Similarly, when managers require a law-abiding rights to debtors' property). Countless types of property reputation to purchase supplies or raise capital, they will are defined and protected, from real estate and movable think twice about violating the sanctity of contract or property to new ideas and inventions. Under central plan- abusing minority shareholders. If managers can instead ning, concepts of property were based not on the scope of turn to the government or the state banking system for individual rights or the nature of the property, but on the subsidies, or if they enjoy a monopoly position, they will identity of the owner. Laws established a hierarchy, with have no reason to worry about their market reputation. state property at the top, cooperative property in the mid- Market-oriented incentives therefore complement mar- dle, and individual property (generally restricted to hous- ket-oriented laws and institutions. One cannot proceed ing and personal items) at the bottom. far without the others, and all three are essential to devel- At the start of transition most of the NIS and the CEE oping the rule of law. countries moved to expand the scope for private property 89 and to put it on an equal footing with state property. housing to commercial use. Both domestic and foreign China and Vietnam still hold to the supremacy of state lessees of state-owned commercial property may be sub- ownership, but they do allow private property and have jected to arbitrary changes in lease terms or rental rates; rent provided wide scope for long-term leases of property by controls often prevent owners from covering even mainte- individuals and small businesses. Chinese farmers, for nance costs. Although the letter of the law may permit the example, typically lease their land for twenty to seventy pledging of assets, the lack of a third-party notice system years. Most transition economies, including those in Asia, and of simple foreclosure procedures may preclude it in have also adopted intellectual property laws, often at the practice (Box 5.1). In sum, although property rights are now urging of trading partners, although these laws are prov- recognized on paper and to a growing extent in practice, ing notoriously difficult to enforce. they are still not free from extensive arbitrary interference. Yet many of these new rights are limited by heavy re- All societies preserve some role for government regulation strictions on use, pledge, and ownership. Land use is often over the use of private property (for example, through envi- subject to strict controls, with prohibitions or high fees for ronmental or nuisance laws), but many transition econ- the conversion of agricultural land to industrial use or of omies still go well beyond what is normal in market settings. Box 5.1 No loans for movable property? Businesses in established market economies rely on Determining priority. For pledging to work, lenders movable capital: it accounts for about half of the pri- need a cheap and easy way to determine whether a vate nonresidential capital stock and about three- prior security interest exists against the property quarters of corresponding gross investment. Yet private offered as collateral. Some advanced legal systems do lenders in most transition economies are reluctant to this by maintaining a publicly accessible registry; oth- make loans when the only collateral offered is movable ers do it less formally. Lenders in transition economies, property held by the borrower tractors, livestock, however, cannot easily determine whether such secu- inventory, machinery, or, in extreme cases, cars and rity interests exist. In Bulgaria the priority of a security trucks. Rather, lenders require that the movable prop- interest is determined by the date it is agreed to; with- erties be placed under their direct controlas if they out a central registry, this can only be uncovered by were valuables in a bank vault or goods in a bonded searching through hundreds of scattered notarial warehouseor that the borrower offer other types of records. The pledge registry in Poland is open only to collateral, such as real estate. This difficulty in using banks. In China and Lithuania a security interest in movable property as collateral results in much presum- movable property can only be registered if the under- ably desirable investment going unfinanced. Capital lying asset requires registrationfine for cars, trucks, formation is slowed, resulting in lower output and ships, and airplanes but useless for tractors, drill growth. Why is real estate or merchandise in a vault presses, and grain silos. In Latvia and Poland state taxes acceptable as collateral, but not livestock, machinery, take automatic priority over secured private claims, so and inventories? The answer lies in the process of cre- private lenders without intimate knowledge of the ating, prioritizing, and enforcing security interests in status of a borrower's tax payments cannot know if a movable propertythe underlying contracts necessary loan is safe. for loans and credit sales to work. Enforcement. In the event of nonpayment, lenders Creation. Legal systems should ideally permit the also need a quick and inexpensive way to recover and inexpensive creation of security interests for any person sell pledged and mortgaged assets. In transition over any thing. Yet many transition economies restrict economies the time required for repossession and sale the development of such interests. Bulgaria and Esto- of a pledged asset ranges from six months to three years nia forbid the pledging of goods not currently held by and can extend even longer. This is too long for most the borrower, making it difficult to finance crops and collateral to retain its economic value. Inventories of livestock. In Hungary and Poland only banks may for- food, clothing, and even machinery will depreciate so mally lend for property that remains in the borrower's much during this period that they cannot effectively hands; this limits development of nonbank lending. guarantee a loan. Recent Russian and Chinese laws Vietnam forbids the sale of pledge items, making it take some promising steps to address this problem, but difficult to finance inventory. it is too early to tell how well they are working. 90 Contracts from entering the market. Long-term interfirm contracts Freedom of contract is one of the great virtues of market- are almost nonexistent, because such contracts are partic- oriented legal systems, providing a decentralized way of ularly difficult to police and maintain. Limits on the scope allocating resources to their best uses. Parties are free to of contracting are only some of the costs of inadequate negotiate performance requirements and prices, to allo- formal enforcement. A more menacing cost is the vacuum cate risks of loss if conditions change, and to specify how opened for more violent enforcement mechanismssuch disputes will be handled. And during the course of the as the mafiathat corrode trust even further, as discussed contract, if the bargain ceases to make economic sense to below. one party, contract law generally allows that party to with- draw and pay monetary compensation rather than con- Company and foreign investment law tinue to perform under the contract. Well-designed and well-enforced company law is essential In centrally planned systems, by contrast, parties had if private companies want to tap into capital markets. In no freedom either to enter into or to exit from commer- 1995 financial markets valued a typical Russian firm at cial contracts. Interenterprise contracts were mere instru- only about one-twentieth of its likely value in a mature ments of the plan, and full performance was generally market economy. This low valuation all but prevents required. The collapse of central planning put an end firms from raising new capital by issuing shares. Why are to these notions of contract, to be replaced by new, share prices so low? A survey of foreign investors suggests amended, or revived civil and commercial codes. Al- that one important reason is the weakness of company law though these codes generally follow Western European as an instrument for overseeing managers and protecting norms, tendencies toward control and paternalism some- shareholders, particularly minority ones. times remain. The new Russian civil code, for example, The need for comprehensive company law emerges in contains several provisions aimed at controlling the activ- full force only when large-scale private activities are fully ities of firms perceived as economically strong. Many of legalized. Transition economies have typically emulated the controls arise from a legitimate desire to protect con- the models in established market economies, particularly sumers and debtors who are unfamiliar with markets, in the company forms and related rules found in Western situations of unequal bargaining power and inadequate Europe. Most new company codes in transition econ- judicial protection. But they can also reflect an older tra- omies provide for joint-stock companies, limited-liability dition of trying to dictate economic relations and out- companies (smaller entities often limited to fifty or so comes. In a market setting some of these controls could investors), and limited and general partnerships. The end up hurting the very people they are meant to protect, most popular form among smaller new firms has been the by constraining their freedom to allocate risk or by pre- simpler and more flexible limited-liability company. The venting some transactions altogether. more formal joint-stock company predominates among The impact of these new contract laws will depend on large privatized firms and publicly traded companies. their enforcement. Most day-to-day contracts in market Like most of the important legal changes discussed in economies do not require formal enforcement. Both par- this chapter, the move to modern forms of company law ties fulfill their legal obligations because they benefit from represents a radical shift for transition country govern- the transaction or because neither party is willing to risk ments, from controlling to merely facilitating economic its reputation by reneging. But an economy still needs activity. Company law has to walk a fine line between credible, low-cost formal enforcement mechanisms to two often-conflicting goals: flexibility and protection. which aggrieved parties can turn when all else fails. Company owners and managers need to be as free as pos- The shortage of institutions to enforce contracts limits sible to arrange their own activities, yet the public, includ- the scope of transactions, makes contracting more costly, ing investors, employees, and other stakeholders, also and prohibits some contracts altogether. A recent study of needs protection from insider fraud and mismanagement. contracting in Bulgaria, for example, found that private Western rules regarding joint-stock companies may not firms have little confidence in the courts (although they give adequate protection to investors in transition still use them from time to time) and instead rely heavily economies, which lack the highly developed market, legal, on trust when choosing business partners. They find sup- and government institutions on which such rules depend pliers who ship quickly and customers who pay quickly, (Box 5.2). and work with them on a continuing basis. They are sus- The tension between flexibility and protection is par- picious of new customers, who are carefully screened and ticularly problematic in transition economies. In the name often required to pay up front. Lack of confidence in for- of protecting investors, creditors, or the public, many mal enforcement mechanisms, and thus in dealings with countries have erected high-cost barriers to entry. Two of strangers, limits firms' activities and hinders new firms the most conspicuous are high minimum capital require- 91 ments and complex registration requirements. Minimum aggrieved shareholders, and doctrines that look behind the capital requirements for joint-stock companies, for exam- corporate veil to make individuals personally liable in cases ple, typically range from $20,000 to $40,000 and some- of fraud. times (as in Hungary) exceed $100,000. And in Moscow, for example, it takes an average of six to eight weeks to ful- Bankruptcy law fill the ten steps typically required to register a new com- A well-designed bankruptcy lawgenerally including pro- pany (not including the additional licenses required for cedures for both liquidation and reorganization of prob- many activities). Supposedly designed to protect the pub- lem firmsplays several important roles in market lic, these requirements are burdensome for new entrants economies. It provides failing firms with an orderly means particularly small entrepreneurs who may therefore choose of exit. It spurs ailing but potentially viable firms to to remain in the informal sectorand are obvious sources restructure. And it promotes the flow of credit by protect- of corruption. Many could be reduced or eliminated. ing creditors. Ideally, bankruptcy shifts control over finan- Fraud is indeed a crucial issue in transition environments, cially distressed firms to their creditors before all the assets but these are inefficient tools to combat it. Countries have been misused or dissipated, and it gives creditors the should work to develop more sophisticated legal devices, information and power to direct the use of the remaining such as criminal prosecutions, class action suits for assets to recover debts. Without this safeguard, creditors Box 5.2 Protecting investors: Corporate law from scratch Transition economies have weak and sometimes cor- procedural rather than substantive requirements. Its rupt courts and regulators, undeveloped capital mar- goal is to give significant minority shareholders the kets, and a shortage of trained lawyers and accountants. power to protect themselves against opportunism by It is difficult for potential investors to get information controlling insiders. At the shareholder level the model on companies and to enforce laws against managers, focuses on voting rules. For example, it puts more who may also be large shareholders. Hence the risk of types of decisions up for shareholder approval, and it insider opportunism is high, which discourages much- requires supermajority approval for important business needed outside investment. Transition economies need decisions such as mergers or major sales of assets. At a corporate law that can work even in this setting. the governing level the model requires that a certain Two broad Western models for protecting investors proportion of directors be independent, and it gives through corporate law are available. So-called prohibi- "disinterested" directors (those without a direct stake) tive corporate laws bar many kinds of behavior that are sole power to approve certain types of transactions, open to abuse, such as self-dealing transactions and such as those between related parties. It mandates cash mergers. This model was followed in nineteenth- "cumulative voting" for directors, a rule that ensures century U.S. and British codes and is to some extent that large minority shareholders are represented on the followed in European codes today. By contrast, the so- board. By imposing these and other procedural re- called enabling corporate laws that prevail in the quirements, the self-enforcing model tries to create United Kingdom and the United States today allow self-policing mechanisms and to reduce reliance on companies greater freedom and depend more on mar- courts and administrative agencies for enforcement. ket constraints and other civil and criminal laws (such Of course, the self-enforcing model also works bet- as antifraud statutes) to discipline managers and pro- ter when judicial enforcement mechanisms can serve as tect investors. The enabling model is almost certainly a backdrop. But even without official enforcement, the unsuitable for transition economies because of the introduction of procedural safeguards may slowly weakness of these other constraints on insider oppor- change norms of behavior as more and more compa- tunism. But the prohibitive model also has its costs. nies adopt them to develop a good reputation for hon- Not only can its inflexibility inhibit legitimate business est behavior, to emulate their peers, or simply because behavior, but strong courts or administrative agencies they are available and reasonable. No one knows are needed to enforce its many rules. whether this model will succeed in Russia or elsewhere, An alternative approach, followed to a large extent but it stands out as a pragmatic attempt to tailor long- in the new Russian companies law, is a self-enforcing term institutional reforms to the limitations of the corporate law. This model focuses on structural and transition environment. 92 will either refuse to make loans or turn to the state for sup- monopoly power. Both are difficult areas and further port when loans turn bad. Bankruptcy is an important examples of the tension between the need for a strong state complement tonot a substitute fordisciplined macro- and the need for constraints on state power. Some transi- economic policies and privatization. tion economies, in their push to free up markets, have Many transition economies have adopted new bank- underestimated the need for active government in- ruptcy laws. Those in Bulgaria, Estonia, Hungary, and volvement. Others have maintained overzealous and anti- Slovenia are among the best designed. They provide, for competitive controls. example, clear criteria for determining insolvency and The case for regulation is not always clear-cut; electric delineating claims, efficiency-enhancing priority rules power generation, for example, and natural gas production (most important, giving preference to secured creditors are potentially competitive, although the distribution side over government claims), broad scope for debt forgiveness of both industries is a true natural monopoly (in which a and workable voting rules (generally requiring one-half to single firm most efficiently supplies the market). In cases two-thirds majorities to bind dissenting minorities) if of natural monopoly, governments need to develop clear creditors want to reorganize the firm, and flexibility as to and effective regulation that is stable over time. This is the method of asset sale in cases of liquidation. especially important when countries want to exploit new Design is only half the issue, however; bankruptcy laws opportunities for private sector involvement in infra- are not yet effectively enforced in any transition economy. structure industries (see Box 3.6). To be credible, natural Hungary perhaps comes the closest (see Box 3.1), although monopoly regulators must be independent, operating at creditor involvement remains inadequate to ensure effi- arm's length from the regulated firm, other government cient economic outcomes and guard against fraud. In some agencies, and other vested interests. They must guard countries, such as the Czech and Slovak Republics, the against both "capture" by the regulated firm and popular government has deliberately slowed the implementation and political pressures to let prices fall below cost. Some of bankruptcy law, and the number of cases (although transition economies, such as Ukraine and Albania, are increasing rapidly) is still relatively small. In others, such as already setting up autonomous regulatory bodies (in elec- Albania, Bulgaria, and Romania, laws are of recent vintage, tric power and other industries) similar to models in the and it remains uncertain whether creditors will have the United States, the United Kingdom, and Latin America. incentive to use them effectively. Finally, China and most Central European regulators in telecommunications NIS (other than the Baltics) have not yet implemented a another industry that tends toward monopolyare less package of reforms, including subsidy reductions, privati- independent, and formal tariff authority and other regula- zation, and banking reforms, that will force hard budget tory powers remain largely with ministers. constraints on creditors (whether banks or firms) and The GEE and Baltic countries, Kazakstan, Mongolia, thereby create the widespread demand that brings bank- and Russia have adopted antimonopoly laws that gener- ruptcy laws to life. ally follow Western European models (in most cases to reflect the harmonization requirements of the European Competition law Union). These laws typically restrict horizontal and verti- As discussed in Chapter 3, transition economies, particu- cal restraints on trade and the abuse of a "dominant" mar- larly in CEE and the NIS, inherited an industrial structure ket position (usually defined as 30 to 40 percent of the rel- with many monopolistic or oligopolistic firms, dominant evant market and the unilateral ability to restrict state ownership, and a strong tradition of state control. competition). Horizontal restraints are agreements among Many governments continue to erect barriers to trade, competitors to fix prices or divide markets; vertical re- whether through tariffs and quotas on imports, taxes on straints include a wide range of restrictive agreements exports, or local government curbs on products entering between producers and distributors. These laws also em- other provinces. These anticompetitive legacies and prac- power the government to block anticompetitive mergers tices need to be dismantled if markets are to function and in some cases to break up monopolies. effectively. Experience in GEE confirms that reducing The European Union and several member and non- tariffs and removing other trade barriers can go a long member countries (particularly Germany, the United way toward promoting competition, particularly in small Kingdom, and the United States) have played important countries, by imposing world prices (adjusted for trans- roles in helping design these competition laws, pushing port costs) as an effective ceiling on domestic prices. Im- for their adoption, and training staff for and otherwise proving market infrastructure, both physical facilities and assisting antimonopoly offices. Because transition econ- services, is also critical. omies inherited such a legacy of state dominance and are But these efforts need to be complemented by regula- short on administrative capacity, however, antimonopoly tion of natural monopolies and by antimonopoly law to offices face somewhat different priorities than their EU ensure efficiency and protect the public from the abuse of and U.S. counterparts. They must focus their scarce re- 93 sources on big issues and big problems, becoming first and give courts more independence by appointing judges for foremost strong and vocal advocates of competition and life. China, the Kyrgyz Republic, and Ukraine are among free trade. Of the offices established so far, those in Cen- the few countries that maintain elections and shorter tral Europe (most notably Poland and the Czech and terms for judges. Private arbitration, always used in inter- Slovak Republics) have been among the most forceful and national trade disputes, is now also allowed for domestic effective, although even their voices are sometimes diffi- disputes in most transition economies. This is extremely cult to hear. Offices also need to concentrate on disman- important because it can save scarce judicial resources by tling regulatory and other barriers to the entry of new privatizing dispute resolution and can provide helpful firms, because entry is a key source of competition in these competition to spur court reform. economies. For example, exclusive supply or distribution Despite these important reforms, courts in transition agreements imposed by dominant firms may act as barri- economies will need time to overcome the legacies of the ers to entry and may be challenged under competition past and regain public confidence. Judges, particularly in laws. The Ukrainian antimonopoly office, established in the NIS, have limited experience with markets, earn low 1994, has devoted much attention to preserving a level salaries, and as a profession enjoy little prestige or public playing field for new firms by combating discrimination trust. Clear notions of professional ethics are not yet well against them, particularly by state actors. With regard to developed. Court fees are high and waits can be long. The horizontal restraints, offices should combat overt price fix- newness and lack of clarity of many laws make for unpre- ing (and similar cartel agreements) among big producers dictable decisions. And even when judgments have been and address structural concerns by maintaining veto reached, the winners can find them difficult to enforce. In power over anticompetitive mergers and by breaking up Vietnam, for example, fewer than 40 percent of court the most egregious state-owned monopolies before or dur- rulings in 1993 and 1994 were actually enforced, and up ing privatization. The Czech and Slovak antimonopoly to half the judgments of Russian courts go unenforced. offices, for example, have focused on dismantling monop- These factors, combined with engrained cultural attitudes olies prior to privatization. Russia could be more aggres- toward the law, help to explain why so few private busi- sive in confronting monopolistic structures, including nesses want to use the courts to settle disputes, particularly some of the emerging financial-industrial groups. in the NIS and East Asia. The private legal profession is another institution that Judicial institutions must develop if people are to become familiar with the As this chapter has stressed throughout, laws are only as law and use it effectively. As markets grow and law be- good as the institutions that enforce them. And it is com- comes more complex, societies need independent lawyers petent and reliable courts and specialized enforcement to counsel clients, structure and formalize transactions, agencies such as securities commissions and antimonopoly and help resolve disputes. In centrally planned economies offices that provide the foundation on which all enforce- lawyers were employees of the state. Their role in the ment activityformal or informalultimately depends. commercial sphere was primarily administrative, and they Courts not only enforce laws and resolve disputes; their had little independence and few of the skills needed in a interpretations also fill in the many inevitable gaps in market economy. Transition has brought a dramatic rise legislation. CEE and the NIS have followed different in the number of lawyers and the training opportunities paths in re-creating judicial institutions for dispute reso- open to them. In China, for example, the number of lution and enforcement. In most of the NIS the state arbi- licensed lawyers rose from only 3,000 over the entire tration system that used to mediate disputes between state 1957-80 period to more than 60,000 in 1995. Law enterprises was transformed into a formal court system school enrollments today exceed 30,000, and the govern- the arbitrazh courtsto supplement existing civil courts. ment has announced a target of 150,000 lawyers by 2000. In CEE, by contrast, the arbitration system was abolished, But standards of competence and professional ethics will and civil courts were expanded to include separate com- take longer to develop and enforce. Many transition mercial sections. Although the latter might be the better economies are beginning to require bar examinations, but approach if it fosters more unified standards and a more the recognition of conflicts of interestand other ethical professional judiciary, either route can work given the dilemmasis still in its infancy. right incentives, training, and experience. The notorious Increasing the level of trust in the state powers of the pretransition "procuracy to supervise courts and intervene in individual decisions has been Defining and enforcing the laws governing private sector reduced, and in CEE the procuracy has been transformed activity require a strong and competent state. Yet well-func- into an institution more akin to a Western public prose- tioning markets also need a clear sense of where the state's cutor's office. Most transition economies have also tried role ends. The government must itself be ruled by law and to reform appointment and oversight mechanisms and trusted by private entities not to intervene arbitrarily in 94 their affairs, to follow its announced policy statements, and Constraining state power to deliver on its obligations. Recent cross-country research Formal constraints on arbitrary state power in established suggests that citizens' level of trust in government to carry market economies derive partly from constitutional and out its declared policies and to meet its obligations is posi- administrative law. These bodies of law ensure that all tively associated with long-term economic growth (Figure legislation is consistent with the national constitution and 5.1). Separate surveys of private firms in 1995 suggest that that regulations, in turn, are consistent with the law. They the Czech Republic has achieved a high level of government delineate the rulemaking authority of various state bodies, credibility, whereas in Russia credibility is much lower. lay out the procedures for enacting laws and promulgating Countries with levels of credibility as different as in these regulations, and provide individuals recourse against two countries typically have widely differing economic unlawful or capricious state action. Of course, these for- growth rates. Trust in government depends partly on citi- mal constraints are not created in a vacuum but are zens knowing that they can seek recourse against arbitrary spurred by deep historical, cultural, and political forces. or illegal state acts, on limits on official corruption, and on Unsurprisingly, there were very few legal or social con- the state's ability to control crime. straints on state power in centrally planned systems. Sev- Government credibility and faster growth usually go together. Figure 5.1 Economic growth per capita and government credibility Government credibility High Russia 1995 Czech Rep. 1995 Low 6 4 2 0 2 4 6 8 Growth of GDP per capita (percent per year) Note: The sample consists of twenty-eight economies plus Czech Republic and Russia. Growth data are annual averages for 1981-90, and data on government credibility are based on public opinion surveys taken in late 1992 (which included retrospective questions), except that data for Czech Republic and Russia are for 1995 on both measures. Source: Borner, Brunetti, and Weder 1994; World Bank data. 95 era! planned economies did establish administrative courts nesses in Lithuania, Russia, and Ukraine (to cite just three or empower regular courts with administrative oversight, examples) acknowledge paying fees to various officials as beginning with Yugoslavia in 1952 and followed by other well as to organized crime. These bribes are large by inter- GEE countries in the 1960s and 1970s and eventually the national standards: in Ukraine, for example, they can rep- Soviet Union (1987) and China (1989). But their power resent up to two months' gross sales per year. Some offi- was tightly circumscribed, and the reforms had little prac- cials have used their positions to give special privileges to tical impact. private businesses in which they have personal stakes. In Democratic reforms have led many transition econ- many transition economies the public's perception of omies to broaden the scope of judicial review to cover all widespread corruptionincluding the misappropriation administrative acts and to give civil or commercial courts of public propertyis undermining support for govern- clear oversight jurisdiction. In addition, all GEE countries ments and for reform. and some NIS have established constitutional courts with Why is corruption thriving? Evidence from other the power to overturn laws and regulations that they find countries shows that corruption thrives when both public unconstitutional. Thus, the procedural means to oversee officials and private agents have much to gain and little to state actions is beginning to emerge. There is still, how- lose, precisely the situation in most transition settings. ever, profound confusion about the division of authority Traditional controls weaken before new legal restraints among various state actors, particularly in the NIS. The not least, rules regarding conflicts of interestbecome distinction between the legislative authority of the parlia- effective. In addition, the state retains enormous wealth ment and the rulemaking authority of the executive is enterprises, properties, natural resourcesand regulatory vague at best, as is the allocation of authority among power, even as private property, business, and wealth are national, provincial, and local governments. Different being legitimized. Uncertain rules, heavy regulation, and state bodies often issue laws or regulations on the same pervasive controls give officials exceptional power, many topics, producing a quagmire of conflicting rules. This opportunities to seek bribes, and wide scope for appropri- struggle for rulemaking power often reflects a deep strug- ating public wealth. The weakness of civil societypolit- gle over the speed and direction of reform. For example, ical parties, interest groups, social organizations, and the reform-minded executives or ministries often try to push likein some transition environments means that this through reforms against defensive or undecided parlia- important countervailing force is largely absent. ments or local governments. Although this may speed The low official pay of public servants makes corrup- reform in the short run, in the long run it could under- tion particularly enticing. Indeed, in some countries it mine the rule of law. now represents the main incentive to remain in public ser- The emerging role of constitutional courts in transition vice. Despite periodic anticorruption efforts, the risks of economies offers an interesting example of the struggle to engaging in corrupt behavior have fallen dramatically. Not establish checks and balances in government and their only is government oversight weak, but the legacy of per- interaction with economic reform. Hungary's and Poland's sonalized economic relationships and more recently of constitutional courts have been active in overturning eco- financial scandals undermine standards for official and pri- nomic reform initiatives. In Poland, for example, the court vate conduct alike. It is hard to punish one person for mis- invalidated most of the government's efforts to cut public conduct if the public perceives that everyone elseinclud- spending on pensions. The Hungarian court struck down ing high officialsis doing the same thing. This raises the provisions of the government's March 1995 stabilization danger that transition economies may experience an package aimed at cutting spending on family allowances extended period of pervasive corruption. and education. This tension between competing authori- Corruption is by no means costless. Recent cross- ties may slow some necessary economic adjustment, but it country analysis suggests a significant association with is a healthy indicator of democracy and is likely to ease both lower private investment and slower economic through continued political debate and legal development. growth. Bribes may help businesses avoid burdensome regulations, but they also create incentives to make regu- Controlling corruption lations even more complex and costly. Officials may block The use of public office for private gain is hardly new to further reforms to entrench their power and maintain transition economies. Before reform, items as important as their illicit income. State enterprise managers may realize housing and as trivial as choice cuts of meat were often that they can purchase or divert enterprise assets cheaply allocated through the back door in exchange for favors or if they delay privatization and make their companies bribes. Transition-style corruption, however, is different: it underperform. Corruption can divert public resources is more visible and more money-based. Corruption has away from vital areas, such as education, where the poten- emerged as a major concern in China. And most busi- tial for bribes is smaller. It also undercuts governments' 96 ability to enforce legitimate regulations and collect public dures so as to reduce the monopoly power of officials in revenues, as activities shift into the shadow economy to granting approvals. Finally, public education campaigns avoid government altogether. Equally serious, corruption and serious attempts to publicize and punish high-level weakens public confidence in government and can help corruption can send a message that the rules of the game extremist politicians who promise order. are changing. These approaches reinforce one another, as What can governments do to combat corruption? Hav- many countries, including the United States (Box 5.3), ing made the move to the market, they cannot turn back have found. the clock and resurrect the old constraints. Instead, they must both reduce the opportunities for corruption and Stopping organized crime raise the attendant risks. Rapid and transparent privatiza- Private organized crime antedated transition but has tion, liberalization, and demonopolization of the econ- grown dramatically in recent years. It has become both omy can do much to reduce the scope for corruption and more visible and, especially in Russia (where it ranks as a restructure incentives. Higher salaries for public officials main concern in both household and business surveys), reduce the attraction of bribes and raise the cost of dis- more violent. Crime is closely intertwined with corrup- missal. Simplifying taxes and regulationsthe most tion. With a private economy opening new avenues for important concern, for example, of businesses surveyed in private criminality, current and former public officials Lithuaniaand clarifying property rights reduce oppor- (including police officers and former secret police agents) tunities for bribery and help firms survive without resort- often facilitate or participate in organized crime. Private ing to corruption. Where regulations are still needed, security groupsincluding groups that are themselves governments must strengthen oversight and appeal mech- criminalhave arisen in part to fill the void left by cor- anisms and, where possible, provide alternative proce- rupt police or courts that are unable or unwilling to pro- Box 5.3 Controlling corruption through overlapping jurisdictions: Examples from the United States Corruption exists in all countries, albeit to different legal regimes that lack legitimacy in the eyes of a large extents. How governments organize their activities segment of the public. affects the opportunities and incentives for corruption. Even after all feasible structural and regulatory One way to reduce the monopoly power of public reforms have been implemented, strong leadership and officials is to give them overlapping domains. Corrup- law enforcement capacity are needed to fight corrup- tion in passport issuance is kept low in the United tion. The experience with reform in major U.S. cities States, for example, by letting people apply at any of as diverse as Toledo, Ohio, in 1900 and New York numerous passport offices. (A national system of City in the 1980s shows the importance of a commit- records prevents repeat issuance.) To avoid the pay- ted leader at the top, strong independent inspectors to ment of bribes for expedited service, the passport pursue investigations and prosecutions, and grassroots agency itself sells such a service. For tasks that impose citizen involvement. In New York, for example, wide- costs instead of benefits, overlapping jurisdictions can spread corruption and racketeering in the construction reduce the gains from bribing any one official. For industry imposed billions of dollars in costs on the example, some observers claim that the coexistence of school system through waste and poor-quality con- federal, state, and local narcotics enforcement authori- struction and maintenance. In 1988 the city created an ties in the United States has reduced the level of offi- Office of Inspector General as a quasi-independent cial corruption. body within the school district with the power to pur- Where possible, it helps to decriminalize or deregu- sue criminal investigations, civil prosecutions, admin- late an activity that is a major source of crime and istrative sanctions, and institutional reform. The office corruption. The Eighteenth Amendment to the U.S. put heavy emphasis on prequalifying bidders and Constitution, ratified in 1919, prohibited the manu- refused to do business with any company that lacked a facture and sale of alcohol. The amendment was reputation for honesty and integrity. In its first five repealed in 1933 after a period of widespread illegal years the office conducted more than 3,500 investiga- activity and corruption of law enforcement officials. tions, debarred 180 firms, and generated more than The U.S. experiment with prohibition is a case study $20 million in savings, paying for itself and reducing of the risks and costs of introducing regulatory and corruption at the same time. 97 tect public safety and enforce contracts. Like corruption, an efficient and law-abiding security apparatus and dis- economic crime thrives when property rights are poorly pute resolution mechanisms that ensure due process. Gov- defined, when monopolies exist that mafias can tap, and ernments at both the national and the local level must when legal procedures are ineffective and thus the risk therefore tackle internal corruption if they hope to control of punishment is low. It also thrives when widespread organized crime. Italy's recent success in combating the poverty and lack of economic opportunity leave potential Sicilian mafia shows that dedicated, honest prosecutors young recruits susceptible to the lure of mafia wealth. and judges can make inroads against corruption and orga- New financial sectors offer a fruitful arena for crime, and nized crime, but only if given strong political and logisti- in many NIS and CEE countries crime has been further cal support from the top levels of government. spurred by the lucrative rewards of drug trafficking. The The agenda region is well located to be a conduit for drug transport between poppy-growing regions in South Asia (particu- It is a hard fact of transition that the features of a market larly Afghanistan) and markets in Western Europe. economy that many of these countries need most are the Russia's mafia is not a single organization but a collec- very ones that will take the longest to build. As this chap- tion of perhaps 3,000 to 4,000 groups employing more ter has emphasized, moving from plan to market requires than 25,000 people; several hundred of these groups now a new way of thinking about the entire legal system. Part- span the NIS and GEE and sometimes reach into the ners to contracts, the lawyers who help draft them, and West. Some fill market gaps created by inadequate gov- the courts that enforce them all must stop behaving as if ernment institutions, providing security services for new they were still the instruments of a single central planner, private businesses or helping to enforce contracts (for and start working in the interests of the countless private example by collecting debts for banks, a significant num- individuals whose activities make up a market. People ber of which maintain close links with organized crime). have to knowand respectthe law and the institutions But the value of these services is dwarfed by the sums charged with enforcing it. Just as important, they must these powerful criminal groups extort from private busi- have some faith that the government will apply the law nesses. They force "loans" out of banks, demand protec- consistently and will itself abide by certain constraints, tion money from new firms, and use banks and other refraining from arbitrary intervention and corruption. businesses to gain access to wealthy clients. They dissem- None of these ingredients will spring up overnight. But inate counterfeit money and launder illicit income. Like the message is not necessarily to proceed slowly toward a their Sicilian namesakes, they adopt ruthless enforcement market economy, to allow these institutions and laws to methods, as shown by the numerous murders of leading develop at their own pace. Many of the countries now Russian bankers and businesspeople in recent years. And without an adequate rule of law are already market these are only the visible costs. What cannot be seen are economies; governments cannot reassert control through the investments forgone for fear of extortion and the legit- the old mechanisms but must instead develop new poli- imate businesses that have failed because they could not cies and institutions to suit a new relationship between compete with mafia-run enterprises. state and citizens. And as noted above, many market Both corruption and organized crime are deep, long- reformssuch as liberalization and demonopolization of term problems without easy solutions, particularly given industrycan actually speed the development of the rule the scale on which they are now emerging in some transi- of law, both by fueling demand for new laws and, just as tion economies. Strong and internationally coordinated important, by reducing the number and influence of law enforcement efforts are needed. These in turn require groups who profit from their absence. Building a Financial System spur economic efficiency by allocating lessons for future reform. Whichever approachor com- resources to their best uses, in response to sup- bination of the twocountries follow, one clear lesson is Markets ply and demand. A good system of financial that governments have a vital role in promoting the devel- markets and institutions is integral to this process, allocat- opment of a stable financial sector and regulating it over ing savings to high-return investments. Worldwide experi- time. That role does not necessarily extend to the direct ence confirms that countries with well-developed financial allocation of financial resources, even though govern- systems grow faster and more consistently than those with ments in transition economies can face strong pressure to weaker systems and are better able to adjust to economic intervene, particularly in the rural sector. Another lesson shocks. Transition implies vast reallocations of resources is that developing a financial system takes time. Reform and ownership, a task at which effective financial systems must seek ways to nurture a system of banks, nonbank could help enormously. Yet financial systems in transition intermediaries, and capital markets that will evolve not in economies start out in no fit state to help, with passive response to government dictate but to the changing needs state-owned banks, often distressed, with limited capacity of the market. to assess credit risk, and an absence of financial regulation, key supporting institutions, and capital markets. The legacy Reformers seeking to address these failings face a par- Under central planning, banks were mere accounting ticularly thorny version of a common transition problem. agencies, passively taking in household deposits (which The success of other market reforms depends on the were often the only asset households could hold) and health of the financial system; yet efforts to reform it can- keeping track of the financial transactions that corre- not proceed independently of those other reforms, espe- sponded to allocations under the plan. Indeed, in China cially macroeconomic stabilization, enterprise reform, and the credit plan still covers a large part of investment and the development of supporting legal institutions. Often remains an important lever of government policy. Normal transition countries respond to this dilemma with inac- banking skills, including risk management, project screen- tion, with the result that financial reforms lag behind. ing and selection, and a diversified menu of instruments to The challenge for reformers is to find ways to help the attract savers, were unknown. The other components of a financial system overcome the legacy of central planning, financial systemincluding the payments system itself while at the same time sowing the seeds of a new system were rudimentary; in most countries nonbank finance in which banks and other financial institutions will have simply did not exist. Initially, one bank performed all to stand on their own two feet. The choice of approaches lending. Early attempts at market reform in most coun- to banking reform brings this problem into stark relief. tries replaced this monobank with a two-tiered system, Should reformers use government funds to rehabilitate comprising one central bank and a number of commercial heavily overindebted state banks, and run the risk of their banks, often specialized by sector. But this reorganization always coming to expect government bailouts? Or should had little effect on banks' behavior. reformers start afresh, encouraging the rapid entry of new Transition has shown up the tremendous weaknesses of banks and possibly the liquidation of old ones? Experience the inherited banks. In CEE and the NIS many bank loans in transition economies to date provides evidence with turned bad, as their traditional clients, the state enterprises, which to assess both strategies and draw some tentative were exposed to competition. During the early stages of 98 99 reform many banks continued to extend new loans to new or acquired parts of old banks. This carries risks, but unprofitable enterprises. Unpaid interest and principal governance of these banks has tended to improve with the were rolled over, increasing dramatically the banks' stock privatization of the parent enterprises, greater diversifica- of nonperforming loanswhich sometimes amounted to tion of ownership, and the introduction of prudential most of their portfoliosand crowding out good borrow- controls to limit lending to owners. ers. Even in China, where economic growth has been rapid Approaches to banking reform and lending rates are below inflation, 20 percent of loans are officially recognized as nonperforming. Eventually Transition countries have two main tasks in approaching these financial flows from banks to enterprises dried up, as banking reform. The first is for each country to develop its stabilization took hold in almost all GEE countries and central bank into an institution that independently formu- many NIS. In some countries high real lending rates lates and conducts monetary policy. Evidence from tran- caused net transfers (net new lending minus real interest sition economies confirms the worldwide finding that payments) from enterprises to banks, instead of vice versa. greater central bank independence, including the right not In many NIS the flow of resources to enterprises simply to finance the government and to set interest rates without stagnated: old loans continued to be rolled over but few government interference, is associated with lower inflation new ones were made, so that net transfers in either direc- and more effective monetary policy. All transition econ- tion were small. In China, by contrast, high household sav- omies have established basic instruments and procedures of ings deposited with the banks have allowed substantial net monetary policy, although their effectiveness varies across transfers to enterprises to continue (see Chapter 2). countries, in part because interbank payments systems are Many banks in GEE and the NIS currently limit their often still poorly developed. Building them up is essential role to financing trade and some working capital, making to creating a market-based financial system. Central banks negative contributions, or none, to enterprises' aggregate have often also played a constructive role in formulating investment. The near-universal reluctance to lend for general macroeconomic and fiscal policies. In China, how- investment reflects in part the strains of stabilization, but ever, more reforms will be needed to make the central bank also the banks' increased perception of both the risk of an effective player in monetary and supervisory policy. lending and the absence of effective means of recovering A much larger and more complicated task is to address debts. Although bank lending has started to rebound and the weaknesses of the commercial banks. Responding maturities have lengthened in some of the more advanced both to initial conditions and to developments early in reformers, in most countries good firms have little access transition, countries' approaches to banking reform have to bank financing, and that at very short maturities. The been based on either entry of new banks, rehabilitation of privileged access to financing that large state enterprises in existing banks, or (usually) some combination of the two. many countries continue to enjoy is yet another financial Some countries, however, have yet to choose a consistent barrier to the emergence of new private firms. financial reform strategy. The new entry approach As already noted, the evolution of financial systems has involves the entry of a relatively large number of new also been heavily affected by the pace of legal and enter- banks, the breakup and privatization of state banks, and in prise reforms. Banks rely on the legal system, including some cases the liquidation of old banks. Estonia and Rus- procedures for collateral recovery and bankruptcy, to sia have both taken this path, although not always as a enforce their claims and perform their role as monitors of strictly deliberate policy choice. In many of the NIS, the firms. Capital markets require company laws to define the confusion surrounding the breakup of the Soviet Union rights of shareholders of joint-stock and limited-liability created an environment in which many new banks enterprises and allow them to exert their influence on emerged spontaneously (Box 6.1). The alternative, reha- management. More progress in these and other economic bilitation approach, adopted by Hungary and Poland laws is needed to make financial systems more effective among others, stresses recapitalization of existing banks, (Chapter 5). Enterprise reform, including privatization together with extensive programs to develop them institu- and the entry of new private firms, is needed to resolve the tionally and to privatize them as soon as possible. bad loan problem and create new lending opportunities. Two factors largely determine each country's approach Better firms also generate demand for better banking ser- to banking reform: the depth of the financial system (the vices and so advance institutional progress. Demand ratio of financial liabilities to GDP) and the institutional forces are strong in CEE and some NIS and have led to legacy. During the late 1980s, financial depth was similar considerable improvements in the quality of banks. across the transition economies. But their different expe- China's limited state enterprise reform, on the other riences with inflationand the collapse in confidence hand, has delayed commercialization of its state banks. In in financial assets in the high-inflation countrieshave the Baltics and the NIS, state enterprises have established since caused an equally wide divergence. Money holdings 100 Box 6.1 Russia's radical banking reform Following the creation of a two-tier banking system in financial products, and quite a few are at the center of 1987, Russia's approach to banking reform rapidly emerging financial-industrial conglomerates. and partly unintentionallydiverged from that of other The banking industry's main problems are the large transition economies. In 1988 a new law permitted the number of poorly capitalized and badly managed banks creation of cooperative banks to serve the nascent private and an associated severe lack of transparency. As stabi- sector. Establishment of joint-stock banks became possi- lization has taken hold in Russia, the environment for ble with the 1990 banking law, with licensing subject to banking has become more difficult. A third of Russia's only minimal requirements. Competition between a re- banks reported losses in 1995, almost immediately after formist Russian government and a more conservative real interest rates turned positive. Although Russia has Soviet government led to a separation of Russian banks started to address its bad banks problem by withdrawing from Soviet banks and, in Russia, to the breakup of sev- licenses and restricting operations, many troubled banks eral state banks into independent regional banks. remain. The authorities will need to deal with these banks Together these events fueled an explosion in the num- quickly, in many cases through liquidation, to restore ber of Russian banks: from 5 in 1989 to 1,500 in 1992 confidence and prevent a major crisis, and to allow re- and 2,500 in 1995. sources to be intermediated by the better banks instead. Macroeconomic developments during this period Increased transparency is another must. Accounting created a competitive advantage for these new banks and disclosure standards are still rudimentary, a well- over the old state banks. Lack of fiscal and monetary developed auditing profession does not yet exist, and control led to rampant inflation, and loan balances banking supervision remains embryonic. These limita- soon shrank to only a few weeks of production. This tions open the door to fraud and imprudent investment provided the new banks with an opportunity to gain and undermine confidence in the financial system. To market share quickly by providing higher-quality address this problem the Russian government, with assis- banking services to the newly emerging private sector. tance from the World Bank and the European Bank for The voucher privatization program provided another Reconstruction and Development (EBRD), has intro- new business opportunity, as many banks invested in duced an international banking standards project. Some enterprises directly or lent to other investors buying of the best banks have been selected to on-lend World shares. As a result the share of the new banks in total Bank and EBRD funds to the private sector. In return, banking system assets has risen sharply, to more than the banks must submit to annual audits by international two-thirds as of early 1996, with the three remaining accounting firms and adhere to prudential norms with state banks holding the rest. Some of the larger new respect to capital adequacy, portfolio diversification, banks have rapidly become the country's leading com- asset and liability management, and so on. It is estimated mercial banks, with balance sheets of $1 billion to $3 that some twenty to forty banks will eventually partici- billion. They move quickly into new business lines and pate in this bottom-up approach to banking reform. presently equal 89 percent of GDP in China but average countries. Comparison of countries according to the insti- only 42 percent in CEE countries and a mere 20 percent tutional capacity of the better segment of their banks shows in the NIS (Figure 6.1). With inflation having wiped out that, while the reformers with more entry generally had bad loans and savings, leaving depositors with little confi- much worse starting conditions, some have now caught up dence in the financial system, most NIS countries have lit- with the other countries. Progress has been particularly tle to lose by starting afresh. Countries in CEE started out rapid in Estonia and Russia, despite an unfavorable starting with stronger institutional bases than did the NIS or the point. A period of relatively free entry can thus stimulate East Asian transition economies. This advantage, together decentralized institution building. But confidence can be with their deeper financial systems and generally better undermined while the sector undergoes convulsive restruc- fiscal positions, led most CEE countries to opt for a more turing and as poor-quality banks spring up. Complemen- phased approach. China's very deep financial system has tary policies are therefore needed to better screen new bank prompted its government to choose a phased approach for applicants, to weed out weak banks, and to improve the its banking reforms, even though banking skills are rela- infrastructure for banking, including through enterprise tively undeveloped. and legal reform. Financial reform with a stress on entry, including entry The rehabilitation approach has the advantage that it by foreign banks, can be a good approach for less advanced maintains a higher degree of confidence in the financial 101 tries may adopt a mixed strategy, limiting the activities of Banking systems in transition economies vary state banks while a new, private sector banking system greatly in size. develops in parallel. Whichever approach is followed, the crucial factor is the incentives it creates, and these depend significantly on government policies and how they are perceived. Experience to date yields several policy lessons. Figure 6.1 Money in circulation Deal with problem banks quickly Percentage of GDP Transition creates a difficult banking environment in 100 which sizable loan losses are unavoidable, especially when 80 Currency 16 Box 6.2 Poland's rehabilitation approach to banking reform 60 Deposits Poland's commercial banking reforms accelerated after 1990. In 1991 the government advised its banks 40 73 17 67 not to make new loans to enterprises that were in arrears on past loans; that restriction became law with 20 the passage of the Enterprise and Bank Restructuring 25 81 12 18 Program in February 1993. The Ministry of Finance 0 required regular audits of all banks according to inter- CEE NIS China Latin OECD America national standards, thus encouraging transparency and exposing the magnitude of the bad loan problem. The restructuring program further required banks to Note: Regional and group data are simple averages of quarterly set up debt workout units and take actions to resolve ratios for 1994 for ten CEE countries, thirteen NIS, twelve Latin American countries, and eighteen OECD countries. Source: IMF loans that had been classified as nonperforming at the and World Bank staff estimates. end of 1991. The program also provided for a new bank-led workout process (see Box 3.1). Indirect incentives were also used. In 1992 bank employees were given the opportunity to purchase up to 20 percent of their bank's shares at half-price system and thus limits financial disintermediation (the upon privatization. This strengthened incentives to tendency for financial transactions to bypass the banking adopt prudent policies with respect to both the system altogether). The downside is that it maintains a workout of existing loans and new lending. Seven large role for existing state banks. Rehabilitation can also banks entered into intensive technical assistance severely undermine banks' incentives to adopt prudent programs with foreign banks to accelerate their investment criteria, by fostering the expectation that, hav- institutional development. Experience in Poland ing bailed out troubled banks once, governments will do and other countries shows that such technical assis- so again. In Hungary, for example, some banks have been tance can be a valuable complement to a bank's recapitalized as many as five times. Thus, like the entry desire for institutional change but is no substitute approach, a consistent rehabilitation policy requires a for a clear, commercially viable strategy on the part good many complementary reforms. These should focus of owners and managers. on improving the interim governance of state banks, Bank recapitalization was implemented in Sep- ensuring a strong commitment to privatization, and, per- tember 1993. The aim was to determine the amount haps, imposing certain restrictions on the state banks' of the recapitalization on the basis of loans that were activities. Poland started out with just such an approach nonperforming at the end of 1991. This was (Box 6.2), although the privatization side of the program intended to avoid penalizing banks that had already has slowed recently. taken action to deal with their problems, and to maintain incentives for managers to try to keep Where government should lead . . . other loans in their portfolios performing. The pro- As we have seen, initial conditions are an important con- gram was accompanied by a plan for privatization of sideration in striking the balance between an entry and a the nine treasury-owned commercial banks. rehabilitation approach to banking reform. Some coun- 102 real interest rates rise and firms have trouble servicing Countries that allow relatively free entry of domestic their loans. Unless governments act decisively, many tran- banks have benefited from increased competition and fast sition economies can expect major financial crises to orig- institutional progress; for many, a period of market-driven inate from troubled banks and from spillovers of problems consolidation of banks and closure of weak banks should at other financial intermediaries. Resolving financially dis- reinforce this progress. But these countries also need to tressed institutions requires three steps. First, financial introduce high minimum capital requirements, checks on flows to insolvent banks, whether from the government or the suitability and integrity of owners and managers, and from deposits attracted by high interest rates, must be other formal guidelines to keep out applicants with poor stopped. Too often, troubled banks continue to receive prospects or fraudulent ventures. Even then, supervision normal or even preferential treatment. In Poland, for will prevent only a few cases of frauda cause of many example, two state-owned banks specializing in housing financial crisesand supervisors may lack the political sup- and rural finance have poor performance records yet are port to intervene. Many warning signals were ignored, for covered by higher explicit deposit insurance than other example, prior to the fraud-induced failures of some large banks, allowing them to attract funds at relatively low banks in the Baltics. Banks also need incentives to act pru- cost. Second, management, often a primary source of the dently in the absence of adequate supervision. Greater problem, must almost always be changed. Third, to transparency, through better disclosure of bank balance reduce incentives for excessive risk taking, private share- sheets and profitability, will help by allowing depositors, holders should completely lose their stakes in liquidated other investors, and bank supervisors to better assess banks' or restructured banks. Depositors may also have to bear quality. In most transition economies accounting and part of the losses. Countries that have moved decisively in information disclosure standards for banksand other this way have incurred lower costs and restored household enterprisesare far below those in market economies. confidence faster, even when households have suffered Supervisors and international agencies need to set manda- some losses, and have had fewer subsequent problem tory standards, especially on improved classification of banks. Estonia approached these problems forcefully in nonperforming loans and more realistic provisioning for late 1992, and Croatia, Kazakstan, the Kyrgyz Republic, losses, and require annual audits. and FYR Macedonia are taking steps to liquidate or dras- tically restructure weak banks. Many other transition Beware of recapitalizing banks economies, however, still have to come to grips with their Large numbers of nonperforming loans and undercapital- problem banks, often because the authority to intervene is ized banks can undermine macroeconomic stability, lead missing, or because ad hoc and often damaging forms of to high interest rates, and forestall a decentralized, case- intervention are attempted. by-case restructuring of enterprises. Some observers have argued for early, comprehensive loan forgiveness to make Develop effective supervision, screen new entry, and a clean break with the past. Canceling the nonperforming improve disclosure debt of state enterprises to state banks has no impact on All transition countries need improved prudential regula- either national or government wealth, or on bank profits tion and supervision of commercial banks and other or fiscal revenues, but it raises a serious danger that financial intermediaries, including financial-industrial money-losing firms will fail to restructure once freed from groups and investment funds. Establishing such mecha- the burden of servicing their old loans, and it sends a per- nisms demands a fully independent and market-oriented verse signal to other borrowers. No country has simply supervisory agency. Every transition economy now has a forgiven debts across the board, and in those that forgave supervisory structure in place, either as a part of the cen- debt on a large scale (such as Bulgaria and Romania) tral bank or as a self-standing body, and has issued laws unprofitable enterprises continued to borrow rather than and regulations aimed at improving the functioning of the adjust. Forgiveness also creates no incentives for banks to financial system. Much less progress, however, has been develop skills in debt workout and recovery. made in translating these reforms into effective regulation A decentralized, case-by-case approach, such as that and supervision. It takes time to train bank examiners and adopted in Hungary and Poland (see Box 3.1), can be for them to acquire adequate experience; therefore super- more useful. Banks are held accountable for their problem vision is likely to remain weak in many transition coun- loans and must take the lead in resolving them. As part of tries for an extended period and will not be able to prevent the operational restructuring of individual enterprises and every banking failure. Supervisors should focus their lim- farms, banks can limit new loans and restructure old ones. ited resources on addressing problem banks and non- The strategy works, however, only if banks and the enter- banks, screening entrants, and improving incentives for prises concerned are properly governed and managed and banks to adopt prudent practices. if banks have enough capital to recognize and make pro- 103 visions against problem loans. This may mean increasing which deplete their capital. In China, for example, the prof- their capital. As noted above, recapitalizing banksby itability of state banks is depressed in part because interest injecting cash or bonds, taking over bad loans, and pro- rates on loans to enterprises are kept below household viding other forms of fiscal supporthas been an impor- deposit rates, and the credit plan dictates a large part of tant component of a rehabilitation strategy. But recapital- their lending. To allow banks to grow out of their bad debt ization is a wise use of taxpayers' money only if it quickly problems, governments need to pay higher interest rates on restores the health of the financial system and improves required reserves, eliminate quasi-fiscal demands on banks, the prospects for bank privatization. Experience elsewhere raise or liberalize lending interest rates, and encourage with recapitalization is mixed. Banks often continue their banks to make more realistic provisions for loan losses. bad lending policies, resources are frequently squan- dered or used fraudulently, and recapitalizations often Establish at least a few reliable banks early on are repeated again and again. Argentina, Chile, and the A combination of low confidence in the financial sector United States have all undertaken repeated recapitaliza- and sizable unofficial economies has meant that cash rep- tions of their banking systems. Recapitalization poses resents a large share of the money stock in CEE and the particularly large risks in transition countries. The adverse NIS, even compared with other countries with poor pay- incentives it gives to already poorly governed state banks ments systems (see Figure 6.1). (In China, the limited pay- tend to be exacerbated by the fact that their privati- ments system rather than lack of confidence explains the zationa necessary complement to the rehabilitation high level of cash.) To restore confidence, governments approachhas proved difficult, making the endpoint un- should aim to certify a few reliable institutions and try to clear (Box 6.3). protect the payments system from bank failures. Entry by Instead of relying on recapitalizations and other forms of foreign banks is one quick way to increase the quality of government support, policies should promote self-help for banking. In Armenia, for example, the entry of the Mid- banks to encourage them to build up their capital base. Rel- land Armenia Bank promises to enhance the financial sys- ative to their large volumes of bad loans, banks in most tem greatly. But in almost all transition countries regula- transition economies make smaller provisions for loan tion or other barriers have impeded foreign entry. Another losses than is usual in high- and middle-income countries. approach, adopted in a number of CEE countries and Almost all the transition economies tax banks heavily, both NIS, is to single out a few select banks for financial and through profit taxes and indirectly through high reserve technical assistance. This approach signals to enterprises requirements, which yield little interest. In some countries, and households which banks may be most deserving of banks are still saddled with quasi-fiscal responsibilities, their trust (see Box 6.1). Still another route, most relevant Box 6.3 Privatizing banks is essential, but difficult Enterprises in many NIS have acquired parts of the Even when state banks are strengthened through capital state banks and established new banks in the early tran- injections, foreign commercial banks have shown little sition. These enterprise-owned banks were then priva- interest in acquiring them because of difficulties in tized when their owners were privatized. As their own- evaluating their loan portfolios and integrating them ership diversifies, and provided that strict limits on with their own systems. Most foreign banks prefer to lending to owners are applied, such banks are generally establish new banks. The potential for cash sales to no worse managed than others. The privately owned domestic investors is limited in transition economies banks in these countries typically are the most dynamic because of lack of capital markets and expertise. Politi- and dominate new lending to private firms. cal concerns have often complicated the pricing and In many GEE countries state banks still dominate; as methods of sales, particularly to foreign buyers. Trans- elsewhere, privatizing these banks has been difficult for ferring ownership through vouchers has been somewhat both economic and political reasons. Privatization of more successful. Large stakes in five banks in the Czech large state banks through cash sales has been rare. and Slovak Republics were transferred in this way. It Hungary and Poland have had some success, privatizing has also proved difficult for the state to withdraw a total of six large banks (two in Hungary, four in credibly from ownership. Like their privatized counter- Poland), but such divestitures have become progres- parts in Chile and Mexico, several banks in transition sively more difficult, in part because local stock markets economies returned to state ownership when they ran lack depth and are already dominated by bank shares. into problems. 104 for the NIS, is to establish "safe" banks in the meantime, individual investments to a certain fraction of assets or possibly built on the national savings banks. These banks capital, and disclosure standards will need to be strictly would primarily collect household deposits and be allowed enforced for banks as well as financial-industrial groups, to invest only in safe assets such as government obligations especially for lending to managers and affiliated enter- or engage in limited interbank lending. Their presence can prises. In addition, some activities will need to be capital- help restore households' confidence in the banking system ized separately to protect depositors. and allow authorities to remove, or at least reduce, the (implicit) deposit insurance now provided to state banks . . . And where government should fear to tread and sometimes to other financial institutions. Some governments in transition countries still intervene in The measures just described would be more useful and the financial sector to allocate resources, typically to far less costly than large-scale formal deposit insurance. unprofitable enterprises or sectors. In Belarus, for example, Deposit insurance is often proposed for two reasons: to the six largest commercial banks have been brought under contain the risk of an individual bank's failure spreading state control by presidential decree, and the functioning of through the payments system to other banks, and to the central bank is now monitored by a council chaired by increase households' confidence. Experience suggests, how- the prime minister. In other countries enterprises and min- ever, that deposit insurance is not essential to contain the istries are directed to hold deposits in distressed banks. contagion effects of bank failure. Especially where banking Schemes where the government directs credit to certain supervision is weak, banks and other investors will discrim- sectors have been proposed in many transition economies. inate on their ownoften better than regulatorsbetween These types of administrative measures and pressures to insolvent banks and banks with temporary liquidity prob- direct resources inhibit the development of a strong, mar- lems. Insuring deposits, by contrast, can create significant ket-based financial system. They weaken the better banks, moral hazard problems because insured banks are able to undermine the efficient functioning of the financial sys- attract low-cost funds regardless of how risky their loans tem, and reduce the credibility of financial regulation. are. The U.S. savings and loan debacle, which led to losses China's credit plan, for example, is increasingly circum- of more than $100 billion, was largely due to generous vented and has led to new avenues of rent seeking through deposit insurance combined with weak supervision. Policy- an informal market as well as nonbank financial interme- makers might decide to introduce a modest form of deposit diaries that profit from low, controlled interest rates. Any insurance, for banks meeting tough eligibility criteria, to government financial support to private and privatized foster depositor confidence. But any such scheme would firms should be on commercial principles and encourage, have to be accompanied by much-improved banking super- not impede, institution building in the financial sector vision, with strong powers to intervene in weak banks, to through technical assistance and training programs. counter the moral hazard problem. Provided households have access to reliable banks, con- Limit state ownership ditions in many transition economies make the more lib- Keeping state-owned banks that specialize in financing eral, universal banking model, common in continental certain sectors or activities risks carrying on the legacy of Western Europe, more attractive than the U.S. practice of poor resource allocation under central planning. Special- separating commercial and investment banks. Allowing ized banks have disappeared in many countries. State- banks to own shares in enterprises (subject to reasonable owned development banks have generally performed limits) and to engage in a variety of financial activities poorly and cannot be expected to do better in the weak (including, for example, securities trading and insurance) institutional environment of most transition economies. exploits banks' advantages at collecting and analyzing Where government-owned banks have been effective, financial information, which are at a premium in the high- lending has been tightly circumscribed. The government risk, limited-information environment of many transition financial institutions in Japan, for example, employ well- economies. The bank-centered financial systems of Ger- designed, focused credit programs of relatively limited many and Japan, for example, are generally considered to duration. It remains to be seen whether the new policy have led to better monitoring of firms. banks in China, which attempt to combine directed lend- Most transition economies have, in fact, opted for ing for infrastructure with commercial lending, will have some type of universal banking model. This model has its the same success (Box 6.4). risks, however, especially given the generally weak super- vision in transition economies. In the Czech Republic and Rural and housing finance: Should government fill Russia, for example, conflicts of interest may arise from the institutional void? substantial cross-holdings between banks, investment Most governments face strong pressure to provide credit funds, and enterprises. Exposure guidelines, which limit for rural finance, which is in crisis in many transition 105 744- Box 6.4 China's new policy banks Most bank lending in China has been directed by the lending more explicit. If professional banking stan- government, rather than by commercial need, and dards are applied, it could also generate efficiency gains undertaken by four banks, specialized by sector. As in the management of public investment. The signals part of its financial sector reform China decided to free are mixed, however: most of the new banks' staff come the banks of this policy-based lending, leaving them to from the Planning Commission or its subsidiaries; on transform themselves into true commercial banks. To the other hand, the State Development Bank did facilitate this, three new policy banks were created in refuse to finance some 10 percent of proposed projects 1994. The State Development Bank makes loans for in 1994. infrastructure and key industrial developments. The The policy banks represent only one aspect of pol- Agricultural Development Bank finances crop pur- icy lending, however. The Chinese government sets chases and food reserves and lends for poverty allevia- many interest rates according to industrial or broader tion and rural infrastructure. The Export and Import policy objectives rather than commercial ones, and the Bank focuses its support on machinery and electronics commercial banks are still obliged to carry the loans. exports, mainly through suppliers' credits. The banks Moreover, the commercial banks' biggest burden is are funded by a combination of bonds (administra- working capital loans to cover public enterprise losses. tively placed with commercial banks), capital contri- The policy banks have no role in financing these, and butions from the government budget, and central bank there is no sign yet whether these loans will be trans- lending. The three banks' operations are already signif- ferred to the already strained government budget. The icant: all bank-financed government investment is creation of the policy banks is therefore just one step expected to flow through them, and their lending is toward a comprehensive reform of China's financial expected to be about 9 percent of all investment, or 3 sector. If applied with rigor, it could prove a significant percent of GDP in 1995. step. On the other hand, the policy banks may just as The new banks have removed the burden of one easily turn out to be merely another layer of govern- type of policy lending from the specialized banks. This ment, and one that perpetuates market segmentation move also makes the cost of subsidizing such policy and the role of planning. economies, especially among the NIS. Agricultural banks, of budgetary funds can help capitalize the new institutions, like most specialized banks, are illiquid and often bank- but, as with other financial intermediaries, the key objec- rupt and are likely to emerge from reform much smaller tives must be to foster self-help and the long-term devel- if they survive at all. New banks are usually reluctant to opment of healthy institutions. One temporary solution serve agriculture, because the risks are high, profitability is might be the approach used in Latvia, where a specially low, credit histories are short or absent, and land is poorly created institution operates on commercial banking princi- registered and difficult to collateralize. Some countries, ples but has a limited life span, after which it will be closed including Croatia and Poland, have made progress toward or merged with a commercial bank. Alternatively, working a legal framework that allows other farm assets, such as capital finance could be used to capitalize a cooperative agricultural stockpiles and farm equipment, to be used as lending structure: in the Kyrgyz Republic, for example, security for loans, but these are still the exceptions (see temporary financial support for working capital will be Box 5.1). In addition, farmers are usually heavy savers, so made available to farmer cooperatives. In other parts of the rural areas need access to reliable and competitive savings world, commercial suppliers of inputs and providers of instruments as well as commercial credit. marketing services often offer credit to farmers. These enti- Creating cooperative financial institutions, in some ties can generally evaluate the credit risks of individual cases out of the remains of the agricultural bank, can be a farmers as well as banks can, if not better. But in the ini- constructive approach to self-sustaining rural finance. tial stages suppliers may need some coaxing to enter these Credit cooperativeswhich already exist in Hungary, markets: the Moldovan government, for example, is pro- China, and Vietnamhave many strengths: active peer viding insurance against certain policy changes that would monitoring of borrowers, close links with clients, and an adversely affect repayment, to encourage foreign suppliers emphasis on mobilization of savings. These benefits can be to provide inputs on credit. undermined, however, if the cooperatives depend on gov- Housing construction has dropped sharply in many ernment as the source of finance. Modest initial injections transition countries, partly for lack of finance. In most 106 countries housing finance is constrained by low saving traditional bank loans, not least that it can work well even and a weak institutional framework. Sometimes, unfair where collateral laws are still extremely weak. In Romania competition from state-owned banks has also inhibited the existing civil law, although a century old, was used to the development of market-based housing finance. Vari- draft watertight leasing arrangements, enabling leasing ous specialized financial institutions and government- companies to operate effectively without a special leasing funded schemes have been proposed to revitalize the law. Furthermore, it is usually easier to assess the value of a housing market. But these schemes do not address the leased asset than the credit of a firm, particularly one with fundamental constraints on housing finance in many a short credit history. Unsurprisingly, perhaps, leasing has countries: the poor legal environment for mortgages, con- come to finance a large share of new investment in transi- trolled rents that discourage home ownership, the lack of tion economies: nearly a third in the case of Slovenia, and institutional investors, and macroeconomic instability and about one-sixth in some other countries. With most leases high inflation. Indeed, such schemes may distract atten- awarded to smaller enterprises, the average lease has like- tion from what is really required to develop a good hous- wise tended to be small. In Slovenia, for example, the leases ing finance system, and they can have heavy fiscal costs. extended by an operating company in which the IFC par- ticipates average $13,000. Leasing has also complemented The role of nonbank financial intermediaries the development of other forms of finance, including bond Many nonbank financial institutions, such as portfolio and commercial paper markets, as well as supported a more capital funds (mutual funds), venture capital funds, and general improvement in the regulatory and legal frame- leasing and factoring companies, are well suited to the works in place for lending. The development of other non- needs of transition economies. They can fill the disin- bank financial institutions, such as insurance companies, termediation gap now prevalent in many transition will be slower, but over time they too can become impor- economies. They also tend to finance small and medium- tant institutions for intermediating savings. Nurturing size enterprises, which are important to overall growth, them, however, will require further improvements in coun- and they can require less in the way of legal infrastructure tries' legal frameworks, particularly in the areas of property than other types of intermediary. Portfolio and venture rights and contract law (see Chapter 5). capital funds have indeed grown rapidly in transition Developing capital markets economies. By early 1995, just six years after the first ven- ture capital fund was set up in GEE, there were more than Capital markets are, at their most basic, easy to define and eighty such funds, managing assets valued at $4.4 billion. almost as easy to create. In a sense, a capital market exists These funds have proved an attractive way for one or a few wherever financial securitiesvouchers, stocks, or bonds large foreign investors to meet the equity needs of small change hands, whether on a formal securities exchange, firms. The venture capital funds in which the Interna- within a less structured but established medium such as an tional Finance Corporation (IFC) participates, for exam- over-the-counter market, or informally between any buyer ple, have an average investment per firm of only and any seller. Yet as with so many of the institutions out- $500,000. Such funds can be particularly useful in transi- lined in this part of the Report, the trick to capital mar- tion economies, not simply because equity investments kets is not bringing them into being but nurturing them offer some hedge against inflation, but also by providing so that they play their proper supporting role in the for considerable control over management, with fund broader process of transition. For capital markets, espe- managers able to help inexperienced managers develop cially the more formal kind, that role is largely one of business plans and upgrade standards. They can also make facilitating the reallocation of property rights. Capital for better audits and build up contacts with foreign firms. markets are especially needed after the initial distribution The IFC's venture capital manager, for example, helped a of vouchers and shareholdings in a mass privatization pro- Ukrainian manufacturer of surgical needles by providing gram, but also for the sale of state assets through direct the company with U.S. equipment and training, enabling share offerings. Some of the standard benefits of capital it to meet U.S. medical regulations. Demanding venture markets in a market economy can often be even more capital fund managers can also help spur the development valuable for transition countries: capital markets improve of local capital and financial markets. corporate governance by monitoring managers and trad- As noted elsewhere in this Report, entry of new firms ing shares actively; they allow cash-strapped governments has been the driving force behind private sector develop- to issue bonds, and firms to make share and bond offer- ment in transition economies. But new small and medium- ings; and they support long-term housing finance and size enterprises have often found it particularly difficult to pension reform. But even healthy capital markets are not attract external finance. In this context, leasingof self-sufficient; they rely heavily on well-functioning banks, machinery, say, or vehiclesoffers many advantages over to process payments and act as custodians, and money 107 markets, to provide benchmarks for pricing securities. requirements could help capital markets develop, just as Both are sorely lacking in many transition economies. In the disclosure provisions of the Companies Act of 1900 addition, property rights are often poorly defined, there is promoted markets in the United Kingdom. Although a lack of necessary market skills and experience, and many transition economies have made significant progress minority shareholder protection is extremely limited (see in enacting modern securities laws, few have succeeded in Chapters 3 and 5). enforcing them, since supervisory institutions are often The more formal, centralized type of securities ex- still lacking. There have been many cases of outright change is not particularly difficult to set up. At least nine- fraud, such as the Caritas scheme in Romania. And many teen transition economies have done so. And almost all transition economies still lack effective trading frame- countries in GEE, several NIS, and China and Vietnam works and supporting financial services. have adopted (or are adopting) supporting, comprehen- In developing and improving rules and institutions, sive securities laws. Yet both market capitalization and countries need to strike a balance between a top-down ap- share turnover in these formal markets have tended to be proach, where the government takes the initiative, and one low by both developing and industrial country standards that is more bottom-up, in that supply and demand create (Figure 6.2). Accordingly, the new markets have raised pressures for the types of markets countries need and the only limited funding. In GEE and the NIS only the best rules and institutions to govern them. Top-down strategies firms have been able to raise any financing, altogether less can deliver higher standards but risk overregulation and than $1 billion from 1991 to 1995. In China new equity may fail to meet markets' true needs. Standards in several offerings have been comparatively large, amounting to GEE countries, for example, are relatively high, but only more than $1 billion in 1993 alone. They still, however, government bonds and several dozen stocks are actively account for only a small portion of total enterprise invest- traded. This is especially likely when infrastructure is devel- ment. In Russia and the Czech Republic, capital mar- oped well in advance of demand or supply. Albania, for ketsincluding informal marketsare mostly used to example, enacted a well-designed capital markets law, but build up controlling stakes, which investors then tend to its capital markets are not yet functioning for lack of strong hold; turnover on formal markets is consequently low. In banks, institutional investors, functioning courts, qualified very few countries has equity trading been active and had lawyers, and a well-staffed regulatory commission. Top- a disciplinary effect on managers. down approaches are especially problematic since most Bringing capital markets to life in transition countries countries need rapid change in the way firms are man- will mean raising both the supply of securities and, natu- agedthrough mass privatization and other programs rally, the demand for them, as well as improving the insti- and this can be slowed by overregulation. tutional background for transactions. On the supply side, A bottom-up approach can have advantages. Experi- bond markets, which often precede stock markets, have ence in transition economies and elsewhere shows that tended to develop because governments need to raise non- more-effective rules and institutions tend to develop when inflationary finance. Similarly, rapid privatizers among they advance in step with demand and supply, rather than developing countries have experienced much faster behind or well in front of them. There is also evidence growth in stock market capitalization than have slow pri- that market participants, seeking to protect their own vatizers. This is also true among transition economies: interests, tend to self-regulate through cross-monitoring, stock market capitalization is greater in relation to GDP especially when trading in large volumes. In Russia, a sys- in mass privatizers such as Russia and the Czech and Slo- tem for over-the-counter trading in stocks and rules gov- vak Republics (see Figure 6.2). Yet trading activity and erning trades were introduced because brokers realized individual share prices are generally much lower among that it was in their own interest to share information with mass privatizers than in other countries, largely because others and agree on common standards. The bottom-up demand is low and institutions are weak. China, with its approach still requires a supportive role for the govern- limited privatization, is a notable exception, with high ment, especially in promoting the necessary institutions turnover due in part to speculation. and in vetting the rules of the game, but it does not risk Boosting domestic demand for securities, and boosting stifling a nascent market. China is an example of bottom- securities trading, will require stable macroeconomic poli- up regulatory development: the emergence of regional cies to raise saving, as well as the emergence of institu- exchanges prompted regional regulators to formulate their tional investors such as private pension funds (see Chap- own rules first, which were later absorbed into an over- ter 4) and insurance companies. Policymakers will also arching national regulatory framework. need to improve the protection of creditors and investors, Foreign demand can be particularly helpful in lifting especially minority shareholders, and vigorously punish standards and increasing confidence. Foreign portfolio fraud and other white-collar crimes. Enhanced disclosure investors stimulate infrastructure improvements because 108 Stock markets in most transition economies remain small and illiquid. Figure 6.2 Stock market capitalization and turnover in selected countries Market capitalization Turnover United Kingdom Thailand France Spain Nontransition economies Mexico Brazil Greece Turkey Czech Rep. Slovak Rep. China Russia Transition economies Hungary Poland Croatia Lithuania Romania 120 100 80 60 40 20 0 20 40 60 80 100 120 140 160 180 200 Percentage of GDP Percentage of market capitalization Note: Capitalization is the market value of shares outstanding at the end of 1995. Turnover is the market value of shares traded during 1995. Some economies with short histories of operating stock exchanges are not shown, as complete data are unavailable. Data do not cover all stock exchanges or over-the-counter trading, and only the most liquid stocks are included. Source: International Finance Corporation and World Bank staff estimates. they demand good custody, trustee, audit, and bank pay- company's management. The resulting international out- ments systemsfiduciary functions missing in many tran- cry spotlighted the deficiencies of Russia's regulatory sition economies. In Russia, for example, a British com- process, leading to pressures for third-party registry facili- pany acquired 20 percent of the shares of an aluminum ties and a national registry company. A joint venture company, but its share ownership was later annulled by the between Russian and several foreign institutions (the Inter- 109 national Finance Corporation, the European Bank for Re- The agenda construction and Development, and the Bank of New York) now handles custodian arrangements for shares, All transition economies face similar obstacles in building making purchases much easier and more attractive. Capi- strong, active financial systems, but they have approached tal market development can also be accelerated through them in very different ways. One lesson of the past few "demonstration" projects, such as portfolio and venture years is that reforming existing banks can be less efficient capital funds. than decentralized institution building that stresses new Capital markets in their various forms have played an entry. The best approach to banking reform for many important role in the transfer and initial reallocation of countries, particularly the less advanced ones, might be to company ownership (vouchers and shares), particularly restrict the activities of state banks while a new or parallel in mass-privatizing countries. Individual shareholders private banking system develops. But the inherited weak- (including insiders) have sold their shares, often through nesses of the financial system and the way these tend to informal markets, and strategic investors have sought to play out during transition demand a series of determined establish controlling ownership stakes. There are historical complementary reforms, no matter which approach gov- precedents for this process. In postWorld War II Japan ernments take. Likewise, all transition governments corporate ownership structure changed rapidly from one should aim to minimize their direct and indirect role in of wide distribution among individuals to one of institu- the allocation of resources. Premature bailouts in particu- tion-centered ownership with extensive cross-holdings. lar have often undermined the credibility of reforms. Gov- But increasing ownership concentration leads to illiquid- ernments should instead encourage banks to be more self- ity, especially in formal markets. In many transition econ- reliant in building capitalfor example, through more omies with mass privatization programs, investors have generous loan-loss provision rulesand improve the gen- held on to their stakes after the initial round of trading. eral framework for debt collection. Trading often occurs in blocks off the formal exchanges Accelerating the development of nonbank financial such is the case with 80 to 90 percent of shares exchanged institutionsan essential part of any financial systemis in the Czech Republicas investors try to build up con- important in all transition economies, because such insti- trolling stakes. Other countries show a similar tradeoff tutions often finance the small, dynamic new firms that are between concentration of ownership and market liquidity. proving central to economic growth. Capital markets are Given the lack of sound corporate governance and scarcity essential for raising financing and improving the gover- of financial skills, concentrated outside ownership (com- nance of firms, and here transition economies may prefer bined with monitoring by banks) has its advantages in to rely on demand and supply pressures when developing most transition economies. At least in the short run it is the supporting framework. In the long run, as evidence probably preferable to highly liquid and speculative capi- from other countries shows, the roles of banks, capital tal markets that may impose little or no discipline on markets, and other intermediaries are complementary, and managers (see Chapter 3). all have a positive influence on development and growth. Toward Better and Slimmer Government transition from plan to market calls for a whole- the exception rather than the rule. State intervention is sale reinvention of government. The state has to justified only where markets failin such areas as defense, The move from doing many things badly to doing its fewer core tasks well. This means government must at once primary education, rural roads, and some social insur- anceand then only to the extent that it improves upon shrink and change its nature. No longer the prime eco- the market. Second, government must stop restricting and nomic agent in most areas, it must instead facilitate private directly controlling private commercial activity and extri- activity. This chapter steps back from the many demands cate itself from intimate involvement in the financial sec- on governments undergoing transitionthe array of eco- tor, focusing instead on promoting macroeconomic sta- nomic and institutional reforms outlined in other chap- bility and providing a legal and institutional environment tersto analyze the more fundamental issue of the role of that supports private sector development and competition the state itself in the economy and how it should evolve (Chapters 2, 5, and 6). Finally, instead of providing gen- during transition. It goes on to analyze how the reinven- erous guarantees to secure adequate living standards for tion of government should proceed in practice, focusing on all, governments need to foster greater personal responsi- the need to overhaul all aspects of the public finances. In bility for income and welfare. Providing social protection most transition economies reforms have sapped power and is a key function of government in all economies, but in a revenue away from governments. Continuing to finance market economy it shouldin principle, at leastbe even a shrunken government without inflationary money mainly targeted at those vulnerable groups who need it creation or overborrowing, while at the same time reorder- most (Chapter 4). ing spending priorities, is proving a major challenge for These shifts are guided by the mix between private and almost all countries. Getting the government's own house public activity in a stylized market economy. They provide in orderachieving tighter control on expenditure, better a general framework, not a rigid blueprint, for changes in budget management, and tax administration, while re- the role of government during transition. Deciding, for forming fiscal relations between levels of governmentis a example, exactly where market failures justify government high priority for advanced and lagging reformers alike. intervention is a contentious business. But four groups of goods and services have features that tend to make private Achieving fundamental change in government markets fail, or function inefficiently, creating a potential Voters and policymakers around the world increasingly rationale for government intervention (although not nec- ask what government is for, and whether some of its tasks essarily government provision): might be better done by private agents. In transition countries the job of redefining government is at once Pure public goods such as defense, law and order, and more urgent and more daunting. First, the role of govern- environmental protection cannot be provided by pri- ment in producing and distributing goods and services vate markets alone. Because everybody shares their ben- must shrink dramatically. Public provision must become efits automatically, no one is willing to pay for them 110 111 individually. But governments can provide them and national objectives. In the early stages of transition the impose their cost on taxpayers. state clearly needs to shrink and move toward less eco- Goods with positive externalities, or spillover benefits, nomic involvement, allowing more room for markets and are worth more to society than to any one consumer. the private sector. But as transition proceeds, policymak- Public health and education, for example, reduce infec- ers increasingly confront tradeoffs between a somewhat tion rates, add to society's knowledge base, and raise more laissez-faire market economy (as in the United productivity. Markets tend to undersupply these goods, States) and a somewhat more "social" market economy (as and complementary public funding or provision can in Germany or Sweden). However governments resolve therefore improve efficiency. Similarly, markets ignore these tradeoffs, they urgently need to improve the effi- negative externalities, such as industrial pollution; reg- ciency and quality of the services they provide, by focusing ulation to curb or clean up the activity causing the pol- on the outcomes of government programs and their costs lution can improve social welfare. rather than only their inputs (see Chapter 8). An especially Natural monopolies such as gas pipelines, local trans- important task of governments during transition is that of port networks, and other infrastructure services are educating the public about the necessity and process of most efficiently provided by a single firm. Uncon- reforms, including reform of government itself, and thor- strained, monopoly producers tend to overprice and oughly explaining policy options and government deci- undersupply these services. But public provision or reg- sions. This is crucial to building consensus and mobilizing ulation can in principle be efficient. support for reform. Imperfect information, on the part of either consumers Governments everywhere have found it extremely dif- or providers, may make markets fail. Private commer- ficult to reorient and reduce their own involvement in the cial insurance, for example, cannot efficiently insure economy, not least for political reasons. Only a few coun- against risks like unemployment, longevity, and deteri- tries have succeeded with large-scale government reforms, orating health in old age, because these risks are influ- Australia and New Zealand being leading examples. Typ- enced by characteristics and behavior of the insured ically, as in New Zealand, such reforms have followed eco- that the insurer cannot observe, along with government nomic crises, which helped bring about the broad consen- policy, and they affect large parts of the population sus needed for far-reaching change. Transition countries equally and simultaneously. Governments can regulate have a unique opportunity to achieve fundamental gov- private pensions and insurance and complement them ernment reform in the course of their economic transfor- with basic public pensions and insurance to improve mation; the political as well as economic breakthrough in efficiency and fill gaps in coverage. Governments also many CEE countries and NIS gives them doubly good inspect food, set standards for airline safety, approve reasons for pushing ahead with government reforms. By new drugs, and regulate banks and securities markets to acting decisively, transition countries can avoid some of protect consumers who have insufficient information the major fiscal and structural problems that have long about the quality of these goods. plagued developing countries and have recently emerged in many industrial countries. Where markets fail, a case-by-case judgment is needed Making government more market-friendly and effi- on whether government provisionor the regulation or cient entails improving public sector management. Coun- funding of private provisioncan do better. Govern- try comparisons show that the two usually advance ments, too, may fail: interventions may be guided by polit- together (Figure 7.1). In both areas, progress with reforms ical objectives, be poorly implemented, create vested inter- has been greater where liberalization is more advanced. ests, or give rise to rents and corruption. Well-intentioned The reason is that some government reformsthe retreat government intervention to correct market failures may from production and the removal of restrictive regula- prove even worse than suboptimal private provision. In a tionsare essentially the institutional counterpart of lib- market economy the burden of proof regarding public eralization. Others, such as targeting social assistance and intervention lies with the government. improving tax administration, require long-term institu- Not surprisingly, market economies in the real world tion building and tend to lag behind market liberalization. differ in how much education, health, and infrastructure Changes in the role and management of government the state provides for free; in the degree to which higher also entail the development of a professional civil service. taxes on the rich are used to redistribute income; and in Civil servants in transition economies tend to be concen- the scope and design of social welfare systems, among trated in the wrong parts of government, given its chang- other things. Countries make these fundamental choices ing functions. They frequently have the wrong skills for depending on their circumstancesa mountainous coun- their jobs and face insufficient pay differentials and other try spends more on roads than a flat oneand on their poor incentives. Contrary to general belief, however, 112 As governments liberalize the economy, they usually reform themselves. Figure 7.1 Government reform and liberalization by country group Score (10 = highest) 10 Index of market orientation of government Liberalization index, 1995 Index of effectiveness of public sector management Group 1 Group 2 Group 3 Group 4 Countries East Asia affected by regional tensions Note: The market orientation index is a composite measure of how much governments have imposed hard budgets on banks and enterprises, shifted public spending away from the productive sector and toward social services and infrastructure, withdrawn from commercial decisionmaking, divested enterprise social assets, and moved toward a targeted social security system. The index of management effectiveness combines measures of the consistency of fiscal policy and overall economic strategy; the quality of public investment planning, budget management, and tax administration; and the transparency of intergovernmental relations. Both indexes are constructed from relative country rankings, estimated based on comparative information and consultations with country specialists. See Figure 1.2 for details of the liberalization index and the grouping of countries. Source: De Melo, Denizer, and Gelb, background paper; World Bank staff estimates. government as a whole is not vastly overstaffed or under- in real wages, a rising gap between public and private paid in most of these countries, and where total spending wages, and often woefully inadequate staffing and pay in remains high, this has little to do with excessive wage bills. a few key areas such as customs, tax administration, and Data from selected CEE countries and NIS show that the police. The problem lies rather in the distribution of overall government employment and wages are broadly in labor: the core central and local administrations in transi- line with those in industrial and middle-income develop- tion economies tend to be too small, whereas education, ing countriesnotwithstanding economy-wide declines health, and other public services are overstaffed. Yet on 113 balance there are too few professional and too many cler- higher. By contrast, government spending in the Baltics ical staff. Even where average education and skill levels are and Romania was around one-third of GDP in 1994, high, government workers lack the accounting, tax, regu- almost 20 percentage points down from 1989 levels. latory, and other public administration skills a market Turkmenistan, where market reforms are the least economy needs. Moreover, public sector pay is severely advanced, now has the smallest government of all transi- compressed, in both European and East Asian transition tion economies, with total spending below 10 percent of countries, and extensive and opaque systems of fringe GDP in 1994. But government spending in Azerbaijan benefits distort incentives further. Performance has little and Ukraine, where reforms are also lagging, still ac- bearing on pay and promotions. Instead, personal loyal- counted for half or more of GDP in 1994. ties and political considerations are still overemphasized What explains this diversity? Levels of income and in routine professional and career decisions. Not surpris- development, sectoral structure, demographics, and poli- ingly, public administrations in many transition econ- tics are known to influence the level and trend of govern- omies have been plagued by poor morale, absenteeism and ment spending in all countries. In transition economies moonlighting, low productivity, petty corruption, and three additional economic factors also seem to explain loss of good staff to the private sector. much of the change and variation in government size: These problems have no quick fix, but the direction of pressures for social spending, financial constraints, and needed reforms is clear. Pay, recruitment, promotions, the degree of commitment to stabilization. In CEE and and layoffs must become more flexible and merit-based. the NIS social spending pressures have risen because of Most fringe benefits and in-kind payments need to be output declines. In the Visegrad countries these new pres- replaced with cash. Salary differentials must rise substan- sures, along with the prospects for integration with the tially. And, of special importance in transition economies, European Union, have reinforced strong traditions of governments need to depoliticize the civil service, intro- high spending for education, health, and social services. A duce systematic career development and link it to training few countries have been able to accommodate spending in market economy skills, and integrate civil service pressures and sustain large or growing governments with staffing with wage bill and budget planning. stable or rising tax revenues (the Visegrad countries, Viet- nam), income from natural resources (Uzbekistan), or Rightsizing government external financing (Albania, Hungary). But most govern- Governments in transition countries vary greatly in size. ments have lacked access to such noninflationary funding. Most have shrunk during transition, by necessity or Some of them, such as Azerbaijan and Ukraine, delayed design, but many remain large in comparison with gov- fiscal adjustment until 1994-95, after keeping up spend- ernments in market economies at similar levels of income ing and suffering high inflation in the interim. Others (Figure 7.2). In CEE and the NIS, total government reduced spending earlier in line with declining revenues spending through central and local budgets and so-called either in connection with stabilization (the Baltics, China, extrabudgetary funds accounted for around half of GDP Romania) or because weak stabilization combined with on average in 1989, about the same as in much richer slow market reforms led to growing informalization, spi- countries. By 1994 average spending had fallen to 45 per- raling inflation, and ever steeper declines in revenues and cent of GDP among CEE countries and 35 percent in the expenditures (Kazakstan, Turkmenistan). Walking a fine NIS. In the Baltics and some other NIS, nominal govern- line between these outcomes are countries such as Belarus, ment spending adjusted for inflation now stands at half or Bulgaria, and Russia, which have kept expenditures high less of prereform levels. Government has also shrunk dra- despite slowly declining revenues, but have usually matically in China; total spending now accounts for less although not alwayscut them by just enough at the than 20 percent of GDP. But in Vietnam its share in right time to avoid a dangerous surge in inflation. GDP has grown and now exceeds that in countries of Are governments in the Visegrad and other high- similar income. spending countries too large? The size of government in There is no systematic relationship between changes in all economies depends directly on the role and functions government size and economic reforms. Both large and assigned to it. This, once again, is ultimately a matter of small governments are found among countries where lib- social choice. General empirical studies relating levels of eralization and government reforms are advanced. In the government spending to economic growth yield few Visegrad countries, for example, government spending robust conclusions. In transition economies, however, exceeded half of GDP in 1994, compared with just above there are stronger grounds for thinking that large govern- 20 percent of GDP (on average) in Chile, Colombia, ments will hurt economic performance: government the Republic of Korea, Thailand, and Turkeycountries spending, especially at high levels, tends to be quite inef- whose incomes per capita were comparable or slightly ficient and, as a result, to contribute less to growth than 114 Governments in most transition economies are shrinking, but many in Europe are still too big. Figure 7.2 GDP per capita and ratios of government expenditure to GDP in selected transition economies Share of government expenditure in GDP (percent) 60 Visegrad 1989 55 Visegrad 1994 Ukraine 1994A USSR 1989 OECD 1994 50 CEE 1989 Vi CEE 1994 OECD 1989 45 Russia 1994 Romania 1989 a 40 China 1978 35 A A NIS 1994 Romania 1994 Baltics 1994 30 25 "Normal" size of government in market Kazakstan 1994 economies 20 15 0 320 1,000 3,200 10,000 32,000 GDP per capita (dollars) Note: GDP per capita is at market exchange rates and plotted on a logarithmic scale. Government expenditure is all expenditure for central and local government plus extrabudgetary operations (quasi-fiscal and state enterprise operations are excluded). The regression line is based on a separate sample of forty-seven developing and industrial market economies. Data for country groups are simple averages. Source: IMF, various years (c); official data; IMF and World Bank staff calculations and estimates. in market economies; also, financing government pro- there are strong pressures for them to expand. Second, grams is costlier and poses a greater risk of inflation. government savingrevenues net of current spending Public spending is inefficient for several reasons. First, and public investment tend to be unusually low in GEE most large governments in transition economies spend a and the NIS. If government accounts for close to half of disproportionate share of public funds on programs with GDP but its saving is negligible (as currently in the Vise- little if any impact on productivity and economic growth, grad countries), even an impressive private saving rate of such as subsidies and social transfers (see below). Since 30 to 35 percent of GDP can generate investment of only these programs create entitlements or vested interests, 15 to 20 percent of GDP, well below levels associated with 115 rapid growth (Chapter 2). Third, the efficiency of govern- position and effectiveness of expenditure, rather than sim- ment services such as health and education in many tran- ply their level, can help introduce economic considera- sition economies is undermined by entrenched spending tions into the politics of budgeting, force a prioritization allocations within sectors, weak implementation capaci- of expenditures, and facilitate reform. ties, and high staffing ratios (see Chapter 8). Increased pri- The restructuring of government expenditures toward vate participation and cost recovery are urgent priorities. market economy patterns is well under way in most tran- Financing government spending in transition econ- sition economies. The biggest changeswhich are fur- omies tends to be costly. Only a few, such as the Visegrad thest advanced in the leading reformersrelate to spend- countries, have been able to finance high spending out of ing on subsidies, social transfers, and capital investment taxes, in part because of significant tax reform. But tax sys- (Figure 7.3). tems even there remain relatively inefficient, so that the Subsidies to enterprises and consumers have generally collection of a given level of revenues imposes a large eco- declined during transition, as has support to industry, nomic burden on taxpayers, especially the emerging pri- agriculture, construction, and other "private commercial" vate sector. Indeed, tax revenues of nearly half of GDP in sectors. As usual, the extent and pace of the decline mir- the Visegrad countries may well be unsustainable in the ror progress with liberalization. Total budgetary subsidies long run. In most transition economies revenues have in CEE and the Baltic countries averaged 3 to 4 percent been declining, so high government spending has tended of GDP in 1994. In Russia they still accounted for an esti- to translate into large budget deficits. Around the world, mated 9 percent and in Ukraine for 17 percent. Ukraine large deficits often lead to high inflation and slow growth. cut subsidies sharply in 1995, but total government This is an even greater danger in the many transition spending on activities that market economies tend to leave economies where the scope for domestic and external bor- to the private sector still accounted for around 15 percent rowing is limited and a large share of deficits can only be of GDP. financed by printing money (Chapter 2). Where subsidies remain high, they are usually used to reduce consumer prices or cushion enterprises from the Setting new spending priorities competitive and financial pressures of transition. Such Changes in the role of government during transition trig- subsidies are inefficient and should be replaced with direct ger shifts in spending priorities. The aim is to make the income transfers, which can provide targeted, more effec- composition of expenditures consistent with the tasks of tive transitional relief to vulnerable workers and house- government in a market economy and conducive to long- holds and do not delay necessary enterprise restructuring. run growth. Indeed, robust empirical evidence supports Several CEE and Baltic countries have demonstrated that the view that government spending tends to be productive many subsidies can indeed be phased out abruptly. Where and to promote economic growth where it corrects proven subsidies have already come down, the main challenges market failures and truly complements private activity are to reduce any remaining subsidiesoften concen- as do some infrastructure investments, preventive health trated in agriculture, energy, and housingand recover a care, and basic educationbut rarely otherwise. greater share of the costs of some education, health, and The specific effects of public expenditures on growth local transport services. Phasing out remaining subsidies in transition economies will vary according to initial con- becomes easier if governments commit to a credible ditions and the past composition of spending. In many schedule for reducing them, carefully monitor their costs, CEE countries and the NIS, for example, the marginal and regularly reassess the need for them. Governments return on general public education spending is likely to be should explicitly include all subsidies in the budget to relatively low because of historically high spending and enable both policymakers and the public to evaluate their educational attainment. But spending specifically on edu- true costs, and to facilitate the management of expendi- cation in newly relevant market economy skills will have tures and macroeconomic stabilization. At one time or higher returns. The quality of spending also matters a another most transition countries have bypassed the for- great deal; the colossal capital investments under central mal budget to channel large volumes of credit subsidies planning were often ineffective. Finally, government through the banking system. Although there is now a spending serves multiple objectives, of which economic trend toward bringing them back into the budget, this growth is only one. The resulting tradeoffs greatly com- practice remains a serious concern in countries such as plicate assessments of the benefits and costs of alternative China and Ukraine (see Chapter 2). compositions of spending. That said, the composition of Social expenditures have risen across the board during public expenditure is at least open to economic analysis transition. Part of the increase is desirable: new energy and, much more than the overall size of government, to and housing allowances replace subsidies being phased public debate. Focusing spending decisions on the com- out; rising social assistance and unemployment benefits 116 Governments' changing spending patterns reflect their increase in market orientation. Figure 7.3 Government expenditure by category in selected transition economies Percentage of GDP 70 Russia Other Capital investment 60 Health and education Ukraine Social transfers Subsidies 50 Middle-income comparators High-income comparators 40 China Baltics Kazakstan 30 20 10 1990 1994 1991 1994 1992 1994 1992 1994 1991 1994 1978 1994 Average, 1983-90 Note: Data include central and local government plus extrabudgetary expenditures (quasi-fiscal and state enterprise expenditures are excluded). For the high-income comparators (Australia, Canada, Germany, Israel, Luxembourg, United Kingdom, and United States) and the middle-income comparators (Argentina, Chile, Malaysia, Panama, Republic of Korea, Swaziland, Turkey, and Zimbabwe), data are weighted averages, and the bottom segment represents subsidies plus social transfers. Source: IMF, various years (a); official data; World Bank staff estimates. protect vulnerable households hit by income declines and in the Visegrad countries. In Poland, for example, pay- layoffs resulting from enterprise restructuring; education ments rose from 7 percent of GDP in the late 1980s to 16 and health expenditures increase as governments take over percent in 1993-94. Permitting this cost explosion to day care, schools, and hospitals from state enterprises. Yet continue not only would further crowd out other expen- the increase in social expenditures has varied enormously ditures but could jeopardize stabilization. Thus, pension across countries, mostly because of diverging trends in reform is a top fiscal as well as social priority for the Vise- pension costs. Sharply rising pension payments are the grad countries (see Chapter 4). Indeed, Leszek Balcero- main reason social and total spending have remained high wicz, the main architect of Poland's economic reform pro- 117 gram, has cited the failure to take on pension reform as stability, implementing new spending priorities, and the biggest mistake of Poland's first reform government. promoting efficient use of public resources hinges on Finally, public investment has fallen sharply in many improved budget management and expenditure control. GEE countries and the NIS, often to less than 3 percent This requires many complex institutional and organiza- of GDP by 1994, because wages and other current expen- tional changes over and beyond the civil service reforms ditures were protected when total spending had to be cut. outlined above. Capital repairs and upgrades have typically suffered, too, To begin, the budget needs to be put on a sound legal and many infrastructure facilities are deteriorating fast. In footing. The executive will usually remain the primary addition, the move to a market economy has rendered arbiter between competing expenditures but becomes parts of the existing capital stock obsolete. So, is it possi- accountable to parliament. During budget preparation ble that, after a period of correction of past investment line agencies will need to submit more detailed spending excesses, public investment is now too low? Recent re- proposals to the ministry of finance, using a common views by the World Bank of investment and expenditure methodology open to careful analysis. The finance min- in selected GEE countries and NIS propose target levels istry then needs to assess these proposals against the gov- for public investment of around 5 percent of GDP. ernment's agreed policy priorities and available financing. Another study, relating the composition of public expen- Its capacity to carry out economic analysis and forecast ditures in low- and middle-income countries to long-run revenue should also be improved to reduce the likelihood growth, suggests that growth is highest when around one- of revenue shortfalls. fifth of total government spending is allocated to public Finally, many governments have initially relied on investment. A small increase in those transition economies sequestration to control cash flows, imposing ad hoc spend- where public investment now is extremely lowsuch as ing cuts on line agencies by releasing funds in accordance the Baltics and several Central Asian stateswould be with incoming revenues rather than spending commit- consistent with both these findings. ments. This crude and inefficient practice has often led to Yet after decades of public overinvestment and misin- arrears on suppliers' payments, wages of civil servants or vestment, any increase in public investment in the GEE state enterprise employees, pensions, and so on. Govern- countries and NIS must be contingent on fundamental ment arrears bring a raft of problems: not only do they typ- improvements in the way such investments are made. ically worsen an economy-wide arrears problem (see Chap- First, public investment decisions must be integrated with ter 2), but they impede private sector development, impose the budget process, to ensure consistency with macroeco- high social costs, and breed cynicism about government nomic spending targets. Second, public investment needs and market reforms overall. Instead, governments need to to be depoliticized, and it should not substitute for private move quickly to develop working cash-management and investment or for maintenance of existing facilities, but treasury systemsa process now under way in the Baltics, rather complement them. For example, investments in Croatia, and Kazakstan. public roads should focus on highways rather than road- Poland shows the progress that can be achieved in side services, and to the extent that maintaining roads is budget management. First, constitutional amendments more cost-effective than upgrading or rebuilding them defined the budgetary powers of government agencies, later, it should get priority. New construction would also and an "organic" budget law set out the principles for be wasteful in sectors with excess capacity, such as hospi- budget formulation, execution, and control. Starting in tals or power generation in many GEE countries and NIS. 1992, instructions to budgetary units were modified to Third, to make public investment more effective and effi- include uniform assumptions on key economic variables cient, projects should be systematically screened using such as GDP growth and inflation. Current and capital economic and financial criteria, including cost-benefit expenditures were more clearly separated, and the over- analysis where feasible. Public investment policy in the all resources available to individual budget units were Baltics now broadly follows these principles. better specified. The Ministry of Finance has refined its economic models and strengthened its collaboration Toward better expenditure control and with the central bank. These steps have dramatically budget management increased government accountability and helped focus Under central planning the budget was driven by two fac- budget discussions on the substance of proposals rather tors: politics and accounting. Preparing the budget was than the politics. essentially automatic and incremental, a matter of topping Improving tax policy and administration: The key to off the previous year's budget. This practice is still fol- closing the revenue gap lowed in China and some other countries. During transi- tion the budget becomes an instrument of economic In the midst of transition some reforming countries have policy. Its effectiveness in maintaining macroeconomic to confront an alarming revenue gap. The sharp drop in 118 output, together with the serious limitations of current external financing of the budget deficit may be war- tax administrations, has constrained the capacity of coun- rantedin the context of policy measures to reform the tries in CEE and the NIS to raise revenues. This has tax system and reduce spending (Chapter 9). created pressure to increase tax rates and introduce new Revenues have fallen in most transition economies taxes or, as in the Kyrgyz Republic, to seize bank deposits (Figure 7.4). In the Visegrad countries and Slovenia, the for tax payments. These methods of raising revenues ratio of revenues to GDP fell on average by 4 percentage are particularly costly. Yet it is politically difficult to cut points during 1989-94, although at one-half of GDP it expenditures in countries where spending has been high was still high for middle-income countries. By contrast, and the population has come to expect a broad range the share of revenues in GDP dropped by an average of 16 of services from government. Until the economy recovers percentage points in most of the other CEE countries and and tax administration becomes effective, some temporary NIS (Ukraine, Uzbekistan, and the countries affected by Tax revenues have fallen sharply in many transition economies. Figure 7.4 Government revenue by source in selected transition economies Percentage of GDP Other 70 Trade taxes Value added tax 60 Individual income tax Visegrad countries Corporate tax 50 Middle-income comparators Russia Ukraine High-income comparators Baltics 40 China 30 Kazakstan 20 10 1990 1994 1991 1994 1992 1994 1992 1994 1991 1994 1978 1994 Average, 1983-90 Note: Data include central and local government plus extrabudgetary revenues (revenues from quasi-fiscal and state enterprise operations are excluded). Data for the high-income and middle-income comparators are weighted averages (see Figure 7.3 for the countries in each group). Source: IMF, various years (a); official data; World Bank staff estimates. Er 119 regional tensions are excluded from this comparison), food and consumer items, are exempt from value added tax before stabilizing at about 29 percent of GDP in 1994. (VAT). And excise rates on alcohol and cigarettes in the Russia's modest revenues partly reflect the political diffi- NIS are about 20 percentage points lower than in OECD culties involved in taxing large and powerful state enter- countries. Meanwhile in nearly all transition countries prises, such as the enormous natural gas monopoly agriculture is exempt from profit taxes, and foreign Gazprom (Box 7.1). Despite rapid economic growth in investors continue to enjoy preferential tax rates. Finally, China, its decline in revenues over the reform period was tax administrations have generally failed to collect taxes equally dramatic: from 34 percent of gross national prod- due from the traditionally dominant state sectors or to uct (GNP) in 1978 to 17 percent in 1994. By contrast, bring the rapidly growing private sector into the tax net, the share of revenues in GDP in Vietnam increased by 10 and tax arrears are generally on the rise (see Chapter 2). percentage points between 1989 and 1994, thanks to the China's sharp decline in government revenues, despite greater profitability of state enterprises and the introduc- rapid economic growth, highlights the need for a coherent tion of import taxes. tax strategy in the pursuit of market reforms. Most of the No one expected tax revenues to fall quite so dramati- revenue decline was due to smaller contributions by state cally during transition. Countries started out with high enterprises. This partly reflected government intentions. In levels of taxation by international standards, and the fall in the interest of promoting enterprise autonomy, the author- revenues was partly a consequence of market-oriented ities allowed state enterprises to retain a portion of their reforms and reducing the role of government. But the profits, and in 1984 introduced a corporate income tax severe contraction in the state enterprise sector in CEE and that lowered their tax burden. Revenue collection was fur- the NIS added insult to injury, cutting revenues further by ther undermined in 1988 by the new tax contract system, shrinking the main tax bases in these countries, namely, which officially sanctioned "tax payment by negotiation" profits, wages, and consumption. Hardest hit have been for state enterprises, and again in the early 1990s, when slower reformers whose incomplete structural adjustment this system was extended to turnover (sales) taxes. But not hurt profits and reduced tax payments by enterprises. Yet all of the revenue impact of the reforms was anticipated. a fair part of the decline in revenues was self-inflicted. Greater competition from collectives eroded the monopoly Most important, the use of taxation for economic and profits of state enterprises. Moreover, as local governments social "engineering" has generated pressures for exemp- gained economic and political strength, they began reduc- tions and reduced rates. In Ukraine many goods, including ing their efforts to collect those taxes that were to be shared Box 7.1 Into the lion's den: Taxing Gazprom Gazprom, the successor to the Soviet Ministry of the Gazprom's tremendous wealth is a source of great Gas Industry, is the largest company in Russia and one power. The company, which is extremely secretive, has of the largest in the world. It is a highly profitable become a "state within a state." Its tax compliance is monopoly, with estimated revalued assets of some low, and it is allowed to retain billions in a tax-free $150 billion ($400 billion or more if gas reserves are "stabilization fund" for investment. Gazprom paid included). Its annual gas production is 600 billion cubic taxes in 1995 of about $4 billion. Had Gazprom not meters twice the consumption of Western Europe. benefited from tax privileges, and had it complied with After-tax profits in 1995 were about $6 billion, which all tax obligations, its tax payments would have been would put it second (after Royal Dutch/Shell) in net more than twice as large. Equivalent to 2 to 3 percent profits on the Fortune Global 500 list. Debt obligations of GDP, these payments would have gone quite some are probably the lowest of any company of its size in the way in shrinking Russia's budget deficit. Gazprom has world: its debt-equity ratio is below 5 percent. strong links with government, and in return for its In 1994 half the company's shares were exchanged special tax status is thought to allocate some of its for vouchers in closed privatization auctions, going in spending to government priorities (such as support to large part to managers, employees, and residents in gas- industry or the military). Some critics argue that the producing regions. The company itself purchased an company should pay higher taxes and be pushed to additional 10 percent of shares at par value from the seek capital on world markets, which would force it to government, which owns the remaining 40 percent. be more open. Others argue that it should be broken Shares cannot be registered in new owners' names up, as was Standard Oil in the United States early in without management approval. this century. 120 with the central government and granting tax relief to vices (notably exports, which should be zero-rated, and "their" enterprises. At the same time they managed to banking and insurance services, where it may be difficult appropriate considerable resources for local purposes, by to determine the amount of value added to be taxed). channeling local surcharges on taxes into their own extra- Major commodities such as gas and oil should be subject budgetary funds and letting local enterprises "donate" to the full tax regime, including not insignificant excise funds to local schools and build local bridges. Until 1994 rates. Deductions from profit and personal income taxes China lacked an effective tax administration. Reversing the need to be limited. The tax status of agriculture, especially resulting decline in revenues will be crucial as China pro- in the NIS, will also have to be overhauled, first by lifting ceeds with reform, and as government takes on its full set exemptions on major taxes and, over time, through intro- of social obligations from enterprises. duction of a land tax. Small private businesses can be Transition economies have made considerable progress taxed through presumptive methods (based on selected in adjusting the mix of their taxes toward patterns common indicators rather than actual profits), as is done in Viet- in market economies. VATs have generally replaced com- nam and several other transition economies. Finally, when plex turnover taxes. Corporate income taxes are beginning broadening tax bases, countries need to contain marginal to substitute for profit taxes and transfers. And systems of tax rates and the overall tax burden of the private sector. personal income taxation are being developed. Neverthe- In the Visegrad countries and Russia, for example, im- less, the tax systems that have emergedoften in an ad hoc proving tax efficiency and reducing tax evasion will almost mannerstill fall well short of what might be considered certainly require lowering combined corporate, personal best practice. The efficiency costs of taxation (the reduction income, payroll, and value added tax rates. in the real income of society due to the imposition of taxes) Improved tax administration is the second pillar of an in a number of transition economies are probably as high effective revenue strategy. Effective tax administration in as in some developing countries. A study for India, for a market economy is based on voluntary compliance by a example, suggests that every rupee of extra sales or import large number of decentralized taxpayers. Most transition tax revenue raised by increasing tax rates has an efficiency economies have only recently started to address compli- cost of 0.85 and 0.77 rupee, respectively. ance issues and build up a modern tax administration with Heavy tax distortions in transition economies come better overall revenue performance. China's new National from various sources. First, base rates are often high. In Tax Service, established in 1994 with authority to collect transition economies with many fledgling small enterprises the bulk of taxes, has helped increase the central govern- and weak tax administration, high rates are likely to ment's share in total revenues. encourage already widespread tax evasion and informaliza- A first step is to restructure how the work is organized. tion. Second, many countries still rely heavily on payroll Tax administrations should develop around activities taxes to finance social expenditures. In Hungary more than (such as recording or auditing), as in Hungary, rather than half of every forint in additional wage income is taxed away according to type of tax and taxpayer. More generally, tax by the payroll tax and the individual income tax combined. payments need to be assessed, collected, and recorded As many market economies are discovering, payroll taxes, more efficiently. Current procedures are rarely up to the levied mainly on employers, can stifle entrepreneurial job of dealing with a growing number of taxpayers, many effort, discourage formal hiring, and push economic activ- of whichparticularly private businesses and service ity underground. The payroll tax base has indeed shrunk a enterprisesare tricky to tax at the best of times. Govern- great deal in some transition countries. Third, and perhaps ment might start by assigning identification numbers to all most important, the many tax exemptions and special tax taxpayers, focusing its efforts on the large taxpayers who rates described above often coexist with higher tax rates on generate the bulk of revenue, and withholding wage taxes other activities, such as banking and insurance, and on the at the source. Next in line should be improved monitoring private sector generally. Such variations in tax treatment and follow-up action against those who fail to file returns undermine revenue performance, complicate tax adminis- or make payments. Latvia, for example, has issued regula- tration, and distort resource allocation. tions for an improved taxpayers' register: every taxpayer Improving tax revenues in transition countries entails must register with the State Revenue Service; financial in- reforming the structure and composition of taxes as well stitutions will not be allowed to open accounts for any as the collection of revenues. The first pillar, better tax business or individual without a taxpayer code. design, will be essential for delivering higher, fairly pre- The nature of audits and enforcement must also dictable revenues, minimizing distortions, and avoiding change with the move to a compliance-based tax system. large increases in tax rates and frequent changes in legisla- Audits need to be conducted selectively. Hungary is tion. The key task is to strictly limit tax exemptions and adopting this approach, but many NIS still conduct a full eliminate sectoral differences in tax treatment. This will audit of every taxpayer every two years. Tax administra- mean extending the VAT to all but a few goods and ser- tors in most transition countries will need to be given 121 greater powers to enforce payment (in some NIS they are tralizing revenue authority has fueled the trend toward limited to calling banks for information on late taxpayers). greater regional inequality mentioned in Chapter 4. Rus- Efforts are under way in Bulgaria and Poland to change sia's richest °blast, for example, now spends sixteen times the law so that the authorities can seize the assets of delin- more per capita than the poorest. quent taxpayers. The new tax law in Latvia imposes vari- Yet decentralization has sometimes yielded benefits. In ous penalties on defaulting taxpayers, extending to closing Poland, for example, the quality of local services appears to their businesses. have improved: the fact that beneficiaries play a more active part in local decisionmaking and that local officials have Fiscal decentralization: Blessing or curse? greater accountability may have increased the user-friendli- Facing political pressure to maintain or increase spending at ness of service provision. Local governments have not gen- a time of declining revenues, central governments in transi- erated deficits and have thus supported macroeconomic tion countries have shifted several spending responsibilities stabilization. In China decentralization has been important down to the local level. Consequently, local governments in promoting an experimental approach to reforms, with handle a large and increasing share of total public spending, the more successful regions setting an example to the rest. including spending on some servicessuch as education, There is no single "right" system of intergovernmental health, and social welfarethat have national as well as relations and no "best" country experience to serve as a local benefits. In China and Russia, for example, subna- model for transition economies in assigning revenues and tional spending was just under 40 percent of total spending expenditures between levels of government. Revenue as- before 1989; now it is closer to 50 percent. As state enter- signments and basic tax systems need to be relatively sta- prises are privatized, their spending on social services and ble so as not to disrupt incentives for investment and infrastructure is also being shifted to subnational budgets. growth, and to ensure that the country remains a unified The same trend toward decentralization has not taken economic space. This can be particularly important in place with regard to revenues, which remain centralized in transition economies where liberalization implies a trend almost all transition economies, largely for stabilization toward decentralization and regional differentiation. Thus, reasons. In countries as diverse as Hungary and Ukraine national uniformity is generally deemed preferable for the center still keeps all revenues from corporate, value profit and personal income taxes, the VAT, and taxes on added, excise, and customs taxes. In Russia, revenues from natural resources and international trade. Revenues that can all four main taxesprofit, personal income, value added, be assigned to subnational governments include excises, and excise taxesare shared with local governments, but supplementary rates on the national personal income tax the underlying arrangements are opaque and the regional ("piggybacking," as has been recommended for Hungary, equalization mechanisms complementing them are inef- Poland, Russia, and Ukraine), and various property taxes fective. Meanwhile local governments' independently col- and fees. The assignment of expenditures is even more lected revenues are inadequate in most transition coun- complex and varies across countries. Whereas the central tries. Property taxes raise little revenue, and minor taxes government retains such responsibilities as national public such as those levied in Russia on dogs, used computers, services and defense, subnational governments can be logos, and horse racing are little more than a nuisance. A responsible for outlays ranging from education and inter- number of NIS inherited a tax on beards dating back to municipal infrastructure to purely local services. Subna- the Russian Empire. tional governments account for 15 percent of total spend- Decentralizing expenditures while holding onto rev- ing in Argentina but more than 50 percent in Canada. enues has allowed central governments to meet deficit tar- Imbalances between own revenues and expenditures at gets. This shift of spending responsibilities, without corre- lower levels of government create a need for intergov- sponding revenues, to subnational levels in the hope that ernmental transfersboth to close the fiscal gap at local they would do the cost cutting has severely squeezed local levels and to ensure minimum levels of public services budgets. Localities have accumulated expenditure arrears across local governments (equalization). Worldwide experi- and, in the case of Russia's oblasts, delayed their contribu- ence in tackling this issue yields four broad lessons for tran- tion to the federal budget. They have also borrowed from sition economies. First, a cooperative approach (whereby the financial sector, both directly and indirectly through transfers are made available to all subnational governments "their" enterprises, and have established extrabudgetary at a given level rather than to a selected few) can help funds. In effect, focusing stabilization policy on the federal engage subnational governments in the equalization process deficit alone is leading to actions that can destabilize the and ensure that central government revenues are not sim- economy and reduce the transparency of the budget. It ply appropriated by powerful subnational governments. can also impede privatization when local governments Second, the evolving role of the state and continuing refine- obtain significant resources from enterprises they own. ments of price and enterprise reforms require some flexibil- Decentralizing spending responsibilities without decen- ity in the size and design of local transfers. Third, where 122 WORLD DEVE OPMENT REPORT 99 possible, transfers should provide incentives for subnational been passed, new taxes have replaced old ones, and subsi- governments to raise their own revenues and manage their dies have generally been cut sharply. But progress at fiscal expenditures efficiently; lump-sum general purpose trans- stabilization has been mixed, spending reallocations that fers, for example, achieve this, but automatic "gap-filling" hinge on deep sectoral reforms are difficult and slow, and transfers from the central government to meet local deficits tax collection and budget management remain weak in do not. Fourth, any equalization system should be tailored most countries. In the short term, some top priorities in fis- to suit the needs and constraints of the country in question. cal reform will be to continue improving the design Economies with data problemssuch as Chinacould of the tax system (above all by eliminating widespread start, for example, with a scheme that takes into account exemptions and cutting high marginal rates), put in place only a limited number of factors and redistributes only part mandatory taxpayer registration, revamp budget prepara- of the central government's revenue surplus. tion procedures, eliminate sequestration, initiate pension Without effective control over subnational borrowing, reform, and reduce the often large, hidden financial bur- even the most elaborate transfer mechanisms could fail to dens on government in the form of tax arrears, government establish the desired incentives for efficient management guarantees, state bank losses, or rolling directed credits. of local government finances. In transition economies Other fiscal reformssuch as overhauling the civil service local borrowing independent of the central authorities and clarifying and rebalancing central-local fiscal rela- should be allowed only in the presence of strong institu- tionsmay be equally important. But because they are tional safeguards. ambitious in their demand on scarce institutional capaci- In short, a well-designed system of intergovernmental ties, they cannot be accomplished by today's government fiscal relations, based on these guidelines, can result in alone. These are priorities for the long term. Finally, more responsive, better-quality local services, which can governments in transition also have a more outward-look- promote private sector development and poverty reduc- ingand probably more importantchallenge. Political tion. Failure to design the system carefully, however, has reforms, economic liberalization and stabilization, and new led to macroeconomic instability in several countries and private sector opportunities all help create a demand for the impeded the reform agenda in some. many legal, financial, and social institutions discussed in this part of the Report. They will not arise out of thin air. The agenda Establishing these institutions and nurturing them over Most transition economies are in the midst of a compre- time may be the single greatest contribution to the long- hensive reform of their governments. Crucial laws have term success of transition that governments can make. Investing in People and Growth healthy work force is essential for primary and lower secondary enrollment, high levels of economic growth. Here the transition economies literacy compared with countries at similar incomes (and Awell-educated, have a strong foundation on which to build. As sometimes with those with much higher income), and the Introduction noted, high quality of and good access to impressive levels of basic numeracy and engineering skills. basic education and health care were two of the proudest Access was relatively equitable, for girls as well as for achievements of central planning. Yet the health care and boysa major achievement given the powerful effect of education systems that transition governments inherited equal education on overall health and productivity. In were built to fit the rigid environment of a command China, too, levels of educational attainment wereand economy, not the more flexible and ever-changing de- areimpressive by developing country standards. mands of freely competitive markets. Reform of education Given these successes, and given the many other is therefore needed, both to give workers more transfer- demands on policymakers during transition, one might able, marketable skills and to develop informed citizens, think that education reform is one policy that govern- capable of participating actively in civil society. Reform of ments could afford to put on hold. But reform of educa- the health care system is needed to raise life expectancy tion is needed, and urgently. First, the inherited education and to reduce the burden of disease and injury, contribut- system was highly inefficient even in the context of central ing both to productivity and the quality of life. The trick planning. The state financed education on the basis of for governments will be to reshape health care and educa- rigid formulas, allocating resources without regard to tion to meet the demands of a new economic system with- student or employer demand. And although the provision out throwing away the achievements of the old. of education was for the most part a public monopoly, it was poorly coordinated. Programs for professional Reshaping skills development were fragmented, and scarce resources were The primary purpose of the education system is to impart often wasted on duplication of facilities, as each enterprise knowledge and skills and, just as important, to transmit and ministry developed its own. Nor did administrators certain values. The resulting education package will vary or teachers have any incentive to use resources efficiently. enormously across countries and cultures. Achieving the The result was gross overstaffing and high unit costs. In primary objective involves a number of subsidiary ones: many ways the education systemlike the health system, equitable access to education and training; producing the as we shall see belowhad problems similar to those of types of educational activities that equip individuals state enterprises. The solution, although not the same, economically, socially, and politicallyfor the societies in will involve some of the same elementsfor example, which they live (external efficiency); running schools and incentives to efficiency and greater responsiveness to con- other institutions as efficiently as possible (internal effi- sumer demand. As explained below, the second reason ciency); and financing education in ways that are both fair why reform is needed is that the inherited system has and efficient. major deficiencies in terms of supporting a market system. Education reform is urgent because the erosion of a Initial conditions country's human capital imposes high downstream costs. Under central planning the GEE countries and the Soviet Ill-educated people make up a large proportion of the Union were well-educated societies, with almost universal unemployed and the poor. Fortunately, there is good 123 124 evidence that higher enrollments and a rapid response of choose which technique to use to solve a new problem. the education system to changing labor markets pay divi- Although this hierarchy of skills was recognized through- dends: such factors explain a significant part of the higher out the centrally planned economies, in many the upper growth rates of the high-performing East Asian econo- endthat involving independent, critical thoughtwas mies in recent decades. In transition economies a shortage regarded as seditious. Figure 8.1 illustrates, in terms of of necessary skills hampers enterprise restructuring and these three dimensions, both the strengths of the old sys- privatization. tem and the need for change. Mathematics and science In China a serious problem is provision of social ser- scores of children in the NIS, Hungary, and Slovenia are vices, which has stagnated in China's poorest regions. considerably above the international average. Clearly these Educational achievement in these areas is deplorable, and, countries have successful education systems. However, as discussed below, so is health status. In the poorest children in these countries, in comparison with their towns and villages half the boys, and in some minority counterparts in Canada, France, Israel, and the United areas nearly all the girls, do not attend school and will not Kingdom, do better on tests of how much they know than attain literacy. Only thirty of the seventy school-age chil- on tests that ask them to apply that knowledge in new cir- dren in a poor village in Tongxin County attend elemen- cumstances. These results suggest that the education sys- tary school; in another village in the same county none of tems of centrally planned and market economies were the fifty children have attended school in the four years both effective in achieving their different objectives. They since the local elementary school collapsed. also indicate the direction in which change is needed in the systems of GEE and the NIS, both to help them con- Adapting education and training to the market economy vert human capital to meet the demands of a market sys- Education systems under central planning focused, on the tem and to fill in gaps in knowledge. Higher education one hand, on teaching all students a uniform interpreta- policy in China is increasingly facing similar problems. tion of history and national purpose, and on the other, on Adapting the education package will not be easy (Table mastery of fixed, specialized bodies of knowledge to be 8.1). The gaps in the curriculum have led to missing con- applied in narrowly defined jobs. Education therefore cepts and hence to missing words. "Efficiency," for exam- emphasized conformity for all and specialist expertise for ple, means something very different to a manager seeking each. This philosophy rendered socialist education sys- only to comply with a central plan than to one seeking to tems inadequate to the needs of a market economy in at boost profit and market share in a competitive system. least three ways. First, although basic education was in Although language adapts rapidly, missing concepts and, many ways superior to that in many Western countries, as a result, missing words can still impede speedy and subsequent training was too specialized from too early an effective transfer of knowledge and skills. age. Poland's secondary technical schools taught about 300 occupational skills to meet the specific and fairly sta- Policy directions tic demands of the central plan. In Germany, by contrast, Priorities for reform lie in three principal areas: finance, about sixteen broad apprenticeship programs are available content, and delivery. The financing of education should to sixteen- to eighteen-year-olds. Second, adult education provide incentives for efficiency. One way is to allocate and training, essential for job mobility in a market econ- public funds for training and higher education on the omy, was neglected because workers were expected to basis of enrollment, to make the system more responsive remain in their first occupation throughout their working to demandalthough such a policy needs to be accom- lives. Third, subjects such as economics, management sci- panied by improved accountability, as discussed below. ences, law, and psychologyall of which feature promi- Training vouchers would allow workers to choose what nently in market economieswere deemed irrelevant and kind of training to seek and where; this would improve ignored or underemphasized. both occupational and geographical mobility. Reform of Liberal market economies also use education to trans- education financing is important not simply because it mit cultural, political, and national values as well as supports more efficient management of schools (internal knowledge and skills. In sharp contrast with education efficiency) but also because it can improve the content of under central planning, however, their systems emphasize education (external efficiency) by empowering consumers personal responsibility, intellectual freedom, and problem- to demand the education and training they need. A sepa- solving skills. rate issue is to ensure that funding improves accessa The skills that students acquire through their educa- major problem in rural China. Government must accept tion can be assessed along three dimensions: the ability to responsibility for guaranteeing access to quality education; solve a known class of problem; the ability to apply a this may require interregional transfers to help offset given technique to a new problem; and the ability to widening regional disparities (see Chapters 4 and 7). 125 Socialist education emphasized accumulating knowledge rather than applying it. Figure 8.1 Science and mathematics test performance of children in selected transition and established market economies Score 10 Israel Canada France Hungary United Kingdom Former Soviet Union Slovenia Mean for 19 countries 2 Awareness of facts Application of facts Use of knowledge in an unanticipated circumstance Note: Data are deviations from the overall mean, for a sample of nineteen countries, of test results of nine- and thirteen-year-olds on the second International Assessment of Educational Progress, conducted in 1991. The countries shown are those whose performance was above the sample mean. Source: Kovalyova 1994; for technical details see Education and Testing Service 1992a, 1992b. New curricula are central to the reform of content, existing ones. Performance incentives for teachers and especially in such subjects as economics and history, both local administrators should be strengthened, as should the to produce a more critical type of learning and to adjust assessment of teachers. Finally, examinations need to be schooling to changing needs and values. New textbooks reformed so that they test the capacity to use knowledge will be needed, and reform should encourage the develop- as well as to accumulate it. ment of a competitive commercial publishing industry. Improving the delivery of education is a complex This would allow replacing the selection of textbooks process. It generally implies decentralization, to make from a centrally determined list with a pluralist model education more responsive to local needs; diversification that allows schools, teachers, and pupils to choose for of supply, including private suppliers, to promote compe- themselves. But perhaps most important to improving tition and thus efficiency; and diversification of educa- quality will be raising the accountability of educators. tional practice, to enhance individual choice. These ini- This must start with training new teachers and retraining tiatives, however, require a major change in the role of the 126 Table 8.1 Examples of needed changes in the education package Component of the education package Objective Knowledge Preserve the achievements of the old system but rectify the earlier underemphasis on social sciences and law. Skills Assist the movement from specific skills to broader and more flexible skills better able to meet the continually changing demands of a market economy. Strengthen the ability to apply knowledge in new and unforeseen circumstances. Attitudes Strengthen the idea that the initiatives of workers and of others are rewarded. Assist the understanding that employing workers (subject to suitable regulation) is not exploiting them but giving them an opportunity to earn a living. Assist the understanding that business has its place in society and hence that profits are needed to provide an engine of growth. Values In line with the changed relationship between the citizen and the state, encourage the understanding that citizens need to take responsibility for their actions, including their choices about education, work, and lifestyle. Foster the understanding that freedom of expression is an essential and a constructive component of a pluralist society governed by consent. state, which has to establish a framework that includes percent to about 80 percent. And schools can now choose methods of funding, accreditation of providers, and mon- their textbooks, although shortages make it difficult for itoring of quality, particularly in poor areas. teachers to follow the new curricula. Yet although the content of lessons may have changed, Progress to date the manner in which they are taught has not. Old meth- Transition countries have made some progress toward ods persist throughout the region and will doubtless take these goals, but much remains to be done. During the time to change. The challenge is daunting. But no educa- early stages of transition education reform in GEE and the tion system can hope to foster choice, autonomy, and NIS, understandably perhaps, was not a high priority. As accountability in society as a whole without first acquiring Chapter 7 noted, fiscal and political pressures prompted these characteristics itself. central governments to decentralize much of the financing Improving health of education. But local governments generally had even fewer resources than central government. Real spending Health care consumes a significant share of resources in all on education fell, yet little effort was made to reduce over- countries, and the debate over access to and the cost of staffing, with the result that a growing share of education quality care inspires strong emotions everywhere. The spending now goes toward teachers' salaries. There has primary objective of health policy is to improve citizens' been both a tremendous decline regionwide in the provi- health, within a budget constraint. Several subsidiary sion of preschool education, with potentially devastating objectives follow from this twofold obligation: equitable consequences for the learning ability of large numbers of access to health care; producing the quantity, quality, and children, and a decline in access to compulsory education mix of health interventions (including preventive care and in the less affluent countries, particularly for minorities. health education) that bring about the greatest improve- The state sector, and its secondary vocational and tech- ment in health (external efficiency); running medical nical training programs in particular, responded slowly to institutions as efficiently as possible (internal efficiency); the arrival of a market economy. As a consequence many and financing health interventions in ways that are effi- graduates now feed the lines of unemployed. On the pos- cient and equitable. itive side, new institutions have sprung up (many of them private), especially in the teaching of social sciences and Initial conditions and progress to date business administration, partly because of rising returns to Many of the GEE countries and the NIS face a health these disciplines. Most of the GEE countries and NIS problem associated with transition itself, superimposed on have revised their curricula, especially in history and the a longer-term problem. By the mid-1960s life expectancy social sciences. Decentralization has also occurred: in Rus- in the GEE countries was only one to two years shorter sia, for example, the centrally determined part of the pri- than that in the industrial market economies, and the gap mary and secondary curriculum was reduced from 100 seemed to be closing. Thereafter, however, the gap started 127 to increase, strikingly so for middle-aged adults, as health health policies, were largely due to rising income and what outcomes increasingly lagged behind progress elsewhere. that means for diet, education, access to clean water and By the late 1980s Hungarian men aged fifteen to fifty- sanitation, and the like. Recent analysis, however, suggests nine stood a greater risk of dying than their counterparts that these gains, at least as indicated by mortality rates for in Zimbabwe, and the risk of death in Czechoslovakia was children under age five, tailed off sometime in the early higher than in Vietnam. By the mid-1980s mortality rates 1980s. By the late 1980s China had actually fallen behind from heart disease among forty-five- to fifty-four-year-old countries at similar income levels. In addition, the inci- men in Czechoslovakia were double those in Austria; dence of noncommunicable diseases is rising rapidly. The thirty years earlier the rates had been much the same. death rate from lung cancer (70 percent of Chinese males What has happened to health during transition? Two smoke) is rising by 4.5 percent a year and that of deaths conclusions emerge: rapid reform is not necessarily detri- related to hypertension by 8.7 percent a year. mental to health indicators, but slow reform or the In rural China a share of communal production used to absence of reform does little to impede a long-run deteri- be set aside to finance collective needs, including primary oration. In many of the NIS the long-run trend toward health care, vaccination, birth control, and maternal health worsening mortality has accelerated since transition care. The downturn in China's health performance relative began, particularly for men. The sharp decline in men's to its income level coincided with agricultural reforms that life expectancy in Russia between 1990 and 1994 was the reduced the ability of the village to tax peasants. A system most dramatic shift of all (Box 8.1). By contrast, infant of cost recovery rapidly replaced tax funding, creating gen- mortality and life expectancy improved in the advanced eral problems of access. Infant and maternal mortality rates reformers (Table 1.1). In Poland between 1989 and 1995, in rural areas are 50 to 100 percent greater than the infant mortality fell from 19.1 to 13.4 per 1,000 live national average. Problems are particularly severe for the births, and life expectancy increased by one year for men rural poor (more than one in four referred to hospitals by and six months for women. The picture is mixed in the village doctors never go because of high cost), and greater other reform groups. The number of low-birthweight still in the poorest townships and villagesamong the babies has risen sharply in Bulgaria, Romania, and the poorest quarter of the population, for example, the infant Slovak Republic from a combination of poor diet, stress, mortality rate is 3.5 times greater than among city dwellers. smoking, and excess alcohol consumption during preg- nancyall risk factors that have increased during transi- Policy options tion. In FYR Macedonia declining levels of basic immu- How CAN HEALTH BE IMPROVED? Four groups of fac- nization in 1991 led to a striking increase in the incidence tors influence a person's health: income, lifestyle, environ- of measles during 1992 and 1993. mental pollution and occupational risks, and the quality of Maternal mortality improved dramatically in CEE available health care. Experts agree that income and between 1990 and 1995 but worsened slightly in the NIS, lifestyle are by far the most important; thus the causes of where mortality rates are now about four times above the health outcomes go well beyond the health sector. European average. The Central Asian republics experi- Lifestyle choices are clearly the key to improving enced a dramatic deterioration between 1988 and 1991. health. The single largest contributor to the health gap Some of the apparent worsening may simply be the result between Eastern and Western Europe is cardiovascular of improved data collection (see Box 4.1). The major and cerebrovascular diseaseheart attacks and strokes causes, however, include the lack of contraception, high for which the main risk factors include excessive alcohol rates of abortion, deteriorating socioeconomic conditions, consumption, smoking, obesity, unhealthy diet, and lack inadequate health services, and the indiscriminate use of of exercise. All these factors are more prevalent in CEE pesticides and chemical fertilizers in agriculture. Of these, and the NIS than in industrial market economies. And abortions are a particularly severe problem, and illegal the single most important factor, smoking, is far more abortions an even greater one. The most obvious remedies prevalent: in the third quarter of 1995 Lithuanians spent include improved education, especially for girls and young 4 percent of GDP on alcohol and tobacco, compared with women, a greater emphasis on preventive measuressuch 2.1 percent on health care. As elsewhere, policies to as contraception, screening for cervical and breast cancer, reduce these risk factors in transition countries include and updated obstetrical practiceshealthier lifestyles, and taxation to discourage consumption of alcohol, tobacco, the promotion of breastfeeding. and unhealthy foods; removal of food subsidies that dis- The story in China has generally been very different, tort food prices in favor of unhealthy diets; and legislation although parallels are now beginning to emerge. The on alcohol, tobacco advertising, and food labeling. Also health status of the Chinese people by the end of the 1970s important are public education programs to inform the was remarkably good for a country at China's income population about diet (specifically, the benefits of reduced level. These gains, although partly the result of sound consumption of alcohol and fat, and of increased 128 Box 8.1 Is transition a killer? More Russians are dying during transition. Male life going through the greatest socioeconomic shock are expectancy fell by six years between 1990 and 1994 starting to see mortality rates rise. These results are (from sixty-four to fifty-eight; see figure) and that of consistent with those from studies of equity and health women by three years (from seventy-four to seventy- in the United Kingdom over the past thirty years. one). Early evidence suggests that the decline may now Two factors can be suggested as at least partial con- have stabilized: in 1995 men's life expectancy was tributors. The first is substance abusealcohol and unchanged, while women's actually rose by a year. The illicit drugs. Alcohol consumption was significantly largest increase in mortality (about 50 percent) was reduced during President Mikhail Gorbachev's cam- among men aged twenty-five to fifty-four; the rise for paign to curb abuse during 1985-88, but the relaxation the older men in that group was mainly due to an of that campaign in the late 1980s coincided with rising increase in cardiovascular disease, and that for younger mortality, including through accidents, alcohol poison- men mainly to accidents, suicide, substance abuse, and ing, and increased fatalities among those already suffer- murder. Russian adult mortality is now 10 percent ing from cardiovascular disease. The second factor, less higher than that in India. Similar if less dramatic well documented but supported by extensive observa- increases in mortality have occurred in the other Euro- tion, is a decline in the quality of and access to medical pean NIS. In contrast, life expectancy has increased in care over the past five years, which has increased mor- the advanced reformers in GEE (Table 1.1). tality among those with serious injuries and cardiovas- Defective data are unlikely to be a major explana- cular emergencies. Transition may have aggravated tion. A second explanationthat transition itself is a both sets of influences. It is not difficult to imagine a direct cause is the subject of continuing investiga- causal link between declining living conditions, stress, tion. But increasing indirect evidence links economic and alcohol consumption. Deterioration in law enforce- hardship with declining health. Early results from a ment, particularly with respect to alcohol production Hungarian study suggest that poor regions and those and road safety, further increases the risk of injury. Male life expectancy and death rates from injury and cardiovascular disease in Russia Life expectancy Death rates Years Deaths per 100,000 population 66 1,200 64 1,000 62 800 Cardiovascular 600 disease 60 58 400 56 200 Injury 0 1970 1975 1980 1985 1990 1995 1970 1975 1980 1985 1990 1995 Note: "Injury" includes deaths caused by accident, assault, poisoning, and suicide. Source: World Bank data. NG PEOP E AN GROWTH 129 consumption of fruit and vegetables), exercise, and the managers therefore have an incentive to keep a large num- risks of smoking and other dangerous behavior. ber of beds, preferably empty ones. Public health programs Pollution and occupational risks are also widespread in are poorly structured, and modern methods of quality con- CEE and the NIS. Severe environmental pollution, in trol are absent. There is little consumer choice and little particular air pollution, is largely the result of these coun- accountability. Citizens are still considered the passive tries' heavy use of hydrocarbon energy sources. In the recipients of state-run health services rather than active "Black Triangle," where Germany, the Czech Republic, participants in efforts to improve their lifestyle. and Poland meet, about 6.5 million people are exposed to Addressing these problems means reforming the quan- extremely polluted air. Air pollution may explain around tity, mix, and quality of health services. When national 9 percent of the Czech Republic's health gap with Austria. income is decliningas it did in every CEE country and Cleanup will be neither easy nor cheap. On the other the NIS in the early stages of reformthe health sector hand, health is damaged more by cigarette smoke than by will almost inevitably shrink. This makes it all the more smokestacks; individual behavior is crucial. Unhealthy important to adjust the mix of health spending away from living environments and behavioral risk factors both highly specialized care toward more basic and outpatient afflict the poor and the undereducated disproportionately. care and toward public, occupational, and environmental It is the poorestbecause they have the fewest choices health services; this will require closure of unnecessary who live in the shadow of belching chimneys and in cold, facilities or their conversion to other uses. Hungary, for damp homes. As with other social policies, closing the gap example, is planning to eliminate 20,000 hospital beds in health will mean focusing on the most disadvantaged during 1995 and 1996. Countries also need to make major groups, disseminating information to them and maintain- efforts to boost the quality of care, including by upgrading ing their access to health care. and modernizing skills. Self-regulation of the medical pro- Health services under the old regime in CEE and the fessionan important component of civil societycan NIS were strong on preventive health care, especially in increase quality. So too can greater competition between providing immunizations. Maintaining and building on providers, and in particular private, nonprofit providers, this impressive record have received too little attention. often organized by NG0s. Preventive health efforts need to focus on control of com- As the economy starts growing again, policymakers municable diseases but are threatened in some countries have to devise a strategy to allow the health sector to grow by problems in vaccine production, purchase, and deliv- in a controlled way, both to prevent an explosion in health ery. Improving education and preventive services for spending and to ease efforts to adjust the overall mix of women and their babies is an effective way to improve medical activities toward preventive and basic health care. overall health and avoid unnecessary medical expenditure. Several countries are already experiencing pressures to This is not to say that curative health servicesprimary increase medical spending sharply, particularly that on health care and hospitalsshould be neglected. Although high-technology care. This is a common problem for they have a smaller direct impact on life expectancy than health policy worldwide. Even though the best way to public health measures, well-being should be assessed not improve health is through improved lifestyles, preventive only in terms of length of life, but also in terms of its qual- measures, and basic health care, the medical profession ity: a hip replacement or the removal of a cataract does tends to be more interested in the hospital sector and state- little to increase life expectancy but can make a huge dif- of-the-art techniques. The medical lobby is well placed to ference to one's enjoyment of life. steer policy in the CEE countries and the NIS because, in How TO IMPROVE HEALTH CARE DELIVERY. Curative contrast with most market economies, the health minister health services in CEE and the NIS retain most of the inef- is often a physician, as are many parliamentarians. As a ficiencies inherited from central planning. In the NIS peo- result, the ministry of health can easily become the min- ple can admit themselves to hospitals, and many enter for istry of the health profession. Here, as elsewhere, policy- long stays for nonclinical reasons (in Russia 21 percent of makers ignore at their peril the politics of reform. the population spent time in the hospital in 1993, com- FINANCING HEALTH CARE. How should transition pared with 16 percent in the industrial market economies countries pay for their health care? Market economies and around 10 percent in middle-income countries). Hos- choose among four approaches. Out-of-pocket payment, pitals have too many doctors, who are poorly paid and the main form of health finance until this century, re- often poorly trained. Rigid budgeting systems give man- mains so today in the very poorest countries, which have agers neither the incentive nor the freedom to use resources neither the tax revenues for public funding nor the insti- efficiently. For example, funding of hospitals is related to tutional capacity for insurance. Private, for-profit insur- inputs, such as the number of beds, rather than to treat- ance is important in many developing countries but ment given orbest of allto health outcomes; hospital among the industrial countries only in the United States. 130 Social insurance is the main source of health finance in adopted annual spending caps. An alternative approach, many countries, including Argentina, Chile, Germany, capitation, pays providers a fixed amount per patient per the Republic of Korea, and Uruguay, whereas tax funding year. This method is excellent at containing costs but less is the principal source in many others, including Den- good at maintaining service quality: doctors have an in- mark, Norway, Sweden, the United Kingdom, and many centive to accept as many healthy patients as possible and countries in Latin America, the Middle East, and North then to see each as little as possible. The primary care Africa. Reliance on public funding is not accidental. Tech- systems of some countries (Romania is an example) pay nical advances have made much medical care too costly for doctors through a mix of capitation and fee-for-service, most people to pay for out of pocket; this implies the need encouraging cost containment across most services but for some form of insurance. A purely private insurance rewarding particular activities. system, however, can lead to gaps in coverage (because of Paying medical providers has triggered a series of prob- uninsurable risks) and to exploding costs. The United lems in CEE and the NIS, not the least of which is run- States exemplifies both problems: despite high public med- away expenditures. In 1992 the Czech Republic intro- ical spending about 17 percent of U.S. citizens below re- duced fee-for-service payment without the necessary tirement age were uninsured in 1994, yet total medical regulatory structure to cap medical spending, resulting in spending that year absorbed over 14 percent of GDP, a an entirely predictableand entirely predictedspend- much higher fraction than in any comparable country (the ing overrun. Most countries have yet to sort out the figure for the United Kingdom is 7 percent). To contain proper relationship between the public and the private costs and promote access, the industrial market economies sector. The private sector will supply health services only have increasingly financed health care through taxation, for a profit, and this raises questions about the extent to social insurance, or a mixture of the two. which public funding should be a source of private profit. Many of the transition economies, including Croatia, Future reforms of provider payment ought to have the Czech Republic, Estonia, Hungary, the Kyrgyz three central components. First, it is necessary to develop Republic, Latvia, FYR Macedonia, Russia, the Slovak new payment systems that create incentives for efficient Republic, and Slovenia, have already switched from taxes service delivery, for example by basing reimbursement as to social insurance to pay for health care, and many oth- far as possible on health outcomes rather than the amount ers are considering doing so. This shift has caused prob- of diagnostic activity or treatment administered. Second, lems, not least because the same prerequisites for sustain- a framework is needed for monitoring quality and access able social insurance outlined in Chapter 4 apply when it and for tight control of spending. Third, policymakers is being used to fund health care. First, structural deficits must seek financing mechanisms that stimulate competi- arise because workers' contributions subsidize the nonac- tion among providers, both public and private. tive population, including pensioners (who consume large China faces difficult problems of health finance in amounts of health care). Second, substantial reliance on both urban and rural areas. Like income transfers, urban payroll taxes has increased labor costs and aggravated health finance is based on the enterprise; the Anshan Iron incentives to work in the informal sector (in Hungary, for and Steel Works, with 400,000 employees, has not only example, as described in Box 4.4). Third, some govern- its own hospital but its own medical school. This ties ments have lost control of spending, because contribu- workers to enterprises. In rural areas, as discussed earlier, tions and expenditure are determined separately by a more the major problem is to finance health care in a way that or less autonomous health insurance fund. assists access to medical care. Alongside the question of how to raise resources is a Health finance in Vietnam also faces severe problems. second and separate issue: how to pay doctors, hospitals, Household spending on health care is high, but there is and other providers. A number of approaches are used, no system to assist the poorest. Without a clearly defined none of them perfect. Payment on a fee-for-service basis government role, the private sector has remained largely creates an incentive to oversupply: the doctor has an unregulated. Ill effects include health care of variable incentive to prescribe more treatment, and if the insur- quality and pharmaceuticals available without prescrip- ance company pays most of the costs, the patient has no tion. For both reasons, spending on private pharmaceuti- incentive to refuse. The resulting cost explosion has been cals has exploded. a problem in almost all countries where fee-for-service is a significant part of health finance. However, carefully The big picture: How to make finding and designed and regulated fee-for-service, together with a delivery compatible global budget cap for medical spending, can help raise Experience from a cross-section of countries yields some efficiency and contain costs at the same time. For precisely clear lessons for transition countries on how to ensure that this reason, many countries (Canada is an example) have the means used to finance health care do not clash with 131 the means of delivery. First, access and cost containment Ensuring that all citizens are able to enjoy and contribute are both assisted by a substantial reliance on public rather to long-term economic growth will require coming to than private funding. Second, health services can be deliv- grips with these failings. In the health sector, policymak- ered effectively by private providers for profit, by private ers must focus first on better allocation of resources: nonprofit providers (often NG0s), by the public sector, expenditures should be shifted from specialized services or by a combination of these. Third, different approaches toward preventive care and encouraging healthier life- to funding and the different types of delivery cannot be styles. Another priority, particularly in rural China and mixed indiscriminately. One compatible package is tax Vietnam, must be to ensure universal access to basic funding of health care produced, often on a decentralized health services. Better allocation of existing inputs will basis, by the state. Another is mainly public funding plus also be critical to upgrading education, although here the private, fee-for-service production plus regulation to con- need to develop a demand-led system of provision is even tain expenditure. The last element is critical. stronger than in health. The ingredients for a healthy pop- ulation are much the same under any economic system, The agenda but what counts as good education changes radically with Like the economy-wide production apparatus they were the move from plan to market. Reformers must focus on built to support, health and education systems under cen- developing an education system that is more responsive to tral planning were strong on accumulation but highly demand, and that teaches people to think for themselves inefficient and unresponsive to changes in people's needs. and to adapt to changing market circumstances. Transition and the World Economy global market that transition economies are tion countries brings benefits for the world economy reentering is an increasingly integrated one. World above all, by opening up almost a third of the world's The trade has grown far faster than global output in the past fifteen years, while total inflows of foreign direct population and a quarter of its land mass. A recurring concern, however, is that the transition countries' gains investment (FDI) to developing countries have increased from this integration will come directly at other countries' sixfold in just ten. Meanwhile a common set of over- expense. Such fears are understandable. Certainly, inte- arching rules and institutions, including most promi- gration holds risks, as well as opportunities, for both nently the new, 110-member World Trade Organization sides. So far, however, the most commonly predicted (WTO), has evolved to support even faster integration global side effects of transition have not, by and large, and to resolve disputes. Developing countries, many of been observed. As transition proceeds, many countries which have recently made their own highly successful, if may indeed face adjustment costs. But the evidence sug- less comprehensive transitions toward more outward- gests that these will be far outweighed by the benefits, for looking economic policies, play an increasingly active part all countries, of being part of a larger and more competi- in this globalized economy. Exports and imports now tive global marketplace. account for 43 percent of developing countries' GDP, The realignment of trade flows compared with 33 percent ten years ago. After years of isolation, transition economies may stand to gain even Transition countries' potential trade growth. . . more from international integration than these other Between 1978 and 1994 China went from being the reformers. As Chapter 2 described, the economic benefits world's thirty-second-largest exporter to its tenth-largest. of moving into the world market are the benefits of inter- Today the GEE countries and the NIS are similarly seeking nal market liberalizationwrit enormous. Capital, goods, to buy and sell in international markets. But how much will and ideas cross borders in response to demand and sup- they tradeand with whom? Several estimates and projec- plyrather than at the behest of a central plannerfuel- tions based on economic modelsand admittedly highly ing faster growth in productivity, trade volumes, and imperfect official statisticsbroadly indicate the likely national income. At the same time integration helps lock changes in trade patterns when the trade of the transition countries onto the path toward more-open trade, while economies start has adjusted to market economy patterns. membership in international institutions spurs domestic These calculations suggest that the GEE countries have institution building. a large untapped potential for trade with established mar- Chapters 2 and 3, respectively, discussed the domestic ket economies, not simply those in nearby Western importance of opening trade and of foreign investment. Europe but industrial countries further afield as well. In This chapter looks at transition economies' interactions the mid-1980s the CEE countries were on average fulfill- with the rest of the world: trade flows to and from these ing just one-quarter of this potential. Since then, trade countries and the consequences thereof for world trade; shifts away from former CMEA markets and toward rapid and full-fledged membership in the WTO and rele- OECD markets have closed the gap and produced a pat- vant regional trade arrangements; and external capital tern of trade that is better attuned to market forces. For flows to transition economies and the impact on other example, based on its 1985 income level, Hungary would developing countries. The successful integration of transi- have been expected to send 43 percent of its exports to the 132 133 European Union; the actual share was 14 percent. By . And the implications for other countries 1994, however, the share going to the EU countries was Transition economies offer the world great opportunities. 49 percent. As Chapter 2 described, those countries that Producers can look to new markets, and consumers can have liberalized and stabilized furthest have made the benefit from new products. Increased efficiency and greatest strides in reorienting their trade toward patterns resource mobilization in transition economies will expand that would be predicted for market economies. the global supply of goods and services. The expected Although the Soviet Union itself was a very closed growth in inter- and intraindustry trade from integra- economy, Soviet planners fostered specialization rather tionalready evident in the CEE countrieswill also than diversification within each republic. The result was increase world welfare by expanding the variety of prod- very little trade with the rest of the world and very large ucts and encouraging gains from rationalization in indus- amounts of trade between republics. In 1989, for exam- tries subject to economies of scale. China's imports and ple, more than 90 percent of Belarus' trade was with other exports have doubled in the past five years, while CEE's Soviet republics; that share would have been about 32 per- imports from OECD countries increased 216 percent cent had all the Soviet republics been market economies. and its exports to them 159 percent in the same period. Nearly 70 percent of Russia's exports went to other Soviet Market economies, particularly the established industrial republics, compared with a predicted level of only 16 per- ones, have a strong interest in encouraging growth in cent. Overall, trade among the former Soviet republics these new markets by keeping their doors open. But rein- accounted for more than four-fifths of their total trade in tegration will inevitably imply some adjustment costs. 1989. This pattern seems likely to be reversed when trade Some developing countries will face fiercer competition, is determined by market forces. The same estimates sug- particularly in labor-intensive products, while industrial gest that, as market economies, the NIS would send fully countries' comparative advantage will also shift further three-quarters of their exports to non-NIS partners, away from these industries. However, where it has been mostly in Western Europe. By 1994 the Baltics had made possible to estimate the costs, they appear to be modest. substantial progress in reorienting their trade toward mar- Transition economies will not exhaust the world's ap- ket economies, but most of the other NIS had done very petite for variety, but only spur producers to invent and little. As Chapter 2 pointed out, the slow pace of price lib- supply many more goods and services, for the benefit of eralization and maintenance of extensive export controls many more people. to keep goods at home resulted in slow progress in reori- Should any countries fear the effects of transition enting trade in many of the NIS. Lacking the institutional economies' trade integration with the European Union? and physical infrastructure and expertise to support new As noted above, the EU countries are already the GEE patterns of trade, some transition economies face a daunt- countries' main trading partners, trade between these ing task in exploiting their trade potential as market econ- regions having more than doubled since 1989. The CEE omies; this is especially true for the Central Asian countries have proved exceptionally good export markets republics, most of whose transport and communications for the European Union, and the Europe Agreements routes run through Russia. (discussed below) between the Union and CEE countries Since the collapse of the Soviet Union, several largely provide free access to EU markets for most CEE manu- unsuccessful attempts have been made to restore trade factures. But there are still some restrictions on imports of among the NIS and reduce adjustment costs through sensitive products, agriculture remains protected, and the regional trade arrangements. Several "free trade" agree- threat of contingent protection (antidumping and safe- ments have been concluded, but these were free in name guard measures) limits the practical effect of liberalization only, because most of the countries preserved export con- measures on steel and chemical exports. Nevertheless, the trols on key products. Establishing a sound interstate pay- Europe Agreements help to lock the CEE countries into ments system and convertibility of currencies is vital to open trade policies, thereby enhancing the credibility of market-based trade among the NIS. Removing trade bar- their trade reforms. The evolving pattern of trade between riers among the NIS alone is not the answer, especially the two regions is one of increasing intraindustry trade because, as we saw above, under market-determined trade and of increasing processing and assembly activity by CEE patterns much of their trade would be with countries out- firms. The Europe Agreements create incentives for EU side the NIS. If agreements create barriers to reorienting companies to engage in outsourcing, where they provide trade and reintroduce the substantial diversion of trade designs and materials, monitor quality, and take care of that occurred under the Soviet Union, they will be coun- marketing. Encouraging this form of trade helps EU firms terproductive. Trade barriers should instead be removed exploit relatively skilled and cheap labor, while reducing on a nondiscriminatory basis, to deepen the integration of the costs and risks that CEE partners face in developing the NIS into the world trading system. new export markets. 134 There has been some concern in the European Union than in simple, labor-intensive products. This structural that a further opening of trade in sensitive products would transformation would further reduce GEE countries' impose heavy adjustment costs on EU producers. The evi- direct competition with low-income developing countries. dence suggests, however, that complete liberalization of China's triumphant return to international markets trade in these products would have only a marginal effect has so far had the greatest impact on global trade of any on EU imports, production, and employment because the transition country. As one would expect, given China's GEE countries are only minor suppliers. Admittedly, vast supply of unskilled labor, its export mix has been long-term trade integration with the NIS could involve increasingly labor-intensive. With growth in China's vastly greater trade flows. But even here the new flows exports in these types of products averaging 23 percent a would largely consist of the NIS sending increased sup- year in the 1980s, labor-intensive exports rose from one- plies of energymost notably, oil and natural gasto third of China's total exports in 1975 to three-quarters in Western Europe in return for a large volume of capital- 1990. Clothing, toys, sporting goods, and footwear to- and technology-intensive goods (machinery and equip- gether accounted for 30 percent of China's exports in ment) and high-quality consumer durables. 1994. Has China's rapid growth in labor-intensive prod- Many Mediterranean and African countries, currently ucts crowded out labor-intensive exporters from other enjoying preferential trade with EU countries, also worry developing countries in world markets? The answer that they will lose from trade liberalization between the appears to be no, for two reasons. First, and more impor- EU and GEE countries. Several Mediterranean countries tant, China's export growth turns out to have replaced the have enjoyed duty-free access to EU markets for industrial exports of soon-to-be-high-income economies rather than goods and preferential access for agricultural commodities other developing ones. And second, there is almost cer- since the 1970s. None of these preferences will be seri- tainly more than enough demand for labor-intensive ex- ously eroded by the emergence of the GEE countries as ports to go around. EU trade partners. It is fair to say that their arrival on China's dramatic growth in labor-intensive exports has the scene may have deprived Mediterranean exporters of been more than matched by a sharp decline in the export whatever geographical advantage in EU markets they pre- shares of East Asia's "four tigers"Hong Kong, the viously enjoyed. But in fact the market share of nonoil Republic of Korea, Singapore, and Taiwan (China) exports of Mediterranean countries in the EU market has from 55 percent in 1984 to 24 percent in 1994. China's been stable. Mediterranean nations and CEE countries exports have simply replaced those of the tigers, so that naturally have very different relative strengthsrevealed their combined world market share has fallen for clothing, comparative advantagesin world trade. Indeed, the toys, and sporting goods (while remaining unchanged for export structures of the two regions hardly overlap at all. footwear). The Chinese eclipse of the tigers has been Longstanding restrictions on exports to EU agricultural fueled by FDI by the tigers themselves, whose firms in markets are a much more important issue for a number of many cases simply moved their production lines to China. Mediterranean countries that cannot fully exploit their For example, about 25,000 factories in the Pearl River agricultural export potential. The countries of Africa that Delta region of Guangdong, directly or indirectly employ- are signatories to the Lome Convention also continue to ing 3 million to 4 million workers, are engaged in sub- enjoy preferential access to EU markets. For most, head- contracting for Hong Kong companies. The tigers, mean- to-head competition with the GEE countries is relatively while, have moved up the development ladder to produce rare, again because the comparative advantage of the two more capital- and skill-intensive products. groups of countries does not generally lie in the same Without the emergence of China, would other devel- goods or industries. In agriculture, too, these countries oping countries have captured larger markets as the tigers compete directly with GEE in only a few products. To be developed away from simple manufactures? Perhaps to balanced against any adverse effect on the export side is some extent, but arguably the tigers vacated these markets the fact that rapidly growing GEE countries are them- precisely because of China's emergence. China's opening selves another potential market for the exports of the changed their comparative advantage in world trade, and Mediterranean and African countries. instead of resisting, the tigers seized the opportunity, The GEE countries enter the international arena with moving resources out of simple manufactures into more relatively highly skilled labor, although some reorientation sophisticated lines of production and using their expertise in educational priorities is needed, as discussed in Chapter to expand production in China. 8. Because FDI brings not only capital and equipment but There is a second reason why China's emergence as a also managerial skills and ties to a trade network, in the force in labor-intensive exports has probably not affected longer run the GEE countries would be expected to com- other developing countries as much as many feared. That pete in medium- or high-skill-intensive products rather is the fact that world demand for these commodities from 135 developing countries has grown threefold over the past Transition economies should therefore view WTO decade. membership as an opportunity to further the reform of In addition, developing countries are sizable markets their trade regimes, not only to meet WTO requirements for each other. Substantial trade among developing coun- but also to increase economic efficiency through reducing tries, including considerable intraindustry trade, makes it distortions in trade policy. Relatively strict terms of acces- possible for them to be simultaneously importers and sionincluding comprehensive tariff bindingscan help exporters of a wide range of manufactured goods. Devel- reduce the payoff to domestic rent seeking. At the same oping countries sent more than one-quarter of their time, without undermining the pressure on applicants to exports of labor-intensive goods to each other in 1994. adopt liberal trade regimes, WTO members should do They can therefore benefit directly from each other's all they can to accelerate the process of admission. For export expansion, even when they are exporting similar some transition economies, technical assistance in meet- goods. ing the extensive information requirements of accession would be helpful. Integration into world trading institutions Integration into the European Union has profound The OECD countries have taken significant steps to nor- implications for the transition economies concerned. The malize trade relations with transition economies. They process began with the Europe Agreements and has entered have granted transition economies most-favored-nation a new phase with the preaccession strategy. The Europe status and eliminated quantitative restrictions that applied Agreements signed between the European Union and six only to "state trading countries," and some have granted CEE countries (Bulgaria, the Czech Republic, Hungary, trade preferences that put the transition economies on a Poland, Romania, and the Slovak Republic; the agreement par with developing countries already enjoying such pref- with Slovenia is not yet signed) and the Baltic states are the erences. But normalization is not yet complete. Transition deepest and broadest of the EU Association Agreements. economies still face certain quantitative restrictions and Like the association agreements signed with other coun- differential treatment in antidumping actions in OECD tries, these agreements not only cover trade relations countries, and only a few are formally protected by WTO between the EU and CEE and Baltic countries but go on rules and procedures. Six transition countriesthe Czech to deal with financial cooperation, commercial practices Republic, Hungary, Poland, Romania, the Slovak Repub- and law, and political dialogue at various levels. They also lic, and Sloveniaare members of the WTO. encourage these countries to liberalize trade among them- WTO membership is an important step for transition selves, for example, through the newly created Central countries, and virtually all have applied to join. The WTO European Free Trade Association. provides a firm institutional basis for the application and It has been more than four years since the first Europe enforcement of multilaterally agreed trade rules on goods Agreements were signed in early 1992. At the Copenhagen and services and on the protection of intellectual property Summit in 1993 the European Union made its first clear rights. Each \VT° member undertakes commitments to commitment to CEE countries' accession. The so-called cap (bind) tariffs on imports and enjoys corresponding White Paper, published in June 1995, forms part of the rights for its exports to member countries. No member preaccession strategy. It identifies the key measures may normally increase tariffs above bound levels without required in each sector of the internal market, suggests an at least providing compensation. The WTO constrains approximate sequence for legislation, and details the various trade procedures to acceptable standards. For a measures necessary for effective implementation and en- country assuming obligations negotiated under WTO aus- forcement. Partly with this in mind, the European Union pices, the requirement to maintain access to its market or has been providing various types of assistance. Accession pay compensation provides an effective constraint on negotiations with some of the CEE and Baltic countries internal pressures for increased trade protection. are expected to start soon after the conclusion of the EU Transition economies will benefit greatly from the Inter-Governmental Conference. Prompt accession should rights attached to WTO membership. Participation will not be taken for granted, however: negotiations for the consolidate their access to international markets, provid- Union's most recent enlargement (with Austria, Finland, ing some insurance against the arbitrary imposition of and Sweden) took less than two years, but negotiations barriers by others. But transition economies will also ben- with Spain took almost nine years. The benefits of acces- efit from accepting the corresponding obligations. Prompt sion are clear: political stability, free trade and capital and firm commitment to abide by WTO rules will greatly flows, access to common funds, and locking into reason- enhance the political feasibility of achieving and main- ably market-friendly policies. taining liberal trade regimes at home, in the face of the Rapid EU accession would do much to sustain and strong sectoral interests that are inevitably emerging. deepen reforms in these transition economies. So what 136 0* former East Germany (see Box 1.1), GEE and the NIS Transition economies have absorbed only a have not absorbed a great deal of foreign capitaleither modest share of global capital flows. private investment flows or official external assistance. Has transition caused a major diversion of private capital flows... Figure 9.1 Capital flows to developing and Between them the countries of GEE and the NIS absorbed transition countries by region 15 percent of total capital flows to developing and transi- tion countries in the period 1990-95 (Figure 9.1). Net Total flows, 1990-95: $1,640 billion resource inflows are much lower and even negative to some countries, once debt service and capital flight are Middle East and taken into account. Capital flight from Russia alone has North Africa CEE and NIS 9% 15% been estimated at some $50 billion for 1992-95, although Sub-Saharan part of this represented capital exported through Russia Africa from other NIS. 9% China 13% Private capital flows to developing countries increased South dramatically during the 1990s, with a surge in FDI and Asia portfolio equity investment. GEE and the NIS, however, 7% between them attracted just 13 percent of total private capital flows to developing and transition countries in 1990-95. In 1994, FDI to GEE and the NIS was only Latin America $6.5 billion, equivalent to the total received by Malaysia Other East Asia and the Caribbean and Thailand. The distribution of these limited FDI flows 21% 26% among them has also been highly uneven. The Visegrad countries received fully three-quarters of the total, whereas Note: Data for 1995 are preliminary. Source: World Bank 1996b. many other countries in the region are still all but untouched by foreign investment (see Chapter 3). Capital flows to China more closely followed the trend for devel- oping countries, with private sources accounting for the stands in the way? One obstacle is the need to develop lion's share. FDI to China was $33.8 billion in 1994, sec- administrative and organizational structures in the GEE ond only to flows to the United States. However, a sub- and Baltic countries to implement and enforce the rules of stantial portion consisted of domestic funds recycled as the Union. The biggest barrier, however, is the EU budget, foreign investment to take advantage of fiscal concessions. some 80 percent of which goes to finance the structural funds, which offer aid to poorer EU regions, and the Com- . . . Or of foreign assistance? mon Agricultural Policy (CAP), which subsidizes farmers Given the relative failure of many CEE countries and NIS in member countries. Extending these policies, unre- to capitalize on the growth of investment in emerging formed, to GEE countries would be expensive. Elements of markets, a key goal of foreign official assistance must be to the CAP were reformed in 1992, but further reforms are help them create a more attractive environment for private needed. Integration is therefore likely to involve a phased inflows and thus help them restructure toward interna- process that advances certain elements of EU member- tional competitiveness. Annual net flows of official devel- shipfree trade in particularfaster than others, while at opment financeincluding official development assis- the same time possibly stimulating some helpful reforms in tance (grants and official concessional loans) and official the Union itself. As far as the transition economies are con- nonconcessional loansto GEE and the NIS averaged cerned, the faster accession proceeds, the better. $8.8 billion in 1990-95. This has not, however, diverted official assistance from the world's poorest regions (Figure Capital flows and transition 9.2). For example, grants to the transition economies rose One might have expected huge imports of capital, both dramatically, from $641 million in 1990 to $4.7 billion in private and official, to participate in financing the costly 1995, but grants to Sub-Saharan Africa increased in this economic and political transformation required in coun- period as well. Former Soviet clients have, however, lost tries undergoing transition. At the beginning of the transi- aidthese countries received an estimated $4.5 billion tion in Europe there were concerns that large capital flows from the Soviet Union in 1987, for example, and $554 to GEE and the NIS would raise world interest rates at the million from Eastern Europe in 1985, but these flows have expense of developing countries. However, except for the now virtually ceased. N0mY 137 Official assistance for transition economies has not been at Africa's expense. Figure 9.2 Official development finance to developing and transition economies Billions of dollars 35 30 25 20 15 10 5 1990 1991 1992 1993 1994 1995 CEE and NIS 1-1 China and Vietnam Sub-Saharan Africa Other developing economies Note: Official development finance consists of official development assistance (grants and concessional lending) plus nonconcessional lending. Data for 1995 are preliminary. Source: World Bank 1996b. All in all, then, transition has not absorbed a large slice est rates of rising demand for foreign capital from transi- of global capital flows. As transition economies recover, tion economies would be small compared with that already demand for investment in infrastructure, economic recon- exerted by the combined budget deficits of the OECD struction, and private sector development will rise. As their countries, now running at some $700 billion a year. creditworthiness improves, they could absorb a larger share of world capital flows and could increase total global How can external assistance help transition? demand for capital, raising world interest rates. But as Through the early years of reform in CEE and the NIS, a noted in Chapter 2, in the long run all countries tend to major share of official assistance has taken the form of bal- finance the bulk of their investment from domestic rather ance of payments and budgetary support and of debt relief. than foreign savings. Moreover, any impact on world inter- Official support from the international financial institu- 138 ORLD EVE OPMEN percent of their combined GDP in 1991-93. Under- Reforming governments receive the most recording of GDP in these economies may bias this ratio external assistance. upward, but on this measure Marshall Plan disbursements were not materially larger than official flows to GEE. The Marshall Plan did, however, embody a larger grant ele- Figure 9.3 Net official capital inflows per ment, and it was much more generous relative to the donor economy's income, at 1.5 percent of U.S. GDP. capita by country group Has the timing of external financial assistance been appropriate? This is another hotly debated issue. External finance has supported a number of stabilization programs, Dollars creating confidence (as was true of the Polish stabilization 40 fund) or reducing the need for monetary financing to 35 cover budget deficits (Chapter 2). However, one of the main findings of this Report is that liberalization, stabi- 30 lization, and structural and institutional reforms have been highly complementary. Macroeconomic pressure 25 often underpins the incentives for microeconomic change, 20 so that external assistance programs in transition economies must be developed carefullywalking the nar- 15 row path between facilitating reform and diminishing its 10 urgencyand must lock in reforms through conditional- ity. Indeed, ill-conceived or premature lending can create 5 large external debts that complicate subsequent reforms 0 as shown by the experience of certain lines of credit Group 1 Group 2 Group 3 Group 4 awarded by export credit agencies. Even after inflation has been brought down to moder- Note: Data are annual averages for 1990-95 (CEE) or ate levels, external assistance may be neededwithin lim- 1992-95 (NIS); 1995 data are preliminary. See Figure 1.2 for itsto help some countries bridge a transitional fiscal gap. the countries in each group. Countries severely affected by regional tensions are excluded. Source: World Bank 1996b. Whereas government spending as a share of GDP still exceeds reasonable limits in some countries, other transi- tion governments are small relative to their core functions. Some governments have been forced to cut social protec- tion and public investment, probably to levels below those needed to sustain reforms. Some, with limited capacity for tions and individual country donors has typically been administering taxes, end up imposing distortionary taxes much larger, relative to population or GDP, for those to meet their spending needs, at huge cost to economic countries that have advanced further with reforms (Figure efficiency (Chapter 7). Meanwhile a number of govern- 9.3). For example, by the end of 1993 the Visegrad coun- ments are themselves in arrears, undermining hard budget tries, in the first of the reform groups in Figure 1.2, had re- constraints elsewhere in the economy (Chapter 2). These ceived more than half of disbursements by the international problems merit close attention by assistance agencies. financial institutions to the region. In 1994 official lending However, budget support should always be conditional shifted to the NIS, which had previously obtained little on policy reforms, notably in the areas of tax policy and funding, as reforms advanced there. Among the NIS the administration, budget management, targeted poverty pro- Baltic states, which have undertaken substantial reforms, grams, and human resource development. received more official assistance in relation to their popula- As this Report has described, adjusting to a market tion as well as to GDP than, for example, did Belarus. economy involves sharp economic declines in some Has external financial assistance been adequate? This regions and social costs that may have political implica- controversial question can be answered in a number of tions. In these areas assistance can speed recovery, for different ways. Aid under the Marshall Plan after World example through funding severance pay and extraordinary War II averaged 2.5 percent of the incomes of the recipi- demands on local goverqments in distressed regions, as ent countries at the time. Total official disbursements to well as possible environmental costs associated with plant the GEE economies, which have generally progressed fur- shutdowns. It may be necessaryand desirableto cush- thest in their reforms, accounted on average for about 2.7 ion the impact of transition on certain regionally concen- 139 trated and overbuilt industries, such as Ukraine's coal sec- central banks and property arrangements that make re- tor (see Box 3.2). Here again, support needs to carefully forms more effective and harder to reverse. Bilateral assis- target temporary losses and to address them without tance, including that provided by the European Union, undermining the longer-run credibility of reforms and has had a large component of technical assistance. The labor market incentives. international financial institutions have also engaged heav- Yet, as ever, the development of market-supporting ily in this kind of institution building, across a wide range institutions is fundamental to transition. Postwar Western of areas, in addition to transferring financial resources. Europe already had long experience with markets, and the Building institutions takes time and sometimes in- associated institutionsproperty rights, information, and volves restoring entire professions in areas essential to a legal systems and courts, as well as skills in using them, well-functioning market economy. For example, although honed over generations of experiencewere all well in considerable support has been given to privatization and place, so foreign aid could readily promote reconstruction the drafting of new legislation, more needs to be allocated and recovery. Even now, many developing countries have for the training of judges and other legal professionals and a stronger institutional base for a market economy than do for the upgrading of judicial facilities (Chapter 5). Tech- most transition economies at similar levels of income. For- nical assistance should encourage local capacity building eign support therefore needs to embody a large compo- through, among other things, more involvement of local nent of technical assistance and institution building in participants. Far greater stress is needed on economic edu- areas that constitute critical reform bottlenecks. This cation in the broad sense as well as hands-on training in involves helping create institutions such as independent key marketable skills (Chapter 8). Box 9.1 Business skills training is good for businessfor trainers and trainees Efforts to teach market-related skills and business is now exported to the British market. A conference on know-how in transition countries have had a somewhat business planning for Russian textile enterprises, which mixed record. But two programs show how to over- Mrs. Smirnova organized, led to the creation of various come the pitfalls and create valuable follow-on effects. business associations, and working together with other In early 1992 the World Bank's Economic Devel- graduates she has advised companies throughout opment Institute launched a training program to sup- Russia, in Kazakstan, and in Uzbekistan. All this has port enterprise restructuring and privatization in created momentum for similar restructuring activities transition economies, based on learning by doing and by many other companies. helping local talent and stakeholders to help them- The East/West Enterprise Exchange Program at selves. The 180 trainees recruited since the program York University in Toronto puts a great emphasis on began including enterprise and bank managers, con- building personal business links in the program it has sultants, government officials, and parliamentarians been running since 1989. It has brought over 450 have worked with over forty local partner institutions business delegates from GEE and the NIS to Canada. and trained over 4,000 other participants. Evaluations Selection of delegates is based on the criteria of spon- by independent consultants concluded that the pro- soring Canadian firms, which fund the program in gram has been highly cost-effective and has had a great partnership with government, other donors, and the impact on enterprise reform and private sector devel- delegates themselves, who pay fees to participate. Dele- opment. Dozens of enterprises have successfully gates first take classes in business practices, accounting, restructured and privatized as a direct result. marketing, and a range of associated topics. They then The career of Mrs. Smirnova, a deputy director of work with their sponsors to develop business plans to the textile conglomerate Mayak in Nizhniy Novgorod, serve as the basis for future deals. An independent eval- Russia, illustrates the potential benefits. Fresh out of uation of the program concluded that it was having a the program, she had Mayak introduce international significant impact on delegates' knowledge and atti- accounting standards before they were required by law, tudes and contributing positively to their careers. It and retrained its accountants. She then initiated the was also contributing to business cooperation: prelim- firm's breakup into thirteen independent companies. inary estimates put the volume of technology transfers, Her business plan for Mayak won an international trade deals, and joint ventures resulting from the pro- award, and around 70 percent of Mayak's production gram at many times the program's cost. 140 Because of the importance of new business entry for Central Asian countries and a number of others whose growth, assistance should also be strongly conditioned on economies have been severely disrupted by regional ten- reforms to reduce regulatory and other barriers, including sions. Yet even in these cases donors need to ensure that access to premises. Carefully designed programs can com- assistance strengthens rather than undermines reform. It bine commercial and educational objectives, and some might be tempting to think that the ability to replace offi- may return more than their cost (Box 9.1). Business cial capital flows with private capital flows is a function of advice and financial support to the private sector should the level of income. In fact, it owes much to government come mainly from the private sector itself, that is, from policies. China, one of the poorest transition economies, private business support services, equity investors, and relies mostly on private capital. private lenders of working and investment capital. These The agenda services and suppliers exist in embryo in some transition economies, not at all in many others. Does this justify a The rapid integration of the global economy in recent role for assistance agencies? Yes, if that role is assisting decades springs from the widespread recognition that econ- financial system reforms to speed the emergence of pru- omies invariably achieve more working with each other dent and capable lenders and investors; and yes, if it exchanging goods, capital, and ideasthan acting alone. means providing training and technical assistance to man- The failure of the Soviet ideal of "socialism in one country" agers and entrepreneurs to overcome years of isolation is further confirmation, if any were needed, of this simple from market forces. But no, if it means simply financing truth. But ensuring that the transition economies realize investment through government restructuring agencies. their potential as members of the global trading system will As already noted, some countries face more of a tran- not be easyfor them or their supporters. For the new sition problem, while others face more of a development entrants, the first step is to adopt the economic, social, and problem. For the first group, heavy dependence on exter- institutional policy reforms outlined in this Report, in nal assistance should be considered a temporary phase order to attract foreign investors and foster growth. For until reforms create an environment that can attract those outside, particularly international bodies such as the private capital. A key purpose of official financial assis- European Union and the international financial institu- tance must be to bring down, decisively and sustainably, tions, it will mean careful consideration of how to help the barriers to committing external and domestic private transition countries in ways that support rather than delay capital, especially private equity investments. Some coun- long-term reform. Speeding the removal of existing trade tries have passed through this phase very quickly. The barriers, along with further direct efforts toward integra- Czech Republic, for example, drew on International tion, will bring perhaps the largest and most immediate Monetary Fund (IMF) credits and other official loans benefits for transition countries. But more-direct forms of relatively heavily in 1991 and 1992 but started to repay support, such as short-term financial assistance and, criti- the IMF earlier than planned (as did Poland in 1995). cally, helping countries acquire much-needed skills and Equally encouraging, private capital flows picked up, institutions, are also important. Finally, the integration rising to $2.85 billion in 1994 from $585 million two process must be buttressed, on both sides, by determined years earlier. efforts to allay fears about the costs of greater global com- Some transition economies, however, may require petition and to persuade those diffident of integration that, longer-term development assistance. These include the in the long term, all they stand to lose is their isolation. Condusionsand the Unfinished Agenda economies have made great strides in growth in previously repressed sectors (services in partic- liberalizing their domestic markets and foreign ular) and the penetration of new export markets. Transition trade regimes and in freeing up entry into private The turnaround in the more successful reformers has business. Many are trying to define property rights more included substantial adjustment, even by state enterprises. clearly and to privatize, to create or renew essential insti- Governments have succeeded in imposing tight budget tutions to support efficient markets, and to reshape social constraints on enterprises, spurring a highly decentralized services and the social safety net to conform to the needs process of deep cost cutting and restructuring by firms of a market system. Taken together, these measures con- themselves, the breakup of some, the introduction of new stitute the economics of transition, but transition has products, and the acquisition of new capabilities, includ- had profound social, political, and strategic implications ing marketing and financial management, not required as well. under the old system. Just saying no to enterprises' This chapter draws out the key messages from the requests for more resources produces positive resultsat analysis of the preceding chapters. What can these coun- least for a time. The next stage of China's reforms will tries learn from each other? What does the experience of also involve redirecting savings away from unprofitable transition to date suggest for the many other countries state firms and exposing them to greater competition. grappling with similar issues of economic reform? What A striking lesson from the experience of all transition are the implications for external assistanceand for the economies is the importance of new entry in response to reform priorities in the countries themselves? the lifting of restrictions on business. In China the new entrants were at first primarily the new township and vil- Lessons of experience lage enterprises (TVEs); more recently new private firms and joint ventures constitute China's most dynamic Consistent policies, combining liberalization of sources of growth, employment, and exports. In Vietnam markets, trade, and new business entry with rea- the protected state sector continues to generate growth, sonable price stability, can achieve a great deal but it is the private sector that is producing new jobs. In even in countries lacking clear property rights and GEE and the NIS new private firms, often using old assets strong market institutions. carved out from the state sectora process greatly encour- aged by harder budgetshave clearly led the recovery. If it Policies of liberalization and stabilization have been is to be widespread and effective, entry must be cheap and the major factor shaping the adjustment process in GEE administratively easy. And new firms cannot flourish with- and the NIS and have been vital to China's and Vietnam's out access to broad markets for their products and inputs. rapid growth. In the first two regions there has been a Market economies perform very poorly when inflation strong link between consistent and credible reform and rises above a moderate level. The same appears to hold for economic recovery: growth has typically resumed about transition economies. Liberalization at first causes prices three years after the determined application of such to rise. This is painful, but in GEE and the NIS the free- reforms, including stabilization programs. Less consistent ing of prices was needed to sever the link between gov- reformers have recovered more slowly and, on average, ernments and enterprises and allow subsidies to be cut, have performed less well. Recovery has involved rapid thereby making stabilization possible. 142 ON LUS.IQNS-AND THE UNFINISHED AGENDA 143 Differences between countries are very important, also quite different from those in GEE and the NIS, as both in setting the feasible range of policy choice China's transition has involved progressively greater and in determining the response to reforms. weight on economic performance as a legitimating factor for an ongoing government. Which works best, rapid or gradual reform? This ques- Hungary and Vietnam offer another contrast illustrat- tion, the one most often asked in the study of transition, ing the importance of initial conditions for the outcome of has no single or simple answer. Economic reform in GEE reform. Despite embarking on transition with a relatively and the NIS was begun in the context of a fundamental liberalized economy, and despite postponing sharp macro- dismantling of repressive political systems that had been, economic adjustment until 1995, Hungary has not been in many cases, propped up from without. These countries able to avoid a deep transformational recession. Vietnam, set out with severe macroeconomic imbalances and struc- on the other hand, had a large rural sector and a smaller tural distortions created by central planning, as well as state sector, and it sustained strong growth through a huge declines in trade as the previous system was disman- period of relatively rapid reform. Its restrictive macroeco- tled. They have not been able to generate the savings nec- nomic policies included layoffs of a full third of state essary to sustain gradual adjustment of the greatly over- enterprise employees, but they were absorbed by the resur- built state sectors. They therefore face a choice between gent rural sector and the newly unleashed private sector. rapid systemic reforms, entailing deep and often painful structural adjustment, and efforts aimed at prolonging the An efficient response to market processes requires status quo. Although the latter course may appear less clearly defined property rightsand this will even- painful at the outset, its result is persisting inflation and tually require widespread private ownership. economic disarray. The differences between leading and lagging reformers The political economy of privatization plays out differ- have largely reflected how they approached this very diffi- ently in different countries, and differently for each of the cult choice. Dedicated and audacious leaders have mat- major types of asset (industrial firms, farms, real estate). tered a great deal, but transition is not just a matter of Experience everywhere reveals a severe and politically intelligent leaders choosing the right policy package or charged tension between promoting efficiency and re- seizing the moment. Countries' characteristicstheir warding existing stakeholders. None of the methods used unique advantages and disadvantagesinfluence what to privatize large firmssales, management-employee policies can be chosen and what leaders can accomplish. buyouts, or equal-access voucher privatizationis without Important advantages include strong government admin- drawbacks in a transition setting, in terms of either the istrative capacity, proximity to market economies, greater effectiveness of corporate governance, speed, fiscal impact, societal memory of market processes, and a strong desire access to investment capital, or fairness. to integrate into Western Europe. All of these have helped Nevertheless, privatization is important. Initial privati- sustain the pace and scope of reform in the advanced zation helps depoliticize economic restructuring and cre- reformers. Differences in the abruptness and timing of ates incentives to support change required at the firm level. political change have also been reflected in the thrust of Governments cannot manage and finance such restructur- economic reform. Nevertheless, for the bulk of these ing on a wide scale. Privatization also frees government to economies, the answer to the question is now clear: faster focus on those few key areas of the economysuch as and more consistent reform is better. infrastructure and, perhaps, key natural resourceswhere China, on the other hand, is both a successful reformer its regulatory and ownership roles are most essential. and a gradual one, although its first major reform, the Is there an alternative to formal privatization? In the- shift from collective to household farming, involved a ory, yes. But the experience of many GEE countries and sharp change from the previous regime of agricultural col- the NIS suggests that in practice the alternative is often an lectivism. China embarked on its transition with a large, ownership vacuum with fuzzy property rights, leading to repressed rural economy. This allowed rapid productivity informal and nontransparent privatization, either of the gains and growth of a nonstate sector using rural labor. assets themselves or of the income streams they generate. Effective macroeconomic management encouraged a high China and Vietnam have so far been able to prevent rate of saving. With a reform program that skillfully took wholesale and egregious asset stripping, but there are signs advantage of China's initial conditions, including strong of similar processes at work there also. Informal privatiza- government capacity and the ability to impose direct con- tion often precedes the legitimization of a private econ- trols, the Chinese government was able to liberalize along omy, but it accelerates thereafter. An ownership vacuum a dual-track process without seriously undermining delays the restructuring of drifting firms, for which no- macroeconomic balance. The political fundamentals were body is fully responsible and which cannot tap external 144 resources. It can create or prolong macroeconomic prob- How to target benefits to the poorwhether through lems, because it produces strong incentives for enterprise income-tested assistance, locally organized relief, targeting managers to show poor financial performance and then based on indicators of poverty (one rationale behind, for snap up their firms (or additional shares) at an artificially, example, child allowances), or self-targeting (such as in low price. It can also be inequitable and induce corrup- public works employment)is a complex matter that tion, which can undermine the authority of government. depends on the administrative capacity of government An initial assignment of property rights is only the first agencies. The large informal sectors and limited capacity step. The broader goal is to develop an efficient secondary of many transition economies suggest that targeting by trading process in which ownership claims can be reorga- poverty indicators is perhaps the most realistic option in nized smoothly. All transition economies need such a the short run. In urban China and much of the NIS, process, particularly because many of the governance delinking of social services from enterprises will eliminate structures emerging during transition are themselves likely, a serious impediment to restructuring. to be transitional. For example, in GEE and the NIS con- In many countries the largest problem, both politically, trol of many firms will need to shift from insiders to out- and in terms of demand on public resources, is state pen- siders if they are to attract the investments and skills sions. Generous access to pensions is one way of cushion- needed to survive in a market economy. Agricultural reor- ing the impact of transition on a generation that was pre- ganization will require moving from corporate to individ- vented from accumulating wealth in the previous system ual property rights to enable new, viable farms to emerge. and has no opportunity to save in the new market system. Further clarification of property rights in China's TVEs is But it is important to distinguish such transitional issues essential for their further development, including the abil- from longer-run policies. Retirement ages need to be ity to raise finance from outside the community. Coun- raised and equalized for men and women. Private pen- tries need to beware of dead ends in the evolution of own- sions are desirable for a variety of reasons but are no sub- ership: some transitional arrangements, such as the closed stitute for directly addressing the problem of excessive joint-stock corporations in Ukraine or the highly dis- spending in the state sector. In China pensions need to be persed individual ownership seen in Mongolia, promise to delinked from enterprise finances, and the continued become obstacles to reorganization, essentially because expansion of the nonstate sector and rising labor mobility they entrench incumbent workers and managers. In con- argue for extension of a formal social safety net beyond trast, besides sales (where feasible), the Czech approach, the state sector. which creates strong external institutional investors and stimulates trading among them, appears to have many Institutions that support markets arise both by advantages. design and from demand. Major changes in social policies must complement the Institutional developmentof legal and financial sys- move to the marketto focus on relieving poverty, to tems and of a retooled governmentnormally takes years, cope with increased mobility, and to counter the if not decades. It therefore trails early macroeconomic adverse intergenerational effects of reform. reforms and formal ownership changes. Institutional reform is now high on the reform agenda in all transition Transition sets in motion vast social change. Much of economies. Reform is particularly badly needed because this change is positive: it increases individual liberties and existing institutions were adapted to the needs of a very choice and gives broad access to information formerly different economic system and because inadequate insti- available only to a privileged few. The negatives include tutions impose high economic costs. greater economic uncertainty and, in some countries, a dramatic growth in crime. To be effective, legislation must be well designed and Transition requires a major reorientation in the social well implemented. In addition, the state must itself be role of the state, away from paternalistic, poorly targeted ruled by law and trusted by the private sector to do benefits conveyed largely through extensive cross-subsidies, what it says it will do. Yet governments are particularly and toward addressing poverty. Market-determined wages susceptible to corruption during the phase when the and employment are vital to achieving deep restructuring, state retains both vast assets and extensive powers to but initial conditions in transition economies make intervene in a growing private economy. Liberalization, increased income inequality an inevitable consequence of demonopolization, andif transparentrapid privati- reform. Until this impact is offset by renewed growththe zation are key steps to reducing these two sources of indispensable element in any antipoverty policyan in- huge economic rents and to strengthen demand for crease in poverty is unavoidable. the rule of law. So are serious efforts to publicize and 145 punish high-level corruption. Like corruption, orga- changing needs. The decline in health status in this region nized crime thrives when property rights are unclear, relative to Western Europe, observable even before transi- legal procedures ineffective, and risks low. Effective tion, emphasizes that the objective ought to be improved action against organized crime also requires that the health, not simply more health care. This argues for a shift state be reasonably free of internal corruption. to include health promotion programsincluding encour- Financial sector reforms cannot proceed in isolation agement of healthy lifestylesthat maintain previous from macroeconomic and enterprise reform. For many achievements while improving incentives for efficiency. countries the best approach involves a mixed strategy, Transition requires major reforms of education and restricting the scope of state banks while a new finan- training, particularly in the NIS and parts of GEE, to cial system develops. Both the entry of new institutions enable it to provide the skills needed in a changing mar- and the rehabilitation of old ones pose risks, requiring ket economy. Incorporating private provision of educa- strong complementary policies. tion services, particularly in higher and adult education, Transition means less government involvement in the and providing education vouchers as part of retraining economy, but where it remains involvedin setting the assistance could help introduce demand-led restructuring. rules of the game, assisting the development of institu- tions, and providing social protectionit must become International integration can help lock in successful more effective. Far-reaching reforms are needed, espe- reforms. cially to strengthen tax systems (reduce exemptions, lower rates, and tighten administration), improve International integration is vital for successful reform expenditure control (eliminate government arrears), in transition countries, especially considering their history and build transparent intergovernmental relations. of autarky. Imports help make their markets competitive. Exports provide a source of growth and learning. In some In all these areas and many others, governments need areas foreign direct investment is the only way of acquir- to take an active, central role. However, the degree of ing vital skills, markets, and finance. Institutional integra- institutional change is also closely related to the compre- tion is also vital. Joining the World Trade Organization hensiveness and duration of macroeconomic and owner- (WTO) would enhance market access and provide some ship reforms. Market-oriented reforms create demand for protection against the arbitrary imposition of trade barri- market-supporting institutions and for their associated ers. Equally important, quick access to the Nirro will skills. Experience shows that institutional development strengthen the political feasibility of maintaining a liberal cannot proceed far in a vacuum or when the economic trade regime in transition economies themselves. system makes it irrelevant or unwanted. Parties will have The integration of transition economies into the global a strong incentive to abide by legal responsibilities only to trading system will benefit the world economy. The coun- the extent that they depend on the marketand their tries of the Organization for Economic Cooperation and reputations in itfor survival. For example, manager- Development, especially, have a strong interest in encour- owners in private firms will be tempted to ignore minor- aging transition by keeping their doors open. The costs of ity shareholders' rights unless their access to capital absorbing the transition economies into world trade are depends on their reputation, and banks will not develop manageable. Enlargement of the European Union to the capabilities necessary to function in a market system if include some of the transition economies may involve they expect to be bailed out by government whenever more concentrated adjustment costs, but even there the crises occur. adjustment to trade flows is a less important issue than the budgetary effects. Sustaining the human capital base for economic The agenda for donors . . . growth requires considerable reengineering of edu- cation and health delivery systems. What should be the timing and composition of foreign assistance to transition economies? A first observation is Relative to other countries at comparable income levels, that although only the poorer transition economies re- people in centrally planned economies were often health), quire long-term financial assistance, all but a very few and well educated. Today, broad access to health and edu- could benefit from extended technical assistance to sup- cation services needs to be protected in China. Such sys- port the building of institutions. This process can take tems in GEE and the NIS require extensive restructuring to decades, as some aspects of institutional reform involve improve their effectiveness. In many respects these systems rebuilding entire professions and require massive training share the weaknesses of industrial enterprises under central programs. Many countries will also require long-term planning, being input-intensive rather than responsive to support, from official sources, nongovernmental organiza- 146 tions, and the private sector, to help build the institutions payroll taxes to be cut. More broadly, improving public of civil society. accountability and strengthening the influence of civil, Second, macroeconomic stress often strengthens incen- democratic society as a counterweight to government are tives for reform. Aid programs in transition economies also important. Another priority is continuing reform in therefore require particular care in their designto walk the legal and regulatory systems, especially in areas relating the narrow path between facilitating reform and diminish- to the financial sector, property rights and competition, ing its urgencyand should lock in reforms through set- better enforcement of contracts and regulations, and har- ting strict conditions on aid provided. This involves creat- monization with EU standards in anticipation of accession. ing the critical institutions, such as independent central Addressing the problems associated with residual state banks and property rights, that make reforms more effec- ownership is a third important task. For these countries tive and harder to reverse. Because of the great importance external financial assistance is progressively less important of new entry for growth, assistance should also be condi- than technical assistance and institution building, which tioned on reforms to reduce barriers to new businesses. are important roles for bilateral and multilateral agencies. Third, in addition to short-term support for stabiliza- Fiscal reforms are vital in the less advanced reformers as tion programs, a case can sometimes be made for tem- well. Improved tax administration is essential. So is the porarily plugging a public finance gap while tax systems need to reduce subsidies through improved cost recovery, and budget management are overhauled. Marginal tax to gain fiscal elbow room for maintenance of and modest rates are high in many countries, encouraging informal- additions to public investments, and for clearing govern- ization of the economy. Some governments now exceed ment's own arrears. But these countries also need to con- reasonable size limits, but others lack revenues for essen- solidate financial discipline both in banks and in large tial functions. Public investment has virtually disappeared enterprises and to restore confidence in financial institu- in many countries, and the maintenance backlog is large tions. Tighter discipline, together with privatization, is also and growing. Transition involves costs, with economic necessary to sustain pressure for more effective ownership. decline in some regions and large losses for the banking Some of these countries also face serious problems of sector, and it may be necessaryand desirableto cush- crime, both economic and general. Addressing this and the ion the impact on certain groups. However, support needs associated issue of corruption is another very high priority, to target these transitional issues and losses carefully. and indeed is essential for rapid growth. In most of these Finally, business advice and financial support to the countries, including Russia, little progress has been made private (and privatized) sector should mainly come from in the overhaul of social programs. Reforms are urgent if the private sector itself, that is, from private business ser- deep, intergenerational poverty is not to become institu- vices, investors in equity, and private lenders of working tionalized. Foreign assistance to these countries can use- and investment capital. These services and suppliers exist fully include transitional budgetary support, especially for in embryo in some transition countries, but not at all in maintenance and to buffer the human cost of transition. many others. Donor agencies can assist reform in the Extensive technical assistance, massive specialized training, financial system to speed the creation of prudent and capa- and broad economic education are all desperately needed. ble lenders and investors and can usefully provide hands- The next stage of reforms in the East Asian countries on training and technical assistance to managers and will be more complex and difficult than their past efforts, entrepreneurs to overcome the effects of years of isolation as they tackle reform of the core of their state sectors and from market forces. Simply financing investment through the institutional underpinnings of their economies. Main- government restructuring agencies should be avoided. taining growth and improving the distribution of its rewards are central goals, because these are still poor coun- . . And for the reformers tries, and also to sustain support for reform. This requires What reforms are most urgently needed to sustain transi- improving the efficiency with which savings are allocated tion? The answer differs for each country according to the and, in parallel, developing better indirect tools of macro- stage it has reached. economic management. Continuing fiscal reform, includ- With macroeconomic stabilization and liberalization ing recentralization of the budget in China, is one prior- largely accomplished, institutional reform and managing ity. So are raising capacity in the banking and legal systems the realignment of the state are now priority areas for the and anticipating the need to deal with the many problem leading reformers in GEE. Public finance has emerged as a clients that will emerge as banks become more commercial critical focus. On the spending side this involves, in partic- and policies shift away from subsidizing credit. A clear def- ular, reforming costly social programs, especially pensions inition of the role and scope of the state sector is called for, and health. Action here will assist reform of currently very and this will almost certainly involve reducing its size. Also distortionary tax systems; in particular it should allow high important are mechanisms to encourage effective corpo- 0 147 rate governance and accountability in state, nonstate, and combine abundant labor, a tradition of high rates of sav- private firms and to avoid an ownership vacuum. Social ing, and large opportunities to increase the efficiency with policy reforms should focus on sustaining broad access to which these resources are allocated. A successful transition key social services and improving their quality, both for therefore promises long-term growth rates considerably increasingly mobile populations and in poor areas. Disen- above world averages. tangling of social benefits from state enterprises is needed And what of the risk of failure? The chances of a return to unlock the door to further reforms. to the planned economy may be small, but long-term With sustained reforms, transition countries have the stagnation and rising povertylikely outcomes of incon- potential to achieve strong growth. GEE can exploit the sistent and unstable policiescannot be ruled out for catch-up effect from its favorable location close to large, some countries. In the last analysis, transition's reforms high-income markets. The NIS can look to major gains will not bear fruit unless they are underpinned by a broad from far more efficient use of its natural resource and political and social consensus. Developing this is perhaps human capital endowments, and the East Asian reformers the highest priority of all. Bibliographical Note Report has drawn on a wide range of World qing Song, Jinglian Wu, Ping Xie, Gang Yi, Weiying Bank reports and on numerous outside sources. Zhang, and Renwei Zha; Hanoi-Le Xuan Ba, Tran Tien This World Bank sources include ongoing research as Cuong, Dang Duc Dam, Le Dang Doanh, Vo Dai Luoc, well as country economic, sector, and project work. These Tran Duc Nguyen, Viet Phoung, Ha Huy Thanh, Vu and other materials are listed alphabetically by author in Thieu, and Nguyen Minh Tu; London: nongovernmental the bibliography. The background papers, some of which organization consultationRichard Blewitt, Matthew will become available through the Policy Research Work- Bullard, Caroline Harper, Antony Mahony, Ruth Mayne, ing Paper series, synthesize relevant literature and Bank Angela Penrose, Paul Spray, Martin Summers, and David work. The views they express are not necessarily those of Wright; ParisWladimir Andreff, Leszek Balcerowicz, the World Bank or of this Report. Roberta Benini, Peter Conze, Saul Estrin, Erich Geis, Gian In addition to the principal authors listed, many peo- Maria Gros-Pietro, Maurice Guyader, Karsten Hinrichs, ple, both inside and outside the World Bank, helped with Vincent Koen, Marie Lavigne, Sten Luthman, Hans- the Report. The core team wishes to thank, in particular, Joachim Maak, Satish Mishra, Alberto Moreno, Joaquin Leszek Balcerowicz, Saul Estrin, Nicholas Lardy, Justin Muns, Alena Nesporova, Mario Nuti, Joan Pearce, Martin Yifu Lin, Peter Murrell, Mario Nuti, Andrei Poletayev, Raiser, Mark Schankerman, Dieter Schulze-Vornhagen, Jeffrey Sachs, Marcelo Selowsky, Lyn Squire, and Michael Pekka Sutela, and Pavel Tepulukhin. A meeting in Toronto Walton for their extensive comments and suggestions. provided a valued opportunity to share views with members Bruce Ross-Larson and Meta de Coquereaumont pro- of Canada's business community who have ethnic roots as vided valuable editorial advice and assistance at various well as business interests in transition countries. Participants stages. The core team wishes to thank Judith Hegedus for included Tonu Altosaar, Charles Bassett, John Coleman, her excellent work as intern. James L. Darroch, Dezso J. Horvath, Joseph Kairys, Ken- Recent and ongoing research underlying the Report neth E. Loucks, Gene Luczkiw, Hy Van Luong, Bohdan S. has involved a wide range of institutions, particularly in Onyschuk, Alina Pekarsky, Frank Potter, Andrew Sarlos, GEE and parts of the NIS. They include CASE, Warsaw; Andrew J. Szonyi, Ping Tan, Nguyen H. Trung, Paul C. CEEPN, Ljubljana; Central European University, Buda- White, John P. Wleugel, and D. M. Zakreski. pest; CMC, Prague; CEMI, Moscow; and the Leontief Those at the IMF who commented include Ehtisham Center, St. Petersburg. We are grateful for having had the Ahmad, William A. Allan, Mark Allen, Gerard Belanger, opportunity to discuss parts of the Report at meetings Eduardo Borensztein, Eduard Brau, Christopher Browne, with some of these institutions. Several participants from Wayne Camard, Adrienne Cheasty, Ajai Chopra, John this region attended the Paris meeting, and continuous Crotty, J. M. Davis, Michael Deppler, P. V. Desai, J. R. regional consultation throughout the process was also pro- Dodsworth, Allan Firestone, James Haley, M. Koch, vided by Laszlo Urban and Ardo Hansson. Ashok Lahiri, Henri Lone, G. A. Mackenzie, Donald Thanks also go to the participants at consultation meet- Mathieson, John Odling-Smee, Alan Pearson, Peter ings in Beijing, Hanoi, London, and Paris, and at the Inter- Quirk, Ratna Sahay, Susan Schadler, Ludger Schuknecht, national Monetary Fund (IMF) in Washington. These Gerd Schwartz, Teresa Ter-Minassian, and Konrad von include: Beijing-Pieter Bottelier, Weili Guan, Shuqing den Heed. We are grateful to the IMF for having sec- Guo, E. C. Hwa, Justin Yifu Lin, He Liu, Feng Lu, Guo- onded Francoise Le Gall to the core team. 148 149 The Report also acknowleges the collaboration of Rus- Soopramanien, Mike Stevens, Mark Sundberg, Andres sell Pittman of the U.S. Department of Justice, Mark Rigo Sureda, Nok Suthiwart-Sethaput, Patrick Tardy, Schankerman of the EBRD, the U.N. International Drug David Tarr, Margaret Thalwitz, Pham Van Thuyet, Anne Control Program, Christian Aid, and Save the Children Tinker, Mariana Todorova, Laura Tuck, Yoshine (U.K.). Other contributors include Anthony Atkinson, Uchimura, Laszlo Urban, Panos Varangis, Jaime Vazquez, David Begg, Willem Buiter, Athar Hussain, and Richard Scott Vicary, Paulo Vieira da Cunha, Dimitri Vittas, Chris- Rose. tine Wallich, Jonathan Walters, Yan Wang, Hugo Many at the World Bankincluding consultants and Waszink, Douglas Webb, Dennis Whittle, Alan Winters, visiting academicsprovided substantial inputs or com- Holger Wolf, and Shahid Yusuf. ments, often on many chapters. They include Wafa Abde- lati, Arvil Adams, Harold Alderman, Ritu Anand, Robert Introduction and Chapter I E. Anderson, Paul Armington, Mark Baird, Ian Bannon, The many excellent treatments of socialist systems include Luca Barbone, Paul Beckerman, Halsey Beemer, Brian Berliner 1952, Brus and Laski 1989, Chavance 1994, Berman, Charles Blitzer, Jose-Luis Bobadilla, Zeljko Held 1992, Hobsbawm 1994, Kornai 1992, Lavigne Bogetic, Eduard Bos, Pieter Bottelier, Loup Brefort, Harry 1995, Lin, Fang, and Zhou 1996, Sapir 1990, and White Broadman, Karen Brooks, Jonathan Brown, Robert Buck- 1995. The most detailed appraisal of the Soviet economy ley, Richard Burcroff, Mary Canning, Gerard Caprio, prior to its dissolution is from the IMF and others 1991. Laurence Carter, Carlos Cavalcanti, Sandeep Chawla, Easterly and Fischer 1995a and 1995b review estimates of Shaohua Chen, Simon Commander, Csaba Csaki, Peter Soviet growth and productivity. Lin, Fang, and Zhou Dean, Martha De Melo, Cevdet Denizer, Shantayanan 1996 discuss total factor productivity growth in China Devarajan, John Dixon, David Dollar, David Donaldson, before 1978. Poznanski 1985 provides a detailed discus- Donna Dowsett-Coirolo, William Easterly, Andrew sion of quality problems in GEE manufactures. Roberts Ewing, Nissim Ezekiel, Qimiao Fan, Richard Feachem, 1993 carries out detailed hedonic price comparisons for Carlos Ferreira, Bruce Fitzgerald, Heywood Fleisig, Mon- Russian and other cars sold in Finland between 1950 and ica Fong, Louise Fox, Lev Freinkman, Michael Fuchs, 1990. Hughes 1995 and OECD 1993 consider environ- Hafez Ghanem, Daniela Gressani, Ardo Hansson, Ralph mental issues in the context of Eastern European reforms. W. Harbison, April Harding, James R. Harrison, Stephen Gordon Hughes provided Box 2. Heyneman, Bernard Hoekman, Bert Hofman, Malcolm The topic of systemic transformation has involved Holmes, Nicholas Hope, Gordon Hughes, Ishrat Husain, enormous debate on the speed and sequencing of reforms; Gregory Ingram, Estelle James, Dean Jamison, Emmanuel see, for example, Aghion and Blanchard 1993, Balcero- Jimenez, Olga Jonas, Bart Kaminski, Philip Keefer, Albert wicz 1995, Bosworth and Ofer 1995, Chaba 1995, Lip- Keidel, Christine Kessides, Timothy King, Jeni Klugman, ton and Sachs 1990a, OECF 1995, Portes 1993 and Paul Knotter, Ulrich Koester, Mihaly Kopanyi, Aart 1994, and Sachs 1990a, as well as Transition 1988-96. Kraay, Kathie Krumm, Arvo Kuddo, Anjali Kumar, Ulrich Much of this literature is reviewed by Murrell 1995. The Lachler, Bruno Laporte, Barbara Lee, Philippe Le background paper by Siebert, Raiser, and Langhammer Houerou, Natalie Lichtenstein, Jennie Litvack, Norman surveys German research on this topic. For analyses of Loayza, Millard Long, Laszlo Lovei, Nariman Mannap- Poland's reforms see Lipton and Sachs 1990a, 1990b, and bekov, Tamar Manuelyan, Albert Martinez, Katarina 1990c, and Sachs 1993 and 1994. Portes 1993 reviews Mathernova, William McCleary, William McGreevey, progress in Eastern Europe, and Dornbusch and Wolf Oey Meesook, Costas Michalopoulos, Branko Milanovic, 1994, Sinn and Sinn 1992, and Welfens 1996 the eco- Pradeep Mitra, Fernando Montes-Negret, Claudia Mor- nomic aspects of German unification. Holger Wolf con- genstern, Paul Murgatroyd, Vikram Nehru, Richard New- tributed Box 1.1. Reviews of China's reforms include farmer, Ian Newport, Erik Nielsen, Mick Nightingale, Cao, Gang, and Woo 1995, Gelb, Jefferson, and Singh Barbara Nunberg, Daniel Oks, Robert Palacios, Shilpa 1993, Harrold 1992, and Lin, Fang, and Zhou 1996. The Patel, Jo Ann Paulson, Kyle Peters, Djordjija Petkoski, growth of macroeconomic imbalances in the Soviet econ- Guy Pfeffermann, Alan Piazza, Brian Pinto, Gerhard Pohl, omy and Russia's reforms are treated in Aslund 1994a and Hana Polackova, Richard Polard, Michael Pomerleano, 1995b, Dunlop 1993, IMF and others 1991, and Sachs Sanjay Pradhan, Alexander Preker, Lant Pritchett, Martin 1995b and 1995c. Michalopoulos and Tarr 1994 provide Ravallion, Bertrand Renaud, Alan Roe, Susan Rose-Acker- estimates of intra-NIS trade volume declines. Kornai man, Jan Rutkowski, Michal Rutkowski, Randi Ryterman, 1996 provides a recent perspective on the macroeconom- George Schieber, Sabine Schlemmer-Schulte, Martin ics of Hungary's reforms. Schrenk, Ibrahim Shihata, John Shilling, Mary Shirley, I. Attitudes to political change and economic reform in J. Singh, Shamsher Singh, Warrick Smith, Renganaden several GEE countries and the NIS are treated in the 150 Aslund background paper, Evans 1995, Nelson 1994, Sahay and Vegh 1995b. These works have provided much Rose 1995b, and Rose and Haerpfer 1994 and 1996. of the backdrop and offer a range of interesting approaches Aslund 1995a considers the case of Ukraine; Lubin 1994 to the topics of this chapter. The chapter draws from many provides information on social attitudes in Uzbekistan individual country studies, including Banerjee and others and Kazakstan. USIA 1995a and 1995b and VCIOM 1995, Blanchard, Froot, and Sachs 1994, Cao, Gang, and 1995 present assessments of political attitudes in Russia Woo 1995, Dollar, Glewwe, and Litvack forthcoming, and other NIS; the Russian Economic Barometer various Ebrill and others 1994, IMF 1995b, the Kornai back- years presents assessments of business opinion. Perotti ground paper, Lin, Fang, and Zhou 1996, Lipton and 1995 presents an econometric analysis of the relationship Sachs 1990a, Reidel and Corner 1995, Sachs 1994, and between economic growth, democracy, and income World Bank 1995e, 1995k, 19950, 1995q, and 1996a. The inequality; see also Persson and Tambellini 1994. For chapter also draws on a written survey of World Bank and detailed reporting on reforms by category in GEE and the IMF country staff to assess reform progress and economic NIS, see EBRD 1994 and 1995. On data difficulties in performance in the twenty-eight transition economies cov- transition and the underestimating of growth, see Berg ered by the report. Other main sources of data are the 1993, Berg and Sachs 1992, Bratkowski 1993, and World Bank's data base and World Bank 1995s. Goskomstat-World Bank 1995. Roberts 1995 estimates The different liberalization and stabilization strategies the impact on welfare of eliminating rationing. Murray of various transition economies are examined in Balcero- and Bobadilla 1995 estimate adjustments to infant mor- wicz and Gelb 1995, Dabrowski 1995a, the De Melo, tality from adopting WHO standards. EBRD 1995 notes Denizer, and Gelb background paper, and OECF 1995. also that the experience of the Visegrad countries shows Price reform issues in selected transition economies are that reforms have not necessarily meant a deterioration of examined in De Broeck, De Masi, and Koen 1995, De social indicators. Masi and Koen 1995, Koen 1995, Rajaram 1992, The major analysis of the implications of China's struc- Richards and Tersman 1995, and Roberts 1995. The tural features for its reform process relative to the NIS is in treatment of energy pricing in Box 2.1 draws from Gray Sachs and Woo 1994; for more discussion see OECF 1995, and lifeline pricing has been proposed for Poland by 1995. McKinnon 1994 considers the implications of Freund and Wallich 1995. China's dual-track price re- China's financial deepening for its macroeconomic stabil- forms (Box 2.2) are discussed by, among others, Gang ity. Brown, Ickes, and Ryterman 1994 consider concen- 1994, and World Bank 1993b. Murphy, Shleifer, and tration and regional specialization in Russian industry; the Vishny 1992 present the theoretical case against partial Ickes and Ryterman background paper discusses the orga- price reforms. The data on China's long-run productivity nization of markets and their role in transition. and growth patterns are from Kraay 1995 and World The discussion of separating out the effects of initial Bank 1996b. The output decline across GEE and the NIS conditions from reforms also draws on ongoing research has been the subject of a lively and controversial debate in by Martha De Melo, Cevdet Denizer, Alan Gelb, and the literature. The discussion here draws mainly on the Stoyan Tenev. In this study, two composite initial condi- articles in Blejer and others 1993, Borensztein, Demekas, tions are constructed using factor analysis and a set of and Ostry 1993, Christensen 1994, Gavrilenko and Koen twelve country characteristics. They are then used as 1994, Holzmann, Gacs, and Winckler 1995, and Kornai explanatory variables in panel regressions. Preliminary 1994b. See also the references on measurement problems results suggest that both initial conditions-one relating noted for Chapter 1. The treatment of unofficial to the degree of urbanization and industrialization, the economies in transition (Box 2.3) draws on Kaufmann other to initial macroeconomic imbalance and distance and Kaliberda 1995 and Loayza forthcoming. from market institutions-do influence country perfor- Much of the analysis of the relationship between liber- mance. The more difficult conditions of the NIS relative alization and growth in GEE and the NIS draws from the to GEE may result in growth rates two percentage points De Melo, Denizer, and Gelb background paper. Trade lower, on average. Policy reform is still, however, a major policy reforms and performance across transition econ- determinant of performance. omies are discussed in Asselain 1994, de Menil 1995, Gacs 1993, IMF 1994b, Kaminski, Wang, and Winters 1996, Chapter 2 and Michalopoulos and Tarr 1994 and 1996. China's Recent overviews of liberalization, stabilization, and growth trade regime and performance are analyzed in Lardy 1995, issues in transition economies include Citrin and Lahiri Wei 1993, and World Bank 1994b. The general phasing 1995, Dervis and others 1995, EBRD 1994 and 1995, Fis- and design of trade liberalization are discussed by, among cher, Sahay, and Vegh 1995, Gros and Steinherr 1995, others, Dean, Desai, and Reidel 1994, who provide an IMF 1994c, Lavigne 1995, Murrell 1991, Sachs 1996, and overview of the extensive literature. Evidence in support of APHIC TE 151 early, far-reaching trade liberalization in transition dari and Schaffer forthcoming, Fan and Lee 1995, Raiser economies is provided by, among others, Aslund 1994b 1993, Rostowski 1994, Rostowski and Nikolic 1995, and and 1995b, Berg and Sachs 1992, Djankov and Hoekrnan Schaffer 1995. 1995, the Kaminski and Wang background paper, and Dornbusch, Noelling, and Layard 1993 include a fas- Sachs and Warner 1996. De Melo and Ofer 1994 and cinating collection of papers on postwar economic recon- Easterly, De Melo, and Ofer 1994 have analyzed the struction and growth and lessons for the transition growth of services in transition economies. Output and economies. Wolf 1993 looks at the specific case of Ger- labor restructuring in transition economies and the impact many, and the East Asian miracle is examined in World of liberalization and stabilization on such restructuring Bank 1993a. Schmidt-Hebbel, Serven, and Solimano and, thereby, on growth are discussed in Alfandari, Fan, 1995 and IMF 1995c provide recent overviews and Freinkman forthcoming, Anderson, Djankov, and of the determinants of saving and investment and the Pohl 1995, Berg 1994, Brada, Singh, and Torok 1994, relationship between them and economic growth. Dervis Claessens, Hunt, and Peters 1995, Commander and Cori- and others 1995 and European Economy 1995 discuss sav- celli 1995, Rutkowski 1995, and Rutkowski and Sinha ing and investment in transition economies. Dervis and 1995, in addition to many of the country studies. Box 2.6 others 1995 and Sachs and Warner 1996 examine the was drafted by Gordon Hughes. medium- and long-term growth potential of transition Inflation and stabilization in China are treated in economies and the speed of their catch-up with middle- Harrold, Hwa, and Jiwei 1993, Hofman 1995a and and high-income market economies. Erdoas 1994 and 1995b, Lin 1995, Montes-Negret 1995, and World Bank Kornai 1994a and 1995 examine the same issue from a 1995e and 1996a. The first stage of inflation and early transition economy perspective. experiences with stabilization in CEE and the NIS are dis- cussed in Aslund 1994a and 1994b, Bruno 1992, Calvo Chapter 3 and Coricelli 1992, Dabrowski 1995c, Hardy and Lahiri The socialist legacy draws on Gelb and Gray 1991. Fur- 1994, Kolodko, Gotz-Kozierkiewicz, and Skrzeszewska- ther references are found in the note to Chapter 1 above. Paczek 1991, and Sachs 1995b. Many works document The discussion of financial discipline and enterprise the essentially monetary nature of inflation in transition restructuring in CEE and NIS draws on Balcerowicz, economies and examine the fiscal and quasi-fiscal pres- Gray, and Hashi 1995, Belka and others 1994, Comman- sures underlying it and implications for stabilization pol- der, Fan, and Schaffer forthcoming, Cuadernos del Este icy. These include Aghevli, Borensztein, and van der 1995, Dolgopyatova and Yevseyeva 1994a and 1994b, Willigen 1992, Citrin and Lahiri 1995, Fischer, Sahay, Estrin, Gelb, and Singh forthcoming, and Grosfeld and and Vegh 1995, Gaidar 1995, Hansson and Sachs 1994, Roland 1995. Box 3.1 summarizes the findings in Gray Illarionov 1995a and 1995b, Koen and Marrese 1995, and Holle forthcoming and Gray, Schlorke, and Szanyi Sachs 1995c, Sachs and Lipton 1992, and Willet and oth- forthcoming. For further analysis of Poland's bank-led ers 1995. Box 2.7 draws on Easterly and Vieira da Cunha restructuring, see Pawlowicz 1994. The discussion of 1994. Recent studies of the empirical relationship enterprise reforms in Vietnam and China draws on between stabilization and growth for the transition Broadman 1995, Cao, Gang, and Woo 1995, Gelb, Jef- economies include Bruno and Easterly 1995, Easterly ferson, and Singh 1993, and Reidel and Corner 1995. forthcoming, and Fischer, Sahay, and Vegh 1995. Ideas on government intervention and isolation exercises Regarding the specific design of stabilization policies draw in part on Selowsky and Vogel 1995 and World in transition economies, Bredenkamp 1993 and Hilbers Bank 1993a and 1995b. The 1995 study of 400 to 500 1993 deal with the mix of direct and indirect instru- firms is described in Pohl, Djankov, and Anderson forth- ments of monetary policy. Banerjee and others 1995, coming. Box 3.2 draws from a World Bank project being Calvo and others 1993, Calvo, Sahay, and Vegh 1995, developed in Ukraine. Gomulka 1995, and Sahay and Vegh 1995a discuss The discussion of private versus public enterprise per- exchange rate policy, capital inflows, and their impact on formance in market economies draws on Galal and others inflation, competitiveness, and growth in transition econ- 1994, Kikeri, Nellis, and Shirley 1992, Megginson, Nash, omies. Russian and East European Finance and Trade and van Randenborgn 1994, Millwood 1982, Vickers and 1994 is devoted entirely to this subject. Coricelli and Yarrow 1988, and Yarrow 1986. Surveys in transition Lane 1993, Coricelli and Revenga 1992, Morsink 1995, economies are described in Barberis and others 1995, and Tait and Erbas 1995 examine the role of incomes Belka and others 1994, Claessens, Hunt, and Peters 1995, policies for stabilization in transition. Enterprise arrears Commander, Fan, and Schaffer forthcoming, Earle, and their causes, inflation implications, and remedies are Estrin, and Leshchenko forthcoming, Kollo 1995, and discussed in Afanasief, Kuznetsov, and Isaev 1995, Alfan- Dubey and Vodopivec 1995. The discussion of Poland 152 follows Pinto, Belka, and Krajewski 1993 and Pinto and 1996. On broader dimensions of well-being, see Moser van Wijnbergen 1994. Box 3.4 draws on Byrd and Lin 1996 and Zippay 1991. 1990, Findlay, Watson, and Wu 1994, Nolan and Dong The impact of the transition on women is discussed by 1990, Ody 1992, and Zweig 1991. The discussion on Einhorn 1993, Fong 1996, Funk and Mueller 1993, and Bulgaria summarizes Bogetic and Hillman 1995. Human Rights Watch 1995a and 1995b. Box 4.2 draws There is a vast literature on privatization of medium- on those sources and also on Chase 1995 and Rouse-Foley size and large enterprises in transition economies, summa- 1995. rized in the Gray background paper. For more on The discussion of labor markets draws on Commander this, see Donaldson and Wagle 1995, Earle, Frydman, and Coricelli 1995, Jackman 1994, Jackman and Rutkow- and Rapaczynski 1993, Estrin 1994b, Frydman, Gray, ski 1994, Orazem, Vodopivec, and Wu 1995, M. Rut- and Rapaczynski 1996, Lieberman and Nellis 1995, and kowski 1995, J. Rutkowski forthcoming, and World Bank Radygin 1995a. Gordon Hughes prepared Box 3.5. Data 1995r. Active labor market policies are discussed by Burda on Russian privatization are from Blasi 1996, Blasi and and Lubyova 1995 and in OECD 1995a and 1995b, and Shleifer 1996, and Earle, Estrin, and Leshchenko forth- regional unemployment by Scarpetta and Worgotter 1995. coming. For more on Russian privatization, see Boycko, The Western backdrop is surveyed by Atkinson and Mick- Shleifer, and Vishny 1995, Grigoriev 1995, and Shatalov lewright 1991 and Layard, Nickell, and Jackman 1991. 1991. The Ukraine-Russia comparison is from Buck and Evidence of widening wage dispersion in Russia is pre- others 1995. The discussion of small-firm privatization sented in Brainerd 1995. draws on Barberis and others 1995 and Earle and others The issues surrounding the rationale for and construc- 1994. The section on farm privatization and restructuring tion of social safety nets are discussed in Atkinson 1996, was prepared with the help of Karen Brooks and draws on Barr 1992, and Barr 1993a (in Polish 1993b). Reform in Csaki and Lerman forthcoming. The discussion of com- the CEE countries is discussed in the chapters by Barr and mercial real estate draws on the Harding background by Sipos in Barr 1994 (in Hungarian and Romanian, paper. The housing discussion tracks current World Bank 1995a and 1995b, respectively, and forthcoming in Rus- assistance in GEE and the NIS. sian), Toth 1994 (Hungary) and World Bank 1995p Surveys on private sector development in transition (Poland). Reform in the NIS is discussed by Klugman economies include De Melo and Ofer 1994, Stone and forthcoming, Kosmarskii and Maleva 1995, and Mozhina Novitzky 1993 and 1995, and Webster 1994. The case of 1994 (Russia), Mabbett forthcoming (Moldova), World foreign investment in Poland was supplied by the Inter- Bank 1993c (Kyrgyz Republic), and Falkingham and oth- national Finance Corporation. The discussion on condi- ers forthcoming (Central Asian republics). For reform in tions and incentives for foreign investors draws on Gray Asia see World Bank 1992 (China) and Dollar, Glewwe, and Jarosz 1995. and Litvack forthcoming (Vietnam). Enterprise restructuring and the provision of social Chapter 4 benefits is discussed in the Commander and Schankerman Box 4.4 draws on Fox 1995, Korng 1996, and Urban background paper. Rural issues are discussed by O'Brien 1996. Emmanuel Jimenez, Timothy King, Jeni Klugman and others 1993 and Patriorkovsky and others 1991. On and Alan Piazza helped with various of the other methods of targeting, see Foley and Klugman forthcom- boxes. The World Bank Social Challenges of Transition ing and Grosh 1994. data base provided additional background data on the There is a huge literature on pension reform, including GEE countries, as did various chapters in Barr 1994. Barr 1992 and 1994, Queisser 1995, U.K. Department of The inheritance, especially as it affects human re- Social Security 1993, Vittas 1993, Vittas and Michelitsch sources, is discussed by Estrin 1994a. The general prob- 1996, and World Bank 1994a. On the political economy lems of measuring poverty are discussed by Atkinson of reform see Sachs 1995a, and on pensions and savings in 1989, data issues in the GEE countries by Atkinson and Eastern Europe see Sachs and Warner 1996. Micklewright 1992, and methodology and OECD out- The role of politics and administration in reform is comes by Atkinson, Rainwater, and Smeeding 1995. discussed by Crawford and Thompson 1994. The first part of the chapter drew heavily on advice from Branko Milanovic and from Milanovic forthcoming Introduction to Part Two and Chapter 5 and on various other World Bank studies, including Klug- Evidence on the relationship between institutions and man forthcoming, Patil and Krumm 1995, van de Walle, growth is in Keefer and Knack 1995 and Knack and Keefer Ravallion, and Gautam 1994, and World Bank 1990b. 1995. The discussion on developing the rule of law draws Poverty in China is discussed by Jalan and Ravallion on Gray and Hendley forthcoming. The discussions of B B JOGRAPHI AL NOTE 153 legal frameworks for private sector development and judi- nomic level and at the individual firm levelis discussed cial institutions are based primarily on Gray and Associates and evidence provided in Demirgiic-Kunt and Levine 1993 and on the Pistor background paper. Box 5.1 was forthcoming, Demirgiic-Kunt and Maksimovic forthcom- prepared by Heywood Fleisig. For further discussion, see ing, and Singh 1995. the Fleisig, Simpson, and Rover background paper. The The typology of approaches to banking reform in tran- study on contracting in Bulgaria is in Koford and Miller sition economies draws on the general references men- 1995. Box 5.2 is drawn from Black, Kraakman, and Hay tioned above. Box 6.1 draws on Pohl 1995a and 1995b 1996. GEE and NIS experiences in developing bankruptcy and Pohl and Claessens 1994. Box 6.2 draws on Baer and legislation are described in Balcerowicz, Gray, and Hashi Gray 1996, Bakker 1993, and the Gray background paper. forthcoming, Coates and Mirsky 1995, and Gray, The Claessens background paper compares the progress in Schlorke, and Szanyi forthcoming. For further discussion institutional capacity building in transition economies and of market infrastructure see the background paper by Ickes the relationship between bank quality and the structural and Ryterman. The discussion of the Chinese legal profes- characteristics of these economies. The paper was based on sion is from Alford 1995; for Vietnam, see Pham Van a survey of experts in the World Bank on the quality of Thuyet 1995. banks in twenty-five transition economies and five com- The cross-country research on economic growth and parator countries, dividing banking systems into "better" government credibility is described in Borner, Brunetti, and "worse" segments. The background paper also pro- and Weder 1994. The sections on crime and corruption in vides evidence about the effects on bank quality in transi- transition economies draw on studies of private firms cited tion economies of more liberal entry, the role of banking in De Melo and Ofer 1995, Stone and Novitzky 1993 and regulation, and intervention in troubled banks. 1995, and Webster 1994, as well as Keh 1994 and infor- The discussion of problem banks and the occurrence mation provided by the United Nations Drug Control and resolution of banking crises is based on Baer and Programme. Mauro 1995 explores the relationship be- Klingebiel 1994, Caprio and Klingebiel forthcoming, tween corruption and growth. For more on the Russian Caprio and Vittas forthcoming, Delyagin 1995, Hansson mafia, see Handleman 1995. The workings of the Sicilian 1995, and Hausmann and Gavin 1995. Principles for mafia are described in Stille 1995. Susan Rose-Ackerman restructuring problem banks are further discussed in helped prepare Box 5.3, which draws on Rose-Ackerman Sheng 1996 and World Bank 1995a. The role of banking 1978 and Thacher 1995. supervision is further discussed in World Bank 1989. The discussion on the different models of debt restruc- Chapter 6 turing draws on Begg and Portes 1993, Caprio and Levine The discussion on the legacies in the financial system in 1994, Levine and Scott 1993, and van Wijnbergen 1992 centrally planned economies is based on many sources but and 1994. The evidence on bank recapitalization is re- draws in particular on Bonin and Mizsei 1995, Gorton viewed in Baer and Gray 1996, Caprio and Klingebiel and Wilton 1996, Kornai 1992, and McKinnon 1991. forthcoming, and World Bank 1995a. The section on General references on financial reform in transition econ- deposit insurance draws on Caprio and Vittas forthcom- omies, used in various places throughout the chapter, are ing and Glaessner and Mas 1995. The discussion of the Bonin and Szekely 1994, Borish, Long, and Noel 1995, issues of universal banks and banks owning shares in Calari and Pinto 1995, Caprio 1995, Caprio, Folkerts- enterprises is based on Coffee 1995, Caprio, Folkerts- Landau, and Lane 1994, Dittus 1994a and 1994b, Pohl Landau, and Lane 1994, Dittus and Prowse 1996, and and Claessens 1994, Saunders and Walter 1991, and Walter 1993. Varhegyi 1995. General macroeconomic developments Lessons on the benefits and costs of development affecting the financial system are discussed in the De banks and directed credit were derived from Vittas and Melo, Denizer, and Gelb background paper. Cho 1995, World Bank 1989, and World Bank 1995f. General background on the importance and role of the The discussion of creating rural finance is based on the financial system is provided in World Bank 1989. Evi- Brooks, Burcroff, and Lerman background paper and dence on the relationships between financial system devel- Laura Tuck's research on best practices. The example and opment and economic growth and adjustment comes discussions of housing finance draw on Lea and Renaud from King and Levine 1993a and 1993b. Evidence on the 1995 and Renaud 1996. importance of central bank independence is provided in The discussion of nonbank finance is in part based on Alesina and Summers 1993 and Fischer 1995. The com- Calari and Pinto 1995. The section on leasing and venture plementary relationships between banks, nonbank finan- funds draws on Kuczynski, Barger, and Carter forthcoming cial intermediaries, and capital marketsat the macroeco- (a) and forthcoming (b). The capital markets section draws 154 on Aoki and Kim 1995, Calari and Pinto 1995, Morgen- Revenue trends in transition economies and their stern and Hay 1995, and Pohl, Jedrzejczak, and Anderson causes are discussed in EBRD 1994, IMF 1994a, McLure 1995. Data come from IFC 1996 and IMF various years. and others 1995, and Shome and Escolano 1993. These works also discuss tax policy reforms in transition econ- Chapter 7 omies, as do the papers in Bogetic and Hillman 1995, Recent overviews of public finance issues across transition Newbury 1995, some of those in Tanzi 1992 and 1993, economies, especially the widening deficits in many coun- and a number of World Bank country studies. Karnite tries and their causes, include Barbone and Marchetti and Dovladbekova 1995, World Bank 1990a and 1996a, 1995, Barbone and Polackova forthcoming, Dabrowski and World Bank 1995q discuss tax administration 1995b, Fakin and de Crombrugghe 1996, and IMF vari- issues in Latvia, China, and Vietnam, respectively. Tanzi ous years (c). and Pellechio 1995 is a recent overview of general tax The role of the state in market economies is an ex- administration issues. The section on fiscal decentraliza- tensively discussed issue. Works that synthesize some of tion has benefited from inputs and comments by Chris- the literature include Barr 1994 (Chapter 2), Krueger tine Wallich and draws from various works on intergov- 1990, Stiglitz 1986, World Bank 1988, World Bank 1991 ernmental relations in transition economies, including (Chapter 7), and World Bank 1995b. The treatment of Ahmad 1995, Bird, Ebel, and Wallich 1995, Ma 1995, market failures also draws from Annex B of World Bank and Wallich 1994a and 1994b. Shah 1994 provides a 1994c. The indices of government market orientation and recent overview of fiscal decentralization issues in devel- of the effectiveness of public sector management are based oping countries. on a survey of World Bank and IMF country staff to assess reform progress and economic performance in the twenty- Chapter 8 eight transition economies covered by this Report. Civil Additional background data on the health and education service issues in transition countries are discussed in Rid- sectors in the CEE countries were provided by the World ley 1995, Schiavo-Campo 1994, World Bank 1994c, and Bank Social Challenges of Transition data base. Figure various internal World Bank documents. Their treatment 8.1 is based on Kovalyova 1994. in this section has benefited from consultations with Bar- The section on education draws on Heyneman 1994 bara Nunberg. Hewitt and van Rijckeghem 1995 contains and Laporte and Schweitzer 1994. Marer and Mabert comparator data on civil service pay and employment in 1996 discuss the extent to which narrow, inflexible skills market economies. impede restructuring. For discussion of education in Since Wagner 1883, which first examined the relation- China, see Leung 1991 and Lewin and Wang 1994 on ship of national income and government expenditures, the school education, Chunling 1995, Lee and Li 1994, and size of government and its determinants have been exten- West 1995 on disparities in education, and Hertling 1996 sively discussed in the literature, including by Heller and on higher education. Diamond 1990 and for transition economies by Barbone Jose-Luis Bobadilla and Alexander Preker helped to and Polackova forthcoming. Many works examine the draft Box 8.1. The section on health draws on Bobak and empirical relationship between the size of government and Feachem 1992, Preker 1994, Preker and Feachem 1994, economic growth, including Barro 1989 and 1991, Easterly and World Bank 1993e. On health developments in the and Rebelo 1993, Fischer 1993, Levine and Renelt 1992, GEE countries see Bobak and Feachem 1995 and and Slemrod 1995. Dervis and others 1995 and Sachs and Feachem 1994, and for Russia, see Shapiro 1993, Tul- Warner 1996, among others, examine this relationship for chinsky and Varavikova 1996, and Vella forthcoming. transition economies. The composition and effectiveness of Rising health spending in the Czech Republic is discussed government expenditures in general are analyzed and impli- by Vepfek, Papes, and Vepfek 1994. Women's health is cations for expenditure prioritization drawn in Aschauer discussed in WHO 1994, and women's reproductive 1989, Bandyopadhyay and Devarajan 1994, Devarajan, health by Jepsen and Brandrup-Lukanow 1995, Johnson Swaroop, and Zou 1995, Devarajan, Xie, and Zou 1994, and Andronache 1993, Popov 1991, and Weinstein, Oliv- Munnell 1992, Pradhan forthcoming, and Chu and others eras, and McIntosh 1993. 1995; the latter two sources also provide an overview of the literature. For transition economies, the same issues are ana- Chapter 9 lyzed in many of the papers collected in Mizsei 1994 and The discussion of trade and its realigment in GEE and the Tanzi 1992 and 1993. Budget management issues in tran- NIS is based on Collins and Rodrik 1991, Havrylyshyn sition economies are discussed in, among others, Allan and Pritchett 1991, Kaminski, Wang, and Winters 1996, 1994, Le Houerou, Gold, and Katash 1994, World Bank Michalopoulos and Tarr 1994, Rosati 1992, and Winters 1995h, and various internal World Bank documents. and Wang 1994. The section on adjusting trade integra- AL NOT 155 tion with the European Union draws on Faini and Portes Siebert, Horst, Martin Raiser, and Rolf J. Langhammer. "The 1995, Hoekman and Djankov 1995, and Winters and Transition in Central and Eastern Europe." Wang 1994. The discussion on integration into the Euro- Wing Thye Woo. "Enterprise Reform in Europe and Asia." pean Union draws on Baldwin 1994, Bofinger 1995, and Selected bibliography CEPR 1992. The discussion on capital flows draws from Afanasief, M., P. Kuznetzov, and P. Isaev. 1995. "Krisis platejei Brau 1995, Eichengreen and Uzan 1992, and the Kamin- v Rossii: Chto proishodit na samom dele? ("Arrears Crisis ski and Wang background paper, which also gives net in RussiaWhat is Happening in Fact?"). Voprosi Economiki official capital inflows by country. The information on 8: 52-72. integration into the European Union is provided by the Agency for Economic Coordination and Development (ACED). Commission of the European Communities 1995a, 1993. Bulgarian Economy in 1993, Annual Report. Sofia. 1995b, and 1995c. Data on trade are from Eurostat data Aghevli, Bijan, Eduardo Borensztein, and Tessa van der Willi- bases such as EEC External Trade and from the IMF's gen. 1992. Stabilization and Structural Reform in the Czech Direction of Trade Statistics 1995, and the United Nations and Slovak Republics: First Stage. Occasional Paper No. 92. COMTRADE data base. 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The East Asian Miracle: Economic Growth and Europe and Central Asia Region, Report No. 14929-RU. Public Policy. A World Bank Policy Research Report. New Washington, D.C. York: Oxford University Press. . 1995o. "Russian Federation: Towards Medium-Term . 1993b. China: The Achievement and Challenge of Price Viability." Report No. 14472-RU. Washington, D.C. Reform. World Bank Country Studies. Washington, D.C. . 1995p. Understanding Poverty in Poland A World Bank . 1993c. Kyrgyzstan: The Transition to a Market Economy. Country Study. Washington, D.C. World Bank Country Study. Washington, D.C. . 1995q. "Vietnam: Economic Report on Industralization . 1993d. Poverty Reduction Handbook. Washington, D.C. and Industrial Policy." Report No. 14645-VN. Washington, . 1993e. World Development Report 1993: Investing in D.C. Health. New York: Oxford University Press. .1995r. World Development Report 1995: Workers in an . 1994a. Averting the Old Age Crisis. A World Bank Policy Integrating World New York: Oxford University Press. Research Report. New York: Oxford University Press. .1995s. Statistical Handbook 1995: States of the Former . 1994b. China: Foreign Trade Reform. World Bank USSR. Studies of Economies in Transition 19. Washington, Country Studies. Washington, D.C. D.C. . 1994c. "Lithuania-Public Expenditure Review." . 1996a. "The Chinese Economy: Fighting Inflation, Report No. 12792-LT, Washington, D.C. Deepening Reforms." Report No. 15288-CHA. China and . 1994d. World Debt Tables 1994-95: External Finance for Mongolia Department, Washington, D.C. Developing Countries. Washington, D.C. . 1996b. World Debt Tables 1996 Washington, D.C. . 1995a. "Bank Recapitalization: If and When." DEC World Bank and Organisation for Economic Co-Operation and Policy Review Note No. 2, April. Washington, D.C. Development (OECD). 1993. Environmental Action Pro- gramme for Central and Eastern Europe-Setting Priorities. . 1995b. Bureaucrats in Business-The Economics and Pol- Washington, D.C.: World Bank. itics of Public Ownership. A World Bank Policy Research WHO (World Health Organization). 1994. "Highlights on Report. New York: Oxford University Press. Women's Health in CEE and NIS, Women's Health Profile: . 1995c. "China: The Emerging Capital Market." Vol- Comparative Analysis of the Country Reports." Women's ume I: Main Report, Strategic Issues and Options. Vol- Health Counts: Conference on the Health of Women in ume II: Detailed Technical Analysis. East Asia and Pacific Central and Eastern Europe, February. Region, Report No. 14501-CHA. Washington, D.C. Yarrow, George. 1986. "Privatization in Theory and Practice." . 1995d. "China: Health Care Finance Study: Health Economic Policy 2: 324-64. Care Financing Reform 1996-2001." Human Development Yusuf, Shahid. 1993. "The Rise of China's Nonstate Sector." Department. Washington, D.C. China and Mongolia Department. World Bank. Washington, . 1995e. China: Macroeconomic Stability in a Decentralized D.C. Economy. A World Bank Country Study. Washington, D.C. Zippay, Allison. 1991. From Middle Income to Poor: Downward . 1995f. "Directed Credit." DEC Policy Review Note Mobility among Displaced Steelworkers. New York: Praeger No. 1, April. Washington, D.C. Publishers . 1995g. The Emerging Asian Bond Market. Washington, Zweig, David. 1991. "Internationalizing China's Countryside." D.C. China Quarterly December (128). Selected][ for Er notmes Transition appendix contains selected statistical indicators indicated. The sources and methods used in the calcu- for twenty-eight transition economies in Central lation of these indicators may be found in the Techni- This and Eastern Europe, the newly independent states, cal Notes to the Selected World Development Indica- and Asia. These data, particularly for later years, are pro- tors in this Report. Updates to these data will be made visional and subject to revision. Data are taken from the available in the annually published World Development World Bank statistical data base except where otherwise Indicators. 171 172 Table A.1 Basic socioeconomic indicators Secondary school GNP per Infant mortality rate enrollment (percent Population capita (per 1,000 live births) Life expectancy at birth (years) of age group) (millions), (dollars), Country mid-1994 1994 1971-80 1981-90 1991-93 1994 1971-80 1981-90 1991-93 1994 1980 1990 1993 Albania 3.2 380 52.0 35.0 32.1 31.0 68.7 71.2 72.5 72.8 67 78 Bulgaria 8.4 1,250 23.7 15.8 16.1 15.3 71.3 71.4 71.0 71.2 84 73 68 Croatia 4.8 2,560 14.9 11.6 10.9 71.0 72.9 73.5 77 83 Czech Republic 10.3 3,200 18.2 12.8 9.6 7.9 70.3 71.1 72.4 73.0 86 Hungary 10.3 3,840 29.6 18.2 14.2 11.6 69.7 69.6 69.3 69.6 70 79 81 Macedonia, FYR 2.1 820 54.2 42.9 27.7 23.8 71.3 72.1 72.7 61 53 54 Poland 38.5 2,410 24.5 18.1 14.3 15.1 70.7 70.9 70.9 71.7 77 81 84 Romania 22.7 1,270 34.3 26.0 23.1 23.9 69.5 69.6 69.8 69.5 71 92 Slovak Republic 5.3 2,250 22.8 15.6 12.1 11.2 70.3 70.9 71.2 72.3 89 Slovenia 2.0 7,040 18.3 12.2 7.9 6.5 70.1 71.5 73.2 73.6 89 Armenia 3.7 680 26.2 23.4 17.8 15.1 71.8 70.5 70.5 71.1 85 Azerbaijan 7.5 500 30.4 28.2 26.3 25.2 68.4 69.6 69.8 69.4 88 Belarus 10.4 2,160 16.3 13.9 12.3 13.2 70.3 71.1 69.8 69.3 98 93 92 Estonia 1.5 2,820 18.2 14.4 15.0 14.5 69.5 70.0 69.6 70.1 92 Georgia 5.4 29.1 22.3 14.8 18.3 70.7 71.4 72.6 73.0 Kazakstan 16.8 1,160 32.7 29.2 27.3 27.4 66.6 68.2 69.0 68.3 90 Kyrgyz Republic 4.5 630 46.1 38.6 31.0 29.1 65.5 65.8 67.9 67.8 Latvia 2.5 2,320 21.7 15.7 16.5 15.5 69.2 69.8 68.8 68.1 87 Lithuania 3.7 1,350 21.5 15.8 15.6 14.1 70.7 71.4 70.0 68.7 78 Moldova 4.4 870 36.1 27.9 19.9 22.6 66.5 66.8 67.7 68.3 69 Russia 148.4 2,650 24.6 19.9 18.6 18.7 67.1 68.8 67.2 64.0 96 94 88 Tajikistan 5.8 360 58.1 47.5 44.5 40.6 64.8 69.0 68.1 66.6 Turkmenistan 4.4 53.6 52.5 45.5 46.4 61.9 64.9 65.8 66.3 Ukraine 51.9 1,910 21.2 14.9 14.3 14.3 69.1 70.0 69.8 67.9 94 93 80 Uzbekistan 22.4 960 47.0 42.7 35.0 28.2 67.3 68.1 69.3 69.8 94 China 1,190.9 530 48.8 37.6 31.0 29.9 65.2 68.3 69.0 69.3 46 48 55 Mongolia 2.4 300 90.0 71.2 58.9 53.0 55.7 60.5 63.6 64.5 91 86 78 Vietnam 72.0 200 70.1 49.2 43.9 42.0 61.0 65.2 67.0 67.5 42 33 35 .. Not available. ,J* 173 Table A.2 Indicators of economic growth GDP growth rate (percent)a 1971-80 1981-89 Gross domestic investment (average (average (percent of GDP) Country annual) annual) 1990 1991 1992 1993 1994 1995 1980 1990 1994 Albania 1.7 -10.0 -27.7 -9.7 11.0 7.4 6.0 34.5 28.9 13.5 Bulgaria 4.9 -9.1 -11.7 -6.0 -4.2 0.0 3.0 34.0 25.6 20.8 Croatia - 15.1 - 12.8 - 3.2 1.8 2.0 13.4 13.8 Czech Republic 1.8 - 1.2 - 14.2 - 6.4 - 0.5 2.6 5.0 28.6 20.4 Hungary 4.6 1.8 -2.5 -7.7 -4.3 -2.3 2.5 2.0 30.7 25.4 21.5 Macedonia, FYR -9.8 -12.4 -12.0 -5.7 -4.0 .. 32.0 18.0 Poland 2.6 -11.6 -7.0 2.6 3.8 5.5 7.0 26.4 25.6 15.9 Romania 7.6 1.0 - 5.6 - 12.9 - 13.8 1.3 2.4 7.0 39.8 30.2 26.9 Slovak Republic 2.7 -2.5 -14.6 -6.2 -4.1 4.8 7.0 37.3 33.5 17.1 Slovenia -9.3 -5.7 1.0 4.0 5.0 16.9 20.8 Armenia 14.5 3.5 -7.2 -8.8 -52.3 -14.8 3.0 7.0 28.5 47.1 10.2 Azerbaijan 21.5 2.9 -11.7 -0.7 -35.2 -23.1 -21.9 -17.0 23.3 27.8 22.5 Belarus 6.6 5.0 -2.8 -1.5 -10.1 -9.0 -21.5 -12.0 19.5 27.4 Estonia 5.1 0.2 -7.1 -22.1 -21.6 -6.6 6.0 4.0 28.5 30.2 Georgia 6.8 1.2 -14.8 -20.1 -40.3 -31.6 -28.2 -5.0 Kazakstan 4.4 2.0 -4.6 -6.8 -13.0 -15.6 -25.0 -9.0 37.6 42.6 24.0 Kyrgyz Republic 4.4 4.0 6.9 - 9.1 - 15.8 - 16.3 - 26.5 - 6.0 28.7 23.8 Latvia 4.7 3.7 - 1.2 - 8.1 - 35.0 - 14.9 0.0 1.0 25.7 40.1 Lithuania 4.6 1.8 -3.3 -13.1 -39.3 -16.2 2.0 3.0 31.2 34.3 Moldova -1.5 -18.6 -25.0 -8.8 -22.1 2.0 7.7 Russia 6.5 3.0 -3.6 -5.0 -14.5 -8.7 -12.6 -4.0 22.4 30.1 27.0 Tajikistan 4.9 3.3 -2.4 -8.7 -30.0 -27.6 -15.0 -12.0 30.0 23.4 Turkmenistan 4.0 4.0 0.8 - 5.0 - 5.4 - 5.0 28.5 40.0 Ukraine .. -3.8 -12.0 -12.5 -7.2 -24.3 -12.0 27.5 Uzbekistan 6.2 3.4 2.0 -0.5 -11.1 -2.4 -4.5 -2.0 31.6 32.2 23.3 China 5.5 11.1 3.9 8.0 13.6 13.4 11.8 10.2 35.2 34.8 42.1 Mongolia 5.7 -2.0 -9.9 -7.6 -1.3 3.3 6.3 46.2 42.3 20.9 Vietnam 4.4 4.5 6.0 8.6 8.1 8.6 9.5 13.0 24.2 .. Not available. a. GDP growth rates for 1990-94 are from the IMF, and those for 1995 from EBRD 1995. Data may differ from those available at the time of writing of the main text of this Report. 174 Table A.3 Inflation Average annual inflation rates (percent' Country 1990 1991 1992 1993 1994 1995 Albania 0.0 35.5 225.9 85.0 28.0 8.0 Bulgaria 22.0 333.5 82.0 72.8 89.0 62.0 Croatia 135.6 249.5 938.2 1,516.0 98.0 4.1 Czech Republic 10.8 56.7 11.1 20.8 10.2 9.1 Hungary 29.0 34.2 22.9 22.5 19.0 28.2 Macedonia, FYR 120.5 229.7 1,925.2 248.0 65.0 50.0 Poland 586.0 70.3 43.0 35.3 32.2 27.8 Romania 5.1 174.5 210.9 256.0 131.0 32.3 Slovak Republic 10.8 61.2 10.1 23.0 14.0 9.9 Slovenia 549.7 117.7 201.0 32.0 19.8 12.6 Armenia 10.3 100.0 825.0 3,732.0 5,458.0 175.0 Azerbaijan 7.8 105.6 616.0 833.0 1,500.0 412.0 Belarus 4.5 83.5 969.0 1,188.0 2,200.0 800.0 Estonia 23.1 210.6 1,069.0 89.0 48.0 29.0 Georgia 3.3 78.5 913.0 3,126.0 18,000.0 160.0 Kazakstan 4.2 91.0 1,610.0 1,760.0 1,980.0 180.0 Kyrgyz Republic 3.0 85.0 854.6 1,208.7 280.0 45.0 Latvia 10.5 124.4 951.2 109.0 36.0 25.0 Lithuania 8.4 224.7 1,020.3 390.2 72.0 35.0 Moldova 4.2 98.0 1,276.0 789.0 327.0 30.0 Russia 5.6 92.7 1,353.0 896.0 303.0 190.0 Tajikistan 4.0 111.6 1,157.0 2,195.0 452.0 635.0 Turkmenistan 4.6 102.5 492.9 3,102.0 2,400.0 1,800.0 Ukraine 4.0 91.2 1,210.0 4,735.0 842.0 375.0 Uzbekistan 3.1 82.2 645.0 534.0 746.0 315.0 China 1.6 3.0 5.4 13.0 21.7 17.0 Mongolia 0.0 208.6 321.0 183.0 145.0 75.0 Vietnam 67.5 67.6 17.5 5.2 8.0 17.0 a. Data are percentage increases in the consumer price index. Data for 1990-94 are from the IMF, and data for 1995 from EBRD 1995, except for Croatia and Tajikistan, which are from the World Bank. Data may differ from those available at the time of writing of the main text of this Report. 175 Table A.4 Selected demographic indicators Annual average population Urban population (percent of growth (percent) total population) Country 1971-80 1981-90 1991-94 1980 1990 1994 Albania 2.2 2.1 -0.6 33.8 36.6 37.0 Bulgaria 0.4 0.2 -0.8 61.2 67.7 70.4 Croatia 0.4 0.4 0.0 50.1 59.8 63.5 Czech Republic 0.5 0.1 0.1 63.6 64.9 65.0 Hungary 0.4 0.3 -0.3 57.0 62.1 64.0 Macedonia, FYR 1.5 0.7 0.9 53.5 57.8 59.0 Poland 0.9 0.7 0.3 58.2 62.5 64.2 Romania 0.9 0.4 -0.5 49.0 53.3 55.1 Slovak Republic 0.9 0.6 0.3 51.6 56.6 58.0 Slovenia 1.0 0.5 -0.1 48.1 59.0 63.0 Armenia 2.0 1.3 1.4 65.7 67.5 68.5 Azerbaijan 1.7 1.5 1.0 52.8 54.4 55.5 Belarus 0.6 0.6 0.2 56.5 66.9 70.3 Estonia 0.8 0.6 - 1.2 69.7 71.8 72.8 Georgia 0.7 -0.2 51.7 56.0 58.0 Kazakstan 1.2 0.1 54.0 57.6 59.3 Kyrgyz Republic 1.9 0.4 38.3 38.2 38.8 Latvia 0.5 - 1.5 68.3 71.2 72.6 Lithuania 0.8 0.9 0.0 61.2 68.8 71.4 Moldova 0.9 -0.1 39.9 47.8 50.9 Russia 0.6 0.0 69.8 73.8 73.2 Tajikistan 2.9 2.0 34.3 32.2 32.2 Turkmenistan 2.5 4.6 47.1 44.9 44.9 Ukraine 0.4 0.0 61.7 67.5 69.7 Uzbekistan 2.5 2.2 40.8 40.6 41.2 China 1.7 1.5 1.2 19.4 26.4 27.5 Mongolia 2.8 2.8 1.9 52.1 58.0 60.3 Vietnam 2.3 2.1 2.1 19.2 19.9 20.7 .. Not available. Selected World Development Indicators Introduction to Selected World Development Indicators 180 Key 184 Tables Summary of socioeconomic development indicators Table 1 Basic indicators 188 Table 2 Macroeconomic indicators 190 Table 3 External economic indicators 192 Human resources Table 4 Population and labor force 194 Table 5 Distribution of income or consumption 196 Table 6 Health 198 Table 7 Education 200 Environmental sustainability Table 8 Commercial energy use 202 Table 9 Land use and urbanization 204 Table 10 Forests and water resources 206 Economic performance Table 11 Growth of the economy 208 Table 12 Structure of the economy: production 210 Table 13 Structure of the economy: demand 212 Table 14 Central government budget 214 Table 15 Exports and imports of merchandise 216 Table 16 Balance of payments 218 Table 17 External debt 220 Table la. Basic indicators for other economies 222 Technical notes 223 Data sources 237 Classification of economies 238 Introduction to Selected World Development Indicators nearly two decades since the World Develop- Changes from previous editions of World Development ment Indicators (WDI) were first issued have seen Report The dramatic changes not only in the global economy The indicators tables in this Report have been redesigned but in the way in which we assess and measure develop- to provide a core set of standard indicators covering the ment. These changes are reflected in the increasing same three development themes: people, the environ- emphasis on poverty reduction through broad-based ment, and the economy. The layout of the seventeen growth and human resource development and on envi- tables retains the tradition of presenting comparative ronmental sustainability. The increasing importance of socioeconomic data for more than 130 economies for the the private sector in development strategies is mirrored by most recent year for which data are available and for an profound changes in the role of the state. Over the years earlier year. An additional table presents basic indicators the WDI has tried to keep up with these changes, but it is for seventy-six economies with sparse data or with popu- now time for a major redesign. lations less than 1 million. New data publication Because the World Bank's primary business is provid- ing lending and policy advice to its low- and middle- A new, freestanding, and more comprehensive World income member countries, the issues covered in this pub- Development Indicators will appear in the autumn of 1996. lication focus mainly on these economies. Where The traditional annex to the World Development Report is available, information on the high-income economies is being replaced in this edition by a set of Selected World also provided for comparison. Readers may wish to refer Development Indicators drawn from the WDI data sets. to national statistical publications or publications from the The design of the new World Development Indicators will Organisation for Economic Co-operation and Develop- enhance its usefulness in examining the world's progress ment and the European Union for more information on in three broad areas: people, the environment, and the the high-income economies. economy. In addition it will provide indicators that describe progress in selected areas of national economic More about the Selected World Development management, such as macroeconomic stability, structural Indicators reforms (including financial sector development, trade policy reforms, state enterprise reforms, etc.), and the Tables 1 to 3, Summary of socioeconomic development in- evolving role of the state. Its companion CD-ROM prod- dicators, offers an overview of key development issues: uct will reflect these changes and include time-series data How rich or poor are the people? What is the life and a more extensive guide to data sources and statistical expectancy of newborns? What percentage of adults are issues. illiterate? How has the economy performed in terms of 180 181 growth and inflation? What kind of external economic available data are deemed to be too weak to provide reli- environment do countries face? able measures of levels and trends or do not adequately Tables 4 to 7, Human resources, shows the rate of adhere to international standards, the data are not progress in social development during the past decade. shown. A standard measure of income inequality, the Gini in- Differences between data presented in each edition dex, has been added. Measures of well-being, such as mal- reflect not only updates by the countries, but also revi- nutrition and access to health care, school enrollment sions to historical series and changes in methodology. ratios, and gender differences of adult illiteracy, are also Thus data of different vintages may be published in dif- presented. ferent editions of Bank publications. Readers are advised Tables 8 to 10, Environmental sustainability, brings not to compare data series between publications. Consis- together the key country-level indicators in this area. This tent time-series data are available in the World*Data 1995 section provides information on air, water, cities, and CD-ROM energy consumption. All dollar figures are current U.S. dollars unless other- Tables 11 to 17, Economic performance, presents infor- wise stated. The various methods used for converting mation on the economic structure and growth of the from national currency figures are described in the Tech- world's economies, as well as information on foreign in- nical Notes. vestment, external debt, and integration into the global economy that is providing new challenges and opportuni- Summary measures ties for both developed and developing economies. The summary measures in the colored bands on each table are totals (indicated by t), weighted averages (w), or Classification of economies median values (m) calculated for groups of economies. As in the Report itself, the main criterion used to classify, Countries for which data in the summary measures are economies and broadly distinguish different stages of eco- not shown in the main tables have been implicitly nomic development is GNP per capita. Countries are tra- included on the assumption that they have followed the ditionally classified into three categories: low, middle, and trend of reporting economies during such periods. The high income. The GNP per capita cutoff levels are: low- countries excluded from the main tables (those presented income: $725 or less in 1994 (51 economies); middle- in Table 1a. Basic indicators for other economies) have income: $726 to $8,955 (57 economies); and high- been included in the summary measures when data are income: $8,956 or more (25 economies). Economies are available or, if no data are available, by assuming that they further classified by region, exports, and indebtedness. For follow the trend of reporting countries. This gives a more a list of economies in each group, see the tables on classi- consistent aggregated measure by standardizing country fication of economies at the back of the book. coverage for each period shown. Where missing informa- tion accounts for a third or more of the overall estimate, Data sources and methodology however, the group measure is reported as not available. Socioeconomic data presented here are drawn from The weightings used for computing the summary mea- several sources: primary collection by the World Bank, sures are stated in each technical note. member country statistical publications, research insti- Terminology and country coverage tutes such as the World Resources Institute, and interna- tional agencies such as the United Nations and its spe- In these notes and tables the term "country" does not cialized agencies, the International Monetary Fund, and imply political independence but may refer to any terri- the Organisation for Economic Co-operation and Devel- tory for which authorities report separate social or eco- opment (see Data Sources at the end of the Technical nomic statistics. Notes for a complete listing of sources). Although inter- Economic data reported for Germany before 1991 national standards of coverage, definition, and classifica- refer to the former Federal Republic, but demographic tion apply to most statistics reported by countries and and social data generally refer to the unified Germany. international agencies, there are inevitably differences in Throughout the tables, exceptions are footnoted to ex- coverage, currentness, and the capabilities and resources plain coverage. The data for China do not include Tai- devoted to basic data collection and compilation. In some wan, China, but footnotes to Tables 15 and 16 provide cases, competing sources of data require review by World estimates of international transactions for Taiwan, China. Bank staff to ensure that the most reliable data available Data reported for Ethiopia after 1991 exclude Eritrea on a given topic are presented. In some instances, where unless otherwise stated. 182 Table layout Technical notes The table format of this edition generally follows the The Technical Notes, Key, country classification tables, format used in previous editions. In each group, econ- and footnotes to the tables should be consulted for inter- omies are listed in ascending order of GNP per capita, preting data. They outline the methods, concepts, defini- except that those for which no such figure can be calcu- tions, and data sources used in compiling the tables. The lated are italicized and listed in alphabetical order at the Data Sources section at the end of the notes lists sources end of the group deemed appropriate. This order is used that contain more comprehensive definitions and descrip- in all tables. Economies in the high-income group tions of the concepts used. marked by the symbol t are those classified by the United Comments and questions relating to the Selected World Nations, or otherwise regarded by their authorities, as Development Indicators should be addressed to: Develop- developing. Economies with a population of fewer than 1 ment Data Group, International Economics Department, million and those with sparse data are not shown sepa- The World Bank, 1818 H St. N.W., Washington, D.C. rately in the main tables but are included in the aggre- 20433, by fax 202-522-1498, by e-mail to info@world- gates. Basic indicators for these economies may be found bank.org, or by calling 800-590-1906 or 202-473-7824. in Table la. The alphabetical list in the Key shows the To order World Bank publications, e-mail your request reference number for each economy; here, too, italics in- to books@worldbank.org, or write to World Bank Publi- dicate economies with no current estimates of GNP per cations at the address above, or call 202-473-1155. capita. For more information, click on "publications" on the World Wide Web at www.worldbank.org. Groups of economies Low-income economies For this map, economies are classified by income group, as they are for the tables that follow. Middle-income economies Low-income economies are those with a GNP per capita of $725 or less in 1994; middle-income, $726$8,955; high-income, $8,956 or more. Six middle-income economiesAmerican Samoa (US), High-income economies Fiji, French Polynesia (Fr), Kiribati, Tonga, and Western Samoaand Tuvalu, for which income data are not available, are not shown on the map because of space constraints. Data not available =., ,5. Greenland Men, Faeroe lslands Norwa Iceland nland Netherlands. Russian federation Canada Isle of Mae (WO LEarv?a'a Lithuania Ireland) 09 .. lPoland Belarus Channel Islands (UK) Belgium Ukraine Kazakstan Luxembourg Moldova Mongolia Liechtenstein' Romania Bulgana Uzbekistan Azdzraga, Kyrgyz Dem. PeopIt -,:urkey,Al:aGefaliaerba'lan , Rep. of Kane Turkmenistan TankiatanMon Greece Rep. Gibraltar (UK), - China 'Maita C(.1rbl'asPon RreaPb- Iraq Islamic Rep. Afghanistan Israel, Jordan Morocco West Bank and Gaza Pakistan Kuwait Nodal Bhutan Algeria Fortrer Libya Arab Reb Saudi Arabial''Oaaintar, of Egypt Lao People's United Arab Bangladesh Dem. Rep. India Emirates Myanma ' \Hong Kong OM Mauritania Oman L Macao (Port) Cape Verde I Mali Niger N. Mama Chad islands (iS) ' Thailand Verna' . St.' tb. Sudan Yelnig The Gambia T Burkina Philippines GUM (US) Cambodia Guinea-Bissau GLa, Faso Bonin . Federated States Mars. Costa Rica Venezuela Guyana Sierra Leone C6. Ghana Nigeria Ethiopia ) P_annka r: of Micronesia talandoca Panama Suriname Central African French Guiana (Fr) SoAialia Colombia Libbba Cameroon Republic Palau Maldives Equatorial Guinea, Uganda Kenya Sao Tome and Principe, Nauru Ecuador Congo Rwanda Zaire Tanzania 71.; Indonesia Brazil oua 'sok, Peru Comoros,Seroities ew mc'n Angola Zambia Malawi m.o. Vanuatu Bolivia Mozambique Madapscar Zimbabwe f Puerta Namibia Dominican Rico (US) Paraguay I'leunion (Fr) Botswana Caledonia Republic Australia Poland ua and Barbuda Czech Republic Ukraine Swaziland Germany Slovak Republic Lesotho laSnriFsi Wig ) 'Stift -:,Guadeloupe (Fr) and Nevis Austria South Africa Dominica Chile Argentina CruguaY Hungary Netherlands ceartinique (Fr) Antilles (Neth) Slovenia Romania St. Lucia Croatia New Aruba Bosnia and Bulgaria Zealand (11/ebb St. Vincent and ti Barbado San Herzegovina I the Grenadines Marino Fed. Rep. of :..-Grenada Yugoslavia Italy PAR Trinidad Macedonia Albania and Tobago Venezuela Greece Anla- ca ---- Key table, below, provides an index to the Except where noted in the Technical Notes, growth countries included in the Selected World Devel- rates for economic data are in real terms. The opment Indicators and additional information on the sources of demographic data for the 133 countries Data cutoff date is April 30, 1996. The symbol. . means not available. included in the main statistical tables. In each statistical A blank space means not applicable. table of the Selected World Development Indicators, The figures 0 and 0.0 mean zero or less than half the economies are listed in ascending order of GNP per unit shown. capita, except those for which no GNP per capita can be Figures in italics indicate data that are for years or peri- calculated; the latter are italicized, in alphabetical order, ods other than those specified. at the end of the income group to which they belong. The The symbol t indicates high-income economies classi- ranking below by GNP per capita therefore indicates a fied by the United Nations, or regarded by their own country's place in the statistical tables. authorities, as developing. Figures in colored bands in the tables are summary measures for groups of economies. The letter w means weighted average; m, median value; and t, total. Sources of 1994 demographic data GNP per capita Population Total Infant Economy ranking in tables census Population fertility rate mortality rate Albania 32 1989 Official Official Official Algeria 71 1987 World Bank 3 Survey 1992 Survey 1992 Argentina 107 1991 Official 2 U.N. Pop. Div. U.N. Pop. Div. Armenia 46 1989 World Bank 3 Official Official Australia 114 1991 Official 2 Official Official Austria 126 1991 Official 2 Official Official Azerbaijan 36 1989 Official 2 Official Official Bangladesh 13 1991 World Bank 2 Survey 1994 Survey 1994 Belarus 77 1989 Official 2 Official Official Belgium 123 1991 Official 2 Official Official Benin 30 1992 World Bank 2 World Bank World Bank Bolivia 52 1992 Official 2 U.N. Pop. Div. U.N. Pop. Div. Botswana 88 1991 World Bank 2 Survey 1988 Survey 1988 Brazil 92 1991 World Bank 1 U.N. Pop. Div. U.N. Pop. Div. Bulgaria 62 1992 Official 2 Official Official Burkina Faso 21 1985 World Bank 3 Survey 1992 World Bank Burundi 5 1990 World Bank 3 U.N. Pop. Div. U.N. Pop. Div. Cameroon 47 1987 World Bank Survey 1991 Survey 1991 Canada 119 1991 Official 2 Official Official Central African Republic 31 1988 World Bank U.N. Pop. Div. U.N. Pop. Div. 184 EL TE WORLD EVELOPMENT INDICATORS 185 Sources of 1994 demographic data GNP per capita Population Total Infant Economy ranking in tables census Population fertility rate mortality rate Chad 8 1993 World Bank 2 U.N. Pop. Div. U.N. Pop. Div. Chile 97 1992 Official 2 Official Official China 39 1990 World Bank 3 Official Survey 1991 Colombia 72 1993 World Bank 2 Survey 1990 Survey 1990 Congo 43 1984 World Bank 2 World Bank World Bank Costa Rica 80 1984 World Bank 3 U.N. Pop. Div. U.N. Pop. Div. Cote d'Ivoire 42 1988 World Bank 3 Survey 1994 Survey 1994 Croatia 84 1991 Official 2 World Bank World Bank Czech Republic 95 1991 Official 2 Official Official Denmark 130 1991 Official 2 Official Official Dominican Republic 65 1993 World Bank 1 U.N. Pop. Div. U.N. Pop. Div. Ecuador 64 1990 World Bank 3 Survey 1994 Survey 1994 Egypt, Arab Rep. 48 1986 World Bank 2 Survey 1992 Survey 1992 El Salvador 67 1992 World Bank U.N. Pop. Div. U.N. Pop. Div. Estonia 89 1989 Official 2 Official Official Ethiopia' 3 1994 World Bank 3 Survey 1990 U.N. Pop. Div. Finland 116 1990 Official 2 Official Official France 124 1990 Official 2 Official Official Gabon 100 1993 World Bank' U.N. Pop. Div. U.N. Pop. Div. Gambia, The 26 1993 World Bank 2 World Bank World Bank Georgia 50 1989 World Bank 3 Official Official Germany b 127 Official 2 Official Official Ghana 33 1984 World Bank 3 Survey 1993 Survey 1993 Greece 106 1991 Official 2 Official Official Guatemala 60 1994 Official 2 U.N. Pop. Div. U.N. Pop. Div. Guinea 38 1983 World Bank 1 World Bank World Bank Guinea-Bissau 16 1991 World Bank 2 World Bank World Bank Haiti 14 1982 World Bank' U.N. Pop. Div. U.N. Pop. Div. Honduras 40 1988 World Bank 3 Survey 1991-92 Survey 1991-92 t Hong Kong 120 1991 Official' Official Official Hungary 99 1990 Official 2 Official Official India 23 1991 World Bank 2 Survey 1993 Survey 1993 Indonesia 55 1990 World Bank 2 Survey 1994 Survey 1994 Iran, Islamic Rep. 90 1991 World Bank 2 U.N. Pop. Div. Official Ireland 112 1991 Official 2 Official Official t Israel 113 1983 Official 2 Official Official Italy 117 1991 Official 2 Official Official Jamaica 69 1991 World Bank 3 World Bank U.N. Pop. Div. Japan 131 1990 Official 2 Official Official Jordan 68 1994 World Bank 2 Official Survey 1990 Kazakstan 59 1989 World Bank 3 Official Official Kenya 17 1989 World Bank 2 Survey 1993 Survey 1993 Korea, Rep. of 108 1990 Official 1 Official Official t Kuwait 118 1985 Official 2 U.N. Pop. Div. U.N. Pop. Div. Kyrgyz Republic 44 1989 World Bank 3 Official Official Lao PDR 24 1985 World Bank' U.N. Pop. Div. U.N. Pop. Div. Latvia 79 1989 Official 2 Official Official 186 Sources of 1994 demographic data GNP per capita Population Total Infant Economy ranking in tables census Population fertility rate mortality rate Lesotho 49 1986 World Bank 3 Survey 1991 Survey 1991 Lithuania 66 1989 Official 2 Official Official Macedonia, FYR 53 1991 World Bank 3 Official Official Madagascar 10 1993 World Bank 2 Survey 1992 Survey 1992 Malawi 7 1987 World Bank 2 Survey 1992 Survey 1992 Malaysia 96 1991 World Bank' U.N. Pop. Div. U.N. Pop. Div. Mali 18 1987 World Bank 2 Survey 1987 Survey 1987 Mauritania 35 1988 World Bank 3 U.N. Pop. Div. U.N. Pop. Div. Mauritius 94 1990 World Bank 3 U.N. Pop. Div. U.N. Pop. Div. Mexico 101 1990 World Bank 2 U.N. Pop. Div. U.N. Pop. Div. Moldova 54 1989 Official 2 Official Official Mongolia 22 1989 World Bank U.N. Pop. Div. U.N. Pop. Div. Morocco 58 1994 World Bank 2 Survey 1995 Survey 1995 Mozambique 2 1980 World Bank 1 U.N. Pop. Div. U.N. Pop. Div. Myanmar 51 1983 World Bank 1 U.N. Pop. Div. U.N. Pop. Div. Namibia 75 1991 World Bank 2 Survey 1992 Survey 1992 Nepal 11 1991 World Bank 2 U.N. Pop. Div. U.N. Pop. Div. Netherlands 121 1971 Official 1 Official Official New Zealand 110 1991 Official 2 Official Official Nicaragua 27 1971 World Bank 1 Survey 1992-93 Survey 1992-93 Niger 15 1988 World Bank 2 Survey 1992 Survey 1992 Nigeria 19 1991 World Bank 2 Survey 1990 Survey 1990 Norway 129 1990 Official 2 Official Official Oman 103 1993 World Bank 3 Survey 1989 Survey 1989 Pakistan 34 1981 World Bank 2 World Bank World Bank Panama 85 1990 World Bank 3 U.N. Pop. Div. U.N. Pop. Div. Papua New Guinea 61 1989 World Bank' U.N. Pop. Div. U.N. Pop. Div. Paraguay 70 1992 World Bank 3 Survey 1990 Survey 1990 Peru 76 1993 World Bank 2 Survey 1991-92 Survey 1991-92 Philippines 56 1990 Official 2 Survey 1993 U.N. Pop. Div. Poland 81 1988 Official 2 Official Official Portugal 109 1991 Official 2 Official Official Romania 63 1992 Official 2 Official Official Russian Federation 86 1989 World Bank 3 Official Official Rwanda 1 1991 World Bank 2 Survey 1992 U.N. Pop. Div. Saudi Arabia 105 1992 World Bank 2 Survey 1990 Survey 1990 Senegal 41 1988 World Bank 2 Survey 1992-93 Survey 1992-93 Sierra Leone 6 1985 World Bank 1 U.N. Pop. Div. U.N. Pop. Div. t Singapore 122 1990 Official' Official Official Slovak Republic 78 1991 Official 2 Official Official Slovenia 104 1991 Official 2 Official Official South Africa 93 1991 World Bank 1 U.N. Pop. Div. U.N. Pop. Div. Spain 111 1991 Official 2 Official Official Sri Lanka 45 1981 Official 2 Survey 1987 Survey 1987 Sweden 125 1990 Official 2 Official Official Switzerland 132 1990 Official 2 Official Official Tajikistan 29 1989 Official 2 Official Official 187 Sources of 1994 demographic data GNP per capita Population Total Infant Economy ranking in tables census Population fertility rate mortality rate Tanzania 4 1988 World Bank 1 U.N. Pop. Div. U.N. Pop. Div. Thailand 82 1990 World Bank' U.N. Pop. Div. U.N. Pop. Div. Togo 25 1981 World Bank 1 U.N. Pop. Div. U.N. Pop. Div. Trinidad and Tobago 98 1990 World Bank2 Survey 1987 Survey 1987 Tunisia 73 1994 World Bank 2 U.N. Pop. Div. U.N. Pop. Div. Turkey 83 1990 World Bank' U.N. Pop. Div. U.N. Pop. Div. Turkmenistan 91 1989 World Bank 3 Official Official Uganda 9 1991 World Bank 2 Survey 1991 Survey 1991 Ukraine 74 1991 Official 2 Official Official t United Arab Emirates 133 1980 World Bank 1 U.N. Pop. Div. Survey 1987 United Kingdom 115 1991 Official 1 Official Official United States of America 128 1990 Official 2 Official Official Uruguay 102 1985 World Bank 3 U.N. Pop. Div. U.N. Pop. Div. Uzbekistan 57 1989 World Bank 3 Official Official Venezuela 87 1990 Official 2 U.N. Pop. Div. U.N. Pop. Div. Vietnam 12 1989 World Bank 3 Survey 1995 Survey 1995 Yemen, Rep. of 20 1994 World Bank 2 Survey 1991-92 Survey 1991-92 Zambia 28 1990 World Bank 1 U.N. Pop. Div. Survey 1987 Zimbabwe 37 1992 World Bank 2 Survey 1994 Survey 1994 Note: Economies with sparse data or with populations of more than 30,000 and fewer than 1 million are shown separately only in Table la; however, they are included in the country group totals and weighted averages in the main tables. For data comparability and coverage, see the Technical Notes. In all tables, data for Ethiopia after 1991 exclude Eritrea unless otherwise noted. In all tables, data refer to the unified Germany unless otherwise noted. Population Official Published by a National Statistical Office, or another official country source, such as Central Bank, Ministry of Planning, etc. Reported as an official estimate by Eurostat, Council of Europe, U.N. Statistical Office, South Pacific Commission, or similar inter- national organization. World Bank Based on the U.N. Population Division's latest estimates and projections for 1990 and 1995. Based on a projection from the latest census. Based on a projection from the latest available official estimate. Fertility and Mortality Rates Official Estimate based on vital registration or other official data collection instrument. U.N. Pop. Div. World Bank estimate based on the U.N. Population Division's estimates and projections for 1990-94 and 1995-99. Survey World Bank estimate from the latest available Demographic and Health Survey, Contraceptive Prevalence Survey, or other survey or census module showing vital rates estimates. World Bank Estimated from other sources, including Bank economic and sector reports, other country studies, and level and trends in other indicators. 188 Table 1. Basic indicators GNP per capita. PPP estimates of GNP per capitab Life Population Area Avg. ann. expectancy at Adult (millions) (thousands Dollars growth (%) US=100 Current int'l $ birth (years) illiteracy (%) mid-1994 of sq. km) 1994 1985-94 1987 1994 1994 1994 1995 Low-income economies 3,182.2 t 40,391 t 33680 w 3.4 w 63w 34w Excluding China and India 1,077.7 t 27,543 t -1.1 w 56w 46w 1 Rwanda 7.8 26 80 -6.6 3.8 1.3 330c .. 40 2 Mozambique 15.5 90 3.8 2.7 3.3 860d 46 60 3 Ethiopia 54.9 1,708902 100 . . 2.0 1.7 430c 49 65 4 Tanzaniae 28.8 945 140 0.8 2.6 2.4 620c 51 32 5 Burundi 6.2 28 160 -0.7 3.4 2.7 700d 50 65 6 Sierra Leone 4.4 72 160 -0.4 3.1 2.7 700' 40 69 7 Malawi 9.5 118 170 -0.7 3.1 2.5 650c 44 44 8 Chad 6.3 1,284 180 0.7 2.7 2.8 720d 48 52 9 Uganda 18.6 236 190 2.3 5.0 5.4 1,426341000:c 42 38 10 Madagascar 13.1 587 200 -1.7 3.1 2.5 52 .. 11 Nepal 20.9 141 200 2.3 4.4 4.8 54 73 12 Vietnam 72.0 332 200 .. .. .. .. 68 6 13 Bangladesh 117.9 144 220 2.0 4.9 5.1 1,330c 57 62 14 Haiti 7.0 230 -5.0 6.2 3.6 930d 57 55 15 Niger 8.7 1,26 278 230 -2.1 3.8 3.0 770d 46 86 16 Guinea-Bissau 1.0 36 240 2.2 2.9 3.2 820d 38 45 17 Kenya 26.0 580 250 0.0 5.7 5.1 1,310c 1,91 59 59 22 18 Mali 9.5 1,240 250 1.0 2.3 2.0 49 69 19 Nigeria 108.0 924 280 1.2 4.3 4.6 52 43 20 Yemen, Rep. 14.8 528 280 .. .. .. .. 53 21 Burkina Faso 10.1 274 300 -0.1 3.5 3.1 800d 49 81 22 Mongolia 2.4 1,566 300 -3.2 .. .. .. 64 .. 23 India 913.6 3,288 320 2.9 4.4 4.9 1,280c 62 48 24 Lao PDR 4.7 237 320 .. .. .. .. 52 43 25 Togo 4.0 57 320 -2.7 6.0 4.4 d 1:i1030d 55 48 26 Gambia, The 1.1 11 330 0.5 4.8 4.3 1,100d 45 61 27 Nicaragua 4.2 130 340 -6.1 13 7 1,800d 67 34 28 Zambia 9.2 753 350 -1.4 4.1 3.3 860c 47 22 29 Tajilcistanf 5.8 143 360 -11.4 12.1 3.7 67 .. 30 Benin 5.3 113 370 -0.8 7.0 6.3 1,9673001c 50 63 31 Central African Republic 3.2 623 370 -2.7 5.4 4.5 1,160d 49 40 32 Albania 3.2 29 380 .. .. .. .. 73 .. 33 Ghana 16.6 239 410 1.4 73 7.9 22,01530; 1c 58 36 34 Pakistan 126.3 796 430 1.3 8.5 8.2 60 62 35 Mauritania 2.2 1,026 480 0.2 6.4 6.1 1,570d 51 62 36 Azerbaijanf 7.5 87 500 -12.2 21.7 5.8 1:05100! 69 .. 37 Zimbabwe 10.8 391 500 -0.5 8.7 7.9 58 15 56 38 Guinea 6.4 246 520 1.3 .. .. .. 44 64 39 China 1,190.9 9,561 530.1 7.8 5.8 9.7 2,51011 69 19 40 41 42 43 44 45 46 Honduras Senegal Cote d'Ivoire Congo Kyrgyz Republicf Sri Lanka Armeniaf 5.8 8.3 13.8 2.6 4.5 17.9 3.7 112 197 322 342 198 66 30 600 600 610 620 630 640 680 0.5 -0.7 -4.6 -2.9 -5.0 2.9 -13.0 8.1 7.3 8.3 11.2 13.5 10.7 26.5 7.5 6.1 5.3 7.3 6.7 12.2 8.3 51 1,940 1,580" ii,:800395070c 1,730g 3,160c 2,160g 66 68 72 71 27 67 60 25 10 .. 47 Cameroon 13.0 475 680 -6.9 15.0 7.5 1,950" 57 37 48 Egypt, Arab Rep. 56.8 1,001 720 1.3 14.4 14.4 3,720c 62 49 49 Lesotho 1.9 30 720 0.6 6.6 6.7 1,730d 61 29 50 Georgia f 5.4 70 73 51 Myanmar 45.6 677 .. .. 58 17 Middle-income economies 1,569.9 t 61,263 t 2,520w -0.1 w 67w Lower-middle-income 1,096.9 t 40,594 59994 t 1,590w -1.2w 67w 52 Bolivia 7.2 770 1.7 8.9 9.3 2,400' 60 17 53 Macedonia, FYR 2.1 26 820 73 54 Moldova f 4.3 34 870 .. .. .. .. 68 55 Indonesia 190.4 1,905 880 6.0 10.0 13.9 3,600' 63 16 56 Philippines 67.0 2,47434407770 950 1.7 10.4 10.6 2,740c 65 5 57 Uzbekistant 22.4 960 -2.3 12.5 9.2 2,3701 70 58 Morocco 26.4 1,140 1.2 13.1 13.4 3,470c 65 56 59 Kazakstanf 16.8 1,160 -6.5 24.2 10.9 2,8101 68 60 Guatemala 10.3 109 1,200 0.9 13.5 13.3 3,440' 65 44 61 Papua New Guinea 4.2 463 1,240 2.2 9.1 10.4 2,680' 57 28 62 Bulgaria 8.4 111 1,250 -2.7 23.5 16.9 4,380) 71 63 Romania 22.7 238 1,270 -4.5 22.7 15.8 4,090) 70 64 Ecuador 11.2 284 1,280 0.9 15.9 16.2 4,190' 69 10 65 Dominican Republic 7.6 49 1,330 2.2 13.9 14.5 3,760' 70 18 66 Lithuania f 3.7 65 1,350 -8.0 33.8 12.7 3,290) 69 .. 67 El Salvador 5.6 21 1,360 2.2 8.4 9.3 2,410' 67 29 68 Jordan 4.0 89 1,440 -5.6 25.4 15.8 4,100d 70 13 69 Jamaica 2.5 11 1,540 3.9 11.1 13.1 3,400k 74 15 70 Paraguay 4.8 407 1:6580 1.0 13.7 13.7 3,550' 68 8 71 Algeria 27.4 2:133892 -2.5 .. .. 69 38 72 Colombia 36.3 1,670 2.4 19.0 20.6 5,330' 70 9 Note: For other economies see Table la. For data comparability and coverage, see the technical notes. 189 GNP per capitaa PPP estimates of GNP per capital' Life Population Area Avg. ann. expectancy at Adult (millions) Dollars US=100 Current int'l $ birth (years) (thousands growth (%) illiteracy (%) mid-1994 of sq. km) 1994 1985-94 1987 1994 1994 1994 1995 73 Tunisia 8.8 164 1,790 2.1 18.5 19.4 5,020c 68 33 74 Ukraine' 51.9 604 1,910 -8.0 20.4 10.1 2,620) 68 75 Namibia 1.5 824 1,970 3.3 17.0 16.7 4,320d 59 76 Peru 23.2 1,285 2,110 -2.0 18.0 13.9 3,610i 65 11 77 Belarus" 10.4 208 2,160 -1.9 25.1 16.7 4,320j 69 78 Slovak Republic 5.3 49 2,250 -3.0 .. .. .. 72 79 Latvia" 2.5 64 2,320 -6.0 24.1 12.4 3,220) 68 80 Costa Rica 3.3 51 2,400 2.8 .. .. .. 77 5 81 Poland 38.5 313 2,410 0.8 21.4 21.2 5,480) 72 .. 82 Thailand 58.0 513 2,410 8.6 16.4 26.9 6,970c 69 6 83 Turkey 60.8 779 2,500 1.4 20.9 18.2 4,710j 67 18 84 Croatia 4.8 57 2,560 .. .. .. .. 73 85 Panama 2.6 76 2,580 -1.2 26.6 22.1 5,730i 73 9 86 Russian Federation' 148.3 17,075 2,650 -4.1 30.6 17.8 4,610) 64 .. 87 Venezuela 21.2 912 2,760 0.7 33.7 30.0 7,770' 71 9 88 Botswana 1.4 582 2,800 6.6 15.4 20.1 5,210c 68 30 89 Estonia' 1.5 45 2,820 -6.1 29.9 17.4 4,510) 70 90 Iran, Islamic Rep. 62.5 1,648 68 28 91 Turkmenistan' 4.4 488 .. .. 66 .. Upper-middle-income 472.8 t 20,669 t 4,640 w 1.4 w 69 w 13 w 92 Brazil 159.1 8,512 2,970 -0.4 24.2 20.9 5,400j 67 17 93 South Africa 40.5 1,221 3,040 -1.3 23.9 19.8 5,130d 64 18 94 Mauritius 1.1 2 3,150 5.8 39.4 49.1 12,720c 70 17 95 Czech Republic 10.3 79 3,200 -2.1 44.1 34.4 8,900) 73 .. 96 Malaysia 19.7 330 3,480 5.6 23.5 32.6 8,440k 71 17 97 Chile 14.0 757 3,520 6.5 24.8 34.4 8,890' 72 5 98 Trinidad and Tobago 1.3 5 3,740 -2.3 40.9 33.5 8,670d 72 2 99 Hungary 10.3 93 3,840 -1.2 28.9 23.5 6,080) 70 .. 100 Gabon 1.3 268 3,880 -3.7 .. .. .. 54 37 101 Mexico 88.5 1,958 4,180 0.9 27.8 27.2 7,040k 71 10 102 Uruguay 3.2 177 4,660 2.9 28.1 29.8 7,710 73 3 103 Oman 2.1 212 5,140 0.5 34.7 33.2 8,590' 70 104 Slovenia 2.0 20 7,040 .. 33.3 24.1 6,230) 74 105 Saudi Arabia 17.8 2,150 7,050 -1.7 45.7 36.6 9,480' 70 37 106 Greece 10.4 132 7,700 1.3 42.1 42.2 10,930) 78 107 Argentina 34.2 2,767 8,110 2.0 32.1 33.7 8,720' 72 4 108 Korea, Rey. 44.5 99 8,260 7.8 27.3 39.9 10,330c 71 m Low- and middle-income 4,752.2 t 101,655 t 1,090w 0.7w 64w 29w Sub-Saharan Africa 571.9 t 24,274 t 460 w -1.2w 52w 43w East Asia and Pacific 1,734.7 t 16,367 t 860 w 6.9 w 68w 17w South Asia 1,220.3 t 5,133 t 320 w 2.7w 61w 50w Europe and Central Asia 487.4 t 24,354 t 2,090w -3.2w 68w Middle East and N. Africa 266.7 t 11,021 t 1,580w -0.4 w 66w 39w Latin America and Caribbean 470.9 t 20,505 t 3,340w 0.6 w 68w 13w High-income economies 849.9 t 31,824 t 23,420 w 1.9 w 77w 109 Portugal 9.9 92 9,320 4.0 41.3 46.3 11,970) 75 110 New Zealand 3.5 271 13,350 0.7 63.2 61.3 15,870) 76 m 111 Spain 39.1 505 13,440 2.8 50.2 53.1 13,740) 77 112 Ireland 3.6 70 13,530 5.0 40.6 52.4 13,550) 76 m 113 t Israel 5.4 21 14,530 2.3 56.5 59.1 15,300' 77 .. 114 Australia 17.8 7,713 18,000 1.2 69.9 70.0 18,120) 77 m 115 United Kingdom 58.4 245 18,340 1.3 70.7 69.4 17,970) 76 m 116 Finland 5.1 338 18,850 -0.3 72.1 62.4 16,150) 76 m 117 Italy 57.1 301 19,300 1.8 70.9 71.3 18,460) 78 m 118 t Kuwait 1.6 18 19,420 1.1 84.3 95.6 24,730' 76 21 119 Canada 29.2 9,976 19,510 0.3 83.2 77.1 19,960) 78 m 120 t Hong Kong 6.1 1 21,650n 5.3" .. . . . . 78 8 121 Netherlands 15.4 37 22,010 1.9 70.0 72.4 18,750) 78 m 122 t Singapore 2.9 1 22,500 6.1 60.2 84.6 21,900d 75 9 123 Belgium 10.1 31 22,870 2.3 74.6 78.3 20,270) 76 m 124 France 57.9 552 23,420 1.6 75.9 76.0 19,670i 78 m 125 Sweden 8.8 450 23,530 -0.1 76.1 66.2 17,130) 78 m 126 Austria 8.0 84 24,630 2.0 72.8 75.6 19,560) 77 m 127 Germany 81.5 357 25,580 .. .. 75.3 19,480) 76 m 128 United States 260.6 9,364 25,880 1.3 100.0 100.0 25,880) 77 m 129 Norway 4.3 324 26,390 1.4 77.7 78.1 20,210/ 78 m 130 Denmark 5.2 43 27,970 1.3 76.6 76.8 19,880) 75 m 131 Japan 125.0 378 34,630 3.2 74.7 81.7 21,140) 79 m 132 Switzerland 7.0 41 37,930 0.5 104.5 97.2 25,150) 78 m 133 t United Arab Emirates 2.4 84 .. 0.4 75 21 World 5,601.3 t 133,478 t 4,470w 0.9 w 67 w tEconomies classified by the United Nations or otherwise regarded by their authorities as developing. a. Atlas method; see the technical notes. b. Purchasing power parity; see the technical notes. c. Extrapolated from 1985 ICP estimates. d. Based on regression estimates. e. In all tables, GDP and GNP cover mainland Tanzania. f. Estimates for economies of the former Soviet Union are preliminary; their classification will be kept under review. g. Extrapolated from 1990 ICP estimates. h. World Bank esti- mate. i. Extrapolated from 1980 ICP estimates. j. Extrapolated from 1993 ICP estimates. k. Extrapolated from 1975 ICP estimates. m. According to UNESCO, illiter- acy is less than 5 percent. n. Data refer to GDP. 190 WORLD Table 2. Macroeconomic indicators Money, broadly defined Nominal interest rates of banks Central Average Current account Gross Net present annual %) (average an gov't. cum. Avg. ann. Average annual balance before international value of deficWsurplusa nom. gr. outstanding Deposit Lending inflation (%) official transfers reserves (months external debt (% of GNP) rate (%) as a % of GDP rate rate (GDP deflator) (% of GNP) of import coy.) (% of GNP) 1980 1994 198544 1980 1994 1980 1994 1980 1994 1984-94 1980 1994 1980 1994 1994 Low-income economies 32w Excluding China and India 60w 1 Rwanda 3.5 -5.5 5.4 13.6 .. 6.3 5.0 13.5 15.0 4.5 -13.3 -69.1 6.7 1.1 78 2 Mozambique .. 53.2 -20.7 -71.4 331 3 Ethiopia .. .. 44.4 .. 11.5 .. 14.3 -4.8, -6.9 4.0b 5.9 68 4 Tanzania -1.3 35.0 .. 30.7 4.0 11.5 39.0 33.3 -9.7 .. 167 5 Burundi 1.9 . . 8.5 13.5 .. 2.5 12.0 .. 5.4 .. -16.6 8.5 50 6 Sierra Leone -5.1c -1.9c 56.4 20.6 11.0 9.2 11.6 11.0 27.3 67.3 -19.9 .. .. 138 7 Malawi 1.2c .. 21.4 18.0 20.5 7.9 25.0 16.7 31.0 18.8 -27.4 -44.0 1.4 0.6 73 8 Chad .. -2.7 20.0 10.9 5.5 8.1 11.0 17.5 1.7 -2.1 .. 1.7 2.9 43 9 Uganda -2.2 .. .. 12.7 9.8 6.8 10.0 10.8 .. 75.4 . . -6.7 48 10 Madagascar . . -2.5 23.7 18.2 20.5 .. 15.8 -15.5 -18.5 . . 161 11 Nepal 7.6 21.2 21.9 33.7 4.0 14.0 12.1 -5.1 -6.1 8.9 6.8 27 12 Vietnam .. .. .. .. . . .. 102.6 .. .. .. 135 13 Bangladesh 11.2c 14.2 18.4 35.0 8.2 6.4 11.3 14.4 6.6 -11.1 -1.4 1.5 7.9 32 14 Haiti -3.3 15.3 24.0 43.0 10.0 .. 13.2 -9.4 -6.8 0.6 .. 25 15 Niger 5.1 1.0 13.3 14.6 6.2 7.8 14.5 168 0.2 -17.3 -7.1 1.6 3.9 58 16 Guinea-Bissau .. 62.9 .. 14.1 .. 28.7 .. 36.3 65.7 -48.9 -15.6 .. .. 222 17 Kenya 2.6c -0.4 18.9 29.8 32.2 5.8 .. 10.6 11.7 -13.7 -0.5 2.1 2.5 80 18 Mali -1.4 5.3 17.9 20.0 6.2 7.8 14.5 168 3.4 -14.5 -10.6 0.6 3.4 84 19 Nigeria 23.3 23.8 .. 5.3 13.1 8.4 20.5 29.6 5.7 -6.4 5.7 1.6 92 20 Yemen, Rep. .. .. 1.0 21 Burkina Faso 2.0 0.5 8.2 13.8 20.0 6.2 7.8 14.5 168 1.6 -15.5 -17.5 1.5 5.0 31 22 Mongolia .. 3.7 .. .. 23.9 92.3 .. 233.6 46.0 -24.9 -8.2 2.4 38 23 India 0.0 -1.8 16.9 34.7 45.2 16.5 163 9.7 -1.7 -0.9 8.0 6.7 24 24 Lao PDR .. 38.4 .. 13.2 7.2 12.0 4.8 24.0 24.2 .. -8.5 . . 2.0 40 25 Togo 1.9 . . -1.2 29.0 25.3 6.2 7.8 14.5 17.5 3.3 -16.4 -3.1 1.4 3.5 98 26 Gambia, The 7.1 7.5 15.2 21.1 23.8 5.0 12.6 15.0 25.0 10.1 -51.4 -5.1 . . 59 27 Nicaragua -1.6 -0.9 .. 24.5 23.2 11.7 .. 20.1 1,311.2 -26.0 -67.7 0.9 1.2 707 28 Zambia -8.7 -2.9 73.3 28.4 10.8 7.0 48.5 9.5 113.3 92.0 -14.5 1.3 157 29 Tajikistan .. .. . . .. 104.3 .. .. .. 25 30 Benin 9.5 17.1 25.0 6.2 7.8 14.5 168 2.9 -7.9 0.4 6.1 56 31 Central African Republic -2.0 4.2 18.9 18.6 5.5 8.1 10.5 17.5 2.6 -18.0 .. 2.2 9.2 52 32 Albania .. .. 19.8 23.7 32.7 .. -12.9 6.7 .. 45 33 Ghana -2.9c -0.9c 38.4 16.2 15.8 11.5 23.1 19.0 28.6 -1.4 -9.0 3.1 3.9 63 34 Pakistan 1.8 -2.1 15.3 38.7 42.3 .. 8.8 -4.9 -3.9 3.1 3.5 42 35 Mauritania 8.7 20.5 21.7 5.5 5.0 12.0 10.0 7.2 -37.6 -14.4 3.6 0.9 162 36 Azerbaijan .. .. .. .. .. .. 122.8 .. .. .. 3 37 Zimbabwe -9.1 20.7 35.2 25.8 3.5 26.8 17.5 34.9 19.7 -4.8 -5.7 2.7 3.2 69 38 Guinea 3.1 . . . . 9.4 .. 18.0 .. 22.0 18.6 .. .. .. .. 60 39 China 23.7 33.2 85.5 5.4 11.0 5.0 11.0 8.4 -1.6 1.4 4.9 5.9 16 40 Honduras 18.2 21.1 25.3 10.6 11.6 165 24.7 13.0 -13.4 -9.7 1.5 1.2 97 41 Senegal 1.8 3.1 26.6 18.6 6.2 7.8 14.5 168 2.9 -18.1 -9.4 0.2 1.3 65 42 Cote d'Ivoire 4.0 0.2 26.7 24.6 6.2 7.8 14.5 168 0.2 -18.7 -13.3 0.1 0.7 282 43 Congo 1.1 14.8 16.2 6.5 8.1 11.0 17.5 -0.3 -15.2 0.9 0.5 382 44 Kyrgyz Republic .. .. .. .. .. .. 100.9 13 45 Sri Lanka -4.6 -3.0 16.5 28.5 30.5 14.5 15.3 19.0 13.0 11.0 -18.7 -8.1 1.5 4.4 41 46 Armenia .. .. .. .. 138.6 .. 8 47 Cameroon 5.7 0.2 -3.3 18.5 19.1 7.5 8.1 13.0 17.5 1.3 -5.8 -3.8 1.1 0.1 86 48 Egypt, Arab Rep. 9.6 65 19.9 52.2 97.2 8.3 11.8 13.3 16.5 16.4 -2.0 -1.3 3.1 10.7 52 49 Lesotho 0.7 14.1 .. 31.4 9.6 8.4 11.0 14.3 14.0 -17.8 -26.6 26 50 Georgia . . . . . . . . . . 228.3 .. .. 56 51 Myanmar 3.9 0.8 16.3 23.9 1.5 9.0 8.0 26.5 -5.3 -0.5 5.6 3.5 7 Middle-income economies 29 w Lower-middle-income 36 w 52 Bolivia -2.7 46.7 16.2 45.1 18.0 18.4 28.0 55.6 20.0 -1.8 -7.3 6.0 5.8 66 53 Macedonia, FYR .. .. .. 1.2 53 54 Moldova .. .. .. .. 7.2 .. .. .. .. .. -4.9 .. 2.6 12 55 Indonesia 10.0 8.9 23.5 13.2 6.0 20.4 20.2 8.9 3.3 -1.6 4.1 3.2 50 56 Philippines 4.1c 1.9c 20.3 20.7 41.2 12.3 10.5 14.0 15.1 10.0 -6.2 -4.5 4.6 3.1 53 57 Uzbekistan .. .. .. 109.1 .. 0.0 .. 5 58 Morocco 0.5 5.7 13.8 38.5 58.4 4.9 7.0 10.0 5.0 -8.6 -2.5 1.7 5.6 64 59 Kazakstan .. .. .. .. . . .. .. 150.2 .. -4.0 .. 14 60 Guatemala 2.1 0.8 23.3 20.5 23.4 9.0 9.7 11.0 22.9 19.5 -2.5 -6.0 4.2 3.0 19 61 PaRua New Guinea -6.4c -4.6c 8.5 32.9 30.2 6.9 5.1 11.1 9.2 3.9 -22.6 8.5 3.6 0.6 46 62 Bulgaria .. -4.7 .. .. .. . . 54.5 64.1 42.2 5.1 1.9 .. .. 100 63 Romania 15.9 2.2 44.7 33.4 15.2 .. .. 62.0 .. -1.0 2.0 4.9 17 64 Ecuador 1.0c 3.6c 41.0 20.2 33.6 9.0 44.0 47.5 -5.6 -6.2 4.2 4.4 85 65 Dominican Republic 3.0 8.4 33.8 17.8 23.5 . 28.9 -11.0 -2.5 1.5 0.9 37 66 Lithuania .. 0.2 .. .. 27.4 62.3 102.3 .. . . 2.9 7 67 El Salvador -0.4c 0.8c 21.2 28.0 36.4 13.6 19.0 15.5 0.1 -3.7 3.6 3.4 20 68 Jordan 3.5c 10.9 .. 104.5 .. 3.2 9.0 9.2 .. -12.5 6.3 5.0 87 69 Jamaica 32.3 32.8 40.0 9.5 36.4 15.6 49.5 27.6 -5.6 -0.4 0.8 1.5 94 70 Paraguay 3.2 3.0 37.8 19.8 24.7 23.1 32.5 26.2 .. 6.7 3.1 22 71 Algeria 14.6 53.3 46.4 .. 22.0 0.8 -4.5 5.8 4.5 61 72 Colombia 1.6 2.9 31.9 17.1 19.8 29.4 .. 40.5 25.6 5.8 28 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. SELECTED WORLD DEVELOPMENT INDICATORS 191 Central Money, broadly defined Nominal interest rates of banks Average Current account Gross Net present annuall international gov't. curr. Avg. ann. Average %)nnu annual balance before value of deficWsurplusa nom. gr. outstanding Deposit Lending inflation (%) official transfers reserves (months external debt (% of GNP) rate (%) as a % of GDP rate rate (GDP deflator) (% of GNP) of import coy.) (% of GNP) 1980 1994 1985-94 1980 1994 1980 1994 1980 1994 1984-94 1980 1994 1980 1994 1994 73 Tunisia 9.4 3.5 10.2 37.6 44.3 2.5 .. 7.2 .. 6.3 -5.0 -2.7 2.1 2.3 52 74 Ukraine .. 208.6 .. 250.3 297.0 .. .. 6 75 Namibia 0.7 .. .. 33.0 9.2 .. 17.1 10.6 .. -0.6 .. 1.3 .. 76 Peru 2.1c 2.2c 469.4 16.5 15.3 .. 22.3 .. 53.6 492.2 -1.2 -6.0 6.6 9.7 41 77 Belarus -0.5 . . 136.7 5 78 Slovak Republic .. 69.3 9.3 .. 14.6 9.8 5.8 3.1 30 79 Latvia .. -0.9 .. .. 30.4 31.7 .. 55.9 69.8 .. .. .. 5.3 6 80 Costa Rica -3.7 -2.3 24.8 38.8 36.5 18.3 17.7 25.0 33.0 18.2 -14.8 -6.5 1.2 2.7 42 81 Poland .. -1.0 94.8 57.0 31.7 .. 30.6 8.0 32.8 97.8 -6.9 -3.1 0.3 2.8 37 82 Thailand -0.1 66 20.1 34.5 74.2 12.0 8.5 18.0 14.4 5.0 -7.0 -5.9 3.3 5.3 42 83 Turkey 3.2 -2.1 70.2 17.2 21.9 8.0 87.8 .. .. 65.8 -6.2 1.7 4.3 3.4 44 84 Croatia 4.6 .. 18.3 6.5 .. 22.9 .. .. 0.0 2.5 15 85 Panama 0.3 60 10.5 32.8 64.8 6.1 .. 10.2 1.6 -9.7 -2.6 . . 104 86 Russian Federation .. -5.7 .. .. 13.7 .. .. .. 124.3 .. .. 1.5 23 87 Venezuela 7.4 2.7 35.0 28.7 24.0 39.0 .. 46.6 36.4 6.7 .. 9.3 9.3 59 88 Botswana 11.6c 23.3c 20.6 28.2 26.4 5.0 10.4 8.5 13.9 11.7 -22.5 4.4 13 89 Estonia .. .. 23.8 11.5 .. 23.1 77.3 . . -1.7 3.8 4 90 Iran, Islamic Rep. -6.1 8.6 23.6 54.4 37.2 23.4 -2.8 9.2 33 91 Turkmenistan 58.6 18.0 1 er-middle-income 92 Brazil .. . . 916.8 9.6 .. 115.0 5,175.0 .. .. 900.3 -5.6 -0.2 2.3 8.5 26 93 South Africa 4.6 -7.7 21.7 30.8 50.4 5.5 11.1 9.5 15.6 14.3 4.9 -0.2 3.7 1.3 .. 94 Mauritius -1.9 4.1 21.0 40.0 70.1 9.2 11.0 12.2 18.9 8.8 -11.1 -6.8 1.9 3.9 35 95 Czech Republic .. 3.4 .. .. 74.1 .. 7.1 .. 13.1 11.8 .. -0.0 .. 4.2 28 96 Malaysia 7.4 8.9 14.8 46.1 83.9 6.2 .. 7.8 7.6 3.1 1.0 -6.6 4.7 4.5 33 97 Chile 6.9 4.9 26.2 21.0 34.9 37.7 15.1 47.1 20.3 18.5 -7.8 -2.4 5.9 10.3 41 98 Trinidad and Tobago 25.4 3.8 27.1 39.3 66 6.9 10.0 16.0 6.5 5.9 5.6 11.3 2.3 47 99 Hungary 4.9 18.2 .. 434 3.0 20.3 .. 27.4 19.4 -2.2 -9.4 5.1 66 100 Gabon .. .. 15.3 13.0 7.5 8.1 12.5 17.5 3.3 8.8 .. 0.7 0.9 110 101 Mexico 3.9 49.3 25.2 30.2 20.6 13.3 28.1 .. 40.0 -5.4 -8.1 1.5 1.0 32 102 Uruguay 2.2 -0.3 75.5 31.2 34.0 50.3 37.0 66.6 95.1 73.8 -7.7 -2.8 .. 5.0 31 103 Oman 8.9 -6.0 5.6 13.8 30.4 .. 4.3 .. 8.6 0.1 15.4 -10.4 3.2 2.2 28 104 Slovenia .. .. 29.2 27.9 .. 39.4 .. .. 3.9 .. 2.2 15 105 Saudi Arabia 5.3 13.8 52.4 .. . . .. .. 2.8 30.2 -10.9 5.0 2.1 106 Greece -0.4 -14.3 15.1 50.5 53.2 14.5 18.9 21.2 27.4 15.5 -5.5 -6.3 3.7 8.2 .. 107 Argentina .. 311.1 19.0 161 79.6 8.1 .. 10.1 317.2 -6.3 -3.6 7.0 6.1 25 108 Korea, Rep. 2.9 4.9 18.8 29.0 40.6 19.5 8.5 18.0 8.5 6.8 -9.5 -1.1 1.3 2.6 14 Low- and middle-income 30w Sub-Saharan Africa 50w East Asia and Pacific 28w South Asia 26w Europe and Central Asia 25w Middle East and N. Africa 32w Latin America and Caribbean 39w High-income economies 109 Portugal -2.8 -2.1 16.5 69.9 77.1 19.0 8.4 18.8 15.0 12.0 -3.8 -1.9 . . 8.8 110 New Zealand -1.7 1.5 21.0 .. 75.7 11.0 6.4 12.6 9.7 4.6 -4.2 -3.1 0.6 2.4 111 Spain 0.4 -1.4 11.8 75.4 79.2 13.1 6.7 16.9 8.9 6.5 -2.4 -1.5 6.0 4.7 112 Ireland -5.9 -2.1 11.3 43.5 49.6 12.0 0.3 16.0 6.1 2.0 -14.2 2.3 2.8 1.9 113 t Israel -17.4 -1.6 22.0 19.9 38.4 .. 12.2 176.9 17.4 18.0 -11.3 -8.4 3.6 2.4 114 Australia 0.6 -2.6 12.6 36.5 58.2 8.6 .. 10.6 12.0 4.1 -2.2 -3.7 2.5 2.5 115 United Kingdom -1.2 -4.9 16.3 29.8 .. 14.1 3.4 16.2 5.5 5.4 1.5 0.4 2.0 1.5 116 Finland 2.0 -11.0 7.2 39.8 58.5 9.0 3.3 9.8 7.9 4.2 -3.1 1.0 1.6 3.9 117 Italy -6.3 -8.5 7.9 70.9 .. 12.7 4.8 19.0 11.2 6.2 -2.2 2.5 6.4 2.7 118 t Kuwait 60.3 2.9 33.1 80.2 9.2 71 9.2 7.9 .. 48.0 15.4 6.2 4.4 119 Canada -2.4 9.2 45.1 58.3 12.9 5.6 14.3 6.9 3.1 -0.7 -3.3 2.3 0.8 120 t Hong Kong .. .. .. 60.7 .. .. . . -4.4 .. .. 121 Netherlands 1.2 -2.2 5.8 67.1 84.2 6.0 3.0 13.5 8.3 1.6 -0.5 3.8 4.6 3.1 122 f Singapore 10.1 13.7 14.9 57.7 83.6 9.4 3.0 11.7 5.9 3.9 -10.2 3.5 .. .. 123 Belgium -3.0 -3.9 5.5 45.0 .. 7.7 4.9 18.0 9.4 3.2 -2.9 70 3.6 1.2 124 France 2.2 -4.2 3.2 71.7 61.4 7.3 4.6 12.5 7.9 2.9 -0.2 1.8 5.3 1.7 125 Sweden -2.6 -11.7 .. 54.0 47.5 11.2 4.9 15.2 10.6 5.8 -2.8 1.2 2.0 3.8 126 Austria 0.6 -1.6 7.2 72.6 89.3 5.0 2.3 -5.5 -0.8 6.4 3.4 127 Germany . -0.3 8.3 .. 62.5 7.9 4.5 12.0 11.5 .. .. 0.3 5.5 2.5 128 United States -0.4 -2.2 4.4 58.7 60.5 13.1d 4.6, 15.3 7.1 3.3 0.3 -2.1 6.2 2.0 129 Norway 4.5 -1.4 6.3 51.6 63.6 5.0 5.2 12.6 8.4 3.0 2.2 4.2 3.0 5.1 130 Denmark -1.2 -4.7 4.7 42.6 61.5 10.8 3.8 17.2 8.3 2.9 -4.5 4.1 1.9 2.0 131 Japan -3.2 .. 6.4 83.4 112.1 5.5 1.7 8.3 4.1 1.3 -0.4 3.0 2.9 3.5 132 Switzerland 0.7 .. 4.7 .. 120.7 8.8 3.6 5.6 5.5 3.7 0.2 69 7.7 133 t United Arab Emirates -10.5c -8.9c 4.3 19.0 9.5 12.1 World a. Refers to current budget balance excluding grants. b. Includes Eritrea. c. Data are for budgetary accounts only. d. Certificate of deposit rate. 192 WORLD DEVELOPMENT Table 3. External economic indicators Export Aggregate net Net private Official development Terms of trade concentration resource flows capital flows assistance (1987=100) index (% of GNP) (millions $1 (% of GNP) 1985 1994 1984 1992 1980 1994 1980 1994 1980 1994 Low-income economies 90 m 2.1w 2.7w Excluding China and India 89 m 4.3w 7.0w I Rwanda 136 75 0.811 0.505 9.3 106.1 14 1 13.3 123.4 2 Mozambique 113 124 0.274 .. 3.8 73.8 0 32 8.4 100.1 3 Ethiopia 119. 74 0.622a 0.557 8.2 18.2 26 -12 4.7 22.9 4 Tanzania 126 83 0.359 0.248 16.4 22.7 100 12 12.4 30.3 5 Burundi 133 52 0.776 .. 8.1 28.1 -3 -1 12.8 32.2 6 Sierra Leone 109 89 0.391 0.586 5.5 21.5 -7 38 8.5 21.4 7 Malawi 99 87 0.530 0.704 15.7 24.3 30 -1 12.6 37.0 8 Chad 99 103 0.617 .. 3.4 19.4 0 7 4.9 24.1 9 Uganda 149 58 0.932 0.561 9.7 12.9 54 -11 9.0 18.3 10 Madagascar 124 82 0.466 0.285 8.7 12.2 131 2 5.8 16.0 11 Nepal 98 85 0.237 0.519 6.5 8.0 0 -3 8.3 10.8 12 Vietnam .. .. .. 0.308 .. 6.5 0 272 .. 5.2 13 Bangladesh 126 94 0.326 0.246 13.5 5.9 11 47 9.9 6.9 14 Haiti 89 52 0.201 0.266 5.2 37.2 20 2 7.3 37.8 15 Niger 91 101 0.738 12.9 19.2 199 -22 6.8 25.5 16 Guinea-Bissau 91 92 0.557 98.4 29.3 18 1 56.6 74.2 17 Kenya 124 80 0.340 0.305 8.8 1.6 301 -272 5.6 10.2 18 Mali 100 103 0.578 12.1 16.5 10 44 16.6 22.0 19 Nigeria 167 86 0.943 0.934 0.9 5.7 694 1,885 0.0 0.6 20 Yemen, Rep. 131 84 0.663 .. .. 97 12 .. .. 21 Burkina Faso 103 103 0.541 0.623 8.4 15.9 4 1 12.5 22.3 22 Mongolia .. 0.0 14.4 0 -12 0.0 22.5 23 India 92 100 0.183 0.140 1.4 2.4 868 5,497 1.3 0.8 24 Lao PDR .. .. 0.345 .. 13.0 0 60 .. 13.4 25 Togo 139 90 0.461 0.491 12.7 11.3 83 0 8.3 12.2 26 Gambia, The 137 111 0.520 35.0 13.9 21 6 24.4 20.9 27 Nicaragua 111 95 0.454 0.289 13.8 27.4 -26 36 10.9 41.6 28 Zambia 89 85 0.844 0.787 14.6 14.8 175 -4 8.9 22.3 29 Tajikistan .. .. 11.5 0 10 .. 3.2 30 Benin 111 110 0.428 7.2 12.9 4 5 6.4 15.7 31 Central African Republic 109 91 0.452 10.7 16.0 4 4 13.9 19.9 32 Albania .. .. .. .. .. 9.1 0 45 .. 7.8 33 Ghana 93 64 0.544 0.465 4.1 24.2 -26 838 4.3 11.1 34 Pakistan 112 101 0.207 0.228 5.4 6.4 230 1,657 5.1 2.5 35 Mauritania 110 106 0.622 0.605 29.4 20.5 27 2 26.2 25.9 36 Azerbaijan .. .. .. .. 3.7 0 0 .. 4.0 37 Zimbabwe 100 84 0.295 0.329 4.2 6.7 22 -70 3.1 10.1 38 Guinea 120 91 0.952 .. .. 9.6 80 21 .. 10.8 39 China 109 105 .. 0.076 1.0 9.6 1,731 46,555 0.0 0.6 40 Honduras 118 73 0.401 0.457 11.7 14.7 136 66 4.2 9.8 41 Senegal 107 107 0.311 0.258 9.0 13.8 18 -9 9.0 17.4 42 Cote d'Ivoire 109 81 0.318 0.368 11.7 28.0 936 30 2.2 26.2 43 Congo 150 93 0.796 0.636 35.5 9.1 440 -130 6.0 31.2 44 Kyrgyz Republic .. .. .. 5.9 0 10 .. 5.8 45 Sri Lanka 106 88 0.456 0.232 10.6 5.7 129 213 9.8 4.6 46 Armenia .. .. .. .. 7.0 0 0 .. 6.9 47 Cameroon 113 79 0.479 9.6 9.5 409 59 3.9 10.7 48 Egypt, Arab Rep. 147 95 0.475 0.361 14.2 6.2 1,131 1,006 6.5 6.4 49 Lesotho 10.5 7.3 7 14 14.9 8.3 50 Georgia .. .. 9.0 0 10 .. 8.4 51 Myanmar 128 107 0.282 4.7 0.2 29 34 5.4 0.2 Middle-income economies 90 m 0.6 w 0.5 w Lower-middle-income 88 m 1.3 w 1.1 w 52 Bolivia 130 69 0.540 0.318 14.1 9.0 203 -5 5.9 10.3 53 Macedonia, FYR -2.4 0 -15 .. 54 Moldova .. .. .. 5.1 0 23 1.4 55 Indonesia 145 79 0.499 0.194 2.5 5.4 987 7,408 1.3 1.0 56 Philippines 99 114 0.298 0.293 3.9 6.9 840 4,107 0.9 1.6 57 Uzbekistan .. 0.2 0 52 0.1 58 Morocco 99 107 0.284 0.160 7.4 3.9 550 877 4.9 2.1 59 Kazakstan .. .. .. 4.4 0 394 .. 0.3 60 Guatemala 114 93 0.310 0.219 2.8 1.9 91 84 0.9 1.7 61 Papua New Guinea 94 90 0.495 0.465 16.8 -0.5 105 -231 13.1 6.5 62 Bulgaria .. .. 1.7 0.1 0 -376 0.0 1.6 63 Romania 66 111 .. .. .. 4.3 1,360 787 .. 0.5 64 Ecuador 143 82 0.616 0.467 7.4 5.3 594 705 0.4 1.4 65 Dominican Republic 115 144 0.430 0.383 7.1 1.0 132 113 1.9 0.7 66 Lithuania .. .. .. .. .. 1.8 0 13 .. 1.4 67 El Salvador 122 89 0.557 0.238 3.2 1.9 -17 -40 2.8 3.9 68 Jordan 127 118 0.335 0.331 .. 4.4 28 -159 .. 6.4 69 Jamaica 89 105 0.462 0.406 12.3 1.9 9 123 5.1 2.9 70 Paraguay 110 101 0.468 0.362 3.6 2.3 120 135 0.7 1.3 71 Algeria 173 83 0.534 0.546 3.1 3.4 896 424 0.4 1.0 72 Colombia 124 71 0.505 0.238 2.9 2.3 688 1,860 0.3 0.2 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. LO gvEL . . 193 Export Aggregate net Net private Official development Terms of trade concentration resource flows capital flows assistance (1987=100) index (% of GNP) (millions $) (% of GNP) 1985 1994 1984 1992 1980 1994 1980 1994 1980 1994 73 Tunisia 123 93 0.414 0.209 7.2 2.8 336 80 2.7 0.7 74 Ukraine 0.9 0 424 .. 0.4 75 Namibia .. .. . . 0.0 5.9 76 Peru 111 86 0.247 0.260 1.8 7.7 -67 3,214 1.0 0.9 77 Belarus .. 1.6 o 105 .. 0.6 78 Slovak Republic 0.0 6.6 0 577 0.0 0.6 79 Latvia .. .. .. .. .. 5.2 0 222 .. 0.9 80 Costa Rica 111 92 0.352 0.303 9.2 0.3 248 29 1.4 0.9 81 Poland 95 109 .. .. 5.5 3.8 10 1,244 0.0 2.0 82 Thailand 103 105 0.182 0.090 6.5 3.3 1,465 4,138 1.3 0.4 83 Turkey 82 109 0.159 0.119 3.7 1.0 660 1,530 1.7 0.1 84 Croatia .. 0.108 .. 0.3 0 96 .. .. 85 Panama 104 86 0.343 0.422 4.1 8.4 65 633 1.3 0.6 86 Russian Federation . . .. .. .. 0.8 o 658 . . 0.5 87 Venezuela 166 82 0.652 0.555 2.6 0.9 1,825 70 0.0 0.1 88 Botswana 97 152 20.3 -0.5 114 -50 11.8 2.2 89 Estonia . . 5.5 0 211 . . 0.9 90 Iran, Islamic Rep. 176 90 0.965 0.880 -0.3 -2.1 -178 -1,579 0.0 0.2 91 Turkmenistan .. 1.0 o 13 . . 0.1 Upper-middle-income 93 m 0.1 w 0.2 w 92 Brazil 101 101 0.126 0.089 2.8 1.8 5,655 11,871 0.0 0.1 93 South Africa 101 102 0.457 0.378 .. .. . . .. . . .. 94 Mauritius 77 121 0.656 0.332 8.3 3.5 49 124 2.9 0.4 95 Czech Republic .. .. .. .. 0.0 7.8 0 2,642 0.0 0.4 96 Malaysia 114 92 0.276 0.156 8.7 10.2 1,913 6,661 0.6 0.1 97 Chile 91 94 0.324 0.308 8.7 8.2 2,447 4,300 0.0 0.3 98 Trinidad and Tobago 138 86 0.546 0.422 6.3 8.9 258 343 0.1 0.5 99 Hungary 103 99 . 3.3 7.3 596 2,717 0.0 0.5 100 Gabon 154 90 0.790 0.743 -1.9 2.5 -93 -128 1.4 5.6 101 Mexico 145 92 0.534 0.153 4.8 4.6 8,182 17,394 0.0 0.1 102 Uruguay 91 112 0.239 0.176 5.3 3.3 479 378 0.1 0.6 103 Oman 182 77 0.435 0.824 3.3 4.5 34 395 3.1 0.9 104 Slovenia 0.083 2.4 0 368 . . . . 105 Saudi Arabia 175 92 0.887 0.776 0.0 0.0 106 Greece 96 99 0.127 0.118 .. .. .. .. 0.1 0.1 107 Argentina 123 120 0.194 0.153 4.6 3.2 3,476 8,214 0.0 0.1 108 Korea, Re,. 94 102 0.193 0.109 4.0 2.1 1,782 8,132 0.2 0.0 Low- and middle-income 90 m 1.1 w 1.1 Sub-Saharan Africa 92 m 3.4 w 12.4 m East Asia and Pacific 87 in 0.7 w 0.8 m South Asia 91 m 2.4w 1.4 v, Europe and Central Asia 97 in 1.0w 0.3 m Middle East and N. Africa 83 m 1.1 w 1.6 vk Latin America and Caribbean 84 m 0.3 w 0.3 IA High-income economies 100 m 109 Portugal 87 104 0.144 0.106 110 New Zealand 90 108 0.212 0.174 111 Spain 82 112 0.120 0.142 112 Ireland 96 92 0.161 0.125 113 t Israel 99 113 0.208 0.256 4.1 1.9 114 Australia 110 98 0.180 0.196 115 United Kingdom 104 105 0.152 0.063 116 Finland 88 94 0.210 0.230 117 Italy 84 104 0.100 0.056 118 t Kuwait 165 88 0.570 0.742 0.0 0.0 119 Canada 99 97 0.225 0.125 120 f Hong Kong 118 87 0.310 0.152 0.0 0.0 121 Netherlands 101 101 0.137 0.061 122 t Singapore 108 91 0.238 0.183 0.1 0.0 123 Belgiumb 93 101 0.115 0.106 124 France 89 106 0.085 0.064 125 Sweden 92 105 0.151 0.110 126 Austria 92 93 0.078 0.061 127 German), 84 97 0.136 0.084 128 United States 101 101 0.110 0.080 129 Norway 141 97 0.345 0.366 130 Denmark 91 102 0.087 0.077 131 Japan 73 128 0.209 0.140 132 Switzerland 85 64 0.119 0.102 133 f United Arab Emirates 181 93 0.801 0.691 0.0 0.0 World 93 In a. Includes Eritrea. b. Includes Luxembourg. c. Data prior to 1990 refer to the Federal Republic of Germany before unification. ,,,,,,,,,,,,,,, ,,WWW WWWWW WNNNNNNNNN 0.00,GN,,WN 0..,, 0..,,,,WN* N******** CO N CN WN ""4'7Yni g FEW4Kx,-,,ggil ","?; .'-'.. g F.,: .9 `-j 1 :6; - pL ',,,,' § WP p , .i-, m p .' 'PI. ' ,,D) ,..,. 9'-' , rb g 0 N* WN ..WNN, 00 CO N N N N N N 00 , ,N000 w,ow-ww,wv.-yy WN 0 n * NNW , 00 .0. NON,WW N ,.0, N,* .,00N* W.,0, ,.,,m 0 ONNOONN,-NNN,00, NONNN* W N N P / a, 0 N N 11 F ,PPPP,P N P .w..o- P'N.PPP0P,'P,PPP NNW00, C.] L...) 00 , 0 00,,, , 00 N00. . W, . : NN W 0. I", N . ,N CN V, nT N. I N* ON. WONWN, WOW,, NNNNNNC.-.NNCcNN-4-.4.NNNNNN W R T ON W, *** N WNNN00NCNN NV ,N*WW N N0,000WWN01,,.,NW* 000 wo g 00 00 NOONN ON, W N, N ,W.,0,8,,, W,W00, yv P,,P0PP N 00C-0000 ON N N NNNN NN NNNNN,W, P o-,wo-. N 0000 , W WNN,NNWNNW*W , (O 00 yw ONWOO . ,"") NP N NNNN, NNN.- NWW*, W N.-NN 0.ONNNNN N) CC N N C .F., co oo N ,N,,,,,,,,,WW,WW L- ON 0 0 0,000,00,00,000,W N. . 0000 N 00 CO X 4 F 40. 00 W 000000 CO CO C N,,, 0 . N 0000 W ,,,w, ,,,,,,,,,,,,,,,,,,,w ..00. 44 ww 7 W N N 0000 00 00,*.W 00N0 N 0 N1, N 0. 00.00 00 U., 00 U., C...) N W NO,,, NW *NWN*,,,,,,,WN, W,W,W.NN,,,,W*, W,000. 7 N WNN,, *WNN**NU.,* N, **, 0 00,p*,0,0N0,,N00 W00 CNN 00,,GNOOW ,,WWW W ON N N 00 N 00 N W CO W N N N W o- w o. WW,NN, N0. NNN NN W **N ,,00. NV 00 NN W O.WWW oo oo oo N N Vs. 0 N 00 N- , SELECTED WORLD DEVELOPMENT INDICATORS 195 Population labor force Total Avg. annual Age 15-64 Total. Avg. annual (millions) growth rate (%) (millions) (millions) growth rate (%) Female (%) Agriculture (%) industry (%) 1980 1994 1980-90 1990-94 1980 1994 1980 1994 1980-90 1990-94 1980 1994 1980 1990 1980 1990 73 Tunisia 6 9 2.5 1.9 3 5 2 3 2.6 3.0 29 30 39 28 30 33 74 Ukraine 50 52 0.4 0.0 34 26 26 -0.2 -0.1 50 48 25 20 39 40 75 Namibia 1 2 2.7 2.8 1 1 0 1 2.3 2.6 40 40 56 49 15 15 76 Peru 17 23 2.2 1.9 9 14 5 8 3.2 3.0 24 28 40 36 18 18 77 Belarus 10 10 0.6 0.2 7 5 5 0.4 -0.1 50 48 26 20 38 40 78 Slovak Republic 5 5 0.6 0.3 4 2 3 0.9 0.9 45 48 14 12 36 32 79 Latvia 3 3 0.5 -1.2 .. 2 1 1 0.2 -0.8 51 51 16 16 42 40 80 Costa Rica 2 3 2.8 2.1 1 2 1 1 3.8 2.8 21 29 35 26 23 27 81 Poland 36 39 0.7 0.3 23 25 19 19 0.1 0.5 45 46 30 27 38 36 82 Thailand 47 58 1.8 1.0 26 39 24 34 2.6 1.5 47 47 71 64 10 14 83 Turkey 44 61 2.3 2.0 25 37 19 28 2.9 2.3 35 35 60 53 16 18 84 Croatia 5 5 0.4 0.0 3 2 2 0.2 -0.1 38 41 25 16 33 34 85 Panama 2 3 2.1 1.9 1 2 1 1 3.1 2.6 30 33 29 26 19 16 86 Russian Federation 139 148 0.6 0.0 99 76 77 0.2 0.0 49 48 16 14 44 42 87 Venezuela 15 21 2.6 2.3 8 13 5 8 3.4 3.1 27 33 15 12 28 27 88 Botswana 1 1 3.5 3.1 0 1 0 1 3.4 3.2 50 46 63 46 10 20 89 Estonia 1 1 0.6 -1.2 1 1 1 0.4 -0.4 51 51 15 14 43 41 90 Iran, Islamic Rep. 39 63 3.5 2.9 20 32 12 20 3.8 3.2 20 24 46 39 24 23 91 Turkmenistan 3 4 2.5 4.6 .. 2 1 2 2.3 2.8 47 41 39 37 24 23 Upper-middle-income 366 t 473 t 1.9 w 1.7 w 206 t 293 t 140 t 199 t 2.7w 2.2w 32 w 36 31 w 21 w 28 w 27 w 92 Brazil 121 159 2.0 1.7 71 99 48 ' 71 3.2 1.9 28 34 37 23 24 23 93 South Africa 29 41 2.4 2.2 17 24 11 16 2.7 2.5 35 37 17 14 35 32 94 Mauritius 1 1 0.9 1.3 1 1 0 0 2.3 1.6 26 31 27 17 28 43 95 Czech Republic 10 10 0.1 -0.1 .. 7 5 6 0.1 0.5 47 47 13 11 56 45 96 Malaysia 14 20 2.6 2.4 8 11 5 8 2.8 2.7 34 36 41 27 19 23 97 Chile 11 14 1.7 1.5 7 9 4 5 2.7 2.2 26 31 21 19 25 25 98 Trinidad and Tobago 1 1 1.3 1.2 1 1 0 1 1.2 2.1 32 36 11 11 39 31 99 Hungary 11 10 -0.3 -0.3 7 7 5 5 -0.8 -0.1 43 44 18 15 43 38 100 Gabon 1 1 3.5 3.2 0 1 0 1 2.6 1.9 45 44 65 51 12 16 101 Mexico 67 89 2.0 2.0 35 53 22 35 3.5 2.9 27 32 36 28 29 24 102 Uruguay 3 3 0.6 0.6 2 2 1 1 1.6 1.0 31 40 17 14 28 27 103 Oman 1 2 4.6 4.5 1 1 0 1 4.1 4.0 7 13 50 44 22 24 104 Slovenia 2 2 0.5 -0.1 .. 1 1 1 0.3 0.3 44 45 15 6 43 46 105 Saudi Arabia 9 18 5.2 3.2 5 10 3 6 6.5 2.5 8 12 43 19 16 20 106 Greece 10 10 0.5 0.6 6 7 4 4 1.2 0.7 28 36 31 23 29 27 107 Argentina 28 34 1.5 1.2 17 21 11 13 1.3 2.0 28 30 13 12 34 32 109 1,,,,, 1,-, 38 44 1.2 0.9 24 31 16 21 2.3 1.9 39 40 37 18 27 35 Low- and middle-income 3,652 t 4,752 t 2.0w 1.7w 1,902 t 2,892 t 1,682 t 2,259 t 2.2 w 1.9 w 41 w 42 w 62w 58w 17 w 18 w Sub-Saharan Africa 380 t 572 t 3.0w 2.7w 197 t 296 t 171 t 251 t 2.8 w 2.7w 43w 44 w 72 w 68 w 9w 9w East Asia and Pacific 1,398 t 1,735 t 1.6w 1.4 w 822 t 1,134 t 719 t 967 t 2.3 w 1.5 w 43w 45 w 72 w 69w 14w 16w South Asia 903 t 1,220 t 2.2 w 1.9w 511 t 715 t 389 t 525 t 2.1 w 2.3w 35 w 33w 70 w 64w 13 w 16w Europe and Central Asia 437 t 487 t 0.9 w 0.4 w 83 t 315 t 219 t 238 t 0.6 w 0.6w 47w 46w 27w 23 w 37w 37w Middle East and N. Africa 175 t 267 t 3.1 w 2.8 w 87 t 146 t 53 t 85 t 3.2w 3.6w 26w 28 w 49w 37w 21 w 24w Latin America and Caribbean 359 t 471 t 2.0w 1.8 w 202 t 286 t 130 t 194 t 3.0w 2.5 w 28w 33 w 34 w 26w 25 w 24 w High-income economies 776 t 850 t 0.6 w 0.7 w 497 t 569 t 352 t 408 t 1.1 w 0.9 w 39 w 43 w 7w 5w 35 w 31 vv 109 Portugal 10 10 0.1 0.0 6 7 5 5 0.4 0.4 39 43 26 18 36 34 110 New Zealand 3 3 0.8 0.9 2 2 1 2 2.0 1.5 34 44 11 10 33 25 111 Spain 37 39 0.4 0.2 24 27 14 17 1.3 1.0 28 36 18 12 37 33 112 Ireland 3 4 0.3 0.5 2 2 1 1 0.4 1.5 28 33 19 14 34 29 113 -I Israel 4 5 1.8 3.7 2 3 1 2 2.3 3.6 34 38 6 4 32 29 114 Australia 15 18 1.5 1.1 9 12 7 9 2.3 1.6 36 42 6 6 32 26 115 United Kingdom 56 58 0.2 0.4 36 38 27 29 0.6 0.3 39 43 3 2 38 29 116 Finland 5 5 0.4 0.5 3 3 2 3 0.6 0.2 46 47 12 8 35 31 117 Italy 56 57 0.1 0.2 36 39 23 25 0.8 0.4 33 37 13 9 38 31 118 t Kuwait 1 2 4.4 -6.8 1 1 0 1 5.9 -2.3 13 33 2 1 32 25 119 Canada 25 29 1.2 1.3 17 20 12 15 1.9 1.1 40 44 7 3 33 25 120 f Hong Kong 5 6 1.2 1.5 3 4 2 3 1.6 0.8 34 36 1 1 50 37 121 Netherlands 14 15 0.6 0.7 9 11 6 7 2.0 0.7 31 39 6 5 31 26 122 -l. Singapore 2 3 1.7 2.0 2 2 1 1 1.7 1.0 37 37 2 0 42 36 123 Belgium 10 10 0.1 0.4 6 7 4 4 0.2 0.5 34 40 3 3 35 28 124 France 54 58 0.5 0.5 34 38 24 26 0.3 0.8 40 44 8 5 35 29 125 Sweden 8 9 0.3 0.6 5 6 4 5 1.0 0.3 44 47 .. .. .. 126 Austria 8 8 0.2 1.0 5 5 3 4 0.5 0.5 40 40 10 8 41 38 127 Germany 78 82 0.1 0.6 52 56 37 40 0.6 0.2 40 41 7 4 45 38 128 United States 228 261 0.9 1.0 151 171 110 131 1.3 1.1 42 45 3 3 31 28 129 Norway 4 4 0.4 0.6 3 3 2 2 0.9 0.7 40 45 8 6 29 25 130 Denmark 5 5 0.0 0.3 3 4 3 3 0.7 -0.1 44 46 7 6 31 28 131 Japan 117 125 0.6 0.3 79 87 57 66 1.1 0.6 38 40 11 7 35 34 132 Switzerland 6 7 0.6 1.0 4 5 3 4 1.7 1.0 37 40 6 6 39 35 133 t United Arab Emirates 1 2 4.7 2.9 1 1 1 1 4.4 1.8 5 13 5 8 38 27 World 4,428 t 5,601 t 1.7 w 1.5 w 2,400 t 3,461 t 2,034 t 2,667 t 2.0 w 1.7w 41 w 42 53 w 49 w 20 w 20 w a. Participation rates from ILO are applied to population estimates to derive labor force estimates. 196 Table 5. Distribution of income or consumption Percentage share of income or consumption Survey Gini Lowest Lowest Second Third Fourth Highest Highest year index 10% 20% quintile quintile quintile 20% 10% Low-income economies Excluding China and India 1 Rwanda 1983/85,1' 28.9 4.2 9.7 13.2 16.5 21.6 39.1 24.2 2 Mozambique 3 Ethiopia .. .. 4 Tanzania 1993,1' 38.1 2.9 6.9 10.9 15.3 21.5 45.4 30.2 5 Burundi 6 Sierra Leone 7 Malawi 8 Chad .. .. .. .. .. .. .. .. 9 Uganda 1992,b 40.8 3.0 6.8 10.3 14.4 20.4 48.1 33.4 10 Madagascar 1993.1' 43.4 2.3 5.8 9.9 14.0 20.3 50.0 34.9 11 Nepal 1984/85,d 30.1 4.0 9.1 12.9 16.7 21.8 39.5 25.0 12 Vietnam 1993,b 35.7 3.5 7.8 11.4 15.4 21.4 44.0 29.0 13 Bangladesh 1992,b 28.3 4.1 9.4 13.5 17.2 22.0 37.9 23.7 14 Haiti .. .. .. .. .. .. .. .. 15 Niger 1992,b 36.1 3.0 7.5 11.8 15.5 21.1 44.1 29.3 16 Guinea-Bissau 1991,b 56.2 0.5 2.1 6.5 12.0 20.6 58.9 42.4 17 Kenya 1992a,b 57.5 1.2 3.4 6.7 10.7 17.0 62.1 47.7 18 Mali .. .. .. .. .. .. 19 Nigeria 1992/93,1, 37.5 1.3 4.0 8.9 14.4 23.4 49.3 31.3 20 Yemen, Rep. 21 Burkina Faso 22 Mongolia .. .. .. .. .. .. .. .. 23 India 1992a,b 33.8 3.7 8.5 12.1 15.8 21.1 42.6 28.4 24 Lao PDR 1992a,b 30.4 4.2 9.6 12.9 16.3 21.0 40.2 26.4 25 Togo 26 Gambia, The .. .. .. .. .. .. 27 Nicaragua 1993,b 50.3 1.6 4.2 8.0 12.6 20.0 55.2 39.8 28 Zambia 1993,b 46.2 1.5 3.9 8.0 13.8 23.8 50.4 31.3 29 Taj ikistan 30 Benin 31 Central African Republic 32 Albania .. .. .. .. .. .. .. .. 33 Ghana 1992a,b 33.9 3.4 7.9 12.0 16.1 21.8 42.2 27.3 34 Pakistan 1991a,b 31.2 3.4 8.4 12.9 16.9 22.2 39.7 25.2 35 Mauritania 19885,1 42.4 0.7 3.6 10.6 16.2 23.0 46.5 30.4 36 Azerbaijan .. .. .. .. .. .. .. .. 37 Zimbabwe 1990a,b 56.8 1.8 4.0 6.3 10.0 17.4 62.3 46.9 38 Guinea 1991,1, 46.8 0.9 3.0 8.3 14.6 23.9 50.2 31.7 39 China 1992c,d 37.6 2.6 6.2 10.5 15.8 23.6 43.9 26.8 40 Honduras 1992c,c1 52.7 1.5 3.8 7.4 12.0 19.4 57.4 41.9 41 Senegal 1991,1) 54.1 1.4 3.5 7.0 11.6 19.3 58.6 42.8 42 Cote d'Ivoire 1988,3 36.9 2.8 6.8 11.2 15.8 22.2 44.1 28.5 43 Congo 44 Kyrgyz Republic 45 Sri Lanka 1990ab 30.1 3.8 8.9 13.1 16.9 21.7 39.3 25.2 46 Armenia 47 Cameroon .. .. .. Egypt, Arab Rep. 1991,1) 32.0 3.9 8.7 12.5 16.3 21.4 41.1 26.7 49 Lesotho 1986/87,1, 56.0 0.9 2.8 6.5 11.2 19.4 60.1 43.4 50 Georgia 51 Myanmar Middle-income economies Lower-middle-income 52 Bolivia 1990,d 42.0 2.3 5.6 9.7 14.5 22.0 48.2 31.7 53 Macedonia, FYR .. .. .. .. .. .. .. .. 54 Moldova 1992,d 34.4 2.7 6.9 11.9 16.7 23.1 41.5 25.8 55 Indonesia 19935,1' 31.7 3.9 8.7 12.3 16.3 22.1 40.7 25.6 56 Philippines 19885,b 40.7 2.8 6.5 10.1 14.4 21.2 47.8 32.1 57 Uzbekistan .. .. .. .. .. .. .. .. 58 Morocco 1990/91a,b 39.2 2.8 6.6 10.5 15.0 21.7 46.3 30.5 59 Kazakstan 1993,d 32.7 3.1 7.5 12.3 16.9 22.9 40.4 24.9 60 Guatemala 1989,d 59.6 0.6 2.1 5.8 10.5 18.6 63.0 46.6 61 Papua New Guinea .. .. .. .. .. .. .. 62 Bulgaria 1992,1 30.8 3.3 8.3 13.0 17.0 22.3 39.3 24.7 63 Romania 1992c,d 25.5 3.8 9.2 14.4 18.4 23.2 34.8 20.2 64 Ecuador 1994a,b 46.6 2.3 5.4 8.9 13.2 19.9 52.6 37.6 65 Dominican Republic 1989,d 50.5 1.6 4.2 7.9 12.5 19.7 55.7 39.6 66 Lithuania 1993,d 33.6 3.4 8.1 12.3 16.2 21.3 42.1 28.0 67 El Salvador .. .. .. .. .. .. .. .. 68 Jordan 1991a,b 43.4 2.4 5.9 9.8 13.9 20.3 50.1 34.7 69 Jamaica 1991a,b 41.1 2.4 5.8 10.2 14.9 21.6 47.5 31.9 70 Paraguay .. .. .. .. .. .. .. .. 71 Algeria 1988ab 38.7 2.8 6.9 11.0 15.1 20.9 46.1 31.5 72 Colombia 1991,d 51.3 1.3 3.6 7.6 12.6 20.4 55.8 39.5 Note: For data comparability and coverage, see the technical notes. 197 Percentage share of income or consumption Survey Gini Lowest Lowest Second Third Fourth Highest Highest year index 10% 20% quintile quintile quintile 20% 10% 73 Tunisia 1990,1) 40.2 2.3 5.9 10.4 15.3 22.1 46.3 30.7 74 Ukraine 1992,,d 25.7 4.1 9.5 14.1 18.1 22.9 35.4 20.8 75 Namibia .. .. .. .. .. .. .. .. 76 Peru 1994a,b 44.9 1.9 4.9 9.2 14.1 21.4 50.4 34.3 77 Belarus 1993,d 21.6 4.9 11.1 15.3 18.5 22.2 32.9 19.4 78 Slovak Republic 1992,, 19.5 5.1 11.9 15.8 18.8 22.2 31.4 18.2 79 Latvia 1993,d 27.0 4.3 9.6 13.6 17.5 22.6 36.7 22.1 80 Costa Rica 1989,d 46.1 1.2 4.0 9.1 14.3 21.9 50.7 34.1 81 Poland 1992a,b 27.2 4.0 9.3 13.8 17.7 22.6 36.6 22.1 82 Thailand 1992a,b 46.2 2.5 5.6 8.7 13.0 20.0 52.7 37.1 83 Turkey 84 Croatia .. .. .. .. .. .. .. 85 Panama 1989,d 56.6 0.5 2.0 6.3 11.6 20.3 59.8 42.2 86 Russian Federation 1993a,b 49.6 1.2 3.7 8.5 13.5 20.4 53.8 38.7 87 Venezuela 1990,' 53.8 1.4 3.6 7.1 11.7 19.3 58.4 42.7 88 Botswana .. .. .. .. .. .. 89 Estonia 1993,4 39.5 2.4 6.6 10.7 15.1 21.4 46.3 31.3 90 Iran, Islamic Rep. .. . . . . .. 91 Turkrnenistan 1993,d 35.8 2.7 6.7 11.4 16.3 22.8 42.8 26.9 Upper-middle-income 92 Brazil 1989,d 63.4 0.7 2.1 4.9 8.9 16.8 67.5 51.3 93 South Africa 1993a,b 58.4 1.4 3.3 5.8 9.8 17.7 63.3 47.3 94 Mauritius .. .. .. .. .. .. .. .. 95 Czech Republic 1993,d 26.6 4.6 10.5 13.9 16.9 21.3 37.4 23.5 96 Malaysia 1989,d 48.4 1.9 4.6 8.3 13.0 20.4 53.7 37.9 97 Chile 1994c,d 56.5 1.4 3.5 6.6 10.9 18.1 61.0 46.1 98 Trinidad and Tobago .. .. .. .. 99 Hungary 1993.'13 27.0 4.0 9.5 14.0 17.6 22.3 36.6 22.6 100 Gabon .. .. .. .. 101 Mexico 1992a.b 50.3 1.6 4.1 7.8 12.5 20.2 55.3 39.2 102 Uruguay 103 Oman .. .. 104 Slovenia 1993,d 28.2 4.1 9.5 13.5 17.1 21.9 37.9 23.8 105 Saudi Arabia 106 Greece 107 Argentina 108 Korea, Rep. Low- and middle-income Sub-Saharan Africa East Asia and Pacific South Asia Europe and Central Asia Middle East and N. Africa Latin America and Caribbean High-income economies 109 Portugal .. .. .. .. .. .. 110 New Zealand 1981/82,, 5.1 10.8 16.2 23.2 44.7 28.7 111 Spain 1988,, 8.3 13.7 18.1 23.4 36.6 21.8 112 Ireland .. .. .. .. .. .. 113 t Israel 1979e,f 6.0 12.1 17.8 24.5 39.6 23.5 114 Australia 1985e, 4.4 11.1 17.5 24.8 42.2 25.8 115 United Kingdom 1988,f 4.6 10.0 16.8 24.3 44.3 27.8 116 Finland 1981,f 6.3 12.1 18.4 25.5 37.6 21.7 117 Italy 1986,f 6.8 12.0 16.7 23.5 41.0 25.3 118 t Kuwait .. .. .. .. 119 Canada 1987,f 5.7 11.8 17.7 24.6 40.2 24.1 120 t Hong Kong 1980,f 5.4 10.8 15.2 21.6 47.0 31.3 121 Netherlands 1988,f 8.2 13.1 18.1 23.7 36.9 21.9 122 t Singapore 1982183,, 5.1 9.9 14.6 21.4 48.9 33.5 123 Belgium 1978/79,f 7.9 13.7 18.6 23.8 36.0 21.5 124 France 1989,f 5.6 11.8 17.2 23.5 41.9 26.1 125 Sweden 1981,f 8.0 13.2 17.4 24.5 36.9 20.8 126 Austria .. .. .. .. .. .. 127 Germany 1988,f 7.0 11.8 17.1 23.9 40.3 24.4 128 United States 1985,' 4.7 11.0 17.4 25.0 41.9 25.0 129 Norway 1979e, 6.2 12.8 18.9 25.3 36.7 21.2 130 Denmark 1981,f 5.4 12.0 18.4 25.6 38.6 22.3 131 Japan 1979e1 8.7 13.2 17.5 23.1 37.5 22.4 132 Switzerland 1982,f 5.2 11.7 16.4 22.1 44.6 29.8 133 t United Arab Emirates World a. Refers to expenditure shares by fractiles of persons. b. Ranked by expenditure per capita. c. Refers to income shares by fractiles of persons. d. Ranked by income per capita. e. Refers to income shares by fractiles of households. f. Ranked by household income. 198 Table 6. Health Maternal Infant mortality Prevalence of Contraceptive mortality ratio Percentage of total population with access to rate (per 1,000 malnutrition prevalence (per 100,000 Health care Safe water Sanitation live births) Total fertility rate (% under 5) rate (%) live births) 1980 1993 1980 1993 1980 1993 1980 1994 1989-95 1989-95 1980 1994 1989-95 Low-income economies 87w 58w 4.4 w 3.3 w Excluding China and India 118w 86w 6.2 w 5.1 w 1 Rwanda 60 64 51 .. 128 .. 28 21 8.3 .. .. 2 Mozambique . . 22 10 21 157 146 .. .. 6.5 6.6 1,512a 3 Ethiopia 55 .. 18 .. 10 155 120 47 4 6.6 7.5 1,528a 4 Tanzania 72 93 49 52 66 86 104 84 28 20 6.7 5.8 748. 5 Burundi . . 80 25 37 58 48 121 99 .. 6.8 6.7 1,327a 6 Sierra Leone 26 20 43 12 .. 190 163 23 6.5 6.5 800 7 Malawi 40 50 70 169 134 27 13 7.6 6.7 620b 8 Chad 26 29 27 147 119 .. 5.9 5.9 1,594a 9 Uganda 67 116 122 23 .. 7.2 7.1 550 10 Madagascar . . 21 3 138 90 32 17 6.5 6.0 660 11 Nepal 10 15 45 6 142 95 70 23 6.4 5.3 . . 12 Vietnam 75 .. .. .. 65 57 42 45 49 5.0 3.1 105 13 Bangladesh 80 74 41 78 3 35 132 81 84 40 6.1 3.6 887a 14 Haiti 33 42 19 24 113 86 27 18 5.2 4.8 6001, 15 Niger 30 40 59 7 37 150 120 4 7.4 7.4 593,, 16 Guinea-Bissau 30 .. 25 15 29 168 138 6.0 6.0 .. 17 Kenya . . 28 .. 30 49 72 59 22 33 7.8 4.9 646a 18 Mali 20 15 49 .. 184 125 .. 6.6 7.1 1,249a 19 Nigeria 40 67 36 40 63 99 81 43 6 6.9 5.6 1,027 20 Yemen, Rep. 16 .. 51 141 102 30 10 7.9 7.4 1,471a 21 Burkina Faso 67 5 .. 154 128 .. 8 6.5 6.9 939. 22 Mongolia 90 66 .. .. 82 53 10 5.3 3.4 240 23 India 50 55 .. 7 16 116 70 63 43 5.0 3.3 437 24 Lao PDR 28 5 4 127 92 40 6.7 6.6 660 25 Togo 10 71 13 .. 110 81 .. 6.6 6.5 626. 26 Gambia, The 90 40 55 73 159 128 .. 12 6.5 5.4 1,050 27 Nicaragua . . 53 .. 90 51 12 44 6.2 4.9 . . 28 Zambia 46 59 55 90 108 27 15 7.0 6.0 229 29 Tajikistan .. 62 58 41 5.6 4.4 39 30 Benin 42 49 16 23 122 96 3.6 6.5 6.1 2,500 31 Central African Rep. 12 117 100 15 5.8 5.7 649a 32 Albania 100 .. .. .. .. 47 31 .. .. 3.6 2.7 33 Ghana 25 49 56 26 27 100 74 27 20 6.5 5.3 742. 34 Pakistan 65 85 39 13 28 124 92 40 12 7.0 5.4 . . 35 Mauritania 66 64 120 98 4 6.3 5.2 800 36 Azerbaijan .. 30 25 .. 3.2 2.5 29 37 Zimbabwe 55 5 58 82 54 16 4.8 6.8 4.0 80 38 Guinea 45 60 11 14 161 131 18 .. 6.1 6.5 880 39 China 71 . . . . 42 30 17 83 2.5 1.9 115e 40 Honduras .. .. 35 64 70 47 19 47 6.5 4.7 221 41 Senegal 40 43 49 36 34 103 64 20 7 6.7 5.8 510 42 Cote d'Ivoire 17 83 17 .. 110 90 11 7.4 6.5 822a 43 Congo 20 9 124 112 6.0 6.7 887a 44 Kyrgyz Republic .. 53 43 29 4.1 3.3 43 45 Sri Lanka 90 37 60 67 61 34 16 38 3.5 2.4 30 46 Armenia .. 26 15 .. 2.3 2.0 35 47 Cameroon 20 26 .. 94 57 14 16 6.5 5.7 511 48 Egypt, Arab Rep. 100 99 . 75 86 70 120 52 9 47 5.1 3.5 . . 49 Lesotho 17 46 12 84 44 21 23 5.6 4.7 598a 50 Georgia 25 18 2.2 2.2 55 51 Myanmar 30 25 33 20 ;16 109 80 3.1,1 5.1 4.0 518a Middle-income economies 63 w 40 w 3.8w 2.8w Lower-middle-income 66 w 36 w 3.8w 2.7w 52 Bolivia 42 46 18 44 118 71 13 45 5.5 4.7 373', 53 Macedonia, FYR .. 54 24 2.5 2.2 .. 54 Moldova .. .. .. 50 35 23 .. .. 24 2.1 34 55 Indonesia 32 42 23 55 90 53 39 55 4.3 2.7 . . 56 Philippines 54 81 75 72 52 40 30 40 4.8 3.8 208b 57 Uzbekistan 18 47 28 .. 4.8 3.8 43 58 Morocco 62 63 99 56 9 50 5.4 3.5 .. 59 Kazakstan .. .. .. 33 27 59 2.9 2.3 53 60 Guatemala 50 60 30 71 75 44 31 6.5 5.2 464a 61 Papua New Guinea 16 33 15 25 67 65 5.7 4.9 700 62 Bulgaria . . 100 .. .. 20 15 .. 2.0 1.5 63 Romania . . 100 50 49 29 24 .. 57 2.4 1.4 64 Ecuador 58 58 43 54 67 37 45 57 5.0 3.3 65 Dominican Rep. 60 62 15 60 76 38 10 56 4.2 2.9 66 Lithuania .. .. .. 20 14 .. .. 2.0 1.5 29 67 El Salvador 41 35 72 81 42 22 53 5.3 3.8 68 Jordan 90 86 99 70 70 41 32 17 35 6.8 4.8 132a 69 Jamaica 72 74 21 13 10 67 3.7 2.5 . . 70 Paraguay 25 33 30 50 34 4 48 4.8 4.5 180 71 Algeria .. 98 35 9 51 6.7 3.7 140 72 Colombia 88 61 56 45 20 10 72 3.8 2.6 107. Note: For data comparability and coverage, see the key and technical notes. Figures in italics are for years other than those specified. E E TE ORLD DEVELOPMENT INDICATORS 199 Maternal Infant mortality Percentage of total population with access to Prevalence of Contraceptive mortality ratio rate (Per 1,000 malnutrition prevalence (per 100,000 Health care Safe water Sanitation live births) Total fertility rate (% under 5) rate (%) live births) 1980 1993 1980 1993 1980 1993 1980 1994 1989-95 1989-95 1980 1994 1989-95 73 Tunisia 95 90 64 46 72 71 40 5.2 3.0 139a 74 Ukraine 50 49 17 14 . 2.0 1.5 33 75 Namibia .. 36 90 57 29 5.9 5.1 76 Peru 54 58 36 45 81 48 16 59 4.5 3.1 77 Belarus 50 16 13 2.0 1.6 25 78 Slovak Republic 77 51 21 11 2.3 1.7 79 Latvia .. 20 16 .. 2.0 1.4 80 Costa Rica 90 94 91 20 13 2 75 3.7 2.9 81 Poland 100 100 50 .. 21 15 2.2 1.8 82 Thailand 30 59 66 .. 87 49 36 13 3.5 2.0 155a 83 Turkey 92 10 95 109 62 63 4.3 3.2 183e 84 Croatia 63 68 19 11 1.9 1.5 85 Panama 83 71 28 20 7 3.7 2.7 .. 86 Russian Federation 22 19 1.9 1.4 52 87 Venezuela 89 52 55 41 32 6 4.1 3.2 200 88 Botswana 56 63 34 6.7 4.5 220a 89 Estonia 17 14 2.0 1.5 41 90 Iran, Islamic Rep. 50 52 89 60 92 47 16 6.1 4.7 91 Turkmenistan .. 60 54 46 4.9 3.9 55 Upper-middle-income 54 w 36 w 3.9 w 2.8 W 92 Brazil 75 96 73 74 56 18 3.9 2.8 200 93 South Africa 67 50 .. 4.9 3.9 404a 94 Mauritius 100 99 99 100 94 100 32 17 75 2.7 2.0 112 95 Czech Republic . .. .. 16 8 69 2.0 1.4 96 Malaysia 88 80 78 70 94 30 12 23 4.2 3.4 34" 97 Chile 85 86 83 83 33 12 1 2.8 2.5 98 Trinidad and Tobago 98 96 56 35 14 3.3 2.5 99 Hungary .. 100 .. 23 12 1.9 1.6 100 Gabon 50 58 .. 76 116 89 4.5 5.5 438a 101 Mexico 51 74 78 55 66 53 35 4.5 3.2 . . 102 Uruguay .. 80 .. 51 82 37 19 2.7 2.2 36 103 Oman 75 89 15 57 79 41 18 9 9.9 7.1 184 104 Slovenia .. 90 15 6 2.1 1.3 105 Saudi Arabia 85 98 84 95 70 78 65 26 7.3 6.3 108a 106 Greece 100 .. 18 8 2.2 1.4 . . 107 Argentina 64 89 35 23 3.3 2.6 140 108 Korea, Rep. 100 78 100 100 32 12 79 2.6 1.8 30 Low- and middle-income 87 w 58w 4.2 w 3.1 w Sub-Saharan Africa 115 w 92w 6.6 w 5.9 w East Asia and Pacific 51w 35w 3.1 w 2.2 w South Asia 119 w 73 w 5.3 w 3.6 w Europe and Central Asia 34 w 23 w 2.5 w 1.9 w Middle East and N. Africa 95w 49w 6.1 w 4.5 w Latin America and Caribbean 60w 41w 4.1 w 2.9 w High-income economies 12w 7w 1.9w 1.7 w 109 Portugal 100 41 24 8 2.2 1.4 110 New Zealand 100 97 13 7 2.1 2.1 111 Spain 100 95 97 12 7 2.2 1.2 112 Ireland 100 11 6 60 3.2 1.9 113 t Israel 100 70 15 8 3.2 2.4 114 Australia 99 .. 99 .. 11 6 1.9 1.9 115 United Kingdom 100 96 12 6 1.9 1.8 116 Finland 100 .. 100 8 5 1.6 1.9 117 Italy 100 99 15 7 1.6 1.3 118 t Kuwait 100 100 100 100 27 11 5.3 3.0 18 119 Canada 60 85 10 6 1.7 1.9 120 t Hong Kong .. .. 11 5 2.0 1.2 121 Netherlands 100 100 100 9 6 1.6 1.6 122 t Singapore 100 100 80 100 12 5 14 1.7 1.8 123 Belgium 100 99 12 8 1.7 1.6 124 France 100 85 10 6 1.9 1.6 125 Sweden 100 85 7 4 1.7 1.9 126 Austria 100 85 14 6 1.6 1.5 127 Germany 12 6 1.6 1.2 128 United States 98 85 13 8 1.8 2.0 129 Norway 100 .. 8 5 1.7 1.9 130 Denmark 100 100 100 8 6 1.5 1.8 131 Japan 100 85 8 4 3 1.8 1.5 132 Switzerland .. 100 85 100 9 6 1.5 1.5 133 t United Arab Emirates 96 90 100 .. 75 95 55 16 5.4 4.1 20. World 81 w 53 w 3.8 w 2.9 w a. UNICEF/World Health Organization estimate. b. Based on indirect estimation using survey data. c. Based on a study covering thirty provinces. d. Refers to chil- dren three years of age and younger. e. Based on sample surveys. f. Based on civil registration. 200 Table 7. Education Percentage Percentage of age group enrolled in education of cohort reaching Primary Secondary grade 4 Aduft illiteracy 1%) Female Male Female Male Tertiary Female Male Female Male 1980 1993 1980 1993 1980 1993 1980 1993 1980 1993 1980 1988 1980 1988 1995 1995 Low-income economies 80w 98w 103w 112w 26w 42w 42w 55w 3w 45w 24w Excluding China and India 64 w 67 w 85 w 82 w 15 w 21 w 27 w 30 w 4w 55w 37w 1 Rwanda 60 50 66 50 3 9 4 11 0 74 75 73 73 48 30 2 Mozambique 84 51 114 69 3 6 8 9 0 0 60 . . 67 77 42 3 Ethiopia a 23 19 44 27 6 11 11 12 0 I 48 . . 42 . . 75 55 4 Tanzania 86 69 99 71 2 5 4 6 89 87 90 87 43 21 5 Burundi 21 63 32 76 2 5 4 9 1 I 83 76 83 78 78 51 6 Sierra Leone 43 . . 61 . . 8 20 1 . . . . . . 82 55 7 Malawi 48 77 72 84 2 5 .6 1 / 55 68 62 73 58 28 8 Chad 38 .. 80 . . .. . . I 66 74 65 38 9 Uganda 43 83 56 99 3 10 7 17 1 1 74 83 50 26 10 Madagascar 133 72 139 75 14 .. 14 3 4 64 63 . . . . 11 Nepal 49 85 117 129 9 23 33 46 6 3 . . . . . . 86 59 12 Vietnam 106 . . 111 . . 40 . . 44 2 2 67 . . 71 . . 9 4 13 Bangladesh 46 105 76 128 9 12 26 26 3 30 46 29 44 74 51 14 Haiti 70 82 13 . . 14 .. 1 64 60 63 60 58 52 15 Niger 18 21 33 :35 3 4 7 9 0 1 79 . . 82 93 79 16 Guinea-Bissau 43 . . 94 .. 2 2 10 10 47 63 58 32 17 Kenya 110 91 120 92 16 23 23 28 1 85 84 30 14 18 Mali 19 24 34 38 5 6 12 12 1 77 73 77 61 19 Nigeria 104 82 135 105 14 27 27 32 2 73 88 53 33 20 Yemen, Rep. 21 Burkina Faso 14 30 23 47 2 6 4 11 o 79 83 79 83 91 70 22 Mongolia 107 . . 107 . . 97 . . 85 .. .. 23 India 67 91 98 113 20 38 39 59 5 52 57 62 3; 24 Lao PDR 104 92 123 123 16 19 25 31 0 2 31 31 56 31 25 Togo 91 81 146 122 16 12 51 34 2 3 84 82 90 87 63 33 26 Gambia, The 35 61 67 84 7 13 16 25 . . 75 47 27 Nicaragua 102 105 96 101 45 44 39 39 13 9 55 51 33 35 28 Zambia 83 99 97 109 11 22 .. 2 29 14 29 Tajikistan .. 88 .. 91 .. 101 .. 98 24 25 . . . . 30 Benin 41 44 87 88 9 7 24 17 2 73 77 . . 74 51 31 Central African Republic 51 51 92 92 7 21 1 2 . . 81 . . 85 48 32 32 Albania 111 97 116 95 63 70 .. 8 10 96 97 .. .. .. 33 Ghana 71 70 89 83 31 28 51 44 2 82 .. 87 . . 47 24 34 Pakistan 27 49 51 80 8 . . 20 . . .. 41 45 53 55 76 50 35 Mauritania 26 62 47 76 4 11 17 19 .. 4 86 83 96 82 74 50 36 Azerbaijan . . 87 .. 91 . . 88 . . 89 25 26 . . . . . . . . . . . . 37 Zimbabwe 57 114 65 123 7 40 8 51 1 6 64 80 67 81 20 10 38 Guinea 25 30 48 61 10 6 24 17 5 . . 57 73 85 80 78 50 39 China 103 116 121 120 37 51 54 60 1 4 .. 81 . . 97 27 10 40 Honduras 99 112 98 111 31 37 29 29 8 9 40 . . 35 .. 27 27 41 Senegal 37 50 56 67 7 11 15 21 3 3 90 90 93 94 77 57 42 ate d'Ivoire 63 58 95 80 12 17 27 33 3 91 83 94 85 70 50 43 Congo .. 91 87 91 88 33 17 44 Kyrgyz Republic . . .. .. .. 28 21 . . 45 Sri Lanka 100 105 105 106 57 78 52 71 3 6 98 97 13 7 46 Armenia . . 93 .. 87 .. 90 .. 80 30 49 . . . . . . 47 Cameroon 89 .. 107 .. 13 . . 24 2 2 81 . . 81 . . 48 25 48 Egypt, Arab Rep. 61 89 84 105 39 69 61 81 16 17 83 97 75 92 61 36 49 Lesotho 120 105 85 90 21 31 14 21 2 2 77 84 61 74 38 19 50 Georgia . . 30 51 Myanmar 89 . . 93 .. . . . . .. .. .. .. 22 11 Middle-income economies 101 w 102 w 107 w 105 w 48 w 63 w 53 w 65 w 20 w 23 w Lower-middle-income 99 w 101 w 107w 105 w 49 w 62 w 55 w 64w 24 w 24 w 52 Bolivia 81 . . 92 . . 32 .. 42 .. 16 23 50 52 24 10 53 Macedonia, FYR 87 88 55 53 28 16 54 Moldova 77 78 .. 72 .. 67 29 35 . . . . 55 Indonesia 100 112 115 116 23 39 35 48 . . 10 65 82 88 97 22 10 56 Philippines 112 .. 113 . . 69 . . 61 24 26 85 84 6 5 57 Uzbekistan . . 79 80 92 96 30 33 . . .. .. 58 Morocco 63 60 102 85 20 29 32 40 6 10 89 85 90 85 69 43 59 Kazakstan . . 86 .. 86 . . 91 .. 89 34 42 .. . . . . 60 Guatemala 65 78 77 89 17 23 20 25 8 56 . . 66 .. 51 38 61 Papua New Guinea 51 67 66 80 8 10 15 15 2 . . 85 67 77 68 37 19 62 Bulgaria 98 84 98 87 84 70 85 66 16 32 95 90 98 93 63 Romania 101 86 102 87 69 82 73 83 12 12 94 93 . . 64 Ecuador 116 122 119 124 53 56 53 54 35 76 78 12 8 65 Dominican Republic 99 95 43 30 . . . . 18 18 66 Lithuania . . 90 .. 95 . . 79 .. 76 49 39 . . .. . . . . 67 El Salvador 75 80 75 79 23 30 26 27 4 15 55 . . 52 .. 30 27 68 Jordan 102 95 105 94 73 54 79 52 27 19 95 97 95 99 21 7 69 Jamaica 104 108 103 109 71 70 63 62 7 6 . . 100 . . 98 11 19 70 Paraguay 101 110 107 114 24 10 38 74 25 36 8 81 74 79 9 7 71 Algeria 81 96 108 11140 66 26 6 55 11 91 96 92 97 51 26 72 Colombia 126 120 123 41 68 11840 57 9 16 46 74 42 72 9 9 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. 201 Percentage Percentage of age group enrolled in education of cohort reaching Primary Secondary grade 4 Adult illiteracy (%) Female Male Female Male Tertiary Female Male Female Male 1980 1993 1980 1993 1980 1993 1980 1993 1980 1993 1980 1988 1980 1988 1995 1995 73 Tunisia 88 113 118 123 20 49 34 55 5 11 90 93 94 93 45 21 74 Ukraine 87 .. 87 95 65 42 46 75 Namibia 138 134 61 49 .. 3 . . 64 .. 65 76 Peru 111 . . 117 .. 54 . . 63 . . 17 40 83 85 17 6 77 Belarus 95 96 96 89 39 44 78 Slovak Republic .. 101 .. 101 90 87 .. 17 79 Latvia .. 82 . . 83 .. 90 . . 84 45 39 . . .. 80 Costa Rica 104 105 106 106 51 49 44 45 21 30 84 90 80 92 5 5 81 Poland 99 97 100 98 80 87 75 82 18 26 97 98 . . 82 Thailand 97 97 100 98 28 37 30 38 13 19 8 4 83 Turkey 90 98 102 107 24 48 44 74 5 16 98 99 28 8 84 Croatia .. 87 .. 87 .. 86 . . 80 .. 27 .. 85 Panama 105 . . 108 .. 65 . . 58 .. 21 23 88 86 87 84 10 9 86 Russian Federation 102 107 102 107 97 91 95 84 46 45 .. .. .. 87 Venezuela 104 97 104 95 25 41 18 29 21 29 83 84 10 8 88 Botswana 100 120 83 113 20 55 17 49 1 3 98 95 91 91 40 20 89 Estonia 83 84 96 87 43 38 90 Iran, Islamic Rep. 101 109 32 58 52 74 .. 15 93 94 22 91 Turkmenistan 23 .. lipperimiddle-income 103 w 106 w 47w .. 48w 13w 20w 14 w 12w 92 Brazil 97 . . 101 .. 36 . . 31 . . 11 12 17 17 93 South Africa 110 111 84 71 13 18 18 94 Mauritius 91 106 94 107 49 60 51 58 1 4 97 99 97 99 21 13 95 Czech Republic .. 100 .. 99 .. 88 . . 85 18 16 . .. . 96 Malaysia 92 93 93 93 46 61 50 56 4 . . . 99 . . 98 22 11 97 Chile 108 98 110 99 56 70 49 65 12 27 81 95 78 94 5 5 98 Trinidad and Tobago 100 94 98 94 62 78 60 74 4 8 89 97 83 96 3 1 99 Hungary 97 94 96 94 67 82 72 79 14 17 96 98 96 98 100 Gabon .. 136 .. 132 . . .. 3 79 .. 82 . . 26 101 Mexico 121 110 122 114 46 58 51 57 14 14 63 74 85 95 13 8 102 Uruguay 107 108 107 109 62 . . 61 . . 17 30 99 99 93 99 2 3 103 Oman 36 82 69 87 6 57 19 64 5 77 96 99 97 104 Slovenia .. 97 . . 97 . . 90 .. 88 .. 28 .. . . . . .. . . 105 Saudi Arabia 49 73 74 78 23 43 36 54 7 14 90 93 90 93 50 29 106 Greece 103 . . 103 77 . . 85 . . 17 . . 98 99 98 98 . . .. 107 Argentina 106 107 106 108 60 75 52 70 22 41 76 73 4 4 108 Korea, Rep. 111 102 109 100 74 92 82 93 15 48 96 100 96 100 b b Low- and middle-income 89 w 99 w 104 w 110 w 32 w 50 w 45 w 59 w 8w Sub-Saharan Africa 69w 91 w 77 w 64 w 10 w 23 w 20 w w w 35 w East Asia and Pacific 103w 115w 117w 119w 38w 53w 51w 61w 3w 6w 24w 9w South Asia 60w 87w 91w 110w 18w 35w 36w 55w 5w 64w 37w Europe and Central Asia .. 97 w .. 97w .. 90w .. 81 w 31 w .. .. Middle East and N. Africa 74w 91w 98w 104w 32w 51w 52w .. 11w .. 50w 28w Latin America and Caribbean 105 w .. 108 w 41 w .. 40w .. 14 w 15 w 14 w 12w High-income economies 102 w 104 w 103 w 104 w .. 98 w 97 w 37 w 53 w 109 Portugal 123 118 124 122 40 34 11 23 .. . . 110 New Zealand 111 101 111 102 84 104 82 103 27 58 .. 97 . . 97 b b 111 Spain 109 105 110 104 89 120 85 107 23 41 94 93 92 91 112 Ireland 100 103 100 103 95 110 85 101 18 34 100 100 97 99 .6 .1,; 113 t Israel 97 96 95 95 76 91 66 84 29 35 98 97 97 98 . . .. 114 Australia 110 107 112 108 72 86 70 83 25 42 97 100 94 99 b b 115 United Kingdom 103 113 103 112 85 94 82 91 19 37 b b 116 Finland 96 100 97 100 105 130 94 110 32 63 99 98 99 98 b b 117 Italy 100 99 100 98 70 82 73 81 27 37 . . .. b b 118 t Kuwait 100 65 105 65 76 60 84 60 11 16 81 85 25 18 119 Canada 99 104 99 106 89 103 87 104 52 103 97 98 94 95 b b 120 t Hong Kong 106 107 65 .. 63 .. 10 21 99 100 12 4 121 Netherlands 101 99 99 96 90 120 95 126 29 45 100 97 b b 122 t Singapore 106 .. 109 .. 59 . . 56 .. 8 100 99 14 4 123 Belgium 103 100 104 99 92 104 90 103 26 . . 81 . . 78 .. b b 124 France 110 105 112 107 92 107 77 104 25 50 95 95 93 100 b b 125 Sweden 97 100 96 100 93 100 83 99 31 38 100 . . 99 .. b b 126 Austria 98 103 99 103 87 104 98 109 22 43 97 100 92 98 b b 127 German), 99 98 99 97 92 100 96 101 26 36 b 98 99 96 97 b 128 United States 100 106 101 107 .. . . 97 98 56 81 . b . b 129 Norway 100 99 100 99 96 92 114118 26 54 100 99 .. b b 130 Denmark 95 98 96 97 104 105 115 112 28 41 . . 98 . 98 b . b 131 Japan 101 102 101 102 94 97 92 95 31 30 100 100 100 100 b b 132 Switzerland 102 100 89 93 18 31 94 92 b b 133 t United Arab Emirates 88 108 90 112 49 94 55 84 3 11 93 94 20 21 World 89w 100w 104w 109w 38w 57w 49w 65w 13w 18w a. Data for 1980 include Eritrea. b. According to UNESCO, illiteracy is less than 5 percent. c. Data before 1990 refer to the Federal Republic of Germany before unification. 202 wo.t.o0 RT Table 8. Commercial energy use Net Energy use (oil equivalent) energy imports CO2 emissions. Total Per capita Avg. annual GDP per kg. as % of energy Total Per capita (thous. metric tons) (kg) growth rate (%) ($) consumption (mill, metric tons) (metric tons) 1980 1994 1980 1994 1980-90 1990-94 1980 1994 1980 1994 1980 1992 1980 1992 Low-income economies 652,586 t 1,222,928 t 271 w 384w 5.5 w 3.7w 1.0w 2,195.1 t 4,012.9 t 0.91 w 1.30w Excluding China and India .. 230,666 t 174 w 1.9 w 355.8 t 575.5 t 0.40 w 0.45 w 1 Rwanda .. 209 .. 27 . . . . 2.8 . . 78 0.3 0.5 0.05 0.06 2 Mozambique 1,123 614 93 40 -5.8 5.8 1.8 2.4 -15 74 3.2 1.0 0.26 0.07 3 Ethiopia 624 1,156 17 21 6.4 0.9 .. 4.1 91 86 1.8 2.9 0.05 0.05 4 Tanzania 1,023 975 55 34 -0.7 2.9 . . 3.5 92 83 1.9 2.1 0.10 0.08 5 Burundi 143 23 .. 7.0 97 0.1 0.2 0.03 0.03 6 Sierra Leone 323 73 .. 2.6 100 0.6 0.4 0.18 0.10 7 Malawi 370 39 . . 3.5 59 0.7 0.7 0.12 0.07 8 Chad 100 16 .. 9.1 100 0.2 0.3 0.05 0.04 9 Uganda 425 23 .. 9.4 58 0.6 1.0 0.05 0.05 10 Madagascar .. 479 .. 37 .. .. . . 4.0 .. 83 1.6 0.9 0.18 0.08 11 Nepal 174 486 12 23 7.2 16.4 11.2 8.3 91 84 0.5 1.3 0.04 0.07 12 Vietnam 4,024 7,549 75 105 4.0 8.3 .. 2.1 32 -55 17.0 21.5 0.32 0.31 13 Bangladesh 2,809 7,700 32 65 9.0 5.8 4.6 3.4 60 31 7.6 17.2 0.09 0.15 14 Haiti 326 47 .. 5.0 70 0.8 0.8 0.14 0.12 15 Niger 327 37 .. 4.7 83 0.6 1.1 0.10 0.13 16 Guinea-Bissau .. 39 37 .. .. 6.2 100 0.1 0.2 0.17 0.21 17 Kenya 1,991 2,792 120 107 4.2 3.3 3.6 2.5 95 82 6.2 5.3 0.37 0.22 18 Mali .. 205 .. 22 .. .. 9.1 .. 80 0.4 0.4 0.06 0.05 19 Nigeria 9,879 17,503 139 162 2.9 4.6 9.4 2.0 -968 -484 68.1 96.5 0.96 0.95 20 Yemen, Rep. 1,364 3,165 160 214 7.8 1.9 .. 100 -406 3.3 10.1 0.39 0.73 21 Burkina Faso 160 16 .. 11.6 .. 100 0.4 0.6 0.06 0.06 22 Mongolia 2,550 .. 1,079 .. .. 0.3 15 6.7 9.3 4.03 4.08 23 India 93,907 222,262 137 243 6.9 4.8 1.8 1.3 21 20 350.1 769.4 0.51 0.87 24 Lao PDR 182 38 .. 8.4 -19 0.2 0.3 0.06 0.06 25 Togo 183 46 .. 5.4 100 0.6 0.7 0.23 0.19 26 Gambia, The 60 56 . . 6.0 100 0.2 0.2 0.25 0.20 27 Nicaragua 1,001 241 . . 1.8 .. 84 2.0 2.5 0.72 0.64 28 Zambia 1,685 1,292 294 140 -3.0 2.3 2.3 2.7 32 29 3.5 2.5 0.62 0.29 29 Tajikistan .. 3,695 642 . . 0.6 55 . . 4.0 .. 0.71 30 Benin 149 97 43 18 -1.4 -2.3 9.4 15.7 93 -239 0.5 0.6 0.14 0.12 31 Central African Republic .. 93 .. 29 .. 9.4 . . 76 0.1 0.2 0.05 0.07 32 Albania 3,058 1,350 1,145 422 -1.0 -12.0 0.5 1.3 o 28 7.4 4.0 2.77 1.24 33 Ghana 1,303 1,511 121 91 1.6 0.5 3.4 3.6 57 64 2.4 3.8 0.23 0.24 34 Pakistan 11,698 32,247 142 255 8.0 6.4 2.0 1.6 38 38 31.7 71.9 0.38 0.60 35 Mauritania .. 229 .. 103 .. . . .. 4.5 . . 100 0.6 2.9 0.39 1.36 36 Azerbaijan 15,001 10,545 2,433 1,414 5.2 -18.8 .. 0.3 1 -41 .. 63.9 . . 8.71 37 Zimbabwe 2,797 4,654 399 432 5.5 0.7 1.9 1.2 28 26 9.7 18.7 1.39 1.82 38 Guinea .. 418 .. 65 .. .. 8.1 87 0.9 1.0 0.21 0.17 39 China 413,130 770,000 421 647 5.6 4.0 0.5 0.7 -4 -1 1,489.2 2,668.0 1.52 2.29 40 Honduras .. 969 .. 169 . . .. .. 3.4 .. 71 2.1 3.1 0.56 0.56 41 Senegal 875 840 158 102 0.8 -1.5 3.4 4.6 100 100 2.8 2.8 0.50 0.36 42 Cote d'Ivoire 1,435 2,350 175 170 1.6 17.9 7.1 2.9 87 82 4.7 6.3 0.57 0.49 43 Congo 262 379 157 147 0.6 7.3 6.5 4.2 -1,193 -2,492 0.4 4.0 0.23 1.64 44 Kyrgyz Republic 1,938 3,197 534 715 0.9 2.9 .. 0.9 -113 76 .. 15.4 .. 3.42 45 Sri Lanka 1,411 1,979 96 111 0.5 7.5 2.9 5.9 91 83 3.4 5.0 0.23 0.29 46 Armenia 2,500 667 . . .. 1.0 . . 87 .. 4.2 .. 1.14 47 Cameroon 774 1,077 89 83 3.5 -1.2 9.7 6.9 -269 -525 3.9 2.2 0.45 0.18 48 Egypt, Arab Rep. 15,176 34,538 371 608 7.2 3.0 1.5 1.2 -120 -67 45.2 84.0 1.11 1.54 49 Lesotho . .. . . 50 Georgia 4,474 3,098 882 572 -1.7 -12.2 . . 0.7 -5 81 . . 13.8 .. 2.54 51 Myanmar .. .. . . 4.8 4.4 0.14 0.10 Middle-income economies 2,501,145 t 1,593 w 1.7w 4,009.3 t 5,370.8 t 3.23 w 3.52 w Lower-middle-income 1,689,117 t .. 1,540w .. 1.1 w .. .. .. .. 52 Bolivia 1,713 2,220 320 307 -0.6 4.4 1.8 2.5 -107 -90 4.5 6.6 0.84 0.96 53 Macedonia, FYR .. .. .. .. 4.1 .. 1.99 54 Moldova .. 4,185 .. 962 .. .. .. 0.9 . . 99 .. 14.2 0.00 3.26 55 Indonesia 25,028 74,794 169 393 7.4 9.3 3.1 2.3 -275 -101 94.6 184.6 0.64 1.00 56 Philippines 13,406 24,428 277 364 2.6 8.3 2.4 2.6 79 70 36.5 49.7 0.76 0.77 57 Uzbekistan .. 42,209 .. 1,886 .. .. . . 0.5 3 . . 123.3 . . 5.74 58 Morocco 4,927 8,107 254 307 3.6 4.3 3.8 3.8 87 95 16.0 27.3 0.82 1.08 59 Kazakstan 76,799 62,368 5,153 3,710 3.6 -10.8 0.3 0 -16 .. 298.0 .. 17.55 60 Guatemala 1,443 1,921 209 186 0.3 9.2 5.5 6.7 84 70 4.5 5.7 0.65 0.58 61 Papua New Guinea .. 990 .. 236 . . . . 5.5 . . -150 1.8 2.3 0.60 0.56 62 Bulgaria 28,476 23,500 3,213 2,786 0.3 -2.6 0.7 0.4 74 63 74.9 54.4 8.45 6.37 63 Romania 63,846 39,782 2,876 1,750 0.3 -8.8 .. 0.8 19 27 191.4 122.1 8.62 5.36 64 Ecuador 4,209 5,807 529 517 2.6 0.0 2.8 2.9 -156 -223 13.4 18.9 1.69 1.76 65 Dominican Republic .. 2,591 .. 340 .. .. .. 4.0 89 6.4 10.2 1.12 1.40 66 Lithuania 11,353 8,164 3,326 2,194 3.0 -19.6 0.6 -2 80 .. 22.0 .. 5.88 67 El Salvador . . 1,236 .. 219 .. 6.6 . . 58 2.1 3.6 0.47 0.66 68 Jordan 1,710 4,024 784 997 5.8 5.0 . . 1.5 100 97 4.7 11.3 2.17 3.03 69 Jamaica 2,169 2,776 1,017 1,112 -0.3 2.3 1.2 1.5 99 100 8.4 8.0 3.96 3.29 70 Paraguay 550 1,251 175 261 6.8 9.6 8.3 6.3 88 -141 1.5 2.6 0.47 0.58 71 Algeria 12,078 28,244 647 1,030 6.2 4.7 3.5 1.5 -452 -273 66.2 79.2 3.55 3.02 72 Colombia 13,972 22,271 501 613 3.7 1.3 2.4 3.0 7 -103 39.3 61.5 1.41 1.76 Note: For data comparability and coverage, see the technical notes. SELECTED WORLD DEVELOPMENT INDICATORS 203 Net Energy use (oil equivalent) energy imports CO2 emissionsa Total Per capita Avg. annual GDP per kg. as % of energy Total Per capita (thous. metric tons) (kg) growth rate (%) ($) consumption (mill. metric tons) (metric tons) 1980 1994 1980 1994 1980-90 1990-94 1980 1994 1980 1994 1980 1992 1980 1992 73 Tunisia 3,083 5,204 483 590 4.0 3.4 2.8 3.0 -99 -7 9.5 13.6 1.48 1.60 74 Ukraine 108,290 170,910 2,164 3,292 6.9 -9.8 .. 0.5 -1 43 611.3 .. 11.72 75 Namibia .. .. .. .. . . .. .. .. .. .. 76 Peru 8,139 8,159 471 351 -0.5 3.1 2.5 6.1 -36 1 23.5 22.3 1.36 1.00 77 Belams 27,881 .. 2,692 .. 0.7 89 102.0 9.89 78 Slovak Republic . .. .. .. .. 37.0 6.97 79 Latvia 4,469 .. 1,755 .. 1.3 88 14.8 . . 5.62 80 Costa Rica .. 1,843 .. 558 .. .. .. 4.5 .. 41 2.5 3.8 1.08 1.20 81 Poland 124,500 98,800 3,499 2,563 -0.4 0.2 0.5 0.9 3 5 459.6 341.9 12.92 8.91 82 Thailand 12,093 44,655 259 770 9.5 10.0 2.7 3.2 96 59 40.0 112.5 0.86 1.98 83 Turkey 31,314 58,100 705 955 5.8 2.7 1.8 2.3 45 56 76.0 145.5 1.71 2.49 84 Croatia .. 5,051 .. 1,057 .. .. . . 2.8 28 . . 16.2 .. 3.39 85 Panama 1,376 1,479 703 566 -1.7 6.6 2.6 4.7 97 83 3.6 4.2 1.86 1.68 86 Russian Federation 750,240 599,027 5,397 4,038 4.2 -8.9 . . 0.6 0 -52 2,103.1 . . 14.14 87 Venezuela 35,011 49,355 2,354 2,331 1.5 4.6 2.0 1.2 -280 -245 89.6 116.4 6.03 5.75 88 Botswana 549 . . 380 .. 7.3 55 1.0 2.2 1.10 1.60 89 Estonia .. 5,325 . . 3,552 . . . . .. 0.9 42 0.4 20.9 0.28 13.53 90 Iran, Islamic Rep. 38,347 97,891 980 1,565 7.5 8.9 2.4 0.7 -118 -127 116.1 235.5 2.97 3.97 91 Turkmenistan 7,948 14,090 2,778 3,198 25.0 -29.9 .. .. -101 -116 .. 42.3 .. 10.48 Upper-middle-income 475,209 s 810,681 t 1,297w 1,715 w 4.9 w 3.5 w .. 2.8w 1,358.3 t 1,907.7 t 3.71 w 4.17 vv 92 Brazil 72,141 110,000 595 691 4.3 3.2 3.3 5.0 65 38 183.6 217.1 1.51 1.41 93 South Africa 60,511 91,349 2,074 2,253 3.6 0.0 1.3 1.3 -14 -33 213.4 290.3 7.31 7.49 94 Mauritius .. 431 .. 387 .. . . .. 7.9 . . 92 0.6 1.4 0.61 1.26 95 Czech Republic 29,394 40,324 2,873 3,902 73.7 -4.5 1.0 0.9 -29 13 .. 135.6 13.15 96 Malaysia 9,522 33,662 692 1,711 9.4 11.2 2.6 2.1 -58 -66 28.0 70.5 2.03 3.76 97 Chile 7,743 13,200 695 943 3.9 4.3 3.6 3.9 50 66 27.0 34.7 2.42 2.55 98 Trinidad and Tobago 3,863 5,891 3,570 4,549 3.9 -0.4 1.6 0.8 -240 -89 16.7 20.6 15.41 16.28 99 Hungary 28,322 25,191 2,645 2,455 0.8 -3.4 0.8 1.6 49 44 82.0 59.9 7.66 5.80 100 Gabon 759 676 942 520 -3.6 5.6 5.6 5.8 -1,106 -2,268 4.8 5.6 5.93 4.50 101 Mexico 97,434 139,600 1,453 1,577 2.3 2.0 2.0 2.7 -49 -55 260.1 332.9 3.88 3.92 102 Uruguay 2,208 1,971 758 623 -0.9 2.7 4.6 7.9 89 68 5.8 5.0 1.98 1.61 103 Oman 1,346 4,924 1,223 2,347 12.4 5.8 4.4 2.4 -1,024 -801 5.9 10.0 5.33 5.24 104 Slovenia 2,995 .. 1,506 .. .. .. 4.7 .. 19 .. 5.5 .. 2.76 105 Saudi Arabia 35,496 85,326 3,787 4,744 5.8 6.1 4.4 1.4 -1,361 -435 130.8 220.6 13.95 13.11 106 Greece 15,973 23,300 1,656 2,235 3.6 1.2 2.5 3.3 77 63 51.4 73.9 5.33 7.16 107 Argentina 39,669 47,850 1,411 1,399 1.1 3.5 1.9 5.9 8 -21 107.5 117.0 3.82 3.50 108 Knrea Ren 41,426 133.374 1,087 3.000 8.5 10.2 1.5 2.8 77 85 125.7 289.8 3.30 6.64 Low- and middle-income 3,716,470 t 782w . 1.5w 6,378.8 t 9,849.7 t 1.75 w 2.14w Sub-Saharan Africa 104,833 t 155,832 t 276w 272 w 3.2 w 1.0w 1.9w 356.8 t 478.6 t 0.94w 0.88 w East Asia and Pacific 566,538 t 1,162,092 t 405 w 670 w 5.9w 5.4w 1.3 w 1,979.2 t 3,682.4 t 1.42w 2.18w South Asia 112,057 t 269,625 t 124w 221 w 7.0w 5.1 w 1.5 w 395.2 t 866.5 t 0.44w 0.74w Europe and Central Asia 1,329,092 t 2,727 w 0.8 w Middle East and N. Africa 143,540 t 333,267 t 821 w 1,250 w 6.4 w 6.2 w . 1.5 w 500.5 t 860.2 t 2.86w 3.40 w Latin America and Caribbean 322,214 t 453,021 t 898w 962w 2.5 w 2.7w . 3.7w 857.6 t 1,047.0 t 2.39w 2.31 w High-income economies 3,743,415 t 4,392,058 t 4,822w 5,168 w 1.5 w 1.4 w . 4.7w 9,835.0 t 10,087.4 t 12.67w 12.03 vv 109 Portugal 10,291 18,100 1,054 1,828 4.7 2.6 2.8 4.8 86 90 27.1 47.2 2.77 4.78 110 New Zealand 9,202 15,200 2,956 4,352 4.5 2.2 2.4 3.3 39 5 17.6 26.2 5.65 7.60 111 Spain 68,692 94,500 1,837 2,414 2.6 1.3 3.1 5.1 77 69 200.0 223.2 5.35 5.72 112 Ireland 8,485 11,200 2,495 3,136 2.1 1.5 2.4 4.6 78 70 25.1 30.9 7.37 8.69 113 t Israel 8,616 15,151 2,222 2,815 4.5 6.7 2.6 5.1 98 96 21.1 41.6 5.45 8.13 114 Australia 70,399 92,300 4,792 5,173 2.1 1.5 2.3 3.6 -22 -91 202.8 267.9 13.80 15.33 115 United Kingdom 201,200 219,200 3,572 3,754 1.0 0.6 2.7 4.6 2 -9 588.3 566.2 10.44 9.76 116 Finland 24,998 30,300 5,230 5,954 2.3 1.3 2.1 3.2 72 62 55.1 41.2 11.53 8.17 117 Italy 139,190 154,800 2,466 2,710 1.4 -0.1 3.3 6.6 86 81 372.1 407.7 6.59 7.17 118 t Kuwait 9,500 12,337 6,909 7,615 4.1 11.7 3.0 2.0 -739 -711 24.7 16.0 17.99 11.42 119 Canada 193,170 228,000 7,854 7,795 1.6 2.2 1.4 2.4 -7 -46 430.2 409.9 17.49 14.36 120 t Hong Kong 5,628 13,822 1,117 2,280 7.0 7.7 5.1 9.5 100 100 16.4 29.1 3.26 5.01 121 Netherlands 65,106 70,100 4,601 4,558 1.0 1.2 2.6 4.7 -10 9 152.8 139.0 10.80 9.16 122 t Singapore 6,049 19,210 2,651 6,556 7.2 10.5 1.9 3.6 100 100 30.1 49.8 13.19 17.67 123 Belgium 46,122 51,500 4,684 5,091 1.3 1.2 2.6 4.4 83 77 127.7 101.8 12.97 10.13 124 France 190,660 222,400 3,539 3,839 1.9 0.2 3.5 6.0 75 47 484.1 362.1 8.99 6.31 125 Sweden 40,992 49,200 4,933 5,603 2.1 0.2 3.1 4.0 61 36 71.4 56.8 8.60 6.55 126 Austria 23,449 26,300 3,105 3,276 1.6 -0.4 3.3 7.5 67 65 52.2 56.6 6.91 7.15 127 Germany 359,170 334,000 4,587 4,097 0.5 -1.5 6.1 49 58 1,068.3 878.1 13.64 10.89 128 United States 1,801,000 2,060,400 7,908 7,905 1.3 1.8 1.5 3.2 14 19 4,623.2 4,881.3 20.30 19.11 129 Norway18,865 23,100 4,611 5,326 1.9 1.5 3.1 4.7 -195 -636 40.0 60.2 9.78 14.06 130 Denmark 19,488 20,800 3,804 3,996 0.5 2.4 3.4 7.0 97 27 63.2 53.9 12.34 10.42 131 Japan 347,120 478,000 2,972 3,825 2.4 2.3 3.1 9.6 88 82 933.9 1,093.5 8.00 8.79 132 Switzerland 20,840 25,200 3,298 3,603 2.1 0.2 4.9 10.3 66 59 40.9 43.7 6.48 6.36 133 t United Arab Emirates 8,558 24,017 8,205 12,795 8.8 4.4 3.5 -996 -470 36.3 70.6 34.77 39.74 World 6,711,356 t 8,035,058 t 1,516w 1,434w 2.7w 0.3w .. 3.3w 15,659.9, 18,821.8 t 3.54 w 3.46w a. From industrial processes. 204 Table 9. Land use and urbanization Land use (% of total land area) Urban population Population in urban agglomerations Permanent As % of total Avg. annual of 1 million or more in 1990, as % of Cropland pasture Other population growth rate MI Urban Total 1980 1993 1980 1993 1980 1993 1980 1994 1980-90 1990-94 1980 1994 1980 1994 Low-income economies 11 w 13 w 28 w 31 w 62w 56 , 22 w 28 w 4.2 w 3.8w 32 w 34 w 7w 10 w Excluding China and India 6w 8w 27w 30 w 68 w 61 w 23 w 29 w 4.4 w 4.4w 29 w 31 w 7w 9w 1 Rwanda 54 47 29 18 17 34 5 6 4.9 4.4 0 0 0 0 2 Mozambique 4 4 62 56 33 40 13 33 9.1 7.4 48 41 6 13 3 Ethiopia 13 13 41 41 46 47 10 13 4.7 3.2 30 29 3 4 4 Tanzania 1 4 10 40 89 56 15 24 6.8 6.4 30 24 5 6 5 Burundi 8 53 6 36 86 12 4 7 6.9 6.7 0 0 0 0 6 Sierra Leone 3 8 13 31 84 62 24 35 5.0 4.9 0 0 0 0 7 Malawi 25 18 35 20 40 62 9 13 6.1 5.7 0 0 0 0 8 Chad 3 3 37 36 60 62 19 21 3.4 3.5 0 0 0 0 9 Uganda 41 34 13 9 46 57 9 12 4.9 5.6 0 0 0 0 10 Madagascar 7 5 79 41 14 53 18 26 5.7 5.7 0 0 0 0 11 Nepal 17 17 14 15 69 68 6 13 8.0 7.4 0 0 0 0 12 Vietnam 22 20 1 1 77 79 19 21 2.5 3.0 27 32 5 7 13 Bangladesh 79 75 5 5 15 21 11 18 5.9 4.9 46 46 5 8 14 Haiti 5 33 3 18 92 49 24 31 3.9 4.0 55 56 13 17 15 Niger 3 3 8 7 90 90 13 22 7.5 6.9 0 0 0 0 16 Guinea-Bissau 10 12 38 38 51 50 17 22 3.5 4.3 0 0 0 0 17 Kenya 3 8 48 37 49 55 16 27 7.5 6.1 32 28 5 8 18 Mali 2 2 22 25 76 74 18 26 5.1 5.7 0 0 0 0 19 Nigeria 33 36 44 44 23 21 27 38 5.8 5.3 23 27 6 10 20 Yemen, Rep. 3 3 28 30 70 67 20 33 7.0 8.4 0 0 0 0 21 Burkina Faso 13 13 48 22 39 65 9 25 10.0 11.5 0 0 0 0 22 Mongolia 1 1 65 80 34 19 52 60 3.9 2.9 0 0 0 0 23 India 73 57 5 4 22 39 23 27 3.2 2.9 25 35 6 9 24 Lao PDR 6 3 5 3 89 93 13 21 6.2 6.4 0 0 0 0 25 Togo 17 45 48 4 36 52 23 30 5.3 4.8 0 0 0 0 26 Gambia, The 1 18 0 9 99 73 18 25 6.0 6.5 0 0 0 0 27 Nicaragua 10 11 41 46 48 43 53 62 3.9 4.2 42 44 23 28 28 Zambia 7 7 40 40 53 53 40 43 4.2 3.6 23 32 9 14 29 Tajikistan .. 6 .. 25 .. 70 34 32 2.3 2.0 0 0 0 0 30 Benin 16 17 4 4 80 79 32 41 5.2 4.9 0 0 0 0 31 Central African Republic 7 3 11 5 82 92 35 39 3.0 3.5 0 0 0 0 32 Albania 26 26 15 15 59 59 34 37 2.9 -0.4 0 0 0 0 33 Ghana 13 19 23 22 63 59 31 36 4.3 4.2 30 27 9 10 34 Pakistan 26 30 6 6 67 64 28 34 4.5 4.7 39 52 11 18 35 Mauritania 0 0 40 38 60 62 29 52 7.6 5.5 0 0 0 0 36 Azerbaijan .. 23 .. 26 .. 51 53 56 1.9 1.6 48 44 26 25 37 Zimbabwe 7 7 14 13 78 80 22 31 6.0 5.0 0 0 0 0 38 Guinea 7 3 65 22 27 75 19 29 5.7 5.7 65 77 12 22 39 China 12 10 39 43 49 47 19 29 4.8 4.1 41 35 8 10 40 Honduras 7 17 10 14 82 69 36 47 5.4 4.9 0 0 0 0 41 Senegal 23 12 30 16 47 72 36 42 4.0 4.0 49 55 18 23 42 Cote d'Ivoire 14 12 59 41 27 47 35 43 5.4 5.3 44 45 15 19 43 Congo 0 0 5 29 95 70 41 58 5.9 5.1 0 0 0 0 44 Kyrgyz Republic 7 47 46 38 39 1.9 0.8 0 0 0 0 45 Sri Lanka 10 29 2 7 87 64 22 22 1.4 2.2 0 0 0 0 46 Armenia .. 20 24 .. 55 66 69 1.6 1.8 51 50 34 34 47 Cameroon 2 15 2 4 96 81 31 44 5.4 5.3 19 36 6 16 48 Egypt, Arab Rep. 2 3 5 98 92 44 45 2.6 2.4 52 51 23 23 49 Lesotho 2 11 12 66 86 24 13 22 6.8 6.1 0 0 0 0 50 Georgia .. 14 .. 29 .. 57 52 58 1.6 0.7 42 43 22 25 51 Myanmar 30 15 1 1 69 84 24 26 2.5 3.3 27 32 7 8 Middle-income economies 8w 10 w 25 w 23 w 74 w 67 w 52 w 61 w 3.0w 2.4w 32 w 33 w 16w 20 w Lower-middle-income 8w 11 w 17 w 18 w 83 w 71 w 47 w 56 w 3.0 w 2.3 w 28 w 30 w 12 w 16 w 52 Bolivia 3 2 43 24 54 73 46 58 4.2 3.2 30 29 14 17 53 Macedonia, FYR 26 25 49 54 59 1.5 1.6 0 0 0 0 54 Moldova .. 67 11 22 40 51 2.7 1.5 0 0 0 0 55 Indonesia 31 17 19 7 50 76 22 34 5.3 3.8 33 38 7 13 56 Philippines 26 31 3 4 70 65 38 53 5.2 4.4 33 25 12 13 57 Uzbekistan 11 .. 52 37 41 41 2.5 2.6 28 24 11 10 58 Morocco 15 22 40 47 44 . . 31 41 48 3.5 3.0 26 37 11 18 59 Kazakstan 13 .. 70 .. 17 54 59 1.9 0.9 12 12 6 7 60 Guatemala 28 17 21 23 52 60 37 41 3.4 4.0 0 0 0 0 61 Papua New Guinea 1 1 0 0 99 99 13 16 3.6 3.7 0 0 0 0 62 Bulgaria 11 39 5 17 84 44 61 70 1.0 0.0 20 23 12 16 63 Romania 62 43 26 21 12 36 49 55 1.3 0.2 18 17 9 9 64 Ecuador 9 11 15 8 77 82 47 58 4.2 3.6 29 44 14 26 65 Dominican Republic 29 30 43 0 27 70 50 64 4.1 3.1 49 51 25 33 66 Lithuania .. 46 7 .. 47 61 71 2.1 0.9 0 0 0 0 67 El Salvador 35 35 29 29 36 35 42 45 1.9 2.7 0 0 0 0 68 Jordan 4 5 9 9 88 87 60 71 5.1 7.0 49 40 29 28 69 Jamaica 4 20 3 24 94 56 47 55 2.3 2.1 0 0 0 0 70 Paraguay 4 6 40 54 56 40 42 52 4.8 4.4 0 0 0 0 71 Algeria 3 3 15 13 82 84 43 55 4.8 3.9 25 24 11 13 72 Colombia 10 5 75 39 14 56 64 72 2.8 2.7 34 38 22 28 Note: For data comparability and coverage, see the technical notes. SELECTED WORLD DEVELOPMENT INDI ATOR 205 Land use (% of total land area) Urban population Population in urban agglomerations Permanent As % of total Avg. annual of 1 million or more in 1990, as % of Cropland pasture Other population growth rate (%) Urban Total 1980 1993 1980 1993 1980 1993 1980 1994 1980-90 1990-94 1980 1994 1980 1994 73 Tunisia 13 32 10 23 77 46 51 57 3.2 2.8 34 39 17 22 74 Ukraine 59 .. 13 .. 28 62 70 1.2 0.9 22 22 14 15 75 Namibia 1 1 46 46 53 53 23 36 6.2 6.2 0 o 0 0 76 Peru 3 3 21 21 76 76 65 72 3.0 2.6 40 43 26 31 77 Belarus 30 15 55 56 70 2.2 1.5 24 24 14 17 78 Slovak Republic 34 17 49 52 58 1.5 1.1 0 o 0 0 79 Latvia .. 28 .. 13 .. 59 68 73 1.0 -0.8 0 0 0 0 80 Costa Rica 15 10 61 46 23 44 43 49 3.8 3.3 o o o 0 81 Poland 49 48 13 13 38 38 58 64 1.4 1.0 31 28 18 18 82 Thailand 50 41 2 2 48 58 17 20 2.8 2.4 59 56 10 11 83 Turkey 45 36 15 16 39 48 44 67 5.8 4.6 39 34 17 23 84 Croatia 25 22 .. 52 50 64 2.2 1.5 o o o 0 85 Panama 7 9 18 20 75 71 50 54 2.8 2.7 0 0 o 0 86 Russian Federation 8 5 .. 88 70 73 1.2 -0.2 23 25 16 19 87 Venezuela 7 4 31 20 62 75 83 92 3.5 2.9 20 29 16 27 88 Botswana 0 1 6 45 94 54 15 30 8.9 7.6 0 o 0 0 89 Estonia 27 7 .. 66 70 73 1.0 -0.9 0 0 o 0 90 Iran, Islamic Rep. 6 11 21 27 73 62 50 58 5.0 3.9 26 35 13 20 91 Turkmenistan . . 3 .. 74 23 47 45 2.0 5.1 0 o o 0 Upper-middle-income 9w 7w 37 w 32 w 55 w 61 w 64 w 74 w 3.0 w 2.6 w 40 w 40 w 26 w 30 w 92 Brazil 15 6 52 22 33 72 66 77 3.3 2.7 42 42 27 32 93 South Africa 10 11 59 67 31 23 48 50 2.7 2.9 23 37 11 19 94 Mauritius 2 52 0 3 98 44 42 41 0.4 1.4 0 0 0 0 95 Czech Republic .. 43 .. 11 .. 46 64 65 0.3 0.1 18 18 12 12 96 Malaysia 17 15 o 0 83 85 42 53 4.4 4.0 16 12 7 6 97 Chile 2 6 6 18 91 76 81 86 2.1 1.8 41 41 33 35 98 Trinidad and Tobago 41 24 4 2 56 74 63 66 1.6 1.7 0 0 0 0 99 Hungary 46 55 11 13 43 33 57 64 0.5 0.6 34 31 19 20 100 Gabon 8 2 82 18 10 80 36 49 6.0 5.1 0 0 0 o 101 Mexico 17 13 52 39 31 48 66 75 2.9 2.8 41 38 27 28 102 Uruguay 3 7 27 77 70 15 85 90 1.0 0.9 49 46 42 42 103 Oman 0 0 3 5 97 95 8 13 8.7 8.6 0 0 0 0 104 Slovenia .. 15 .. 28 .. 57 48 63 2.6 1.3 0 0 o 0 105 Saudi Arabia 1 2 40 56 59 42 67 80 6.9 4.1 28 27 19 21 106 Greece 38 27 51 41 11 32 58 65 1.3 1.5 54 54 31 35 107 Argentina 10 10 52 52 38 38 83 88 1.9 1.6 42 44 35 39 108 Korea, Rep.. 21 1 1 62 78 57 80 3.8 2.9 65 64 37 51 Low- and middle-income 10 w 11w 27w 26w 68w 63w 32w 39w 3.6w 3.1w 32w 34w 10 w 13w Sub-Saharan Africa 4w 7w 24w 33w 72w 60w 24w 31w 4.9w 4.8w 21w 24w 5w 8w East Asia and Pacific 13 w 12 w 35 w 34 w 52 w 54 w 22 w 32 w 4.6 w 3.9 w 40 w 36 w 9w 11 w South Asia 50w 45w 12w lOw 39w 45w 22w 26w 3.5w 3.3w 27w 36w 6w lOw Europe and Central Asia 39 w 13 w 16 w 16 w 92 w 71 w 58 w 65 w 2.0 w 1.0 w 24 w 24 w 14 w 16 w Middle East and N. Africa 4w 6w 19 w 24 w 78 w 70 w 48 w 56w 4.4w 3.7w 32 w 35 w 15 w 18 w Latin America and Caribbean 9 w 7w 38 w 29 w 53 w 64 w 65 w 74 w 3.0 w 2.6 w 36w 37 w 24 w 28 w High-income economies 15 w 12 w 32 w 25 w 54 w 63 w 76 w 77 w 0.8 w 0.3 w 40 w 433w 34 w 109 Portugal 34 34 9 9 57 56 29 35 1.4 1.3 46 52 13 18 110 New Zealand 2 14 53 51 45 35 83 86 0.9 1.2 o o o o 111 Spain 25 40 13 21 62 40 73 76 0.7 0.5 27 23 20 18 112 Ireland 5 13 19 68 77 18 55 57 0.6 0.7 o o 0 o 113 t Israel 11 21 3 7 86 72 89 90 .. .. 41 39 37 35 114 Australia 6 6 57 54 37 39 86 85 1.4 1.0 55 68 47 58 115 United Kingdom 11 27 18 46 71 27 89 89 0.3 0.4 28 26 25 23 116 Finland 8 8 1 0 91 91 60 63 0.7 1.1 o o o o 117 Italy 53 41 22 15 25 45 67 67 0.1 0.2 39 31 26 20 118 t Kuwait 0 0 1 8 99 92 90 97 5.1 -5.4 67 70 60 67 119 Canada 8 5 5 3 87 92 76 77 1.4 1.3 38 45 29 35 120 1. Hong Kong 5 .. 1 .. 94 92 95 1.6 1.7 100 100 91 95 121 Netherlands 24 27 35 31 41 41 88 89 0.6 0.8 8 16 7 14 122 t Singapore 14 2 o 0 86 98 100 100 1.7 2.0 100 100 100 100 123 Belgium .. 31 21 .. 48 95 97 0.2 0.5 13 11 12 11 124 France 34 35 23 20 42 45 73 73 0.4 0.6 29 28 21 21 125 Sweden 21 7 5 1 74 92 83 83 0.3 0.6 20 21 17 17 126 Austria 20 18 25 24 56 58 55 55 0.3 1.0 49 46 27 26 127 Germany .. 34 .. 15 .. 51 83 86 0.4 1.0 46 47 38 40 128 United States 30 20 38 25 32 55 74 76 1.2 1.3 49 56 36 43 129 Norway 3 3 0 0 97 97 71 73 0.6 0.8 o o o o 130 Denmark 63 60 6 5 31 35 84 85 0.2 0.4 32 30 27 26 131 Japan 22 12 3 2 76 86 76 78 0.7 0.4 44 48 34 37 132 Switzerland 12 11 47 32 40 56 57 61 1.0 1.4 o o o 0 133 t United Arab Emirates 0 0 2 2 97 97 72 83 6.1 3.7 o o o 0 World 11w 11w 28w 26w 65w 63w 39w 45w 2.7w 2.3w 34w 35w 14w 16w 206 Table 10. Forests and water resources Forest area Annual freshwater withdrawal, 1970-90 Total area Ann. deforestation, 1981-90 Nationally protected areas, 1994a As % of Per capita (Cu. nil (thousand sq. km) Thousand As % of Thousand As % of total Total total water 1990 sq. km total area sq. km Number surface area (cu. km) resources Domestic Other Low-income economies 2,006.6 t 1,666 t 5.0 w Excluding China and India 1,282.4 t 829 t 4.7 w 1 Rwanda 2 0.0 0.2 3.3 2 12.4 0.2 2.4 6 18 2 Mozambique 173 1.4 0.8 0.0 1 0.0 0.8 0.4c 13 42 3 Ethiopia 142 0.4 0.3 60.2 23 5.5 2.2 2.0 6 45 4 Tanzania 336 4.4 1.3 138.9 30 14.7 0.5 0.5c 7 28 5 Burundi 2 0.0 0.6 0.9 3 3.2 0.1 2.8 7 13 6 Sierra Leone 19 0.1 0.6 0.8 2 1.1 0.4 0.2 7 92 7 Malawi 35 0.5 1.5 10.6 9 8.9 0.2 0.9c 7 13 8 Chad 114 0.9 0.8 114.9 9 9.0 0.2 0.4c 6 29 9 Uganda 63 0.6 1.0 19.1 31 8.1 0.2 0.3c 7 14 10 Madagascar 158 1.3 0.9 11.1 37 1.9 16.3 4.8 16 1,568 11 Nepal 50 0.5 1.1 11.1 12 7.9 2.7 1.6 6 144 12 Vietnam 83 1.4 1.6 13.3 59 4.0 28.9 7.7 54 361 13 Bangladesh 8 0.4 4.9 1.0 8 0.7 22.5 1.0c 7 213 14 Haiti 0 0.0 6.5 0.1 3 0.4 0.0 0.4 2 5 15 Niger 24 0.1 0.4 84.2 5 6.6 0.3 0.9c 9 33 16 Guinea-Bissau 20 0.2 0.8 .. .. .. 0.0 0.0c 3 8 17 Kenya 12 0.1 0.6 35.0 36 6.0 1.1 3.6c 14 37 18 Mali 121 1.1 0.9 40.1 11 3.2 1.4 1.4c 3 159 19 Nigeria 156 1.2 0.8 29.7 19 3.2 3.6 1.3c 13 28 20 Yemen, Rep. 41 0.0 0.0 .. .. 3.4 136.0 17 318 21 Burkina Faso 44 0.3 0.7 26.6 12 9.7 0.2 0.5 5 13 22 Mongolia 139 1.3 0.9 61.7 15 3.9 0.6 2.2 30 243 23 India 517 3.4 0.7 143.5 374 4.4 380.0 18.2= 18 594 24 Lao PDR 132 1.3 1.0 24.4 17 10.3 1.0 0.4 21 239 25 Togo 14 0.2 1.6 6.5 11 11.4 0.1 0.8c 17 11 26 Gambia, The 1 0.0 0.8 0.2 5 2.0 0.0 0.3c 2 27 27 Nicaragua 60 1.2 2.1 9.0 59 6.9 0.9 0.5 92 275 28 Zambia 323 3.6 1.1 63.6 21 8.5 0.4 0.3c 54 32 29 Tajikistan . . . . .. 0.9 3 0.6 12.6 13.2c 123 2,332 30 Benin 49 0.7 1.4 7.8 2 6.9 0.1 0.4c 7 19 31 Central African Republic 306 1.3 0.4 61.1 13 9.8 0.1 0.0 5 20 32 Albania 14 0.0 0.0 0.3 11 1.2 0.2 0.9c 6 88 33 Ghana 96 1.4 1.4 11.0 9 4.6 0.3 0.6c 12 23 34 Pakistan 19 0.8 4.1 37.2 55 4.7 153.4 32.8c 21 2,032 35 Mauritania 6 0.0 0.0 17.5 4 1.7 0.7 6.4c 59 436 36 Azerbaijan .. .. .. 1.9 12 2.2 15.8 56.4c 90 2,158 37 Zimbabwe 89 0.6 0.7 30.7 25 7.9 1.2 6.1c 19 117 38 Guinea 67 0.9 1.3 1.6 3 0.7 0.7 0.3 14 126 39 China 1,246 8.8 0.7 580.7 463 6.1 460.0 16.4 28 433 40 Honduras 46 1.1 2.4 8.6 44 7.7 1.5 2.1= 12 282 41 Senegal 75 0.5 0.7 21.8 10 11.1 1.4 3.5c 10 191 42 Cote d'Ivoire 109 1.2 1.1 19.9 12 6.2 0.7 0.9 15 52 43 Congo 199 0.3 0.2 11.8 10 3.4 0.0 0.0c 12 7 44 Kyrgyz Republic .. .. 2.8 5 1.4 11.7 24.0 82 2,647 45 Sri Lanka 17 0.3 1.5 8.0 56 12.1 6.3 14.6 10 493 46 Armenia .. .. .. 2.1 4 7.2 3.8 45.8c 149 996 47 Cameroon 204 1.2 0.6 20.5 14 4.3 0.4 0.1 17 20 48 Egypt, Arab Rep. 0 0.0 0.0 7.9 12 0.8 56.4 97.1. 67 889 49 Lesotho 0 0.1 1 0.2 0.1 1.0 7 24 50 Georgia 1.9 15 2.7 4.0 6.5c 156 586 51 Myanmar 289 4.0 1.4 1.7 2 0.3 4.0 0.4 7 94 Middle-income economies 2,984.5 t 2,675 t 4.9 w Lower-middle-income 2,161.0 t 1,670 t 5.4w 52 Bolivia 493 6.3 1.3 92.3 25 8.4 1.2 0.4 20 181 53 Macedonia, FYR 9 0.0 0.1 2.2 16 8.4 .. . . .. .. 54 Moldova .. .. .. 0.1 2 0.2 3.7 29.1c 60 793 55 Indonesia 1,095 12.1 1.1 185.6 175 9.7 16.6 0.7 12 83 56 Philippines 78 3.2 4.0 6.1 27 2.0 29.5 9.1 123 562 57 Uzbekistan .. .. 2.4 10 0.5 82.2 76.4c 165 3,956 58 Morocco 90 -1.2 -1.3 3.6 10 0.8 10.9 36.2 23 404 59 Kazakstan .. .. .. 8.9 9 0.3 37.9 30.2c 92 2,202 60 Guatemala 42 0.8 1.9 8.3 17 7.6 0.7 0.6 13 127 61 Papua New Guinea 360 1.1 0.3 0.8 5 0.2 0.1 0.0 8 20 62 Bulgaria 37 -0.1 -0.2 3.7 46 3.3 13.9 6.8c 43 1,501 63 Romania 63 0.0 0.0 10.9 39 4.6 26.0 12.5c 91 1,044 64 Ecuador 120 2.4 2.0 111.1 15 39.2 5.6 1.8 41 541 65 Dominican Republic 11 0.4 3.3 10.5 17 21.5 3.0 14.9 22 423 66 Lithuania .. .. .. 6.3 76 9.7 4.4 19.0c 83 1,107 67 El Salvador 1 0.0 2.6 0.1 2 0.2 1.0 5.3 17 228 68 Jordan 1 0.0 -1.0 2.9 10 3.3 0.4 32.1c 50 123 69 Jamaica 2 0.3 11.2 0.0 1 0.2 0.3 3.9 11 148 70 Paraguay 129 4.0 3.1 14.8 19 3.6 0.4 0.1c 16 93 71 Algeria 41 0.3 0.8 119.2 19 5.0 3.0 20.3c 35 125 72 Colombia 541 3.7 0.7 93.6 79 8.2 5.3 0.5 71 103 Note: For data comparability and coverage, see the technical notes. SELECTED WORLD DEVELOPMENT INDICATORS 207 Forest area Annual freshwater withdrawal, 1970-941) Total area Ann. deforestation, 1981-90 Nationally protected areas, 1994a As % of As % of As % of total total water Per capita (cu. ml (thousand sq. km) Thousand Thousand Total 1990 sq. km total area sq. km Number surface area (cu. km) resources Domestic Other 73 Tunisia 7 -0.1 -1.8 0.4 7 0.3 2.3 60.5c 41 276 74 Ukraine 92 -0.2 -0.3 5.2 20 0.9 34.7 40.0c 108 565 75 Namibia 126 0.4 0.3 102.2 12 12.4 0.1 0.3c 7 103 76 Peru 679 2.7 0.4 41.8 22 3.2 6.1 15.3 57 243 77 Belarus 63 -0.3 -0.4 2.4 10 1.2 3.0 5.4, 94 200 78 Slovak Republic 18 0.0 0.1 10.2 40 20.7 1.8 5.8 .. . . 79 Latvia . . .. .. 7.8 45 12.0 0.7 2.2, 110 152 80 Costa Rica 14 0.5 3.5 6.4 29 12.5 1.4 1.4 31 749 81 Poland 87 -0.1 -0.1 30.6 111 9.8 12.3 21.9' 42 279 82 Thailand 127 5.2 4.0 70.2 111 13.7 31.9 17.8c 24 578 83 Turkey 202 0.0 0.0 8.2 44 1.1 33.5 17.3' 140 445 84 Croatia 20 0.0 0.1 3.8 29 6.8 .. . . . . . . 85 Panama 31 0.6 2.1 13.3 15 17.6 1.3 0.9 91 664 86 Russian Federation .. 655.4 199 3.8 117.0 2.7' 134 656 87 Venezuela 457 6.0 1.3 263.2 100 28.9 4.1 0.3' 164 218 88 Botswana 143 0.8 0.5 106.6 9 18.3 0.1 0.6' 5 94 89 Estonia 4.4 39 9.8 3.3 21.2' 105 1,992 90 Iran, Islamic Rep. 180 0.0 0.0 83.0 68 5.0 45.4 38.6 54 1,307 91 Turkmenistan 11.1 8 2.3 22.8 32.6' 64 6,326 Upper-middle-income 823.5 t 1,005 t 4.0 w 92 Brazil 5,611 36.7 0.7 321.9 273 3.8 36.5 0.5' 54 191 93 South Africa 45 -0.4 -0.8 69.3 237 5.7 14.7 29.3' 47 348 94 Mauritius 1 0.0 0.2 0.0 3 2.0 0.4 16.4 66 344 95 Czech Republic 26 0.0 0.0 10.7 34 13.5 2.7 4.7 109 157 96 Malaysia 176 4.0 2.3 14.9 54 4.5 9.4 2.1 177 592 97 Chile 88 -0.1 -0.1 137.2 66 18.1 16.8 3.6 98 1,528 98 Trinidad and Tobago 2 0.0 -1.9 0.2 6 3.1 0.2 2.9 40 108 99 Hungary 17 -0.1 -0.5 5.7 53 6.2 6.8 5.7c 59 601 100 Gabon 182 1.2 0.6 10.4 6 3.9 0.1 0.0 41 16 101 Mexico 486 6.8 1.4 97.3 65 5.0 77.6 21.7 54 845 102 Uruguay 7 0.0 -0.6 0.3 8 0.2 0.6 0.5, 14 227 103 Oman 41 0.0 0.0 37.4 29 17.6 0.5 24.0 17 547 104 Slovenia 10 0.0 0.0 1.1 10 5.3 .. . . . . .. 105 Saudi Arabia 12 0.0 0.0 62.0 10 2.9 3.6 163.6 224 273 106 Greece 60 0.0 0.0 2.2 24 1.7 5.0 8.6c 42 481 107 Argentina 592 0.9 0.1 43.7 86 1.6 27.6 2.8c 94 949 108 Korea, Rep. 65 0.1 0.1 6.9 28 7.0 27.6 41.8 117 515 Low- and middle-income 4,991.1 t 4,341 t 5.0 w Sub-Saharan Africa 1,361.7 t 677 t 5.7 w East Asia and Pacific 997.4 t 993 t 6.1w South Asia 212.6 t 520 t 4.1 w Europe and Central Asia 807.0 t 940 t 3.3 w Middle East and N. Africa 318.2 t 172 t 3.2 w Latin America and Caribbean 1,294.2 t 1,039 t 6.3 w 1-1;ohinrnrm. ernnnmie 4,324.5 t 5,508 t 13.6w 109 Portugal 31 -0.1 -0.4 5.8 25 6.3 7.3 10.5' 111 628 110 New Zealand 75 . . .. 61.5 206 22.7 2.0 0.6 271 318 111 Spain 256 0.0 0.0 42.5 215 8.4 30.8 27.6c 94 687 112 Ireland 4 0.0 -1.1 0.5 12 0.7 0.8 1.6' 37 196 113 t Israel 1 0.0 -0.3 3.1 15 14.6 1.9 84.1' 65 343 114 Australia 1,456 0.0 0.0 935.5 892 12.1 14.6 4.3 607 327 115 United Kingdom 24 -0.2 -1.0 51.3 191 20.9 11.8 16.6 41 164 116 Finland 234 -0.1 0.0 27.3 82 8.1 2.2 I.9c 53 387 117 Italy 86 22.8 172 7.6 56.2 33.7, 138 848 118 t Kuwait o 0.0 0.0 0.3 2 1.5 0.5 . . 336 189 119 Canada 4,533 . . . . 825.5 640 8.3 45.1 1.6 288 1,314 120 'I' Hong Kong o 0.0 -0.5 .. .. .. .. .. .. . . 121 Netherlands 3 0.0 -0.3 3.9 79 10.4 7.8 8.7c 26 492 122 t Singapore o 0.0 2.5 0.0 1 4.8 0.2 31.7 38 46 123 Belgium 6 0.0 -0.3 0.8 3 2.5 9.0 72.2' 101 816 124 France 135 -0.1 -0.1 56.0 110 10.2 37.7 19.1c 106 559 125 Sweden 280 -0.1 0.0 29.9 214 6.6 2.9 1.6c 123 218 126 Austria 39 -0.1 -0.4 20.0 170 23.9 2.4 2.6c 101 203 127 Germany 107 -0.5 -0.4 92.0 504 25.8 46.3 27.1c 64 518 128 United States 2,960 3.2 0.1 1,042.4 1,494 11.1 467.3 18.9c 244 1,626 129 Norway 96 55.4 114 17.1 2.0 0.5c 98 390 130 Denmark 5 0.0 0.0 13.9 113 32.2 1.2 9.2' 70 163 131 Japan 238 0.0 0.0 27.6 80 7.3 90.8 16.6 125 610 132 Switzerland 12 -0.1 -0.6 7.3 109 17.7 1.2 2.4c 40 133 133 t United Arab Emirates o 0.0 0.0 .. .. 0.9 300.0 97 787 World 9,315.5 t 9,849 t 7.1 w a. Data may refer to earlier years and are the most recent reported by the World Conservation Monitoring Centre in 1994. b. Refers to any year from 1970 to 1994. c. Total water resources include river flows from other countries. 208 Table 11. Growth of the economy Average annual growth rate (%) Exports of goods and Gross domestic GDP GDP deflator Agriculture Industry Servicesa nonfactor services investment 1980-90 1990-94 1980-90 1990-94 1980-90 1990-94 1980-90 1990-94 1980-90 1990-94 1980-90 1990-94 1980-90 1990-94 Low-income economies 5.8 w 6.2w 13.0w 59.0 w 3.5w 2.8w 7.4 w 11.0w 6.8w 5.2 w 5.7w 10.4w 6.1 w 7.9w Excluding China and India 2.9w 1.4 w 24.8w 150.2w 2.0w 1.5w 2.7w -0.7w 3.7w 2.1w 2.5w 3.0w -0.4w -1.8w 1 Rwanda 2.3 -15.5 3.3 9.7 0.7 -13.8 1.7 -23.4 4.3 -14.2 4.4 1.2 3.7 -12.3 2 Mozambique -0.2 7.3 38.4 49.3 1.6 2.4 -9.8 -2.4 2.8 12.7 -5.0 7.2 -2.5 8.6 3 Ethiopia 2.3b .. 3.4b .. 1.1b .. 0.1b .. 4.4, .. 4 Tanzania 3.8 3.1 35.7 20.4 4.9 5.8 3.4 9.7 2.8 -3.1 .. .. .. .. 5 Burundi 4.4 -1.4 4.4 7.1 3.1 -3.1 4.5 -3.4 6.3 1.5 4.5 -2.5 4.5 -4.0 6 Sierra Leone 0.9 0.6 56.0 55.9 2.9 0.6 -2.0 7.4 0.7 -2.7 -7.6 5.4 -4.0 1.1 7 Malawi 2.7 -0.7 14.6 22.8 2.0 -0.6 2.9 -0.4 3.0 -1.0 2.5 0.4 -3.9 -14.5 8 Chad c 6.3 1.3 1.1 6.6 b 6.9 8.0 -9.9 9.9 1.2 7.7 -15.8 19.0 -2.9 9 Uganda 3.1 5.6 125.6 28.8 2.3 3.3 6.0 9.3 3.5 7.7 2.3 5.3 9.3 2.6 10 Madagascar 1.1 -0.2 17.1 16.8 2.5 1.5 0.9 -0.7 0.5 -1.1 -2.0 4.4 4.9 -7.4 11 Nepal 4.6 4.9 11.1 12.6 4.0 1.3 6.0 10.5 4.8 6.8 0.9 26.8 2.2 6.3 12 Vietnamc .. 8.0 .. 29.8 .. 4.5 .. .. .. .. .. .. .. .. 13 Bangladeshc 4.3 4.2 9.5 4.1 2.7 1.9 4.9 7.1 5.7 5.0 6.6 11.7 1.4 4.7 14 Haiti -0.2 -8.1 7.5 20.9 .. .. .. .. .. .. 1.2 -19.0 -0.6 -45.7 15 Nigel, -1.1 -0.3 2.9 4.7 1.8 -3.5 -3.3 -1.3 -5.2 -2.2 -4.6 -6.7 -5.9 -6.9 16 Guinea-Bissau 4.5 3.6 56.1 53.4 6.7 4.7 0.4 2.3 3.3 2.3 -1.6 -6.2 5.8 0.7 17 Kenya 4.2 0.9 9.0 17.7 3.3 -1.5 3.9 0.9 4.8 2.0 4.3 0.4 0.8 -2.2 18 Malic 1.5 2.0 5.6 8.0 4.3 1.7 2.7 5.3 -1.4 1.1 5.2 3.0 5.4 5.0 19 Nigeria 1.6 2.4 16.6 37.4 3.3 2.2 -1.0 0.3 2.8 4.5 -0.3 1.7 -10.9 -4.6 20 Yemen, Rep. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 21 Burkina Faso 3.7 2.5 3.1 4.0 3.1 4.6 3.7 1.4 4.2 1.6 -0.6 -2.4 8.6 -15.1 22 Mongoliac 5.5 -4.4 -1.2 157.7 2.9 -4.0 4.6 -7.0 18.5 -4.0 5.2 -13.0 1.7 -20.3 23 India 5.8 3.8 8.0 10.1 3.1 2.9 7.1 3.2 6.9 4.6 5.9 13.6 6.5 1.2 24 Lao PDRc .. 6.2 .. 8.8 .. .. .. .. .. .. .. 8.3 .. .. 25 Tog, 1.8 -3.4 4.7 5.7 5.6 3.3 1.1 -6.0 -0.3 -8.6 0.6 -13.6 2.1 -34.3 26 Gambia, The 3.4 1.4 18.7 5.6 0.4 -0.5 6.0 -0.8 4.8 2.4 0.6 -5.6 0.8 3.0 27 Nicaragua, -2.0 0.5 422.6 148.6 -2.2 0.3 -1.7 -4.4 -2.0 2.2 -3.8 3.8 -4.7 2.8 28 Zambiac 0.8 -0.1 42.4 124.2 3.6 2.1 1.0 -1.3 0.1 0.4 -3.3 13.7 -2.7 -16.9 29 Tajikistan 2.9 -22.5 0.5 522.3 -1.4 .. 3.6 .. 5.9 .. .. .. 4.2 .. 30 Beni, 2.6 4.1 1.6 7.9 5.1 4.9 2.1 3.5 1.2 3.5 -2.2 1.9 -6.2 12.1 31 Central African Republic 1.7 -0.1 5.6 6.2 2.7 1.5 3.1 -4.6 0.5 -2.9 -3.7 4.4 4.8 -8.7 32 Albania 1.5 -4.2 -0.4 101.6 2.4 6.4 3.2 -21.8 -2.4 4.3 -2.6 -6.6 -0.3 -11.3 33 Ghana, 3.0 4.3 42.4 20.7 1.0 1.8 3.3 4.3 6.4 7.3 2.5 7.5 4.5 -3.9 34 Pakistan 6.3 4.6 6.7 10.8 4.3 2.7 7.3 6.3 6.9 4.7 8.1 11.3 5.9 4.7 35 Mauritania 1.7 3.6 8.6 7.6 1.7 5.3 4.9 2.0 0.3 3.3 3.4 -3.8 -4.1 3.2 36 Azerbaija, 2.1 -22.9 .. 696.6 -1.4 .. 2.8 .. 4.2 .. .. .. 0.4 .. 37 Zimbabwe 3.5 1.1 11.5 27.0 2.4 1.6 3.6 -3.6 3.9 1.3 5.4 4.5 1.3 0.2 38 Guinea .. 3.5 .. 11.7 .. 4.3 .. 1.9 .. 4.3 .. 0.5 .. -1.1 39 China, 10.2 12.9 5.8 10.8 5.9 4.1 11.1 18.8 13.6 9.9 11.5 16.0 11.0 15.4 40 Honduras 2.7 3.8 5.7 16.9 2.7 3.4 3.3 6.0 2.5 1.5 1.1 1.4 2.9 12.6 41 Senegalc 3.2 0.0 6.4 7.1 2.9 -4.9 3.8 1.1 3.1 1.2 2.8 1.4 3.6 -0.1 42 Cote d'Ivoire -0.1 -0.2 3.1 6.8 -0.5 -0.9 4.4 0.2 -1.4 0.1 -1.0 -1.2 -10.8 1.4 43 Gong, 3.6 -0.1 0.3 2.1 3.4 -2.8 5.2 3.4 2.6 -2.6 4.8 5.7 -11.9 -6.7 44 Kyrgyz Republic 4.2 -16.9 0.1 454.9 2.2 .. .. .. .. .. .. .. 2.5 16.0 45 Sri Lanka 4.2 5.4 10.9 9.5 2.2 2.0 4.6 7.5 5.0 5.8 3.7 10.7 1.7 10.8 46 Armenia 3.3 -27.8 0.3 967.0 -3.9 -1.9 5.1 -36.7 4.4 -28.7 .. .. 6.2 -25.0 47 Cameroonc 1.9 -4.1 5.7 2.7 1.2 -1.2 3.7 -6.9 1.0 -3.9 9.1 -0.6 -0.8 -10.0 48 Egypt, Arab Rep. 5.0 1.1 11.7 14.9 1.5 1.8 2.6 0.1 7.5 1.2 6.1 -1.5 2.7 -2.7 49 Lesotho 4.3 6.1 13.6 11.9 2.6 -2.3 7.2 11.4 3.6 4.7 4.1 10.6 6.9 10.4 50 Georgia 0.5 -31.2 1.9 2,707.1 0.7 -31.5 1.8 -38.8 -1.3 -26.6 .. .. .. .. 51 Myanmar 0.6 5.7 12.2 24.4 0.5 5.1 0.5 9.4 0.7 5.5 1.9 13.6 -4.1 9.4 Middle-income economies 2.2w 0.2 w 57.3 w 334.6w .. 0.9 w 1.3 w 3.7w 2.1 w Lower-middle-income 2.2 w -2.3 w 15.5 w 326.4 w .. .. 52 Bolivia, 3.8 317.4 10.9 2.0 -2.9 -0.1 3.5 6.1 -9.9 5.8 53 Macedonia, FYR 54 Moldova .. .. .. .. .. .. .. .. .. .. .. .. .. 55 Indonesiac 6.1 7.6 8.5 7.4 3.4 3.0 6.9 9.8 7.0 7.6 2.9 10.8 7.0 7.5 56 Philippine, 1.0 1.6 14.9 9.6 1.0 1.6 -0.9 0.9 2.8 2.1 3.5 8.0 -2.1 2.3 57 Uzbekistan 3.4 -5.0 -0.7 628.7 -0.1 -0.7 4.3 -6.7 5.4 -6.3 .. .. 0.4 -9.1 58 Moroccoc 4.2 1.7 7.2 4.4 6.7 -1.5 3.0 0.3 4.2 3.4 5.6 2.1 2.5 -2.7 59 Kazakstan 1.5 -14.3 2.8 976.5 .. .. .. .. .. .. .. .. 1.9 -26.0 60 Guatemala, 0.8 4.1 14.6 15.5 2.3 2.5 2.1 4.2 2.1 4.9 -2.1 5.2 -1.8 10.7 61 Papua New Guinea, 1.9 11.5 5.3 3.8 1.8 5.3 1.9 24.3 0.7 .. 3.3 18.3 -0.9 -4.1 62 Bulgaria 4.0 -5.9 1.2 90.0 -2.1 -2.9 5.2 -9.3 4.8 -0.6 -3.5 -5.3 2.4 -10.1 63 Romania 0.6 -3.7 2.5 191.9 .. -2.3 .. -5.1 .. -3.1 .. .. .. -13.1 64 Ecuadorc 2.0 3.5 36.4 41.0 4.4 2.0 1.2 5.2 1.8 2.9 5.4 7.5 -3.8 5.9 65 Dominican Republic, 2.7 4.2 21.5 13.6 0.4 3.0 2.2 3.7 3.7 4.6 2.8 5.2 3.7 7.0 66 Lithuania, 2.3 -20.3 3.5 390.6 .. .. .. .. .. .. .. .. .. .. 67 El Salvadorc 0.2 6.2 16.4 11.4 -1.1 1.0 0.1 4.2 0.7 8.8 -3.4 12.1 2.2 16.0 68 Jordan -1.5 8.2 7.0 4.7 13.2 10.2 -1.3 7.9 -7.3 7.9 14.0 3.3 7.3 6.5 69 Jamaica, 2.0 3.5 18.6 42.8 0.6 8.3 2.4 -0.5 1.9 6.0 5.4 -1.0 -0.1 5.8 70 Paraguayc 2.5 2.9 24.4 19.3 3.6 1.4 -0.3 1.9 3.4 4.1 11.5 13.5 -0.8 1.2 71 Algeria 2.9 -0.6 7.8 27.1 4.5 -0.2 1.7 -0.8 3.3 -0.6 4.1 -0.4 -2.3 -6.8 72 Colombia 3.7 4.3 24.6 23.8 2.9 1.4 5.0 3.0 3.1 6.4 7.5 5.9 0.5 21.2 Note: For data comparability and coverage, see the technical notes. 209 Average annual growth rate 1%) Exports of goods and Gross domestic GDP GDP deflator Apiculture Industry Servicesa nonfactor services investment 1980-90 1990-94 1980-90 1990-94 1980-90 1990-94 1980-901990-94 1980-901990-94 1980-90 1990-94 1980-90 1990-94 73 Tunisia 3.3 4.5 7.5 5.5 2.8 0.5 3.1 4.0 3.5 5.9 5.6 5.9 -1.8 2.3 74 Ukraine, .. -14.4 .. 1,169.1 -8.5 -19.4 .. -11.3 .. .. .. 75 Namibia 1.1 4.1 13.6 9.5 1.8 6.8 -1.1 2.9 2.2 4.1 0.2 6.1 11.9 -2.8 76 Peru, -0.2 4.2 229.6 83.0 .. .. .. .. .. .. -1.7 7.4 -44..24 -105..73 77 Belarus 4.8 -10.5 0.6 905.5 1.8 -6.8 6.2 -5.3 4.9 -11.1 78 Slovak Republic, 1.9 -5.4 1.8 17.0 0.6 -2.6 2.2 -11.8 1.7 3.4 4.4 -20.5 79 Latvia 3.5 -17.7 0.0 205.1 2.3 -19.1 4.3 -35.7 3.1 -8.0 .. .. .. .. 80 Costa Rica, 3.0 5.6 23.5 18.8 3.1 3.8 2.8 6.1 3.1 6.0 6.1 10.7 5.3 10.6 81 Poland 1.7 1.6 53.9 36.9 0.7 -3.0 0.1 1.2 2.2 2.6 4.5 6.3 0.9 -3.3 82 Thailand, 7.6 8.2 3.9 4.4 4.0 3.1 9.9 10.9 7.3 7.4 14.0 14.6 9.4 9.3 83 Turkey 5.6 3.2 48.4 71.7 4.4 0.8 6.4 4.3 5.5 3.3 16.6 7.7 5.3 2.2 84 Croatia .. .. .. .. .. 85 Panama, 0.3 7.0 2.4 1.6 5.1 18.6 5.5 4.9 19.6 86 Russian Federation 1.9 -10.6 3.2 616.7 .. .. .. .. .. .. .. 87 Venezuela, 1.1 3.2 19.3 34.2 3.0 2.3 0.5 4.1 1.1 2.6 2.8 5.0 -5.3 6.9 88 Botswana, 10.3 4.4 13.1 8.4 2.2 0.6 11.4 1.7 11.0 7.9 .. 89 Estonia, 0.2 -11.6 4.4 208.4 -1.9 -9.3 1.6 -19.4 -0.5 -27.1 0.5 -33.8 90 Iran, Islamic Rep. 1.5 5.2 14.6 30.3 4.5 5.8 3.3 4.5 -0.3 5.4 6.9 9.0 -2.5 -7.8 91 Turkmenistan 3.6 -5.2 0.7 545.8 1.2 2.7 7.2 .. .. .. 3.6 .. Upper-middle-income 2.2 w 3.4w 121.5 w 347.1 w 2.5 w 0.9 w 2.1 w 2.6w 2.7w 4.4w 7.1 w 7.8 w 0.7 w 5.7w 92 Brazil 2.7 2.2 284.5 1,231.5 2.8 3.2 2.0 0.8 3.5 3.2 7.5 9.0 0.2 1.8 93 South Africa 1.3 -0.1 14.8 11.9 3.0 -2.3 -1.1 -1.2 2.9 0.6 1.9 2.3 -4.8 2.4 94 Mauritius 6.5 5.3 8.7 7.2 2.6 -2.1 9.2 6.0 5.3 6.4 10.4 4.6 11.8 5.5 95 Czech Republic, 1.7 -4.7 1.5 21.3 .. .. . .. .. .. .. 2.3 -6.6 96 Malaysia, 5.2 8.4 1.7 3.7 3.8 2.8 7.2 9.8 4.3 9.1 10.9 12.9 2.6 14.9 97 Chile, 4.1 7.5 20.9 15.3 5.6 4.0 3.7 7.5 4.2 9.7 7.0 9.0 9.6 12.9 98 Trinidad and Tobago -2.5 0.3 4.1 6.4 -5.8 0.9 -5.5 -0.5 1.3 0.9 8.9 12.1 -10.1 -0.6 99 Hungary, 1.6 -2.0 8.6 22.4 0.6 -9.4 -2.6 -1.1 4.8 -0.5 4.0 -5.9 -0.4 3.2 100 Gabon, 0.5 -2.1 1.9 10.5 1.7 -0.3 1.0 2.8 -0.3 -9.2 2.8 4.5 -4.6 -2.8 101 Mexico, 1.0 2.5 70.4 13.1 0.6 1.1 1.0 2.5 1.1 2.7 6.6 4.0 -3.1 6.5 102 Uruguay, 0.4 4.4 61.3 60.0 0.1 3.3 -0.2 -2.6 0.9 8.5 4.3 8.4 -7.8 11.6 103 Oman, 8.3 6.7 -3.6 -3.4 7.9 2.1 10.3 6.2 6.0 11.4 104 Slovenia .. .. .. .. .. .. .. 105 Saudi Arabia, -1.2 1.9 -3.7 0.4 13.4 .. -2.3 .. -1.2 .. .. .. .. .. 106 Greece 1.7 1.4 17.9 13.7 -0.1 3.3 1.3 -1.1 2.3 2.3 7.1 10.4 -0.9 1.2 107 Argentina -0.3 7.6 389.1 27.6 0.9 1.2 -0.9 8.0 0.0 8.4 3.7 2.7 22.0-4.7 108 Korea. Reo., , 9.4 6.6 5.9 6.3 2.8 1.8 13.1 6.1 8.2 12.0 7.5 10.6 11.9 4.3 Low- and middle-income 3.1 w 1.9w 45.7w 262.4w 3.1 w 1.9w 3.9w 4.6w 3.8w 4.0w 7.3w .. 2.3 w .. Sub-Saharan Africa 1.7w 0.9 w 18.8 w 39.2 w 1.8 w 0.7 w 0.5 w -0.2w 2.4w 0.9 w 1.8 w 2.1 w -4.1 w -0.4 w East Asia and Pacific 7.9w 9.4w 9.3 w 9.9w 4.4w 3.6w 9.7w 13.4w 8.6w 8.0w 9.7w 12.7w 9.1 w 10.6 w South Asia 5.7w 3.9w 8.0w 9.9w 3.2w 2.7w 6.9w 3,8w 6.8w 4.6w 6.1 w 13.1w 6.1w 1.8w Europe and Central Asia 2.3 w -7.5 w 9.8 w 528.9 w .. .. Middle East and N. Africa 0.2 w 2.3 w 8.2 w 15.9 w 4.5 w .. 1.0 w .. 1.3 w .. .. .. .. Latin America and Caribbean 1.7 w 3.6w 179.4 w 482.8 w 2.0 w 2.3 w 1.3 w 2.9w 2.1 w 4.4w 5.4 w 6.3 w -1.5 w 7.9 w High-income economies 3.2w 1.7w 4.7w 2.5 w 2.3 w 3.2 w 3.2 w 5.1 w 4.1 w 109 Portugal, 2.9 0.6 18.1 10.1 8.7 1.0 2.6 2.7 110 New Zealand, 1.9 3.0 10.8 1.2 4.1 1.3 1.8 4.1 5.4 4.4 2.4 111 Spain, 3.2 0.7 9.3 5.6 -1.0 5.7 7.8 5.7 -5.4 112 Ireland 3.3 4.5 6.3 2.0 8.9 9.7 -0.4 -10.8 113 t Israel 3.5 6.2 101.4 12.9 .. .. 5.5 9.2 2.1 12.2 114 Australia, 3.5 3.4 7.3 1.2 3.3 -0.1 2.6 -0.2 4.0 2.8 7.0 7.6 2.6 0.9 115 United Kingdom 3.2 0.8 5.7 4.0 .. .. .. .. .. .. 3.9 1.9 6.4 -2.0 116 Finland 3.3 -2.2 6.8 1.9 -0.2 -2.6 3.3 -4.0 3.7 -4.2 2.2 66 3.0 -19.5 117 Italy, 2.4 0.7 9.9 4.9 0.6 2.1 2.2 -0.5 2.7 0.9 4.1 5.2 2.1 -5.9 118 t Kuwait, 0.9 .. -2.4 .. 14.7 .. 1.0 . 0.9 .. -2.3 .. -4.5 .. 119 Canada 3.4 1.4 4.4 1.4 1.5 -1.2 2.9 -0.9 3.6 1.0 6.0 65 5.2 -1.3 120 t Hong Kong 6.9 5.7 7.7 8.9 .. .. .. 14.4 14.3 4.0 9.1 121 Netherlands, 2.1 1.5 1.7 2.2 .. 2.6 .. -0.4 .. 1.9 4.6 3.0 3.3 -2.8 122 t Singapore, 6.4 8.3 2.0 3.7 -6.2 -1.3 5.4 8.7 7.2 8.1 10.0 12.3 3.7 6.1 123 Belgium, 1.9 0.9 4.4 3.3 1.8 7.7 2.2 .. 1.8 .. 4.6 2.8 3.2 -1.7 124 France, 2.4 0.8 6.0 2.3 2.0 0.4 1.1 -1.0 3.0 1.1 3.7 3.8 2.8 -6.3 125 Sweden 2.3 -1.0 7.4 3.2 1.5 -1.9 2.8 -2.7 2.1 -1.2 4.3 2.4 4.3 -13.3 126 Austria, 2.1 1.6 3.7 3.8 1.1 -2.8 1.9 0.9 2.3 2.2 4.6 2.6 2.5 0.9 127 Germanycl 2.2 1.1 2.6 3.8 1.7 1.2 2.9 4.4 -3.0 2.0 -1.8 128 United States, 3.0 2.5 4.1 2.4 4.0 2.8 3.1 5.2 67 3.4 4.1 129 Norway 2.9 3.3 5.5 0.5 0.9 .. 3.5 .. 2.6 .. 5.0 7.2 0.6 -0.4 130 Denmark 2.4 1.8 5.5 1.7 3.1 1.3 2.9 0.4 2.1 1.5 4.4 2.7 4.0 -69 131 Japan, 4.1 1.2 1.5 1.1 1.1 -2.8 4.9 0.7 3.7 2.6 4.8 4.0 5.7 -0.4 132 Switzerland, 2.2 0.1 3.7 2.8 .. .. 3.4 1.5 4.8 -7.3 133 t United Arab Emirates -2.0 0.7 .. 9.6 9.3 -4.2 -1.8 2.0 -8.7 World 3.1 w 1.8 w 14.8w 66.2 w 2.8w 3,4w 3.3w 5.3 w 3.7 w a. Services include unallocated items. b. Includes Eritrea. c. GDP components are at purchaser values. d. Data prior to 1990 refer to the Federal Republic of Germany before unification. 210 Table 12. Structure of the economy: production Distribution of gross domestic product I%) GDP (million $) Agriculture Industry (Manufacturing.) Services', 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 Low-income economies 751,872 t 1,208,422 t 34w 28w 32w 34w 21w 25w 32w 36w Excluding China and India 377,855 t 392,644 t 38w 21 w 13w 39w 1 Rwanda 1,163 585 50 51 23 9 17 3 27 40 2 Mozambique 2,028 1,467 37 33 31 12 32 55 3 Ethiopia, 5,179 4,688 56 57 12 10 6 3 31 32 4 Tanzania 5,702 3,378 46 57 18 17 11 8 37 26 5 Burundi 920 1,001 62 53 13 18 7 12 25 29 6 Sierra Leone 1,100 843 33 47 22 18 6 2 45 35 7 Malawi 1,238 1,302 37 31 19 21 12 14 44 47 8 Chad, 727 910 54 44 12 22 16 34 35 9 Uganda 1,267 4,001 72 49 4 14 7 23 37 10 Madagascar 4,042 1,918 30 35 16 13 54 52 11 Nepal 1,946 4,048 62 44 12 21 9 26 35 12 Vietnarnd 15,570 28 30 22 43 13 Bangladesh, 12,950 26,164 50 30 16 18 11 10 52 14 Haiti 1,462 1,623 44 12 9 44 15 Niger, 2,538 1,540 43 39 23 18 4 7 35 44 16 Guinea-Bissau 105 243 44 45 20 18 7 36 37 17 Kenya 7,265 6,860 33 29 21 17 13 11 47 54 18 Malid 1,629 1,871 58 42 9 15 4 9 32 42 19 Nigeria 93,082 35,200 27 43 40 32 8 7 32 25 20 Yemen, Rep. 21 Burkina Faso 1,709 1,856 33 34 22 27 16 21 45 39 22 Mongoliad 2,329 741 14 21 28 45 57 34 23 India 172,321 293,606 38 30 26 28 18 18 36 42 24 Lao PDRd 1,534 51 18 13 31 25 Togo, 1,1% 981 27 38 25 21 8 9 48 41 26 Gambia, The 233 363 30 28 16 15 7 7 53 58 27 Nicaragua, 2,144 1,833 23 33 31 20 26 16 45 46 28 Zambia, 3,884 3,481 14 31 41 35 18 23 44 34 29 Tajikistan 2,009 30 Benind 1,405 1,522 35 34 12 12 8 7 52 53 31 Central African Republic 797 872 40 44 20 13 7 40 43 32 Albania 1,636 1,808 28 55 37 22 35 23 33 Ghana, 4,445 5,421 58 46 12 16 8 8 30 39 34 Pakistan 23,690 52,011 30 25 25 25 16 18 46 50 35 Mauritania 709 1,027 30 27 26 30 12 44 43 36 Azerbaijand 3,541 22 27 47 32 39 44 31 41 37 Zimbabwe 5,355 5,432 14 15 34 36 25 30 52 48 38 Guinea 3,395 24 31 5 45 39 Chinad 201,696 522,172 30 21 49 47 41 37 21 32 40 Honduras 2,566 3,333 24 20 24 32 15 18 52 48 41 Senegal, 3,016 3,881 19 17 25 20 15 14 57 63 42 Cote d'Ivoire 10,175 6,716 31 41 24 26 15 26 45 32 43 Congo, 1,706 1,578 12 10 47 44 7 7 42 46 44 Kyrgyz Republic 2,666 37 30 33 45 Sri Lanka 4,024 11,712 28 24 30 25 18 16 43 51 46 Armenia 2,607 44 49 30 26 47 Cameroond 7,499 7,470 28 32 26 28 8 12 46 41 48 Egypt, Arab Rep. 22,912 42,923 18 20 37 21 12 15 45 59 49 Lesotho 368 886 24 14 29 46 7 17 47 40 50 Georgia 2,063 61 23 17 16 51 Myanmar 47 63 13 9 10 7 41 28 Middle-income economies 2,477,885 t 4,069,532 t 10 w 36w 20w 52w Lower-middle-income 1,783,221 t 13w 36w 49w 52 Bolivia, 3,074 5,506 18 35 15 47 53 Macedonia, FYR 1,678 54 Moldova 3,672 48 28 25 25 55 Indonesia, 78,013 174,640 24 17 42 41 13 24 34 42 56 Philippinesd 32,500 64,162 25 22 39 33 26 23 36 45 57 Uzbekistan 21,508 28 33 37 34 27 18 35 34 58 Morocco, 18,821 30,803 18 21 31 30 17 17 51 49 59 Kazakstan 18,167 44 35 21 60 Guatemala, 7,879 12,919 25 19 56 61 Papua New Guinead 2,548 5,403 33 28 27 38 10 40 33 62 Bulgaria 20,040 10,199 14 13 54 35 32 53 63 Romania 30,086 21 33 46 64 Ecuador, 11,733 16,556 12 12 38 38 18 21 50 50 65 Dominican Republied 6,631 10,416 20 15 28 22 15 15 52 63 66 Lithuania, 5,224 19 21 53 41 29 38 67 El Salvador, 3,574 8,116 38 14 22 24 16 . . 40 62 68 Jordan 6,105 8 27 14 65 69 Jamaica, 2,679 4,241 8 8 38 37 17 17 54 54 70 Paraguay, 4,579 7,826 29 24 27 22 16 16 44 54 71 Algeria 42,347 41,941 10 12 54 44 9 11 36 44 72 Colombia 33,399 67,266 19 14 32 32 23 18 49 54 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. SELECTED WORLD DEVELOPMENT INDICATORS 211 Distribution of gross domestic product (%) GDP (million $) Agriculture Industry (Manufacturing.) Servicesb 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 73 Tunisia 8,743 15,770 16 15 36 32 14 20 48 53 74 Ukraine .. 91,307 .. 19 .. 50 .. 38 .. 31 75 Namibia 2,190 2,884 12 14 53 29 5 9 35 56 76 Perud 20,661 50,077 10 7 42 37 20 23 48 56 77 Belarusd 20,287 18 17 53 54 45 44 29 29 78 Slovak Republicd 12,027 12,370 7 7 63 36 30 57 79 Latvia .. 5,817 9 .. 34 20 .. 57 80 Costa Ricad 4,831 8,281 18 15 27 24 19 19 55 61 81 Poland 57,068 92,580 .. 6 .. 40 .. .. .. 54 82 Thailand, 32,354 143,209 23 10 29 39 22 29 48 50 83 Turkey 56,919 131,014 23 16 30 31 21 20 47 52 84 Croatia .. 14,017 13 25 20 62 85 Panama, 3,592 6,975 .. 11 .. 16 .. .. 73 86 Russian Federation .. 376,555 9 7 54 38 31 37 55 87 Venezuela, 69,377 58,257 5 5 46 42 16 14 49 53 88 Botswana, 971 4,011 13 5 44 49 4 4 43 46 89 Estoniad .. 4,578 14 10 49 36 42 23 37 55 90 Iran, Islamic Rep. 92,664 63,716 18 21 32 37 9 14 50 42 91 Turkmenistan 5,156 . . Upper-middle-income 1,054,324 t 2,264,369 t 8w 8w 47 w 37 w 22 w 20w 43 w 53 w 92 Brazil 236,995 554,587 11 13 44 39 33 25 45 49 93 South Africa 78,743 121,888 7 5 50 31 23 23 43 65 94 Mauritius 1,132 3,385 12 9 26 33 15 22 62 58 95 Czech Republicd 29123 , 36,024 7 6 63 39 .. .. 30 55 96 Malaysia, 24,488 70,626 22 14 38 43 21 32 40 42 97 Chile, 27,572 51,957 7 .. 37 .. 21 .. 55 .. 98 Trinidad and Tobago 6,236 4,792 2 3 60 46 9 10 38 51 99 Hungaryd 22,163 41,374 7 .. 33 .. 23 .. 60 100 Gabond 4,279 3,945 8 60 52 5 11 33 40 101 Mexicod 194,905 377,115 8 8 33 28 22 20 59 64 102 Uruguay, 10,133 15,539 14 8 34 23 26 17 53 69 103 Ornand 5,982 11,628 3 3 69 53 1 4 28 44 104 Slovenia .. 14,037 5 .. 38 .. 29 .. 57 105 Saudi Arabiad 156,487 117,236 1 .. 81 .. 5 .. 18 .. 106 Greece 40,147 77,721 20 16 35 31 22 18 44 53 107 Argentina 76,962 281,922 6 5 41 30 29 20 52 65 108 Korea, Rep., 63,661 376,505 15 7 40 43 29 29 45 50 Low- and middle-income 3,222,247 t 5,276,483 t .. 14w .. 36 w .. 21 w .. 48 w Sub-Saharan Africa 297,077 t 277,021 t 24w 20 w 36 w 30 w 13 w 15 w 38 w 48 w East Asia and Pacific 524,972 t 1,520,558 t 27 w 18 w 39 w 42 w 28 w 30 w 32 w 41 w South Asia 219,283 t 394,958 t 39w 29w 24w 26w 16w 15w 35w 43w Europe and Central Asia .. 1,029,958 t .. .. .. Middle East and N. Africa 463,036 t 425,707 t 9w 57w 7w 10 w 32 w Latin America and Caribbean 762,475 t 1,624,083 t 10 w 10 w 38 w 33 w 25 w 21 w 50 w 55 w High-income economies 7,685,574 t 20,120,240 t 3w 36w 23 w 59 w 109 Portugal, 28,526 87,257 .. 110 New Zealandd 22,469 50,777 11 .. 31 22 58 111 Spaind 211,542 482,841 3 .. 17 . . 112 Ireland 20,231 52,060 8 9 3 83 113 t Israel 22,690 77,777 .. .. .. .. .. . . . . . . 114 Australiad 159,728 331,990 5 3 36 30 19 15 58 67 115 United Kingdom 537,383 1,017,306 2 2 43 32 27 22 55 66 116 Finland 51,306 97,961 10 5 40 32 28 24 51 63 117 Italy, 452,648 1,024,634 6 3 39 31 28 20 55 66 118 t Kuwaitd 28,639 24,289 o o 75 53 6 11 25 47 119 Canada 263,192 542,954 4 .. 36 .. 20 .. 60 .. 120 I- Hong Kong 28,496 131,881 1 0 31 18 23 11 68 82 121 Netherlands, 172,280 329,768 .. 3 .. 27 .. 18 .. 70 122 1. Singapored 11,718 68,949 1 o 38 36 29 27 61 64 123 Belgiumd 118,021 227,550 2 2 34 .. 24 .. 64 .. 124 France, 664,595 1,330,381 4 2 34 28 24 20 62 70 125 Sweden 125,557 196,441 4 2 34 30 23 20 62 68 126 Austria, 76,882 196,546 4 40 34 28 23 56 64 127 Germany 2,045,991 1 .. .. 29 . . 128 United States, 2,708,147 6,648,013 3 34 22 64 129 Norway 57,711 109,568 4 .. 40 .. 16 .. 57 .. 130 Denmark 66,322 146,076 6 4 30 27 20 19 65 69 131 Japand 1,059,257 4,590,971 4 2 42 40 29 27 54 58 132 Switzerlandd 101,646 260,352 .. .. . 133 t United Arab Emirates 29,625 35,405 1 2 77 57 4 8 22 40 World 10,759,322 t 25,223,462 t 8w 37 w 22 w 53 w a. Because manufacturing is generally the most dynamic part of the industrial sector, its share is shown separately. b. Services, etc., include unallocated items. c. Data prior to 1992 include Eritrea. d. GDP components are at purchaser values. 212 Table 13. Structure of the economy: demand Distribution of gross domestic product (%) General govt. Private Gross domestic Gross domestic Exports of goods Resource consumption consumption, etc. investment saving and nonfactor services balance 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 Low-income economies 12 w 12w 66w 62w 24w 30w 22w 28w 13w 19w 3w 2w Excluding China and India 11 w 10 w 71w 79w 20w 17w 18w 11w 20w 17w w 6w 1 Rwanda 12 11 83 158 16 6 4 69 14 8 12 15 2 Mozambique 21 20 78 75 22 60 1 5 20 23 22 55 3 Ethiopia 14a 12 83a 85 9a 15 3a 3 //a 12 6a 12 4 Tanzania 12 8 69 88 29 31 19 3 14 24 10 28 5 Burundi 9 11 92 99 14 9 1 10 9 14 15 19 6 Sierra Leone 8 12 92 83 16 9 1 4 24 17 17 5 7 Malawi 19 22 70 79 25 16 11 1 25 29 14 16 8 Chad 8 17 99 93 4 9 6 10 9 13 10 19 9 Uganda 11 10 89 85 6 14 0 4 19 8 6 10 10 Madagascar 12 7 89 91 15 12 1 2 13 22 16 10 11 Nepal 7 9 82 78 18 21 11 12 12 24 7 8 12 Vietnam 9 77 24 13 .. 23 .. 11 13 Bangladesh 6 7 92 85 15 14 2 8 6 12 13 6 14 Haiti 10 6 82 101 17 2 8 7 22 4 9 9 15 Niger 10 17 67 82 37 6 23 24 13 14 4 16 Guinea-Bissau 29 8 77 90 30 20 6 2 8 19 36 18 17 Kenya 20 15 62 62 29 21 18 24 28 39 11 3 18 Mali 10 12 91 82 17 26 2 6 16 21 19 21 19 Nigeria 12 10 56 79 22 10 32 11 29 22 10 1 20 Yemen, Rep. 21 Burkina Faso 10 16 95 78 17 22 6 6 10 14 23 16 22 Mongolia 14 73 71 46 21 27 15 19 56 20 6 23 India 10 11 73 68 21 23 17 21 7 12 4 2 24 Lao PDR 25 Togo 22 15 53 78 30 11 25 7 51 30 5 4 26 Gambia, The 20 18 79 76 26 21 5 47 44 26 16 27 Nicaragua 20 14 83 95 17 18 2 9 24 24 19 27 28 Zambia 26 13 55 84 23 7 19 4 41 34 4 3 29 Tajikistan 19 57 30 24 6 30 Benin 9 9 96 82 15 20 5 23 27 20 10 31 Central African Republic 15 15 94 78 7 14 10 7 26 21 17 6 32 Albania 9 15 56 100 35 13 35 15 23 12 0 29 33 Ghana 11 12 84 84 6 16 5 4 8 25 1 12 34 Pakistan 10 12 83 71 18 20 7 17 12 16 12 3 35 Mauritania 25 10 68 80 36 17 7 10 37 43 29 8 36 Azerbaijan 19 40 96 23 23 41 4 55 18 18 37 38 Zimbabwe Guinea 20 19 9 64 82 19 22 14 16 17 9 30 39 20 3 6 39 China 15 13 51 43 35 42 35 44 6 24 0 2 40 Honduras 13 13 70 73 25 26 17 14 36 36 8 12 41 Senegal 22 12 78 79 15 16 0 10 28 36 16 6 42 Cote d'Ivoire 17 17 63 58 27 13 20 25 35 47 6 13 43 Congo 18 23 47 54 36 16 36 23 60 0 8 44 Kyrgyz Republic 20 11 61 74 29 30 18 14 10 15 45 Sri Lanka 9 9 80 76 34 27 11 15 32 34 23 12 46 Armenia 16 18 47 101 29 10 37 19 32 9 29 47 Cameroon 9 8 69 73 25 14 22 20 24 29 3 5 48 Egypt, Arab Rep. 16 14 69 81 28 18 15 6 31 22 12 12 49 Lesotho 36 28 124 86 42 86 60 14 20 15 102 99 50 Georgia 51 Myanmar .1; 82 89 21 12 18 11 9 Middle-income economies 14w 59w 26w 25w 23w 1w Lower-middle-income 14w 62w 26w 25w Iw 52 Bolivia 14 13 67 79 15 15 19 8 21 20 4 7 53 Macedonia, FYR 7 89 18 4 41 14 54 Moldova 21 79 8 0 32 8 55 Indonesia 11 8 52 61 24 29 37 30 33 25 13 1 56 Philippines 9 11 67 71 29 24 24 18 24 34 5 6 57 Uzbekistan 19 25 54 51 32 23 27 24 63 5 1 58 Morocco 18 17 68 68 24 21 14 16 17 22 10 5 59 Kazakstan 20 20 55 60 38 24 25 20 28 12 4 60 Guatemala 8 6 79 86 16 17 13 8 22 19 3 9 61 Papua New Guinea 24 15 61 53 25 15 15 32 43 53 10 17 62 Bulgaria 6 15 55 64 34 21 39 21 36 53 5 0 63 Romania 5 13 60 62 40 27 35 25 35 25 5 2 64 Ecuador 15 7 60 70 26 21 26 23 25 29 0 2 65 Dominican Republic 8 4 77 80 25 20 15 16 19 24 10 4 66 Lithuania 20 13 64 76 31 18 16 11 . 71 15 7 67 El Salvador 14 8 72 88 13 19 14 4 34 20 1 15 68 Jordan 22 75 26 3 49 23 69 Jamaica 20 12 64 69 16 22 16 19 51 60 0 3 70 Paraguay 6 7 76 79 32 23 18 14 15 36 13 9 71 Algeria 14 17 43 57 39 32 43 27 34 24 4 72 Colombia 10 9 70 75 19 20 20 15 16 15 1 4 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. INDICATORS 213 Distribution of gross domestic product MI General govt. Private Gross domestic Gross domestic Exports of goods Resource consumption consumption, etc. investment saving and nonfactor services balance 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 73 Tunisia 14 16 62 62 29 24 24 22 40 45 5 2 74 Ukraine . . . . . . .. . . .. .. . . . . .. . . . . 75 Namibia 17 31 44 52 29 20 39 17 76 53 10 3 76 Peru 11 10 57 70 29 24 32 20 22 11 3 4 77 Belarus 23 22 46 51 19 35 32 27 46 12 8 78 Slovak Republic b 24 70 53 37 17 31 23 72 6 6 79 Latvia 10 22 58 53 26 9 32 25 .. 72 7 16 80 Costa Rica 18 17 66 60 27 28 16 23 26 40 10 5 81 Poland 9 19 67 64 26 16 23 17 28 24 3 1 82 Thailand 12 9 65 55 29 40 23 35 24 39 6 5 83 Turkey 13 11 73 67 22 22 14 23 6 21 8 1 84 Croatia 28 60 14 12 47 2 85 Panama .. 16 . . 61 . . 25 .. 23 38 .. 2 86 Russian Federation 15 21 62 50 22 27 22 29 . . 27 o 2 87 Venezuela 12 7 55 72 26 13 33 22 29 30 7 8 88 Botswana 19 32 53 44 38 25 28 25 53 52 10 0 89 Estonia 12 24 63 48 28 32 25 28 70 4 4 90 Iran, Islamic Rep. 21 15 53 54 30 23 26 31 13 30 3 8 91 Turkmenistan 18 50 .. 28 32 3 Upper-middle-income 12w .. 56w .. 25w . . 32w .. 28w .. 6w . . 92 Brazil 9 17 70 61 23 21 21 22 9 8 2 2 93 South Africa 13 21 50 59 28 18 36 20 36 24 8 2 94 Mauritius 14 13 75 64 21 32 10 23 51 59 10 9 95 Czech Republic .. 22 . . 58 .. 20 .. 20 52 . . 96 Malaysia 17 10 51 53 30 39 33 37 58 90 3 2 97 Chile 12 9 67 63 25 27 20 28 23 28 4 1 98 Trinidad and Tobago 12 12 46 63 31 14 42 24 50 40 11 10 99 Hungary 10 13 61 72 31 21 29 15 39 29 2 6 100 Gabon 13 13 26 40 28 25 61 47 65 62 33 22 101 Mexico 10 12 65 70 27 23 25 18 11 13 2 5 102 Uruguay 12 10 76 79 17 13 12 12 15 20 6 2 103 Oman 25 39 28 33 22 17 47 27 63 25 10 104 Slovenia . . 21 .. 55 .. 21 .. 25 58 . . 4 105 Saudi Arabia 16 29 22 44 22 24 62 28 71 40 41 3 106 Greece 16 19 60 73 29 18 23 8 21 22 5 10 107 Argentina b b 76 82 25 20 24 18 5 7 1 2 108 Korea. Rep. 12 10 64 53 32 38 25 39 34 36 7 1 Low- and middle-income 14w 14w 57w 60w 26w 27w 28w 26w 23w 22w 2w 1w Sub-Saharan Africa 14w 17w 60w 68w 23w 17w 27w 16w 30w 27w 2w 2w East Asia and Pacific 12w 11w 58w 54w 29w 36w 28w 37w 28w Ow Ow South Asia 9w 11 w 75w 70w 20w 22w 15w 20w 8w 13w 6w 3w Europe and Central Asia 18w 60w 24w 23w 4w Middle East and N. Africa . . . . .. Latin America and Caribbean 11w 12w 67w 67w 25w 21w 23w 20w 16w 15w 3w 2w High-income economies 17w 60w 23w 23w 22w 1w 109 Portugal 14 17 65 66 34 26 22 17 24 26 13 9 1 110 111 112 New Zealand Spain Ireland 18 13 19 15 18 16 62 66 67 60 63 56 21 23 27 21 20 14 20 21 14 24 19 28 30 16 47 31 19 68 2 13 / 14 3 113 t Israel 38 26 51 61 22 23 11 13 40 31 11 10 2 114 115 116 Australia United Kingdom Finland 18 22 18 18 22 23 59 59 54 63 64 57 25 17 29 20 15 14 24 19 28 19 14 20 16 27 33 19 25 33 1 2 / 5 117 Italy 15 18 61 62 27 17 24 20 22 23 3 4 118 119 120 t Kuwait Canada t Hong Kong 11 19 6 37 22 8 31 55 60 41 61 59 14 24 35 11 18 31 58 25 34 22 18 33 78 28 90 55 30 139 44 1 2 / 12 2 121 Netherlands 17 15 61 61 22 19 21 24 50 51 5 122 t Singapore 10 8 53 40 46 32 38 51 207 177 9 19 123 Belgium 18 15 63 62 22 18 19 23 63 69 3 5 124 France 18 19 59 61 24 18 23 20 22 23 1 2 125 Sweden 29 28 51 55 21 13 19 17 29 33 2 4 126 Austria 18 19 56 55 28 25 26 26 37 38 2 127 Germany . . 20 . . 58 .. 22 22 . . 22 . . 0 128 United States 18 17 63 68 20 16 19 15 10 10 1 129 Norway 19 22 47 52 28 20 34 26 47 43 6 7 130 Denmark 27 26 56 52 19 14 17 21 33 34 1 7 131 Japan 10 10 59 58 32 30 31 32 14 9 1 2 132 Switzerland 13 14 64 59 27 22 24 27 37 36 4 5 133 t United Arab Emirates 11 18 17 49 28 25 72 33 78 68 43 9 World 15w 59w 24w 24w 22w 1w a. Includes Eritrea. b. General government consumption figures are not available separately; they are included in private consumption, etc. 21 4 Table 14. Central government budget Percentage of GNP Overall Total revenuea Total expenditure Percentage of total expenditure., deficit/surplus. Tax Nontax Current Capital Defense Social servicesd (% of GNP) 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 Low-income economies Excluding China and India 1 Rwanda 11.0 11.6 1.8 1.6 9.3 18.7 5.0 65 -1.7 -69 2 Mozambique .. .. 3 Ethiopia 13.2e 12.4 3.5e 2.4 .. .. .. .. .. .. 4 Tanzania 17.2 0.7 19.2 .. 10.4 9.2 21.9 -7.0 5 Burundi 13.3 0.8 11.6 11.0 -3.9 6 Sierra Leone' 15.2 15.2 1.7 0.6 22.6 17.6 5.8 7.8 -13.2 -6.1 7 Malawi, 18.1 2.7 19.6 18.0 11.3 14.2 -17.3 8 Chad .. .. .. .. .. 9 Uganda 3.0 0.1 5.3 0.8 24.4 23.5 -3.1 10 Madagascar 13.1 8.5 0.3 1.6 12.6 .. 7.8 .. -5.0 11 Nepal 6.5 1.3 0.2 0.2 15.6 -3.0 12 Vietnam .. .. .. 13 Bangladesh, 7.7 3.6 .. .. 15.8 2.5 14 Haiti 9.4 1.3 14.0 3.5 .. -4.7 15 Niger 12.4 2.2 9.6 9.1 3.6 24.8 -4.8 16 Guinea-Bissau .. .. .. .. .. .. 17 Kenya, 19.8 22.4 2.9 2.5 20.0 25.3 6.1 6.1 15.3 61 30.3 25.7 -4.6 -3.6 18 Mali 9.6 0.9 12.4 1.9 10.5 20.7 -4.7 19 Nigeria, .. 20 Yemen, Rep. .. .. .. .. .. .. .. .. 29.4 .. 27.0 . . 21 Burkina Faso 10.5 8.7 1.2 2.9 9.8 11.3 2.3 4.5 17.7 30.1 0.2 22 Mongolia .. 17.1 .. 4.0 .. 17.4 .. 3.2 9.8 .. 28.1 .. -1.8 23 India 9.7 9.6 1.9 3.2 11.7 14.6 1.6 2.0 14.1 12.8 5.5 9.3 -6.5 -6.0 24 Lao PDR .. .. .. .. .. .. .. 25 Togo 28.0 .. 4.5 .. 24.8 .. 9.3 .. 7.0 39.9 -2.0 .. 26 Gambia, The 21.0 22.1 3.6 1.4 17.5 160 16.2 4.7 23.7 .. -4.7 3.6 27 Nicaragua 21.6 28.8 2.5 1.7 26.3 31.3 6.0 11.1 10.9 5.7 33.2 45.5 -7.3 -5.7 28 Zambia 25.0 10.6 2.0 0.4 35.7 13.9 4.3 7.1 17.4 29.3 -20.0 -7.3 29 Tajikistan .. 30 Benin 31 Central African Republic 14.9 1.5 18.4 1.3 9.6 28.6 -3.5 32 Albania .. .. .. .. .. .. .. .. Ghana, 6.4 13.1 0.5 3.8 9.8 17.9 1.1 3.1 3.7 4.8 35.1 38.5 -4.2 -2.5 34 Pakistan 13.5 13.2 3.0 5.3 14.6 20.7 3.1 3.6 .. -5.8 -6.9 35 Mauritania 36 Azerbaijan Zimbabwe 19.5 .. 4.9 .. 33.5 1.8 .. 24.9 28.5 -11.1 . 38 Guinea 12.6 1.4 10.9 11.0 .. -3.3 39 China, 2.6 0.5 19.0 3.3 .. -2.1 40 Honduras 14.4 1.0 .. .. 41 Senegal 21.5 1.6 23.1 2.0 16.7 36.8 0.9 42 COte d'Ivoire 22.2 1.8 20.0 9.5 -11.4 43 Congo 29.9 9.2 23.6 19.1 7.0 -5.8 44 Kyrgyz Republic .. .. .. .. .. .. .. .. .. .. .. .. 45 Sri Lanka 19.3 17.4 1.1 1.9 24.9 22.3 16.7 5.3 1.6 11.6 23.6 33.0 -18.4 -8.7 46 Armenia .. .. .. .. .. .. .. .. .. .. .. 47 Cameroon 14.8 10.9 1.3 4.9 10.4 161 5.1 1.7 9.1 9.3 25.4 25.5 0.5 -2.0 48 Egypt, Arab Rep. 31.1 264 17.9 15.0 39.4 34.9 9.7 8.1 11.6 8.2 22.2 29.7 -68 2.1 49 Lesotho 14.7 .. 2.4 .. 165 . . 50 Georgia .. .. .. .. Myanmar 9.7 4.9 6.4 2.6 12.1 67 3.8 3.5 21.9 39.1 26.5 24.6 1.2 -2.2 Middle-income economies Lower-middle-income 52 Bolivia 12.1 5.7 .. 20.5 5.6 8.5 .. 42.0 .. -3.7 53 Macedonia, FYR 54 Moldova .. .. .. .. .. Indonesia 21.1 16.3 1.1 2.8 12.2 8.9 10.9 8.1 12.7 62 11.8 14.4 -2.3 0.6 56 Philippines, 12.5 15.1 1.5 1.8 9.9 15.0 3.5 2.9 13.5 10.2 20.8 23.1 -1.4 -1.4 57 Uzbekistan .. .. .. .. .. .. .. 58 Morocco 21.0 267 3.0 3.3 23.5 24.2 10.7 7.2 17.8 13.9 27.0 27.2 -10.0 -1.4 59 Kazakstan .. .. .. .. .. .. 60 Guatemala 8.8 6.8 0.7 0.8 7.4 6.9 5.1 2.3 10.0 15.2 29.8 29.5 -3.5 -1.2 61 Papua New Guinea, 21.1 20.8 2.5 3.4 29.9 28.8 5.4 3.6 4.3 3.3 27.2 30.7 -2.0 -4.5 62 Bulgaria 29.3 .. 8.9 42.8 .. 1.1 6.1 36.3 .. -4.5 63 Romania 10.3 26.5 36.0 3.5 30.5 27.8 15.3 4.3 3.8 7.3 18.8 46.9 0.5 -2.5 64 Ecuador, 12.9 14.9 0.6 2.0 12.5 13.3 2.4 3.5 12.5 43.9 -1.5 0.0 65 Dominican Republic, 11.4 161 3.3 1.4 11.7 9.0 5.3 8.7 7.8 4.. 7 35.5 39.8 -2.7 0.0 66 Lithuania 18.3 0.8 18.9 .. 1.6 67 El Salvador, 11.3 10.7 0.5 1.3 12.0 11.2 2.9 3.7 8.8 8.7 34.3 39.4 -5.9 -0.8 68 Jordan, 22.2 8.4 27.1 67 22.4 21.3 23.0 40.7 1.9 69 Jamaica 30.4 .. 1.3 .. .. .. .. -16.9 70 Paraguay 9.7 9.0 0.9 5.0 7.4 11.0 2.4 1.9 11.7 10.7 33.6 463 0.3 1.2 71 Algeria .. .. .. .. 72 Colombia 10.4 14.4 1.7 2.8 10.5 12.2 4.2 2.6 67 8.1 44.1 31.5 -1.8 -0.6 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. INDICATORS 215 Percentage of GNP Overall Total revenue. Total expenditure Percentage at Mal exPenditareb deficit/surplus. Tax Nontax Current Capital Defense Social servicesd (% of GNP) 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 73 Tunisia 24.6 24.3 7.1 5.4 22.8 262 9.7 69 11.1 5.4 34.2 43.0 -2.9 -2.6 74 Ukraine .. .. .. .. 75 Namibia .. 30.7 3.8 33.8 60 .. .. -4.7 76 Peru, 16.5 13.7 1.4 1.3 15.8 12.9 4.6 2.9 21.0 .. 21.2 .. -2.5 3.1 77 Belarus 30.8 0.6 31.9 5.9 4.1 . . 57.2 -5.2 78 Slovak Republic .. .. .. .. .. .. .. .. .. .. 79 Latvia 25.3 1.6 27.8 .. 1.3 .. 3.1 .. 52.8 .. -4.4 80 Costa Rica 17.6 22.8 1.1 3.0 22.4 28.1 5.4 3.5 2.6 0.0 62.4 61.3 -7.8 -5.9 81 Poland 37.9 .. 4.2 43.1 .. 1.6 .. .. .. .. -2.4 82 Thailand 13.3 17.0 1.2 1.8 14.6 11.4 4.4 3.9 20.9 170 28.0 35.4 -4.9 1.9 83 Turkey 17.7 15.4 4.6 4.1 19.1 21.6 7.2 2.0 15.2 9.5 23.8 21.7 -3.8 -4.0 84 Croatia 41.7 .. 1.7 38.8 .. 3.0 20.2 53.6 1.7 85 Panama 19.5 21.8 7.1 10.0 26.2 25.8 5.8 3.1 0.0 5.6 39.6 70.9 -5.4 416 86 Russian Federation 19.1 .. 1.4 26.2 .. 1.3 14.5 54.1 .. -10.7 87 Venezuela 18.9 15.4 3.4 4.2 14.9 16.9 4.0 2.6 4.9 .. 32.0 .. 0.0 -4.3 88 Botswan41 26.8 30.5 9.8 25.6 24.9 32.8 11.6 7.4 8.5 10.3 30.6 360 -0.2 11.2 89 Estonia 29.1 L5 .. .. 3.0 56.4 1.2 90 Iran, Islamic Rep. 6.8 8.3 14.6 16.9 27.5 16.6 7.9 8.9 16.1 6.5 36.7 37.4 -13.7 -0.1 91 Turkmenistan . . Upper-middle-income 92 Brazil 18.4 175 5.0 75 19.2 33.8 1.7 1.0 3.2 2.5 32.3 367 -2.5 -4.0 93 South Africa 21.4 24.7 3.1 2.0 20.0 34.4 3.2 1.6 .. .. -2.5 -9.2 94 Mauritius 18.5 20.0 2.4 3.0 22.8 18.9 4.6 4.5 0.7 1.4 40.7 48.6 -10.4 -0.3 95 Czech Republic .. 38.0 .. 3.0 .. 37.7 .. 4.9 6.6 60.6 .. 0.9 96 Malaysia 24.4 22.5 2.9 7.7 19.9 21.4 10.3 5.0 13.1 12.0 26.8 39.5 -6.2 4.1 97 Chile 26.6 19.1 6.6 2.6 26.3 17.8 2.8 3.4 12.1 8.8 57.6 64.9 5.6 1.7 98 Trinidad and Tobago 37.5 7.2 .. 19.3 12.6 7.6 99 Hungary 465 8.9 .. 50.6 77 4.3 267 -2.9 100 Gabon 26.1 13.3 .. .. .. 6.8 101 Mexico 14.8 .. 0.8 .. 11.7 .. 5.7 .. 2.1 .. 36.1 .. -3.1 .. 102 Uruguay 21.8 31.7 1.3 2.3 20.9 34.3 1.8 2.8 13.1 7.3 61.1 73.1 0.0 -3.0 103 Oman 12.1 9.1 30.8 26.5 34.0 41.7 9.1 7.8 49.6 36.7 9.4 30.0 0.5 -12.6 104 Slovenia 105 Saudi Arabia .. .. .. .. 106 Greece 26.5 25.8 3.1 2.1 30.1 38.6 5.4 4.3 12.5 8.9 51.2 30.6 -4.8 -15.6 107 Argentina 10.5 5.3 18.4 .. 14.3 .. 28.6 -2.6 .. 108 Korea, Rep. 15.8 18.1 2.2 2.8 15.1 16.0 2.5 2.9 29.3 18.7 22.0 32.0 -2.3 0.3 Low- and middle-income Sub-Saharan Africa East Asia and Pacific South Asia Europe and Central Asia Middle East and N. Africa Latin America and Caribbean High-income economies 109 Portugal 24.9 29.3 1.9 4.4 29.6 374 4.6 5.4 7.0 .. 46.0 .. -8.7 -2.2 110 New Zealand 31.3 33.5 3.6 3.1 36.6 35.1 2.5 1.0 4.8 3.5 57.0 69.1 -6.8 0.8 111 Spain 22.4 30.1 1.9 2.5 24.0 34.0 3.0 2.5 4.1 3.4 64.8 48.6 -4.2 -4.8 112 Ireland 31.8 39.2 4.0 2.8 41.7 4410 4.8 3.0 3.2 3.2 49.3 573 -12.9 -2.3 113 flsrael 44.6 33.5 7.3 4.8 69.3 39.8 2.9 4.4 36.8 19.2 25.7 49.1 -16.1 -3.0 114 Australia 19.9 21.2 2.2 3.2 21.5 27.0 1.6 1.2 9.1 7.8 45.5 57.5 -1.5 -2.9 115 United Kingdom 30.6 31.9 4.6 3.1 36.4 39.9 1.8 2.8 13.1 10.4 43.7 52.2 -4.6 -66 116 Finland 25.5 29.6 2.1 5.3 25.6 460 3.0 1.8 5.3 3.7 50.3 59.3 -2.2 -14.1 117 Italy 29.1 38.8 2.5 1.1 37.5 48.5 2.1 1.9 3.3 48.8 -10.7 -10.6 118 t Kuwait 2.3 1.3 74.1 .. 16.1 43.6 7.6 6.3 11.0 24.0 .. 50.2 119 Canada 16.6 19.5 2.6 2.5 21.6 0.3 7.4 69 43.8 51.4 -3.6 -4.5 120 t Hong Kong . . . . . . . . . . .. . . . . . . . . . . . . . . . . 121 Netherlands 44.0 44.7 5.2 3.8 48.1 50.7 4.6 2.2 5.5 4.3 62.9 69.3 -4.5 -0.5 122 t Singapore 18.2 171 8.1 10.0 16.2 13.4 4.6 4.2 20.8 21.4 24.1 35.9 2.2 15.7 123 Belgium 42.1 42.8 1.9 1.8 47.0 48.4 4.3 2.0 5.5 .. 60.2 .. -8.2 -61 124 France 36.5 38.0 2.9 2.7 37.3 44.9 2.1 2.5 7.3 5.6 69.4 68.7 -0.1 -5.5 125 Sweden 30.2 31.7 4.9 6.9 37.7 50.3 1.8 0.7 7.0 5.3 58.2 56.8 -8.1 -13.4 126 Austria 32.2 33.7 2.7 3.1 34.3 38.4 3.4 3.2 3.0 2.2 70.0 70.1 -3.4 -5.1 127 Germany . . 29.6 .. 2.0 .. 31.9 .. 1.7 9.0 .. 68.8 .. .. -2.5 128 United States 18.3 18.5 1.6 1.5 20.3 22.2 1.4 0.8 20.3 18.1 48.8 52.1 -2.8 -3.0 129 Norway 38.6 37.0 3.8 9.5 37.9 47.9 1.3 1.9 6.8 65 47.4 55.6 -2.0 -75 130 Denmark 32.2 33.3 4.2 6.2 37.6 44.3 2.8 1.7 6.5 4.7 56.3 53.5 -2.7 -5.7 131 Japan 11.0 178 0.6 3.3 14.8 3.6 .. .. 4.2 .. 59.2 -7.0 -1.6 132 Switzerland 17.5 20.0 1.4 18.2 1.3 .. 10.1 .. 63.6 .. -0.2 .. 133 t United Arab Emirates 0.0 0.5 0.2 1.7 10.7 11.0 0.9 0.4 41.4 37.1 20.5 29.9 2.0 -0.2 World a. Refers to current revenue. b. Includes lending minus repayments. c. Includes grants. d. Refers to education, health, social security, welfare, housing, and community amenities. e. Includes Eritrea. f. Data are for budgetary accounts only. 216 Table 15. Exports and imports of merchandise Exports Imports Total Food Fuels Average annual growth rate I%) Total Manufactures (million $1 1% of total) (million $1 (% of total) (% of total) Exports Imports 1980 1994 1980 1993 1980 1994 1980 1993 1980 1993 1980-90 1990-94 1980-90 1990-94 Low-income economies 85,945 t 202,239 t 102,726 t 218,960 t 5.7 w 9.1 w 1.6 w 13.0 w Excluding China and India 60,700 t 56,192 t 69,547 t 76,433 t 1.0w 2.6w -4.0w 3.9 w 1 Rwanda 112 0 243 .. 12 13 5.6 -19.6 1.3 -1.9 2 Mozambique 281 .. 2 20 800 1,000 .. .. -10.5 -0.3 -1.0 2.9 3 Ethiopian 425 372 0 12 717 1,033 8 16 25 23 1.2 -9.4 3.3 -3.3 4 Tanzania 511 519 14 .. 1,250 1,505 13 21 -1.8 10.0 -3.3 12.7 5 Burundi 65 106 3 10 168 224 13 19 7.4 -4.8 1.4 -14.6 6 Sierra Leone 224 115 40 29 427 150 24 2 -2.1 -4.3 -9.9 -1.1 7 Malawi 295 325 7 4 439 491 8 8 15 11 0.1 -1.8 1.3 -1.6 8 Chad 71 .. 8 12 74 .. 23 2 5.4 -10.0 10.5 -12.1 9 Uganda 345 421 3 1 293 870 11 23 -1.4 3.9 -0.6 28.7 10 Madagascar 401 277 6 20 600 434 9 14 15 19 -0.1 -68 -4.6 -5.6 11 Nepal 80 363 31 88 342 1,176 4 9 18 12 7.8 22.1 4.9 68 12 Vietnam 339 3,770 1,310 4,440 .. .. .. .. .. .. 13 Bangladesh 793 2,661 69 83 2,600 4,701 24 16 10 10 7.5 12.7 1.8 5.3 14 Haiti 226 73 375 292 24 13 -2.9 -11.2 -4.4 -68 15 Niger 566 .. 2 594 .. 14 26 -6.4 -2.0 -4.5 2.5 16 Guinea-Bissau 11 32 .. 55 63 20 6 -5.1 -18.3 1.3 -5.4 17 Kenya 1,250 1,609 12 29 2,120 2,156 8 14 34 15 2.6 166 1.1 -5.6 18 Mali 205 .. 9 .. 439 .. 19 .. 35 2.6 -3.7 1.2 -3.4 19 Nigeria 26,000 9,378 0 2 16,700 6,511 17 6 2 1 -2.4 -1.9 -17.5 7.6 4 .. ........ 20 Yemen, Rep. 802 51 2,510 28 7 1.5 7.2 -5.9 11.1 21 Burkina Faso 90 .. 11 14 359 .. 21 13 5.4 1.3 2.1 8.3 22 Mongolia .. 324 .. 223 .. .. .. .. 23 India 8,590 25,000 59 75 14,900 26,846 9 3 45 27 6.3 7.0 4.5 2.7 24 Lao PDR 31 300 8 .. 29 564 .. .. .. .. .. . . 25 Togo 338 .. 11 9 551 .. 17 22 23 10 4.9 9.0 1.1 -11.2 26 Gambia, The 31 35 9 36 165 209 23 11 2.3 269 1.0 9.0 27 Nicaragua 451 352 14 11 887 824 15 23 20 14 -4.4 -8.7 -4.1 7.3 28 Zambia 1,300 6 9 1,340 .. 5 22 -3.5 269 -5.0 -62 29 Tajikistan .. 531 .. .. .. 619 .. .. .. .. .. .. 30 Benin 63 8 11 331 .. 26 8 7.7 -0.3 -6.3 29.4 31 Central African Republic 116 29 47 81 .. 21 2 2.5 3.5 6.0 -3.3 32 Albania .. 116 .. .. .. 596 .. .. .. .. .. .. 33 Ghana 1,260 1 24 1,130 .. 10 11 27 17 3.9 9.1 1.6 12.8 34 Pakistan 2,620 7,370 49 85 5,350 8,890 13 14 27 17 9.5 8.8 2.1 10.3 35 Mauritania 194 2 1 286 .. 30 14 7.8 3.5 1.1 4.4 36 Azerbaijan .. 682 .. .. 791 .. .. .. .. .. .. 37 Zimbabwe 1,410 38 38 1,450 .. 3 11 39 15 2.2 -6.6 -2.2 -5.1 38 Guinea 401 .. .. .. 270 .. .. .. .. -3.6 -8.6 -2.9 -2.8 39 China* 18,100 121,047 48 81 19,900 115,681 .. 3 .. 6 11.4 14.3 10.0 24.8 40 Honduras 830 843 13 13 1,010 1,056 10 13 16 14 1.3 10.7 -1.0 7.0 41 Senegal 477 15 22 1,050 .. 25 29 25 11 2.6 3.6 1.0 61 .. ........ 42 Cote d'Ivoire 3,130 16 2,970 2,000 13 16 3.3 -7.5 -4.0 5.4 43 Congo 911 .. 7 14 580 .. 19 14 5.5 9.7 -2.0 2.5 44 Kyrgyz Republic .. 340 .. 459 .. .. .. .. 45 Sri Lanka 1,070 3,210 16 74 2,040 4,780 20 14 24 8 6.3 17.0 2.0 15.0 46 Armenia .. 209 .. .. 401 .. .. .. .. .. 47 Cameroon 1,380 4 14 1,600 1,100 9 16 12 3 4.5 -1.7 -1.4 -11.2 48 Egypt, Arab Rep. 3,050 3,463 11 33 4,860 10,185 32 24 1 2 -0.2 -0.1 -0.7 -2.9 49 Lesotho 58 464 .. .. 50 Georgia .. 381 .. 744 .. .. .. .. 51 Myanmar 472 771 6 10 353 886 7 3 -7.0 272 -7.0 38.7 Middle-income economies 606,399 t 826,822 t 453,101 t 890,818 t 3.5 w 7.0w 1.0 w 9.8 w Lower-middle-income .. .. .. .. .. .. .. -5.4 ........ 52 Bolivia 942 1,032 3 19 665 1,209 19 9 1 5 1.7 -2.8 18.9 53 Macedonia, FYR 1,120 1,260 54 Moldova .. 618 .. .. .. 672 .. .. .. .. ........ 55 Indonesia 21,900 40,054 2 53 10,800 31,985 13 7 16 8 5.3 21.3 1.2 9.1 56 Philippines 5,740 13,304 37 76 8,300 22,546 8 8 28 12 2.9 10.2 2.4 15.2 57 Uzbekistan .. 3,543 .. .. .. 3,243 .. .. .. .. 58 Morocco 2,490 4,013 24 57 4,160 7,188 20 17 24 14 4.2 0.8 2.9 1.7 59 Kazakstan .. 3,285 .. .. 4,205 .. .. . .. 60 Guatemala 1,520 1,522 24 30 1,600 2,604 8 11 24 12 -1.3 8.2 -0.6 19.3 61 Papua New Guinea 1,030 2,640 3 12 1,180 1,521 21 .. 15 .. 4.5 19.3 -0.2 2.1 62 Bulgaria 10,400 4,165 .. 9,650 4,160 . . 8 22 .. . . . . . . 63 Romania 11,200 6,151 .. 76 12,800 7,109 .. 14 .. 26 -6.8 -4.7 -0.9 -5.4 64 Ecuador 2,480 3,820 3 7 2,250 3,690 8 5 1 2 3.0 8.9 -3.9 10.0 65 Dominican Republic 962 633 24 52 1,640 2,630 17 .. 25 .. -1.0 -10.2 2.6 8.9 66 Lithuania 1,892 . . 64 . . 2,210 .. 11 . . 44 .. . . . . 67 El Salvador 967 844 35 46 966 2,250 18 13 18 11 -2.8 13.0 1.3 162 68 Jordan 574 1,424 34 51 2,400 3,382 18 20 17 13 7.4 7.1 -3.1 13.0 69 Jamaica 963 1,192 63 65 1,100 2,164 20 14 38 19 1.2 1.3 3.1 7.0 70 Paraguay 310 817 12 17 615 2,370 11 .. 12 9.9 -1.9 3.2 7.3 71 Algeria 13,900 8,594 0 4 10,600 8,000 21 27 3 1 2.5 -0.8 -5.1 -5.7 72 Colombia 3,920 8,399 20 40 4,740 11,883 12 8 12 4 9.7 4.8 -1.9 22.3 Data for Taiwan, China 19,800 92,847 88 93 19,700 85,507 8 6 25 8 11.6 5.9 12.8 14.2 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. TED WORLD OEVELOPMENICAT 217 Exports Imports Average annual growth rate (%) Total Manufactures Total Food Fuels (million $) (% of total) $1 (% of total) (% of total) Exports Imports 1980 1994 1980 1993 1980 1994 1980 1993 1980 1993 1980-90 1996-94 1980-90 1990-94 73 Tunisia 2,200 4,660 36 75 3,540 6,580 14 8 21 8 6.2 7.7 1.3 64 74 Ukraine 11,818 14,177 75 Namibia 1,321 1,196 76 Peru 3,900 4,555 18 17 2,500 6,794 20 20 2 8 -1.9 11.0 -1.0 12.1 77 Belarus 3,134 3,857 78 Slovak Republic 6,587 6,823 79 Latvia .. 967 .. .. .. 1,367 .. . . .. .. .. .. . . 80 Costa Rica 1,000 2,215 34 33 1,540 3,025 9 8 15 9 4.9 10.1 2.8 15.1 81 Poland 14,200 17,000 71 68 16,700 21,400 14 11 18 12 4.8 3.9 1.5 26.3 82 Thailand 6,510 45,262 28 73 9,210 54,459 5 5 30 8 14.3 21.6 12.1 12.7 83 Turkey 2,910 18,106 27 72 7,910 23,270 4 6 48 14 12.0 8.8 11.3 11.2 84 Croatia .. 4,259 71 . . 5,231 7 .. 10 . . 85 Panama 358 584 9 16 1,450 2,404 10 10 31 13 2.6 23.3 -4.1 14.3 86 Russian Federation, .. 53,000 .. 41,000 . . 87 Venezuela 19,900 15,480 2 14 10,700 7,710 15 11 2 1 1.6 -0.1 -6.1 19.3 88 Botswana 502 1,845 692 1,638 11.4 -0.8 7.7 -5.6 89 Estonia .. 1,329 .. 1,690 90 Iran, Islamic Rep. 14,700 13,900 5 9 12,200 20,000 13 0 7.4 10.2 -4.0 15.7 91 Turkmenistan .. 2,176 .. .. 1,690 .. .. Upper-middle-income 280,750 t 404,146 t 174,465 t 428,837 t 3.5 w 7.8 w 2.2 w 10.4 w 92 Brazil 20,100 43,600 39 60 25,000 36,000 10 10 43 16 6.1 66 -1.5 8.5 93 South Africa 25,500 25,000 39 94 19,600 23,400 3 6 0 1 0.9 2.8 -0.8 5.3 94 Mauritius 431 1,347 27 90 609 1,926 26 14 14 7 8.6 2.0 11.0 2.5 95 Czech Republic .. 14,252 .. .. .. 15,636 .. .. .. .. .. .. . . 96 Malaysia 13,000 58,756 19 70 10,800 59,581 12 6 15 4 11.5 17.8 6.0 15.7 97 Chile 4,710 11,539 10 18 5,800 11,800 15 6 18 10 5.7 10.5 1.4 14.5 98 Trinidad and Tobago 3,960 1,867 4 34 3,160 1,131 11 15 38 16 -4.3 4.9 -12.1 8.1 99 Hungary 8,670 10,733 66 68 9,220 14,438 i8 6 16 13 3.0 -1.8 0.7 7.9 100 Gabon 2,170 . . 0 3 674 .. 1 .. 0.6 5.7 -2.0 2.0 101 Mexico 15,600 61,964 12 75 19,500 80,100 16 8 2 2 12.2 14.7 5.7 18.7 102 Uruguay 1,060 1,913 38 43 1,680 2,770 8 8 29 9 2.9 -3.1 -2.0 21.7 103 Oman 2,390 5,418 3 15 1,730 3,915 15 19 11 3 13.1 9.8 -1.6 18.5 104 Slovenia .. 6,828 86 . . 7,304 .. 8 .. 11 . . . . .. . . 105 Saudi Arabia 109,000 38,600 1 7 30,200 22,796 14 1 -8.2 4.0 -8.4 5.9 106 Greece 5,150 9,384 47 53 10,500 21,466 9 14 23 11 5.1 11.9 5.8 12.8 107 Argentina 8,020 15,839 23 32 10,500 21,527 6 5 10 2 3.1 -1.0 -8.6 . . 108 Korea, Rep. 17,500 96,000 90 93 22,300 102,348 10 6 30 18 13.7 7.4 11.2 7.7 Low- and middle-income 683,360 t 1,033,887 t 550,291 t 1,098,170 t 3.9w 7.5w 1.1w 10.5w Sub-Saharan Africa 77,330 t 59,065 t 67,448 t 63,330 t 1.1w 0.9w -3.7w 1.8w East Asia and Pacific 87,323 t 388,383 t 88,303 t 404,292 t 10.7w 14.4 w 8.3 w 14.5 w South Asia 13,855 t 38,922 t 25,884 t 47,582 t 6.5 w 8.5 w 3.4 w 5.3 w Europe and Central Asia Middle East and N. Africa 203,874 t 96,741 t 104,130t 107,306t -2.3w 1.1 w -5.9w 6.1 w Latin America and Caribbean 99,344t 212,790 t 0.6w 13.7w High-income economies 1,375,665 t 3,291,137 t 1,478,865 t 3,307,266 t 5.0w 5.1w 6.1w 4.6w 109 Portugal 4,640 17,540 72 84 9,310 26,680 14 14 24 9 12.2 0.5 9.8 2.4 110 New Zealand 5,420 12,200 20 27 5,470 11,900 6 8 23 7 3.6 5.4 4.6 5.5 111 Spain 20,700 73,300 72 78 34,100 92,500 13 14 39 11 6.9 11.2 10.1 5.3 112 Ireland 8,400 34,370 58 75 11,200 25,508 12 10 15 5 9.3 11.4 4.7 5.6 113 t Ism' 5,540 16,881 82 91 9,780 25,237 11 7 27 7 5.9 10.0 4.6 12.3 114 Australia 21,900 47,538 20 42 22,400 53,400 5 5 14 6 5.8 8.1 4.9 5.1 115 United Kingdom 110,000 205,000 74 82 116,000 227,000 13 11 14 5 4.4 1.8 6.3 0.9 116 Finland 14,200 29,700 70 83 15,600 23,200 7 7 29 13 2.3 8.7 4.4 -1.9 117 Italy 78,100 189,805 85 89 101,000 167,685 13 13 28 9 4.4 6.0 5.3 -1.7 118 t Kuwait 19,700 11,614 10 84 6,530 21,716 15 15 1 1 -2.0 42.3 -6.3 23.0 119 Canada 67,700 166,000 49 66 62,500 155,072 8 6 12 4 5.7 8.4 6.2 6.2 120 t Hong Kong 19,800 151,395 92 95 22,400 162,000 12 6 6 2 15.4 15.3 11.0 15.8 121 Netherlands 74,000 155,554 51 63 76,600 139,795 15 15 24 9 4.5 5.8 4.6 4.3 122 t Singapore 19,400 96,800 50 80 24,000 103,000 9 6 29 11 12.1 16.1 8.6 12.1 123 Belgiumc 64,500 137,394 74 81 71,900 125,762 11 11 17 8 4.4 2.4 4.0 0.3 124 France 116,000 235,905 74 78 135,000 230,203 10 11 27 9 4.1 2.3 5.0 0.8 125 Sweden 30,900 61,292 79 85 33,400 51,800 7 7 24 9 4.6 7.4 4.9 5.0 126 Austria 17,500 45,200 83 89 24,400 55,300 6 5 16 5 6.4 3.9 5.8 1.9 127 Germanyd 193,000 427,219 86 90 188,000 381,890 12 10 23 8 4.6 2.2 4.9 2.8 128 United States 226,000 513,000 68 82 257,000 690,000 8 5 33 10 3.6 5.6 7.2 7.4 129 Norway 18,600 34,700 32 31 16,900 27,300 8 7 17 3 6.8 65 4.2 0.7 130 Denmark 16,700 41,417 56 66 19,300 34,800 12 14 22 5 4.4 5.4 3.6 3.4 131 Japan 130,000 397,000 96 97 141,000 275,000 12 18 50 21 5.0 0.4 6.5 4.0 132 Switzerland 29,600 66,200 91 94 36,300 64,100 8 7 11 4 6.0 3.3 4.9 -6.7 133 t United Arab Emirates 20,700 19,700 3 13 8,750 21,100 11 11 11 2 6.1 63 -1.3 21.0 World 2,003,736 t 4,326,096 t 2,007,961 t 4,391,660 t 4.8 w 5.7w 5.0 w 5.7 w a. Data prior to 1992 include Eritrea. b. Excludes trade with other members of the Commonwealth of Independent States. c. Includes Luxembourg. d. Data priorto 1990 refer to the Federal Republic of Germany before unification. 218 Table 16. Balance of payments Current transfers Current account Exports of goods Imports of goods Net workers' Other net private balance before Gross international and smvicesa and servicesa remittances transfers official transfers reserves (million $) (million $) (million $1 (million $1 (million $) (million $1 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 Low-income economies 105,529 t 237,848 t 136,812 t 285,936 t 42,943 t 119,140 t Excluding China and India 74,386 t 76,664 t 98,041 t 121,425 t 20,842 t 37,138 t 1 Rwanda 182 51 335 496 -14 0 11 45 -155 -400 187 39 2 Mozambique 452 341 875 1,403 0 55 0 138 -423 -870 3 Ethiopia' 590 563 797 1,189 22 247 58 61 -126 -317 262 588 4 Tanzania 762 855 1,412 2,067 0 0 22 450 -628 -762 5 Burundi .. 106 .. 307 .. 0 29 . . -171 105 211 6 Sierra Leone 276 .. 494 .. -2 10 .. -209 . . .. 7 Malawi 315 390 638 639 0 0 13 18 -310 -230 76 48 8 Chad 71 181 83 336 -4 0 -8 -16 -163 12 80 9 Uganda 331 333 450 901 -2 0 .. 304 -121 -264 10 Madagascar 518 630 1,121 988 -30 -2 10 33 -623 -327 .. 11 Nepal 239 1,004 368 1,320 0 70 29 -4 -100 -250 272 752 12 Vietnam .. 4,918 .. 6,218 .. .. .. 170 .. -1,130 .. .. 13 Bangladesh 976 3,220 2,622 4,830 197 1,090 13 154 -1,436 -366 331 3,175 14 Haiti 309 64 498 216 52 0 0 43 -137 -109 27 .. 15 Niger 644 245 1,016 351 -47 10 -9 -10 -429 -106 132 115 16 Guinea-Bissau 17 55 83 102 -14 0 0 9 -80 -37 .. .. 17 Kenya 2,061 2,666 3,095 2,844 0 -3 27 151 -1,006 -30 539 588 18 Mali 263 392 537 817 40 85 0 146 -234 -194 26 229 19 Nigeria 27,749 9,879 22,044 12,504 -410 546 0 0 5,295 -2,079 10,640 1,649 20 Yemen, Rep. .. 2,010 3,178 .. 1,059 .. -15 .. -124 .. 274 21 Burkina Faso 225 343 596 933 100 71 12 26 -259 -493 75 241 22 Mongolia 443 421 934 481 0 0 0 -0 -491 -59 94 23 India 12,348 35,020 18,105 43,692 2,786 4,976 74 1,224 -2,897 -2,473 12,010 24,221 24 Lao PDR .. 259 400 .. 0 .. 10 -99 -131 68 25 Togo 570 305 752 341 1 5 -0 -0 -181 -31 85 99 26 Gambia, The 66 220 181 254 0 0 4 13 -112 -20 .. .. 27 Nicaragua 514 459 1,049 1,429 0 30 2 0 -534 -940 75 146 28 Zambia 1,625 1,185 1,987 1,593 -61 -122 -19 -545 -427 206 29 Tajikistan .. .. .. .. .. .. .. .. .. .. .. .. 30 Benin 241 405 428 518 75 65 0 0 -112 -48 15 262 31 Central African Republic 205 186 329 280 -19 .. 3 0 -141 -95 62 214 32 Albania 386 276 375 775 0 265 6 -4 16 -238 209 .. 33 Ghana 1,213 1,386 1,264 2,123 -4 12 0 259 -54 -466 330 689 34 Pakistan 3,010 8,401 6,042 12,812 1,748 1,446 147 945 -1,137 -2,020 1,568 3,716 35 Mauritania 270 427 493 568 -27 24 -1 -23 -251 -140 146 44 36 Azerbaijan .. 637 .. 852 .. .. .. 36 .. -179 .. 37 Zimbabwe 1,719 2,016 1,900 2,338 8 0 -129 26 -302 -295 41. 9 585 38 Guinea 553 678 577 952 -8 9 5 -50 -26 -315 .. .. 39 China 20,901 124,665 24,752 118,344 640 395 0 441 -3,211 7,157 10,091 57,781 40 Honduras 967 1,370 1,306 1,859 0 90 8 5 -331 -394 159 179 41 Senegal 830 1,349 1,337 1,740 -15 40 -4 1 -526 -350 25 191 42 Cote d'Ivoire 3,640 3,177 4,761 3,590 -716 -312 0 0 -1,836 -726 46 221 43 Congo 1,029 1,078 1,195 1,400 -38 -26 -25 -230 -346 93 55 44 Kyrgyz Republic .. 340 .. 490 .. 0 -52 .. -202 .. 45 Sri Lanka 1,340 4,087 2,269 5,646 152 698 -16 -72 -793 -933 283 1,686 46 Armenia .. 258 .. 525 .. 0 .. 36 .. -232 .. .. 47 Cameroon 1,828 2,210 2,226 2,485 11 52 -8 -34 -395 -257 206 14 48 Egypt, Arab Rep. 6,516 10,511 9,745 16,121 2,696 5,073 95 0 -438 -536 2,480 14,413 49 Lesotho 363 551 482 914 0 0 2 3 -117 -360 50 Georgia . . . . . 51 Myanmar 556 1,125 869 1,776 0 0 7 312 -307 -339 409 518 Middle-income economies 662,723 t 1,047,195 t 670,749 t 1,214,187 t 173,363 t 316,491 t Lower-middle-income .. .. 78,989 t 136,901 t 52 Bolivia 1,046 1,226 1,112 1,670 0 -1 13 25 -53 -419 553 793 53 Macedonia, FYR 1,226 1,733 .. 137 -370 166 54 Moldova .. 618 .. 823 .. 0 .. 22 .. -183 .. 180 55 Indonesia 22,241 46,295 19,432 49,704 0 449 0 0 2,810 -2,960 6,803 13,321 56 Philippines 7,997 24,033 10,348 27,809 202 367 97 93 -2,052 -3,316 3,978 7,126 57 Uzbekistan .. 3,561 .. 3,569 0 0 .. -8 .. .. 58 Morocco 3,270 7,035 5,807 9,901 989 2,061 15 55 -1,533 -750 814 4,622 59 Kazakstan .. 3,114 .. 3,916 .. 0 .. 80 .. -722 .. .. 60 Guatemala 1,834 2,586 2,107 3,734 0 0 109 378 -164 -770 753 943 61 Papua New Guinea 1,089 2,909 1,561 2,356 0 0 -106 -150 -578 402 458 120 62 Bulgaria 9,443 5,507 8,547 5,525 0 0 58 164 954 146 .. . . 63 Romania 12,160 7,158 14,580 7,704 0 0 0 194 -2,420 -352 2,511 3,092 64 Ecuador 2,975 4,521 3,647 5,482 0 0 0 0 -672 -962 1,257 2,003 65 Dominican Republic 1,313 2,601 2,237 3,253 183 420 17 0 -725 -232 279 259 66 Lithuania 2,153 .. 2,463 .. 0 .. 31 .. -279 .. 597 67 El Salvador 1,271 1,675 1,289 2,982 11 967 6 37 -1 -303 382 829 68 Jordan 1,781 3,058 3,318 4,783 715 1,093 -120 -91 -942 -723 1,745 1,997 69 Jamaica 1,422 2,680 1,678 3,112 51 327 31 120 -175 15 105 . . 70 Paraguay 781 2,657 1,399 3,981 0 0 0 42 -618 -1,282 783 1,030 71 Algeria 14,500 9,698 14,552 12,919 241 0 36 1,400 225 -1,821 7,064 4,813 72 Colombia 5,860 12,428 6,231 16,283 68 211 96 651 -207 -2,993 6,474 7,862 . Data for Taiwan, China 22,627 112,899 23,445 105,524 -92 -1,316 -910 6,059 4,055 97,653 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. SELECTED WORLD DEVELOPMENT INDICATORS 219 Current transfers Current account Exports of goods Imports of goods Net workers' Other net private balance before Gross international and servicesa and services. remittances transfers official transfers reserves (million $) (million $) (million $1 (million $) (million $1 (million 5) 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 1980 1994 73 Tunisia 3,356 6,983 4,119 8,086 304 675 -2 8 -462 -419 700 1,544 74 Ukraine 14,426 15,837 0 -566 -1,977 75 Namibia 1,758 1,806 0 30 -19 203 76 Peru 4,832 5,996 5,080 9,197 0 280 0 -14 -248 -2,935 2,804 7,420 77 Belarus 2,770 3,345 70 -505 78 Slovak Republic 9,138 8,496 0 63 706 2,186 79 Latvia 1,263 1,446 -158 641 80 Costa Rica 1,219 3,399 1,897 4,004 0 0 20 89 -659 -516 197 906 81 Poland 16,200 22,189 20,338 25,898 0 0 593 991 -3,545 -2,718 574 6,023 82 Thailand 8,575 59,161 10,861 68,429 0 0 75 986 -2,212 -8,282 3,026 30,280 83 Turkey 3,672 30,084 9,251 30,589 2,071 2,627 82 126 -3,426 2,248 3,298 8,633 84 Croatia 6,654 6,872 340 -116 7 1,410 85 Panama 7,736 7,647 8,062 7,756 0 0 -52 -25 -378 -136 . . 86 Russian Federatione 59,006 . . 59,208 . . 0 . . -202 7,206 87 Venezuela 22,232 19,170 17,065 15,993 -418 -746 0 436 4,749 2,450 13,360 12,459 88 Botswana 748 2,356 954 2,096 -17 15 -85 -207 174 89 Estonia 1,173 1,240 0 0 -68 .. 446 90 Iran, Islamic Rep. 14,073 19,765 16,509 16,384 0 0 0 1,200 -2,436 4,581 12,783 91 Turkmenistan Upper-middle-income 305,516 t 488,002 t 286,289 t 569,204 t 94,374 t 179,589 I 92 Brazil 23,275 50,674 36,250 54,474 1 126 2,597 -12,848 -1,203 6,875 38,492 93 South Africa 29,258 29,580 25,989 30,215 94 -19 3,363 -654 7,888 3,295 94 Mauritius 574 2,087 712 2,385 0 0 10 68 -129 -230 113 771 95 Czech Republic 19,602 19,744 0 126 -16 6,949 96 Malaysia 14,836 65,795 15,100 70,106 0 0 -43 48 -307 -4,262 5,755 26,339 97 Chile 6,276 14,881 8,360 15,978 0 0 64 52 -2,020 -1,045 4,128 13,802 98 Trinidad and Tobago 3,371 2,161 2,972 1,943 1 26 -44 -30 357 213 2,813 373 99 Hungary 9,780 11,441 10,374 16,404 0 0 63 896 -531 -4,067 6,853 100 Gabon 2,434 2,418 1,926 2,275 -143 -14 -72 350 71 115 180 101 Mexico 22,240 53,607 33,496 86,406 687 3,705 106 216 -10,463 -28,878 4,175 6,441 102 Uruguay 1,594 3,442 2,312 3,892 0 0 2 33 -716 -416 2,401 1,622 103 Oman 3,852 5,800 2,650 5,558 -362 -1,329 0 0 840 -1,087 704 1,090 104 Slovenia 8,628 8,185 . . 56 33 532 1,499 105 Saudi Arabia 114,208 54,598 62,710 52,159 -4,094 -15,717 0 0 47,404 -13,278 26,129 9,139 106 Greece 8,374 15,650 11,670 22,732 1,066 2,576 21 53 -2,209 -4,453 3,607 15,809 107 Argentina 11,202 21,029 15,999 31,421 0 0 23 318 -4,774 -10,074 9,297 16,003 108 Korea, Rep. 22,577 116,228 28,347 121,364 0 0 399 832 -5,371 -4,304 3,101 25,764 Low- and middle-income 763,625 t 1,290,939 t 797,322 t ,484,372 t 216,306 t 435,631 Sub-Saharan Africa 91,798 t 79,026 t 96,504 t 100,724 t 22,249t 20,107 East Asia and Pacific 101,752 t 451,795t 117,669t 482,575 t 33,794t 161,686 South Asia 18,792 t 52,585 t 30,493 t 69,750 t 15,403 t 31,901 Europe and Central Asia 11,445t 63,580 Middle East and N. Africa 218,507 t .. 165,659 t 76,217 t 46,538 Latin America and Caribbean 132,434 t 233,334 t 178,545 t 319,456 t 57,197t 111,820 High-income economies 1,908,362 t 4,923,317 t 1,916,810 t 4,792,515 t 730,811 t 1,031,132 109 Portugal 6,846 24,586 10,916 30,354 2,928 3,844 71 -3 -1,072 -1,926 13,863 21,671 110 New Zealand 6,561 16,011 7,630 18,116 143 177 -35 806 -961 -1,123 365 3,709 111 Spain 33,863 111,791 41,089 121,337 1,647 1,780 411 99 -5,168 -7,667 20,474 47,531 112 Ireland 10,418 40,446 13,754 39,483 0 0 123 -52 -3,213 911 3,071 6,253 113 t Israel 9,858 24,527 13,458 33,898 0 0 1,060 3,260 -2,540 -6,111 4,055 6,796 114 Australia 26,668 58,062 30,683 68,755 0 0 295 738 -3,720 -9,955 6,366 14,313 115 United Kingdom 201,137 386,474 189,683 380,663 0 0 -473 -398 10,980 5,414 31,755 48,079 116 Finland 17,332 36,490 18,621 34,992 0 0 -20 -96 -1,308 1,402 2,451 11,430 117 Italy 105,011 278,378 116,794 256,921 1,609 242 -155 -247 -10,329 21,453 62,428 57,817 118 t Kuwait 27,344 17,927 10,463 12,261 -692 -1,445 0 0 16,190 4,221 5,425 4,474 119 Canada 77,995 190,101 79,859 209,087 o 0 53 832 -1,811 -18,153 15,462 13,775 120 t Hong Kong 24,190 .. 25,448 .. .. .. .. .. -1,258 .. .. 121 Netherlands 97,922 197,115 97,610 180,466 -316 -395 -498 -1,547 -503 14,707 37,549 47,859 122 t Singapore 25,239 101,929 26,695 99,194 0 0 -104 -482 -1,560 2,253 123 Belgimnd 88,925 224,364 92,625 209,188 -266 -360 -104 -240 -4,070 14,576 27,974 23,474 124 France 171,817 424,737 171,856 408,318 -2,591 -1,290 137 -87 -2,494 15,043 75,592 57,627 125 Sweden 39,388 83,406 42,495 80,711 0 91 -301 -273 -3,407 2,513 6,996 25,579 126 Austria 29,152 82,237 32,951 83,834 -67 33 9 -294 -3,857 -1,858 17,725 23,852 127 Germanye 233,971 565,307 235,078 554,118 -4,437 -4,634 -1,464 -4,228 -7,007 2,327 104,702 113,841 128 United States 344,440 836,415 333,830 957,209 -810 -7,680 -220 -8,010 9,580 -136,484 171,413 163,591 129 Norway 28,252 50,837 26,658 45,573 -23 -236 -32 -215 1,539 4,813 6,746 19,479 130 Denmark 24,152 72,481 26,642 67,263 0 0 -89 -133 -2,578 5,086 4,347 9,680 131 Japan 158,230 600,110 167,450 463,390 0 0 -240 -2,820 -9,460 133,900 38,919 135,145 132 Switzerland 59,462 119,920 58,524 100,364 -603 -2,007 -98 -220 238 17,329 64,748 66,645 133 t United Arab Emirates 11,800 2,355 6,964 World 2,639,869 t 6,275,740 t 2,666,779 t 6,276,817 t 947,117 t 1,466,763 t a. Corresponds to the fourth edition of the IMF's Balance of Payments Manua/definition. b. Data prior to 1992 include Eritrea. c. Excludes trade with other members of the Commonwealth of Independent States. d. Includes Luxembourg. e. Data prior to 1990 refer to the Federal Republic of Germany before unification. 220 St Table 17. External debt External debt as percentage of Debt service Ratio of present Multilateral debt as Total external debt Exports of goods as % of exports of value to nominal % of total external $) GNP and services goods and services value of debt I%) debt 1980 1994 1980 1994 1980 1994 1980 1994 1994 1980 1994 Low-income economies Excluding China and India .. .. .. .. 1 Rwanda 190 954 16.3 164.8 113.7 2,163.9 4.6 14.7 47.3 47.8 78.5 2 Mozambique .. 5,491 450.4 .. 1,388.7 .. 23.0 73.5 0.0 19.2 3 Ethiopia.. 824 5,058 .. 109.8 139.4 630.0 7.6 11.5 62.3 41.2 42.0 4 Tanzania 2,616 7,441 .. 229.5 349.7 877.5 21.5 20.5 72.9 21.6 35.5 5 Burundi 166 1,125 18.2 113.8 .. 1,144.9 .. 41.7 43.7 35.7 78.3 6 Sierra Leone 435 1,392 40.7 187.3 158.3 .. 23.3 .. 73.7 14.2 23.9 7 Malawi 821 2,015 72.1 160.3 262.4 523.0 27.8 17.4 45.6 26.7 78.8 8 Chad 228 816 31.6 91.0 320.2 450.9 8.3 8.1 47.2 32.6 72.3 9 Uganda 702 3,473 55.7 88.1 213.2 1,042.7 17.4 45.6 54.9 11.6 58.4 10 Madagascar 1,241 4,134 31.1 225.3 240.7 652.1 20.5 9.5 71.6 14.7 38.6 11 Nepal 205 2,320 10.4 56.2 91.5 223.4 3.4 7.9 48.5 62.0 77.8 12 Vietnam 6 25,115 .. 161.3 .. 514.3 .. 6.1 83.7 100.0 0.9 13 Bangladesh 4,327 16,569 33.4 63.4 399.8 400.7 25.6 15.8 50.7 29.0 55.9 14 Haiti 303 712 20.9 44.2 73.4 1,108.9 6.3 1.2 56.5 43.8 73.3 15 Niger 863 1,569 34.5 104.2 138.6 617.4 22.7 26.1 55.4 16.5 52.7 16 Guinea-Bissau 135 816 128.4 340.7 1,801.8 .. 15.2 65.3 21.6 44.6 17 Kenya 3,383 7,273 48.1 112.4 168.6 275.0 21.6 33.6 70.9 18.6 37.9 18 Mali 732 2,781 45.4 151.8 227.2 589.2 5.1 27.5 55.3 23.7 44.3 19 Nigeria 8,921 33,485 10.1 102.5 33.0 322.6 4.3 18.5 89.4 6.4 14.4 20 Yemen, Rep. 1,684 5,959 .. .. .. 196.3 .. 4.8 80.1 14.9 20.3 21 Burkina Faso 330 1,125 19.5 61.1 91.8 .. 6.2 .. 50.0 42.9 78.1 22 Mongolia .. 443 .. 61.3 .. 106.5 .. 9.6 62.1 .. 25.5 23 India 20,582 98,990 11.9 34.2 146.5 253.7 10.0 26.9 71.4 29.5 31.8 24 Lao PDR 350 2,080 .. 135.6 .. 803.1 .. 7.7 29.3 5.9 25.4 25 Togo 1,052 1,455 95.9 156.6 187.9 470.5 9.3 7.8 62.3 11.3 46.9 26 Gambia, The 137 419 61.5 117.3 206.5 194.6 6.3 14.4 50.6 29.9 71.5 27 Nicaragua 2,192 11,019 108.5 800.6 443.4 2,286.1 23.2 38.0 88.3 19.2 11.9 28 Zambia 3,261 6,573 90.7 204.3 202.3 560.1 25.5 31.5 77.0 12.2 30.3 29 Tajikistan .. 594 .. 28.7 .. .. .. .. 88.5 .. 11.4 30 Benin 424 1,619 30.2 109.4 139.7 399.9 6.7 10.1 51.5 24.5 48.5 31 Central African Republic 195 891 24.3 104.0 96.9 490.6 5.0 12.9 50.2 27.4 66.3 32 Albania .. 925 .. 50.8 .. 190.7 .. 2.5 88.4 .. 7.1 33 Ghana 1,398 5,389 31.6 101.5 115.8 389.2 13.2 24.8 62.1 19.9 49.6 34 Pakistan 9,930 29,579 42.4 56.6 211.0 303.3 18.1 35.1 74.5 15.4 38.9 35 Mauritania 843 2,326 125.5 240.1 326.7 518.1 18.4 23.3 67.6 14.8 35.7 36 Azerbaijan .. 113 .. 3.1 .. 17.7 .. 0.0 96.6 .. 7.4 37 Zimbabwe 786 4,368 14.9 85.9 48.3 .. 4.0 .. 80.0 0.4 34.1 38 Guinea 1,117 3,104 .. 94.7 202.0 455.7 19.8 14.2 63.2 11.6 42.0 39 China 4,504 100,536 2.2 19.3 21.4 84.3 4.4 9.3 85.2 0.0 13.5 40 Honduras 1,472 4,418 60.6 .. 156.3 345.3 22.0 33.9 76.4 31.2 46.7 41 Senegal 1,473 3,678 50.5 99.1 167.0 277.6 29.4 14.9 65.7 17.8 48.3 42 Cote d'Ivoire 7,445 18,452 76.9 338.9 208.3 581.0 39.4 40.1 83.2 7.0 18.2 43 Congo 1,526 5,275 99.0 454.2 149.2 489.2 10.6 51.5 84.1 7.7 13.2 44 Kyrgyz Republic .. 441 .. 16.2 .. 129.8 .. 4.8 79.3 .. 21.9 45 Sri Lanka 1,841 7,811 46.1 67.6 127.6 168.3 12.4 8.7 61.2 11.7 34.0 46 Armenia .. 214 .. 8.3 .. 83.4 .. 1.7 91.9 .. 48.6 47 Cameroon 2,513 7,275 36.8 107.0 138.2 325.1 15.4 16.7 80.7 16.8 22.3 48 Egypt, Arab Rep. 19,131 33,358 89.2 78.9 213.9 231.8 13.8 15.8 65.7 13.7 12.5 49 Lesotho 72 600 11.4 44.4 79.5 331.9 6.1 16.9 58.3 56.1 68.6 50 Georgia . . 1,227 .. 58.6 .. 254.2 .. 1.2 95.3 .. 12.1 51 Myanmar 1,499 6,502 26.0 8.8 278.0 580.8 26.2 15.4 74.8 18.6 22.4 Middle-income economies Lower-middle-income .. .. 52 Bolivia 2,702 4,749 93.4 89.4 262.4 390.1 35.5 28.2 74.0 16.5 47.9 53 Macedonia, FYR 924 56.9 75.4 12.7 93.5 23.6 54 Moldova .. 492 .. 13.2 .. 79.7 2.2 88.7 .. 33.1 55 Indonesia 20,944 96,500 28.0 57.4 94.7 211.3 13.9 32.4 87.2 8.8 19.8 56 Philippines 17,417 39,302 53.7 59.7 233.9 189.7 29.3 21.9 89.1 7.5 21.2 57 Uzbekistan .. 1,156 .. 5.4 .. 33.0 .. 3.2 91.2 .. 0.4 58 Morocco 9,710 22,512 53.3 76.3 227.0 257.1 33.0 33.3 84.0 7.4 27.4 59 Kazaks tan .. 2,704 .. 14.9 .. 88.1 .. 1.9 91.0 .. 8.0 60 Guatemala 1,166 3,017 14.9 23.4 67.4 121.4 8.4 11.4 80.6 30.0 28.3 61 Papua New Guinea 719 2,878 28.9 57.5 69.9 99.4 14.6 30.0 80.3 21.2 31.3 62 Bulgaria 392 10,468 2.0 104.8 4.2 193.1 0.5 14.0 95.6 0.0 13.3 63 Romania 9,762 5,492 .. 18.3 80.9 78.0 12.7 8.4 92.0 8.3 25.2 64 Ecuador 5,997 14,955 53.8 96.6 207.7 335.3 34.9 22.1 87.6 5.4 16.1 65 Dominican Republic 2,002 4,293 31.2 41.8 137.7 144.8 26.1 17.0 87.9 10.2 21.8 66 Lithuania .. 438 .. 8.4 20.3 .. 2.8 82.9 .. 27.2 67 El Salvador 911 2,188 26.1 26.9 74.0 84.0 7.8 13.1 74.6 28.3 57.2 68 Jordan 1,971 7,051 .. 121.8 86.2 172.9 9.2 12.4 71.3 8.0 14.3 69 Jamaica 1,913 4,318 78.0 110.1 135.7 149.8 19.9 20.6 85.4 14.9 27.4 70 Paraguay 955 1,979 20.7 25.1 136.2 78.3 20.7 10.2 88.6 20.2 36.0 71 Algeria 19,365 29,898 47.1 74.3 132.8 312.1 28.0 56.0 81.9 1.5 11.1 72 Colombia 6,940 19,416 20.9 29.6 128.8 159.4 17.7 30.3 93.7 19.5 27.7 Note: For data comparability and coverage, see the technical notes. 221 External debt as percentage of Debt service Ratio of present Multilateral debt as Total external debt Exports of goods as % of exports of value to nominal % of total external (million $) GNP and services goods and services value of debt (%) debt 1980 1994 1980 1994 1980 1994 1980 1994 1994 1980 1994 73 Tunisia 3,526 9,254 41.6 60.8 98.5 122.1 15.2 18.8 85.9 12.3 37.9 74 Ukraine 5,430 6.6 37.7 2.0 92.4 4.1 75 Namibia .. .. .. .. .. .. .. .. 76 Peru 9,386 22,623 47.6 46.2 202.5 379.6 46.4 17.7 88.5 5.5 14.8 77 Belarus 1,272 .. 6.3 45.9 4.3 74.4 13.6 78 Slovak Republic 670 4,067 5.6 33.2 45.3 9.3 91.9 0.0 12.5 79 Latvia .. 364 .. 6.3 .. 28.8 .. 2.1 89.6 .. 31.5 80 Costa Rica 2,744 3,843 59.7 47.8 229.3 116.4 29.6 15.0 88.1 16.4 33.6 81 Poland 8,894 42,160 16.3 46.2 55.5 195.0 18.1 14.3 79.3 0.0 4.6 82 Thailand 8,297 60,991 25.9 43.1 104.5 107.9 20.4 16.3 98.4 12.0 5.1 83 Turkey 19,131 66,332 34.3 51.4 336.2 217.1 28.2 33.4 85.8 11.2 14.0 84 Croatia .. 2,304 .. 16.4 .. 33.4 4.2 93.8 .. 22.9 85 Panama 2,975 7,107 81.8 107.2 88.0 .. 14.4 .. 96.6 11.0 8.2 86 Russian Federation 4,477 94,232 .. 25.4 .. 161.1 6.3 92.2 0.0 1.7 87 Venezuela 29,345 36,850 42.1 65.6 146.6 209.7 30.2 21.0 90.2 0.7 8.5 88 Botswana 147 691 16.3 17.4 22.7 32.3 2.4 4.3 75.9 57.5 72.6 89 Estonia 186 .. 4.1 .. .. .. 90.3 .. 35.2 90 Iran, Islamic Rep. 4,500 22,712 4.8 36.6 34.5 118.6 7.4 22.5 90.9 13.8 1.3 91 Turkmenistan 418 17.2 4.2 90.6 13.2 Upper-middle-income 92 Brazil 72,920 151,104 31.8 27.9 334.0 336.0 67.7 35.8 92.6 4.2 6.1 93 South Africa .. .. .. . .. .. .. .. .. 94 Mauritius 467 1,355 41.6 40.3 82.1 68.1 9.2 7.3 86.5 16.6 19.2 95 Czech Republic 3,789 10,694 13.0 29.7 .. 56.8 . 13.1 94.3 0.0 8.8 96 Malaysia 6,611 24,767 28.0 36.9 46.8 39.0 6.6 7.9 89.3 11.3 6.9 97 Chile 12,081 22,939 45.5 45.5 202.4 160.0 45.3 20.3 90.2 2.9 19.0 98 Trinidad and Tobago 829 2,218 14.0 50.3 26.4 104.1 7.3 31.6 93.9 8.6 18.4 99 Hungary 9,764 28,016 44.8 70.1 .. 260.9 .. 53.0 94.2 0.0 12.4 100 Gabon 1,514 3,967 39.3 122.5 63.0 165.1 18.0 10.5 89.8 2.7 11.4 101 Mexico 57,378 128,302 30.5 35.2 266.4 238.4 50.9 35.4 91.4 5.6 13.3 102 Uruguay 1,660 5,099 17.0 33.2 108.6 161.4 19.6 16.1 93.3 11.0 23.9 103 Oman 599 3,084 11.2 30.7 15.8 .. 6.6 .. 90.6 5.8 5.2 104 Slovenia 2,290 16.4 26.8 5.4 93.1 21.6 105 Saudi Arabia 106 Greece 107 Argentina 27,157 77,388 35.6 27.8 274.6 405.4 42.3 35.1 88.5 4.0 9.9 108 Korea, Rep. 29,480 54,542 47.9 15.3 134.5 48.1 20.3 7.0 91.2 8.0 5.7 Low- and middle-income 647,308 t 1,921,450 t 26.5 w 37.6 w 88.3 w 162.8 w 13.2 w 16.6w 7.6 w 14.6 m Sub-Saharan Africa 84,049 t 212,416 t 30.6 w 78.7 w 90.9 w 265.7 w 9.7 w 14.0 w 9.0 w 23.9 NI East Asia and Pacific 94,307 t 421,329 t 21.5 w 30.9 w 93.6 w 93.3 w 13.4 w 12.0 w 8.3 w 12.5 m South Asia 38,112 t 161,128 t 17.4w 42.0 w 161.1w 271.6w 11.6w 25.6 w 24.5w 35.4 v, Europe and Central Asia 87,919 t 356,090 t 25.7 w 32.8 w 54.6 w 153.7 w 8.6 w 14.6 w 5.4 w 8.6 m Middle East and N. Africa 84,257 t 207,669 t 18.6w 41.7w 36.8 w 148.5 w 5.0 w 15.4 w 6.7 w 10.1 NI Latin America and Caribbean 258,665 t 562,818 t 36.2 w 37.2 w 206.0 w 258.6 w 36.9 w 27.5 w 5.5 w 12.2 vs High-income economies 109 Portugal 110 New Zealand 111 Spain 112 Ireland 113 t Israel 114 Australia 115 United Kingdom 116 Finland 117 Italy 118 t Kuwait 119 Canada 120 t Hong Kong 121 Netherlands 122 t Singapore 123 Belgium 124 France 125 Sweden 126 Austria 127 Germany 128 United States 129 Norway 130 Denmark 131 Japan 132 Switzerland 133 t United Arab Emirates World a. Includes Eritrea. 222 Table la. Basic indicators for other economies GNP per capitaa PPP estimates of GNP per capita's Life Population Area Avg. ann. expectancy at Adult (thousands) (thousands Dollars growth (%) US=100 Current int'l $ birth (years) illiteracy (%) mid-1994 of sq. km) 1994 1985-94 1987 1994 1994 1994 1995 1 Afghanistan 22,789 652.09 c 44 69 2 American Samoa 55 0.20 d .. 3 Andorra 65 0.45 e .. 79 4 Angola 10,442 1,246.70 f -6.8 47 5 Antigua and Barbuda 67 0.44 6,770 2.5 75 6 Aruba 77 0.19 e . .. .. .. 75 .. 7 Bahamas, The 272 13.88 11,800 -0.8 73.1 59.8 15,470g 73 2 8 Bahrain 557 0.68 7,460 -0.7 57.7 51.1 13,220g 72 15 9 Barbados 260 0.43 6,560 -0.0 48.0 43.3 11,210g .. 3 10 Belize 211 22.96 2,530 5.0 18.0 21.6 5,600g 69 11 Bermuda 63 0.05 e -1.2 .. .. .. 12 Bhutan 675 47.00 400 4.4 4.8 4.9 1,2701 58 13 Bosnia and Herzegovina 4,383 51.13 c .. 14 Brunei 280 5.77 14,240 75 12 15 Cambodia 9,951 181.04 e 52 16 Cape Verde 372 4.03 930 2.0 7.1 7.4 1,9201 65 28 17 Cayman Islands 33 0.26 e 77 18 Channel Islands 143 0.19 e .. 78 19 Comoros 485 2.23 510 -1.4 6.8 5.5 1,4301 55 43 20 Cuba 10,978 110.86 f .. 76 4 21 Cyprus 726 9.25 10,260 4.6 47.2 57.2 14,800g 77 22 Djibouti 603 23.20 c .. .. 49 34 23 Dominica 72 0.75 2,800 4.3 73 24 Equatorial Guinea 386 28.05 430 2.2 48 25 Eritrea 3,482 125.00 c 48 26 Faeroe Islands 45 1.40 e .. 77 27 Fiji 767 18.27 2,250 2.4 20.4 23.0 5,940g 72 .8 28 French Guiana 141 90.00 d 73 29 French Polynesia 219 4.00 d 69 30 Greenland 55 341.70 e 66 31 Grenada 92 0.34 2,630 32 Guadeloupe 421 1.71 d 75 33 Guam 146 0.55 d .. .. .. 73 34 Guyana 826 214.97 530 0.4 8.8 10.6 2,750g 66 2 35 Iceland 266 103.00 24,630 0.3 86.4 74.2 19,210h 79 36 Iraq 20,356 438.32 f 67 42 37 Isle of Man 72 0.57 d .. 38 Kiribati 78 0.73 740 61 39 Korea, Dem. Rep. 23,448 120.54 f 70 40 Lebanon 3,930 10.40 f 69 .8 41 Liberia 2,719 97.75 c 53 42 Libya 5,218 1,759.54 d 64 43 Liechtenstein 31 0.16 e 72 44 Luxembourg 404 3.00 39,600 1.2 143.1 138.6 35,860h . . 76 i 45 Macao 444 0.02 e 46 Maldives 246 0.30 950 7.7 62 7 47 Malta 368 0.32 d 5.1 77 48 Marshall Islands 54 0.20 f 63 49 Martinique 383 1.10 d 76 50 Mayotte 89 0.37 d 60 51 Micronesia, Fed. Sts. 104 0.70 f 65 52 Monaco 33 .. e 78 53 Netherlands Antilles 198 0.80 e 77 54 New Caledonia 187 18.58 d 72 55 Northern Mariana Islands 47 0.48 f .. .. 56 Puerto Rico 3,651 8.90 d 1.6 75 57 Qatar 610 11.00 12,820 -2.4 90.4 73.8 19,100g 72 21 58 Reunion 640 2.51 d .. 74 59 Sao Tome and Principe 125 0.96 250 -2.1 68 60 Seychelles 72 0.45 6,680 4.8 72 21 61 Solomon Islands 365 28.90 810 2.2 8.2 8.1 2,100g 62 62 Somalia 8,775 637.66 c -2.3 49 63 St. Kitts and Nevis 41 0.36 4,760 4.7 30.4 36.0 9,310g 69 64 St. Lucia 160 0.62 3,130 4.0 71 65 St. Vincent and the Grenadines 110 0.39 2,140 4.5 .. 72 66 Sudan 27,364 2,505.81 c -0.2 8.8 .. .. 54 54 67 Suriname 407 163.27 860 1.8 13.8 9.5 2,470g 69 7 68 Swaziland 906 17.36 1,100 -1.2 14.0 11.6 3,010i 58 23 69 Syrian Arab Republic 13,844 185.18 f -2.1 68 70 Tonga 101 0.75 1,590 0.3 69 71 Vanuatu 165 12.19 1,150 -0.3 9.3 9.2 2,370g 60 72 Virgin Islands (U.S.) 100 0.34 e 75 73 West Bank & Gaza 1,951 0.38 f .. 74 Western Samoa 164 2.84 1,000 -0.3 9.5 8.0 2,060g 69 75 Yugoslavia, Fed. Rep. 10,520 102.17 f 72 76 Zaire 42,540 2,344.86 c -1.0 33 a. Atlas method; see the technical notes. b. Purchasing power parity; see the technical notes. c. Estimated to be low income ($725 or less). d. Estimated to be upper mid- dle income ($2,896 to $8,955). e. Estimated to be high income ($8,956 or more). f. Estimated to be lower middle income ($726 to $2,895). g. Based on regression esti- mates. h. Extrapolated from 1993 ICP estimates. i. According to UNESCO, illiteracy is less than 5 percent. j. Extrapolated from 1985 ICP estimates. otes technical notes discuss the sources and meth- problems that cannot be unequivocally resolved. For these ods used to compile the 120 indicators included in reasons, although the data are drawn from the sources These the 1996 Selected World Development Indica- thought to be most authoritative, they should be con- tors. Notes on specific indicators are arranged by table strued only as indicating trends and characterizing major heading and, within each table, by order of appearance of differences among economies rather than offering precise the indicator. quantitative measures of those differences. Also, national The 133 economies included in the main tables are statistical agencies tend to revise their historical data, par- listed in ascending order of GNP per capita. A separate ticularly for recent years. Thus, data of different vintages table (Table la) shows basic indicators for seventy-six may be published in different editions of World Bank economies that have sparse data or have populations of publications. Readers are advised not to compare such fewer than 1 million. data from different editions. Consistent time series are available from the World *Data 1995 CD-ROM In addi- Sources tion, data issues have yet to be resolved for the fifteen Indicators published here are based on data compiled by economies of the former Soviet Union: coverage is sparse, the World Bank from a variety of sources. Data on exter- and the data are subject to more than the normal range of nal debt are reported directly to the World Bank, by uncertainty. developing member countries, through the Debtor Reporting System. Other data are drawn mainly from the Ratios and growth rates United Nations (U.N.) and its specialized agencies, the For ease of reference, only ratios and rates of growth are International Monetary Fund (IMF), and country reports usually shown. Absolute values are generally available from to the World Bank. Bank staff estimates are also used to other World Bank publications, notably the 1995 edition improve currentness or consistency. For most countries, of the World Tables and World*Data 1995 CD-ROM national accounts estimates are obtained from member Most growth rates are calculated for two periods, 1980-90 governments through World Bank economic missions. In and 1990-94, and are computed, unless otherwise noted, some instances these are adjusted by staff to ensure con- by using the least-squares regression method. (See notes formity with international definitions and concepts, con- on statistical methods below.) Because this method takes sistency, and currentness. Most social data from national into account all available observations in a period, the sources are drawn from regular administrative files, special resulting growth rates reflect general trends that are not surveys, or periodic census inquiries. Citations of specific unduly influenced by exceptional values. To exclude the sources are included in the Key table and with the indica- effects of inflation, constant-price economic indicators are tor notes below. used in calculating growth rates. Data in italics are for years or periods other than those specifiedup to two Data consistency and reliability years on either side of the date shown for economic indi- Considerable effort has been made to standardize the data, cators and up to three years for social indicators, because but full comparability cannot be ensured, and care must the latter tend to be collected less regularly and change less be taken in interpreting the indicators. Many factors affect dramatically over short periods of time. availability, comparability, and reliability: statistical sys- tems in many developing economies are still weak; statis- Constant price series tical methods, coverage, practices, and definitions differ To facilitate international comparisons and include the widely among countries; and cross-country and cross-time effects of changes in intersectoral relative prices for the comparisons involve complex technical and conceptual national accounts aggregates, constant price data for most 223 224 economies are first partially rebased to three sequential GNP per capita: Gross national product (GNP) in U.S. base years and then "chain-linked" together and expressed dollars is calculated using the World Bank Atlas method, in the prices of a common base year, 1987. The year 1970 which is described in the section on statistical methods at is the base year for the period from 1960 to 1975, 1980 the end of these notes. for 1976 to 1982, and 1987 for 1983 and beyond. GNP measures the total domestic and foreign value During the chain-linking procedure, components of added claimed by residents. It comprises GDP (see Table gross domestic product (GDP) by industrial origin are 12) plus net factor income from abroad, which is the individually rescaled and summed to provide the rescaled income residents receive from abroad for factor services GDP. In this process a rescaling deviation may occur (labor and capital) less similar payments made to nonres- between the constant price GDP by industrial origin and idents who contribute to the domestic economy. GNP per the constant price GDP by expenditure. Such rescaling capita is calculated using the resident population in the deviations are absorbed under the heading private con- corresponding year. sumption, etc. on the assumption that GDP by industrial GNP per capita is a useful measure of average eco- origin is a more reliable estimate than GDP by expendi- nomic productivity but does not, by itself, measure wel- ture. Independently of the rescaling, value added in the fare or success in development. It does not distinguish services sector also includes a statistical discrepancy as between the aims and ultimate uses of a given product, reported by the original source. nor does it say whether a product merely offsets some nat- ural or other obstacle, or harms or contributes to general Summag measures welfare. More generally, GNP does not deal adequately The summary measures across countries for regions and with environmental costs and benefits, particularly those income groups, presented in the blue bands in the tables, associated with natural resource use. The World Bank has are calculated by simple addition when they are expressed joined with others to see how national accounts might in levels. Growth rates and ratios are usually combined by provide insights into these issues. "Satellite" accounts that a base-year, value-weighting scheme. The summary mea- delve into practical and conceptual difficulties (such as sures for social indicators are weighted by population or assigning a meaningful economic value to resources that subgroups of population, except for infant mortality, markets do not yet perceive as "scarce" and allocating which is weighted by the number of births. See notes on costs that are essentially global within a framework that is specific indicators for more information. national) have been included in the 1993 revision of the For summary measures that cover many years, the cal- System of National Accounts (SNA). This will provide a culation is based on the same country composition over framework within which national accountants can con- time. The methodology permits group measures to be sider environmental factors in estimating alternative mea- compiled only if the country data available for a given year sures of income. account for at least two-thirds of the full group, as defined In estimating GNP per capita, the World Bank recog- by the 1987 benchmarks. As long as that criterion is met, nizes that perfect cross-country comparability of GNP per missing reporters are assumed to behave like those that capita estimates cannot be achieved. Beyond the classic, provide estimates. Readers should keep in mind that the strictly intractable, index number problem, two obstacles goal of the summary measures is to provide representative stand in the way. One concerns the GNP and population aggregates for each topic, despite myriad problems with estimates themselves. There are differences in national country data, and that nothing meaningful can be deduced accounting and demographic reporting systems and in the about behavior at the country level by working back from coverage and reliability of underlying statistical informa- group indicators. In addition, the weighting process may tion among various countries. The other obstacle is the result in discrepancies between subgroup and overall totals. use of official exchange rates for converting GNP data expressed in different national currencies to a common Table 1. Basic indicators denominationconventionally the U.S. dollarto com- Basic indicators for economies with sparse data or with pare them across countries. populations of fewer than 1 million are shown in Table la. Recognizing that these shortcomings affect the compa- Total population estimates are for mid-1994. See the rability of the GNP per capita estimates, the World Bank Key table and notes to Table 4 for additional information has introduced several improvements in the estimation on the definition and sources of population estimates. procedures. Through its regular review of member coun- Area data come from the Food and Agriculture Orga- tries' national accounts, the Bank systematically evaluates nization (FAO). Area is the total surface area, measured the GNP estimates, focusing on the coverage and con- in square kilometers, comprising land area and inland cepts employed and, where appropriate, making adjust- waters. ments to improve comparability. As part of the review 225 process, World Bank staff make estimates of GNP (and lated to 1987 for countries that participated in the earlier sometimes of population). phases only; (d) World Bank estimates for China, and The World Bank also systematically assesses the appro- (e) ICP estimates obtained by regression for the remaining priateness of official exchange rates as conversion factors. countries. These estimates are expressed as an index An alternative conversion factor is used when the official (U.S.=100 in column 5). Economies whose 1987 esti- exchange rate is judged to diverge by an exceptionally mates are based on regressions are footnoted. large margin from the rate effectively applied to domestic This blend of extrapolated and regression-based 1987 transactions of foreign currencies and traded products. figures was extrapolated to 1994, using World Bank esti- This applies to only a small number of countries. Using mates of real GNP per capita growth rates, and scaled up either the official or the alternative conversion factor, by inflation rates measured by SDR deflators. These esti- GNP per capita is calculated using the World Bank Atlas mates are expressed as an index (U.S.=100) in columns 5 method. Because of unresolved problems associated with and 6. Economies whose 1987 figures are extrapolated the availability of comparable data and the determination from another year or imputed by regression are footnoted of conversion factors, information on GNP per capita is accordingly. The adjustments do not take account of not shown for some economies. changes in the terms of trade. Some sixty low- and middle-income economies suf- The estimates of GNP per capita shown in column 8 fered declining real GNP per capita during the late 1980s are stated in international dollars by applying the PPP con- and early 1990s. In addition, significant fluctuations in version factor to local currency GNP and then dividing by currency values and the terms of trade and the time lag the midyear population. The international dollar, used as between exchange rate movements and domestic price the common currency, is the unit of account that equal- adjustments have affected relative income levels. For this izes price levels in all participating countries. It has the reason, the levels and ranking of GNP per capita estimates, same purchasing power over total GNP as the U.S. dollar calculated by the Atlas method, have sometimes changed in a given year, but purchasing power over subaggregates in ways not necessarily related to the relative domestic is determined by average international prices at that level growth performance of the economies. rather than by U.S. relative prices. Purchasing power parity (PPP) estimates of GNP per For further details on ICP procedures, readers may capita: the U. N. International Comparison Programme consult the ICP Phase IV report, World Comparisons of (ICP) has developed measures of GDP on an internation- Purchasing Power and Real Product for 1980 (New York: ally comparable scale, using purchasing power parities United Nations, 1986). Readers interested in detailed instead of exchange rates as conversion factors. The PPP ICP survey data for 1975, 1980, 1985, and 1990 may conversion factor is defined as the number of units of a refer to Purchasing Power of Currencies: Comparing country's currency required to buy the same amounts of National Incomes Using ICP Data (World Bank, 1993). goods and services in the domestic market as one dollar Life expectancy at birth indicates the number of years would buy in the United States. a newborn infant would live if prevailing patterns of The ICP collects average domestic prices of represen- mortality at the time of its birth were to stay the same tative products included in each participating country's throughout its life. The data are from a variety of sources, national accounts through special price surveys and including national statistical offices, demographic and derives its PPP in relation to the average international health surveys, censuses, the U.N. Population Division, prices that are implicitly derived from the prices of all par- and the World Bank. ticipating countries. In Table 1, the most recent ICP esti- Adult illiteracy: see Table 7. mates are expressed in GNP terms rather than in GDP The summary measures for GNP per capita, life ex- terms to make them consistent with World Bank pectancy, and adult illiteracy in Table 1 are weighted by Atlasbased estimates. population. Information on the ICP has been published in a num- Table 2. Macroeconomic indicators ber of other reports. The most recent report is for 1993, part of which has already been published by the Organi- The principal sources of the data in Table 2 are the IMF's sation for Economic Co-operation and Development Government Finance Statistics (GFS) and International (OECD). To obtain the estimates shown here, several sets Financial Statistics (IFS). Data on GNP, GDP, and total of data were employed. The data include (a) results of the external debt come from the World Bank's data files. ICP for 1993 for OECD, Eastern Europe, and FSU coun- Central government current deficit/surplus is defined as tries extrapolated backward to 1987; (b) results for 1985 current revenue of the central government less current for non-OECD countries, extrapolated to 1987; (c) the expenditure. Note that grants are excluded. This is a use- latest available results for either 1980 or 1975 extrapo- ful measure of the government's own fiscal capacity. The 226 overall deficit/surplus, including grants and the capital The net present value of total external debt is the dis- account, is shown in Table 14. counted sum of all debt service payments due over the life Money, broadly defined, comes from the IFS. Broadly of existing loans in current prices. To estimate the ratio to defined money comprises most liabilities of a country's GNP, the debt figures are converted into U.S. dollars monetary institutions to residents other than the central from currencies of repayment at end-of-year official government. For most countries, broadly defined money is exchange rates, and GNP is converted from national cur- the sum of money (IFS line 34) and quasi-money (IFS line rencies to U.S. dollars by applying the conversion proce- 35). Money comprises the economy's means of payment: dure described in the technical note for Table 12. currency outside banks and demand deposits other than The summary measures are computed from group those of the central government. Quasi-money comprises aggregates for gross international reserves and total im- time and savings deposits and similar bank accounts that ports of goods and services in current dollars. the issuer can exchange for money with little, if any, delay Table 3. External economic indicators or penalty and foreign currency deposits of resident sectors other than those of the central government. Where non- Data in this table reflect a country's openness to interna- monetary financial institutions are important issuers of tional markets and its potential vulnerability to changes in quasi-monetary liabilities, these are often included in the export prices, international interest rates, and the avail- measure of broadly defined money. The average annual ability of private capital flows and official development nominal growth rate of broadly defined money is calculated assistance. from year-end figures using the least-squares method. The The terms of trade, or the net barter terms of trade, mea- average of the year-end figures for the specified year and sure the relative movement of export prices against that of the previous year is used to calculate the average of broadly import prices. Calculated as the ratio of a country's index defined money outstanding as a percentage of GDP. of average export prices to its average import price index, The nominal interest rates of banks show the deposit this indicator shows changes over a base year in the level of rate paid by commercial or similar banks for demand, export prices as a percentage of import prices. The terms of time, or savings deposits and the lending rate charged by trade index numbers are shown for 1985 and 1994, where the banks on loans to prime customers. The data are of 1987 = 100. The data come from the U.N. Conference on limited international comparability, partly because cover- Trade and Development (UNCTAD) data base and the age and definitions vary. Interest rates (and growth rates IMF's International Financial Statistics. See also Table 15. for broadly defined money) are expressed in nominal The export concentration index is taken from UNC- terms; therefore, much of the variation among countries TAD's Handbook of International Trade and Development stems from differences in inflation. Statistics. The index measures the degree to which a coun- The average annual rate of inflation is measured by the try's exports are concentrated in, or diversified among, rate of change in the GDP implicit deflator. The implicit SITC (Revision 2) three-digit level commodities. The deflator is calculated by dividing annual GDP at current index is calculated using the Hirschman or Herfindahl prices by the corresponding value of GDP at constant methodology: the shares of exports in each commodity are prices, both in national currency. The least-squares squared summed; the index is the square root of the sum, method is then used to calculate the growth rate of the normalized to a range of zero to one (maximum concen- GDP deflator for the period. This measure of inflation, tration). An interesting interpretation is that the inverse of like any other, has limitations but is the most broadly the index represents the equivalent number of commodi- based measure, showing annual price movements for all ties, each having equal-sized shares, that the country goods and services produced in an economy. trades. There are 239 commodities identified at the three- The current account balance before official transfers is digit level in the SITC Revision 2. the sum of net exports of goods, services, and private trans- Aggregate net resource flows are the sum of net flows on fers. Net official transfers are excluded. See also Table 16. long-term debt (excluding use of IMF credit), plus official Gross international reserves comprise holdings of mone- grants (excluding technical assistance), net foreign direct tary gold, special drawing rights (SDRs), the reserve posi- investment, and net portfolio equity flows. Total net tion of members in the IMF, and holdings of foreign flows on long-term debt are disbursements less the repay- exchange under the control of monetary authorities. In- ment of principal on public, publicly guaranteed, and pri- ternational reserves in U.S. dollars are shown in Table 16. vate nonguaranteed long-term debt. Official grants are Reserve holdings as months of import coverage are calcu- transfers made by an official agency in cash or in kind, in lated as the ratio of gross international reserves to the cur- respect of which no legal debt is incurred by the recipient. rent U.S. dollar value of imports of goods and services Net private capital flows consist of private debt and non- multiplied by 12. debt flows. Private debt flows include commercial bank ELECTED WORLD DEVELOPMENT INDICATORS 227 lending, bonds, and other private credits; nondebt private includes people working in the mining, manufacturing, flows are net foreign direct investment and portfolio invest- construction, and electricity, water, and gas industries. ment. All summary measures are country data weighted by Official development assistance (ODA) comprises loans population or population subgroup. and grants made on concessional financial terms by all Table 5. Distribution of income or consumption bilateral official agencies and multilateral sources to pro- mote economic development and welfare. Net disburse- The table describes the distribution of income or con- ments equal gross disbursements less payments to the orig- sumption expenditures accruing to subgroups of the pop- inators of aid for amortization of past aid receipts. In order ulation in sixty-five low- and middle-income countries to qualify as ODA, each transaction must meet the fol- and twenty high-income countries. Because the subgroups lowing tests: it is administered with the promotion of the are ranked by per capita income or expenditure or, in the economic development and welfare of developing coun- case of high-income countries, by household income, the tries as its main objective; and it is concessional in charac- resulting shares indicate the extent to which the distribu- ter and conveys a grant element of at least 25 percent. tion of income or consumption expenditures in each Summary measures for ODA as a percentage of GNP country differs from strict equality. are computed from group totals for ODA and GNP in Survey year is the year in which the underlying data current U.S. dollars. were collected. The data sets refer to different years be- tween 1985 and 1994 and are drawn from nationally Table 4. Population and labor force representative household surveys. Population and labor force data provide a basic profile of The Gini index is a summary measure of the extent to the demographic trends in a country. which the actual distribution of income or consumption Population estimates for mid-1994 are from a variety of differs from a hypothetical uniform distribution in which sources, including the U.N. Population Division, national each person or household receives an identical share. The statistical offices, and World Bank country departments. Gini index has a maximum value of 100 percent, indicat- (See also the notes in the Key table.) The World Bank ing that one person or household receives everything, and uses the de facto definition of a country's population, a minimum value of zero, indicating absolute equality. which counts all residents regardless of legal status or cit- The Gini index is the most popular measure of inequality, izenship. Note, however, that refugees not permanently but it is not a very discriminating indicator. For example, settled in the country of asylum are generally considered when the underlying Lorenz (income distribution) curves to be part of the population of their country of origin. cross, countries with different income distributions may The average annual growth rate of population is com- have the same index value. See the section on statistical puted from end-point data using an exponential growth methods for more information. model. See the section on statistical methods for more The following columns report the percentage share information. of income or consumption by quintiles and deciles of Age structure of the population shows the proportion the population. Income distribution data for low- and of the total population between the ages of fifteen and middle-income countries have been compiled from two sixty-four inclusively. main sources: government statistical agencies and the Total labor force estimates are derived by applying par- World Bank. Where the original unit record data from ticipation rates from the International Labour Office the household survey were available, these have been used (ILO) to the population estimates. They cover the so- to calculate directly the income (or consumption) shares called economically active population, a restrictive con- by quintile; otherwise, shares have been estimated from cept that includes the armed forces and the unemployed the best available grouped data. The distribution indica- but excludes homemakers and other unpaid caregivers. tors for low- and middle-income countries have been Percentage of females in the total labor force is from adjusted for household size, thus providing a more consis- ILO data. This indicator shows the extent to which tent measure of income or consumption per capita. No women are "gainfully employed" in the formal sector. adjustment has been made for spatial cost-of-living differ- Labor force numbers in several developing countries ences within countries, because the data needed for such reflect a significant underestimation of female participa- calculations are not generally available. For further details tion rates. on both the data and the estimation methodology for low- The structure of labor force shows the share of the labor and middle-income countries, see Martin Ravallion and force engaged in agricultural and industrial activities. The Shaohua Chen (1996). agricultural labor force includes people engaged in farming, The data for Australia, Canada, Israel, Italy, Norway, forestry, hunting, and fishing. The industrial labor force Sweden, Switzerland, and the United States are from the 228 cifLD DEVELOPMENT ORT Luxembourg Income Study data base (1990); those for usual means of transportation in no more than one hour. France, Germany, Netherlands, Spain, and the United Note that facilities tend to be concentrated in urban areas. Kingdom are from the Statistical Office of the European In some cases, rural areas may have a much lower level Union. The data for Belgium, Denmark, Finland, Japan, of access. and New Zealand come from the U.N., National Accounts Population with access to safe water is the percentage of Statistics: Compendium of Income Distribution Statistics, the population with reasonable access to safe water supply 1985. Data for other high-income countries come from (including treated surface waters or untreated but uncon- national sources. taminated water, such as from springs, sanitary wells, and There are significant comparability problems across protected boreholes). In an urban area this may be a pub- countries in the income distribution data presented here. lic fountain or standpost located not more than 200 The underlying household surveys are not fully compara- meters away. In rural areas it implies that members of the ble, although these problems are diminishing as survey household do not have to spend a disproportionate part of methodologies both improve and become more standard- the day fetching water. The definition of safe water has ized, particularly through the initiatives of the United changed over time. Nations (under the Household Survey Capability Pro- Access to sanitation refers to the percentage of popula- gram) and the World Bank (under the Living Standard tion with at least adequate excreta-disposal facilities that Measurement Study and the Social Dimensions of Adjust- can effectively prevent human, animal, and insect contact ment Project for Sub-Saharan Africa). The following with excreta. three sources of noncomparability ought to be noted. The infant mortality rate is the number of deaths of First, the surveys differ in the use of income or consump- infants under one year of age per thousand live births in a tion expenditure as the living standard indicator. For given year. The data are a combination of observed values thirty-nine of the sixty-five low- and middle-income and interpolated and projected estimates. A few countries, countries, the data refer to consumption expenditure. such as the economies of the former Soviet Union, Typically, income is more unequally distributed than con- employ an atypical definition of live births that reduces sumption. Second, the surveys differ in the use of the the reported infant mortality rate relative to the standard household or the individual as their unit of observation. (World Health Organization) definition. Further, household units differ in the number of house- Prevalence of malnutrition measures the percentage of hold members and the extent of income sharing among children under five with a deficiency or an excess of nutri- members. Individuals differ in age and need for con- ents that interferes with their health and genetic potential sumption. Where households are used as the observation for growth. Methods of assessment vary, but the most unit, the quintiles refer to the percentage of households, commonly used are the following: less than 80 percent of rather than the percentage of persons. Third, the surveys the standard weight for age; less than minus 2 standard differ according to whether the units of observation are deviations from the fiftieth percentile of the weight-for- ranked by household or income (or consumption) per age reference population; and the Gomez scale of malnu- capita. The footnotes to the table identify these differ- trition. Note that for a few countries the figures are for ences for each country. children three or four years of age and younger. The international comparability of high-income coun- Contraceptive prevalence rate is the proportion of try data is particularly limited, because the observation women who are practicing, or whose husbands are practic- unit is a household unadjusted for size, and households ing, any form of contraception. Contraceptive usage is are ranked according to total household income rather generally measured for married women age fifteen to forty- than income per household member. These data are pre- nine. A few countries use measures relating to other age sented pending the publication of improved data from the groups, especially fifteen to forty-four. Data are mainly Luxembourg Income Study, where household members derived from demographic and health surveys, contracep- are ranked by the average disposable income per tive prevalence surveys, and World Bank country data. adult-equivalent person. The estimates in the table, there- The total fertility rate represents the number of chil- fore, should be treated with considerable caution. dren that would be born to a woman were she to live to the end of her childbearing years and bear children at each Table 6. Health age in accordance with prevailing age-specific fertility This table provides selected indicators of the prevailing rates. The data are a combination of observed, interpo- health infrastructure and the health status of the population. lated, and projected estimates. Access to health care is measured by the percentage of The maternal mortality ratio refers to the number of the population that can reach local health services by the female deaths that occur during pregnancy and childbirth 229 per 100,000 live births. Because deaths during childbirth the denominator, because it represents an average tertiary are defined more widely in some countries to include com- level cohort, although people above and below this age plications of pregnancy or the period after childbirth or of group may be registered in tertiary institutions. abortion, and because many pregnant women die from lack The percentage of cohort reaching grade 4 is the propor- of suitable health care, maternal mortality is difficult to tion of children starting primary school in 1980 and 1988 measure consistently and reliably across countries. Clearly, who continued to the fourth grade by 1983 and 1991, many maternal deaths go unrecorded, particularly in coun- respectively. Figures in italics represent earlier or later tries with remote rural populations. This may account for cohorts. The data are based on enrollment records. some of the low estimates shown in the table, especially for Adult illiteracy is defined here as the proportion of the several African countries. The data are drawn from diverse population fifteen years and older who cannot, with national sources. Where national administrative systems understanding, read and write a short, simple statement are weak, estimates are derived from demographic and on their everyday life. This is only one of three widely health surveys using indirect estimation techniques or from accepted definitions, and its application is subject to qual- other national sample surveys. For a number of developing ifiers in a number of countries. The data are from the illit- countries, maternal mortality estimates are derived by the eracy estimates and projections prepared in 1995 by World Health Organization (WHO) and the United UNESCO. Nations Children's Fund (UNICEF) using modeling tech- The summary enrollment measures in this table are niques. computed from country enrollment rates weighted by All summary measures, except for infant mortality, are population. weighted by population or by subgroups of the popula- Table 8. Commercial energy use tion. Infant mortality is weighted by the number of births. The data on commercial energy use are primarily from Table 7. Education International Energy Agency (TEA) and U.N. sources. The data in this table refer to a variety of years, generally They refer to commercial forms of primary energy not more than two years distant from those specified. The petroleum (crude oil, natural gas liquids, and oil from data are from the U.N. Educational, Scientific, and Cul- unconventional sources), natural gas, solid fuels (coal, lig- tural Organization (UNESCO). nite, and other derived fuels), and primary electricity Primary school enrollment data are estimates of the ratio (nuclear, hydroelectric, geothermal, and other)all con- of children of all ages enrolled in primary school to the verted into oil equivalents. For converting nuclear elec- country's population of primary schoolage children. tricity into oil equivalents, a notional thermal efficiency of Although many countries consider primary school age to 33 percent is assumed; hydroelectric power is represented be six to eleven years, others use different age groups. For at 100 percent efficiency. countries with universal primary education, the gross Total energy use refers to domestic primary energy use enrollment ratios may exceed 100 percent because some before transformation to other end-use fuels (such as elec- pupils are younger or older than the country's standard tricity or refined petroleum products) and is calculated as primary school age. indigenous production plus imports and stock changes, Secondary school enrollments are calculated in the same minus exports and international marine bunkers. Energy manner, and again the definition of secondary school age consumption also includes products for nonenergy uses, differs among countries. It is most commonly considered mainly derived from petroleum. The use of firewood, to be twelve to seventeen years. Late entry of students as dried animal excrement, and other traditional fuels, well as repetition and the phenomenon of "bunching" in although substantial in some developing countries, is not final grades can influence these ratios. taken into account, because reliable and comprehensive The tertiary enrollment ratio is calculated by dividing data are not available. the number of pupils enrolled in all postsecondary schools Energy use per capita is based upon total population and universities by the population in the twenty to estimates in the years shown. twenty-four age group. Pupils attending vocational GDP per kilogram of commercial energy use is the U.S. schools, adult education programs, two-year community dollar estimate of GDP produced per kilogram of oil colleges, and distant education centers (primarily corre- equivalent. spondence courses) are included. The distribution of Net energy imports as a percent of consumption: both pupils across these different types of institutions varies imports and consumption are measured in oil equivalents among countries. The youth populationthat is, twenty for the purpose of calculating their ratio. A negative sign to twenty-four yearshas been adopted by UNESCO as indicates that the country is a net exporter. 230 EVE opivte A*, The data on carbon dioxide emissions cover industrial Permanent pasture is land used for five or more years contributions to the carbon dioxide flux from solid fuels, for forage, including natural crops and cultivated crops. liquid fuels, gas fuels, gas flaring, and cement manufac- Only a few countries regularly report data on permanent ture. They are based on several sources as reported by the pasture, as this category is difficult to assess because it World Resources Institute. They are mainly from the the includes wild land used for pasture. Carbon Dioxide Information Analysis Center (CDIAC), Other land includes forest and woodland, which is the Environmental Science Division, Oak Ridge National land under natural or planted stands of trees, as well as Laboratory. logged-over areas that will be forested in the near future. CDIAC annually calculates emissions of CO2 from the It also includes uncultivated land, grassland not used for burning of fossil fuels and the manufacture of cement for pasture, wetlands, wastelands, and built-up areas. The lat- most of the countries of the world. These calculations are ter refers to residential, recreational, and industrial lands based on data on the net apparent consumption of fossil and areas covered by roads and other fabricated infra- fuels from the World Energy Data Set maintained by the structure. United Nations Statistical Division and from data on Urban population as a percentage of total population and world cement manufacture based on the Cement Manu- estimates of the population in urban agglomerations come facturing Data Set maintained by the United States from the U.N.'s World Urbanization Prospects: The 1994 Bureau of Mines. Emissions are calculated using global Revision. Urban agglomerations are metropolitan areas average fuel chemistry and usage. Estimates do not in- with populations of 1 million or more. To compute the clude bunker fuels used in international transport because growth rate of the urban population, the U.N.'s ratio of of the difficulty of apportioning these fuels among the urban to total population is first applied to the World countries benefiting from that transport. Although the Bank's estimates of total population (see Table 4). The estimates of world emissions are probably within 10 per- resulting series of urban population estimates are also used cent of actual emissions, individual country estimates may to compute the population in urban agglomerations as a have larger error bounds. percentage of the urban population. Because the estimates in The summary measures of energy use are computed by this table are based on different national definitions of aggregating the respective volumes for each of the years what is urban, cross-country comparisons should be made covered by the periods and applying the least-squares with caution. growth rate procedure. For energy consumption per The summary measures for urban population as a per- capita, population weights are used to compute summary centage of total population are calculated from country measures for the specified years. percentages weighted by each country's share in the aggre- The summary measures of CO2 emissions are com- gate population. The other summary measures are puted from group aggregates. For per capita estimates, weighted in the same fashion, using urban population. aggregate emissions and population are used. Table 10. Forests and water resources Table 9. Land use and urbanization This table provides information on the status of two impor- The data on land use are compiled by the World Re- tant environmental resources. The data are drawn from sources Institute (WRI). The main source, however, is the sources cited in the the World Resources Institute's World Food and Agricultural Organization (FAO), which gath- Resources 1994-95. Perhaps even more than other data in ers these data from national agencies through annual this report, however, these data should be used with cau- questionnaires and national agricultural censuses. How- tion. Although they are indicative of major differences in ever, countries sometimes use different definitions of land resource endowments and uses among countries, true com- use. The FAO often adjusts the definitions of land use cat- parability is limited because of variation in data collection, egories and sometimes substantially revises earlier data. statistical methods, definitions, and government resources. Because the data on land use reflect changes in data They have been chosen because they are available for most reporting procedures as well as actual land use changes, countries and reflect some general conditions of the envi- apparent trends should be interpreted with caution. Most ronment. land use data are from 1993. Forest areas refer to natural stands of woody vegetation in Crop&ndincludes land under temporary and permanent which trees predominate. These estimates are derived from crops, temporary meadows, market and kitchen gardens, country statistics assembled by the FAO and the United and land that is temporarily fallow. Permanent crops are Nations Economic Commission for Europe (UNECE). those that do not need to be replanted after each harvest, New assessments were published in 1993 for tropical coun- but excludes land used to grow trees for wood or timber. trie by FAO and for temperate zones by UNECE/FAO. ORLØ DEVELOPMENT INDICATORS 231 FAO and UNECE/FAO use different definitions in on long-term averages, their estimation explicitly excludes their assessments. The FAO defines natural forest in decade-long cycles of wet and dry. The Departement tropical countries as either a closed forest, where trees Hydrogeologie in Orleans, France, compiles water re- cover a high proportion of the ground with no continu- source and withdrawal data from published documents, ous grass cover, or an open forest, which is defined as including national, United Nations, and professional lit- mixed forest and grasslands with at least 10 percent tree erature. The Institute of Geography at the National Acad- cover and a continuous grass layer on the forest floor. A emy of Sciences in Moscow also compiles global water tropical forest encompasses all stands, except plantations, data on the basis of published work and, where necessary, and includes stands that have been degraded to some estimates water resources and consumption from models degree by agriculture, fire, logging, or acid precipitation. that use other data, such as area under irrigation, livestock The UNECE/FAO defines a forest as land where tree populations, and precipitation. These and other sources crowns cover more than 20 percent of the area. Also have been combined by the World Resources Institute to included are open forest formations; forest roads and fire- generate data for this table. Withdrawal data are for single breaks, small, temporarily cleared areas, young stands years and vary from country to country between 1970 and expected to achieve at least 20 percent crown cover on 1994. Data for small countries and countries in arid and maturity, and windbreaks and shelter belts. Plantation semiarid zones are less reliable than those for larger coun- area is included under temperate country estimates of tries and countries with higher rainfall. natural forest area. Some countries in this table also Total water resources include both internal renewable include other wooded land, defined as open woodland resources and, where noted, river flows from other coun- and scrub, shrub, and brushland. tries. Estimates are from 1992. Annual internal renewable Deforestation refers to the permanent conversion of water resources refer to the average annual flow of rivers forestland to other uses, including shifting cultivation, and aquifers generated from rainfall within the country. permanent agriculture, ranching, settlements, or infra- Withdrawals include those from nonrenewable aquifers structure development. Deforested areas do not include and desalting plants but do not include losses from evap- areas logged but intended for regeneration or areas oration. Withdrawals can exceed 100 percent of renewable degraded by fuel wood gathering, acid precipitation, or supplies when extractions from nonrenewable aquifers or forest fires. The extent and percentage of total area shown desalting plants are considerable or if there is significant refer to the average annual deforestation of natural forest water reuse. area. Total per capita water withdrawal is calculated by Nationally protected areas are areas of at least 1,000 dividing a country's total withdrawal by its population in hectares that fall into one of five management categories: the year for which withdrawal estimates are available. For scientific reserves and strict nature reserves; national parks most countries, sectoral per capita withdrawal data are cal- of national or international significance (not materially culated using sectoral withdrawal percentages estimated affected by human activity); natural monuments and nat- for 1987 to 1992. Domestic use includes drinking water, ural landscapes with some unique aspects; managed nature municipal use or supply, and use for public services, com- reserves and wildlife sanctuaries; and protected landscapes mercial establishments, and homes. Other withdrawals are and seascapes (which may include cultural landscapes). those for direct industrial use, including withdrawals for This table does not include sites protected under local or cooling thermoelectric plants and withdrawals for agricul- provincial law or areas where consumptive uses of wildlife ture (irrigation and livestock production). are allowed. These data are subject to variations in defini- Tables 11, 12, and 13. Growth and structure of the tion and in reporting to the organizations, such as the economy World Conservation Monitoring Centre, that compile and disseminate them. Total surface area is used to calcu- Table 11 shows the growth of gross domestic product late the percentage of total area protected. (See Table 1.) (GDP) and its components. Table 12 shows the structure Data on annual freshwater withdrawal are subject to of GDP by industrial origin. Table 13 shows the corre- variation in collection and estimation methods but are sponding structure of GDP by its uses. indicative of the magnitude of water use in both total and Most of the definitions used are those of the UN Sys- per capita terms. These data, however, also hide what can tem of National Accounts (SNA), Series F, No. 2, Version be significant variations in total renewable water resources 3. Version 4 of the SNA was completed only in 1993, and from one year to another. They also fail to distinguish the it is likely that many countries will continue to use the seasonal and geographic variations in water availability recommendations of version 3 for the next few years. Esti- within a country. Because freshwater resources are based mates are obtained from national sources, sometimes 232 OR LO DEVELOP reaching the World Bank through other international sonal services and including imputed bank service charges, agencies but more often collected by World Bank staff. import duties, and any statistical discrepancies noted by World Bank staff review the quality of national national compilers, are included in services. accounts data and, in some instances, help adjust national In Table 13, general government consumption includes series. Because of the sometimes limited capabilities of all current expenditures for purchases of goods and ser- statistical offices and basic data problems, strict interna- vices by all levels of government, but excluding most gov- tional comparability cannot be achieved, especially in ernment enterprises. Capital expenditure on national economic activities that are difficult to measure, such as defense and security is regarded as a general government parallel market transactions, the informal sector, or sub- consumption expenditure. sistence agriculture. Private consumption is the market value of all goods GDP measures the total output of goods and services and services, including durable products (such as cars, for final use produced by residents and nonresidents, washing machines, and home computers) purchased or regardless of the allocation to domestic and foreign claims. received as income in kind by households and nonprofit It is calculated without making deductions for deprecia- institutions. It excludes purchases of dwellings but tion of fabricated assets or depletion and degradation of includes imputed rent for owner-occupied dwellings. In natural resources. International comparability of the esti- practice, it may include any statistical discrepancy in the mates is affected by differing country practices in valua- use of resources. tion systems for reporting value added by production Gross domestic investment consists of outlays on addi- sectors. The SNA envisages estimates of GDP by indus- tions to the fixed assets of the economy plus net changes trial origin to be at either basic or producer prices, but in the level of inventories. many countries report such details at purchaser prices. As Gross domestic saving is calculated by deducting total a practical solution, GDP estimates are shown at pur- consumption from GDP. chaser prices in Table 11 if the components are on this Exports of goods and nonfictor services represent the basis, and such instances are footnoted. In Table 13, GDP value of all goods and nonfactor services provided to the is measured in purchaser values for all countries. rest of the world. This includes the value of merchandise, In Table 11, growth rates are computed from partially freight, insurance, travel, and other nonfactor services. rebased, chain-linked, 1987 constant price series in The value of factor services, such as investment income, domestic currencies. interest, and labor income, is excluded. Current transfers The growth rate of exports of goods and nonfactor services are also excluded. is based on national accounts data in constant prices. The resource balance is the difference between exports In Table 12, the figures for GDP are U.S. dollar values of goods and nonfactor services and imports of goods and converted from domestic currencies using single-year offi- nonfactor services. cial exchange rates. For a few countries where the official In calculating the summary measures for each indica- exchange rate does not reflect the rate effectively applied tor in Table 11, partially rebased, constant 1987, U.S. to actual foreign exchange transactions, an alternative dollar values for each economy are calculated for each year conversion factor is used. Note that Table 12 does not use of the periods covered; the values are aggregated across the three-year averaging technique applied to GNP per countries for each year; and the least-squares procedure is capita in Table 1. used to compute the growth rates. The average sectoral Summary measures in Table 12 are computed from percentage shares in Tables 12 and 13 are computed from group aggregates of sectoral GDP in current U.S. dollars. group aggregates of sectoral GDP in current U.S. dollars. Agriculture covers forestry, hunting, and fishing, as Table 14. Central government budget well as cultivation of crops. In developing countries with high levels of subsistence farming, much agricultural pro- The data on central government revenues and expenditures duction is either not exchanged or not exchanged for are from the IMF's Government Finance Statistics Yearbook money. This increases the difficulty of measuring the con- (1995), and IMF data files. The accounts of each country tribution of agriculture to GDP and reduces the reliabil- are reported using the system of common definitions and ity and comparability of such numbers. classifications found in the IMF's A Manual on Government Industry comprises value added in mining, manufactur- Finance Statistics (1986). For complete and authoritative ing (also reported as a separate subgroup in Table 12), explanations of concepts, definitions, and data sources, see construction, and electricity, water, and gas. Value added these IMF sources. The commentary that follows is in all other branches of economic activity, such as whole- intended mainly to place these data in the context of the sale and retail trade, transportation, government, and per- broad range of indicators reported here. L TED WORLD DEVE ME1,IT ND c/,T s 233 Because of differences in coverage of available data, the Social services comprises expenditures on health, educa- individual components of central government expendi- tion, housing, welfare, social security, and community ture and revenue shown may not be strictly comparable amenities. These categories also cover compensation for across all economies. loss of income to the sick and temporarily disabled; pay- Inadequate statistical coverage of state, provincial, and ments to the elderly, the permanently disabled, and the local governments requires the use of central government unemployed; family, maternity, and child allowances; and data; this may seriously understate or distort the statistical the cost of welfare services, such as care of the aged, the portrayal of the allocation of resources for various purposes, disabled, and children. Many expenditures relevant to en- especially in countries where lower levels of government vironmental defense, such as pollution abatement, water have considerable autonomy and are responsible for many supply, sanitary affairs, and refuse collection, are included economic and social services. In addition, "central govern- indistinguishably in this category. ment" can mean either of two accounting concepts: con- Overall deficit/surplus is defined as current and capital solidated or budgetary. For most countries, central govern- revenue and official grants received, less total expenditure ment finance data have been consolidated into one overall and lending minus repayments. This is a broader concept account, but for others only the budgetary central govern- than the current government deficit/surplus shown in ment accounts are available. Because budgetary accounts do Table 2. not always include all central government units, the overall Table 15. Exports and imports of merchandise picture of central government activities is usually incom- plete. Countries reporting budgetary data are footnoted. The main source of current trade values is the U.N. Con- Consequently, the data presented, especially those for ference on Trade and Development (UNCTAD) trade social services, are not comparable across countries. In data base, supplemented by the data from the IMF's Inter- many economies, private health and education services are national Financial Statistics (IFS), the U.N.'s Commodity substantial; in others, public services represent the major Trade (COMTRADE) data base, and World Bank esti- component of total expenditure but may be financed by mates. The shares in these tables are derived from trade lower levels of government. Caution should therefore be values in current dollars reported in the UNCTAD exercised in using the data for cross-country comparisons. trade data system, supplemented by data from the U.N. Total revenue is derived from tax and nontax sources. COMTRADE system. Tax revenues comprise compulsory, unrequited, nonre- Merchandise exports and imports, with some excep- payable receipts for public purposes. They include interest tions, cover international movements of goods across cus- collected on tax arrears and penalties collected on non- toms' borders; trade in services is not included. Exports payment or late payment of taxes and are shown net of are valued f.o.b. (free on board) and imports c.i.f. (cost, refunds and other corrective transactions. insurance, and freight) unless otherwise specified in the Nontax revenue comprises receipts that are not compul- foregoing sources. These values are in current U.S. dollars. sory, nonrepayable payments for public purposes, such as The categorization of exports and imports follows the fines, administrative fees, or entrepreneurial income from Standard International Trade Classification (SITC), Series government ownership of property. Proceeds of grants and M, No. 34, Revision 1. For some countries, data for cer- borrowing, funds arising from the repayment of previous tain commodity categories are unavailable. Food com- lending by governments, incurrence of liabilities, and pro- modities are those in SITC Sections 0, 1, and 4 and ceeds from the sale of capital assets are not included. Division 22 (food and live animals, beverages and tobacco, Central government expenditure comprises the expendi- animal and vegetable oils and fats, oilseeds, oil nuts, and ture by all government offices, departments, establish- oil kernels). Fuels are the commodities in SITC Section 3 ments, and other bodies that are agencies or instruments (mineral fuels, lubricants, and related materials). of the central authority of a country. It includes both cur- Average annual growth rates of exports and imports are cal- rent and capital (development) expenditures. culated from values in constant prices, which are derived Defense comprises all expenditures, whether by defense from current values deflated by the relevant price index. or other departments, on the maintenance of military The World Bank uses the price indexes produced by UNC- forces, including the purchase of military supplies and TAD for low- and middle-income economies and those equipment, construction, recruiting, and training. Also in presented in the IMF's International Financial Statistics for this category are closely related items such as military high-income economies. These growth rates can differ aid programs. Defense does not include expenditure on from those derived from national sources because national public order and safety, which are classified separately. price indexes may use different base years and weighting Defense is treated as a current expenditure. procedures from those used by UNCTAD or the IMF. 234 The summary measures for the growth rates are calcu- vailing exchange rates. See Table 2 for reserve holdings lated by aggregating the 1987 constant U.S. dollar price expressed as months of import coverage. series for each year and then applying the least-squares The summary measures are computed from group growth rate procedure for the periods shown. aggregates for gross international reserves. Table 16. Balance of payments Table 17. External debt The data for this table are based on IMF data files. World The data on debt in this table come from the World Bank Bank staff also make estimates and, in rare instances, Debtor Reporting System, supplemented by World Bank adjust coverage or classification to enhance international estimates. The system is concerned solely with developing comparability. Definitions and concepts are based on the economies and does not collect data on external debt for IMF's Balance of Payments Manual, Fourth Edition other groups of borrowers or for economies that are not (1977). The IMF now uses the fifth edition to compile members of the World Bank. Debt is stated in U.S. dol- balance of payments data. As a result, some indicators lars converted at official exchange rates. The data on debt shown here may differ from those published in recent include private nonguaranteed debt reported by thirty IMF publications. Values are in U.S. dollars converted at developing countries and complete or partial estimates for official exchange rates. an additional twenty that do not report but for which this Exports and imports of goods and services comprise all type of debt is known to be significant. transactions involving a change of ownership of goods and Total external debt is the sum of public, publicly guar- services between residents of a country and the rest of the anteed, and private nonguaranteed long-term debt, use world, including merchandise, nonfactor services, and fac- of IMF credit, and short-term debt. Long-term debt has tor services. three components: public, publicly guaranteed, and pri- Net workers' remittances cover payments and receipts of vate nonguaranteed loans. Public loans are external income by migrants who are employed or expect to be obligations of public debtors, including the national gov- employed for more than a year in their new economy, ernment, its agencies, and autonomous public bodies. where they are considered residents. These remittances are Publicly guaranteed loans are external obligations of pri- classified as private unrequited transfers, whereas those vate debtors that are guaranteed for repayment by a pub- derived from shorter-term stays are included in services as lic entity. Private nonguaranteed loans are external obliga- labor income. The distinction accords with internation- tions of private debtors that are not guaranteed for ally agreed guidelines, but some developing countries clas- repayment by a public entity. Use of IMF credit denotes sify workers' remittances as a factor income receipt repurchase obligations to the IMF for all uses of IMF (hence, a component of GNP). The World Bank adheres resources, excluding those resulting from drawings in the to international guidelines in defining GNP and therefore reserve tranche. It comprises purchases outstanding under may differ from national practices. the credit tranches, including enlarged access resources, Other net private transfers comprise net unrequited pri- and all special facilities (the buffer stock, compensatory vate transfers other than workers' remittances. financing, extended fund, and oil facilities), trust fund The current account balance before official transfers is the loans, and operations under the enhanced structural sum of net exports of goods and services and net private adjustment facilities. Use of IMF credit outstanding at transfers, but excludes net official transfers. year-end (a stock) is converted to U.S. dollars at the dol- Gross international reserves comprise holdings of mone- lar-SDR exchange rate in effect at year-end. Short-term tary gold, special drawing rights (SDRs), the reserve posi- debt is debt with an original maturity of one year or less. tion of members in the IMF, and holdings of foreign It includes interest arrears on long-term debt outstanding exchange under the control of monetary authorities. The and disbursed that are due but not paid on a cumulative data on holdings of international reserves are from IMF basis. Available data permit no distinctions between pub- data files. The gold component of these reserves is valued lic and private nonguaranteed short-term debt. at year-end (December 31) London prices: that is, Total external debt as a percentage of GNP and exports $589.50 an ounce in 1980 and $383.25 an ounce in of goods and services (including workers' remittances) is 1994. Because of differences in the definition of interna- calculated in U.S. dollars. tional reserves, in the valuation of gold, and in reserve Total debt service as a percentage of exports of goods and management practices, the levels of reserve holdings pub- services is the sum of principal repayments and interest lished in national sources may not be strictly comparable. payments on total external debt. It is one of several con- The reserve levels for 1980 and 1994 refer to the end of ventional measures used to assess a country's ability to ser- the year indicated and are in current U.S. dollars at pre- vice debt. LECTED WORLD DEVELOPMENT INDICATORS 235 The ratio of present value to nominal value of debt is the specifically, the regression equation takes the form discounted value of future debt service payments divided by the face value of total external debt. The present value log X, = a+ bt, of external debt is the discounted sum of all debt service payments due over the life of existing loans. The present which is equivalent to the logarithmic transformation of value can be higher or lower than the nominal value of the geometric growth rate equation, debt. The determining factors for the present value being above or below par are the interest rates of loans and the X= (1 + r)t. discount rate used in the present value calculation. A loan with an interest rate higher than the discount rate yields a In these equations, X is the variable, t is time, and a = log present value that is larger than the nominal value of debt; X, and b = log (I + r) are the parameters to be estimated. the opposite holds for loans with an interest rate lower If b" is the least-squares estimate of b, then the average than the discount rate. annual growth rate, r, is obtained as [antilog (b")-1] and The discount rates used to calculate the present value is multiplied by 100 to express it as a percentage. are interest rates charged by Organisation of Economic The calculated growth rate is an average rate that is rep- Co-operation and Development (OECD) countries for resentative of the available observations over the period. It officially supported export credits. The rates are specified does not necessarily match the actual growth rate between for the Group of Seven (G7) currenciesBritish pounds, any two periods. Assuming that geometric growth is the Canadian dollars, French francs, German marks, Italian appropriate "model" for the data, the least-squares esti- lire, Japanese yen, and U.S. dollars. International Bank for mate of the growth rate is consistent and efficient. Reconstruction and Development (IBRD) loans and International Development Association (IDA) credits are Exponential growth rate discounted by the most recent IBRD lending rate, and The growth rate between two points in time for certain International Monetary Fund (IMF) loans are discounted demographic data, notably labor force and population, is by the Special Drawing Rights (SDR) lending rate. For calculated from the equation: debt denominated in other currencies, discount rates are the average of interest rates on export credits charged by r = ln (p I p,) I n other OECD countries. For variable rate loans, for which where pn and p1 are the last and first observations in the the future debt service payments cannot be precisely period, n is the number of years in the period, and In is determined, debt service is calculated using the end-1994 the natural logarithm operator. rates for the base period specified for the loan. Multilateral debt as a percentage of total external debt This growth rate is based on a model of continuous, conveys information about the borrower's receipt of aid exponential growth. To obtain a growth rate for discrete from the World Bank, regional development banks, and periods comparable to the least-squares growth rate, take other multilateral and intergovernmental agencies. the antilog of the calculated growth rate and subtract 1. Excluded are loans from funds administered by an interna- tional organization on behalf of a single donor government. The Gini index The summary measures are taken from the 1996 World The Gini index measures the extent to which the distri- Debt Tables, Volume 1. bution of income (or, in some cases, consumption expen- ditures) among individuals or households within an econ- Statistical methods omy deviates from a perfectly equal distribution. A Lorenz curve plots the cumulative percentages of total income This section describes the calculation of the least-squares received against the cumulative percentage of recipients, growth rate, the exponential (end-point) growth rate, the starting with the poorest individual or household. The Gini index, and the World Bank's Atlas methodology for Gini index measures the area between the Lorenz curve estimating the conversion factor used to estimate GNP and a hypothetical line of absolute equality, expressed as a and GNP per capita in U.S. dollars. percentage of the maximum area under the line. Thus a Gini index of zero presents perfect equality while an index Least-squares growth rate of 100 percent implies maximum inequality. The least-squares growth rate, r, is estimated by fitting a The World Bank employs a numerical analysis pro- least-squares linear regression trend line to the logarithmic gram, POVCAL, to estimate values of the Gini index; see annual values of the variable in the relevant period. More Chen, Datt, and Ravallion (1992). 236 World Bank Atlas method ( ,S$ \ i ss \ 1 Pt tt Pt Pt /t Pt The Atlas conversion factor for any year is the average of t-2 ,S$ + e t_1 ,,S$ +e] a country's exchange rate (or alternative conversion fac- ,Pt-2 Pt-2 ) ,Pt-1 ft_i j tor) for that year and its exchange rates for the two pre- ceding years, after adjusting them for differences in rates and for calculating GNP per capita in U.S. dollars for of inflation between the country and the G-5 countries year t. (France, Germany, Japan, the United Kingdom, and the United States.) The inflation rate for G-5 countries is rep- Yts=(Y,INt)le: resented by changes in the SDR deflators. This three-year averaging smooths annual fluctuations in prices and where exchange rates for each country. The Atlas conversion fac- Yt = current GNP (local currency) for year t; tor is applied to the country's GNP. The resulting GNP pt = GNP deflator for year t; in U.S. dollars is divided by the midyear population for et = average annual exchange rate (national currency the latest of the three years to derive GNP per capita. to the U.S. dollar) for year t; The following formulas describe the procedures for Nt = midyear population for year t; computing the conversion factor for year t. t = SDR deflator in U.S. dollar terms for year t. ps$ Data Sources Summary of International Monetary Fund. Various years. Government Finance Statistics Yearbook. Vol. 11. Washington, D.C. socioeconomic . Various years. International Financial Statistics. Washington, D.C. development U.N. International Comparison Programme Phases IV (1980), V (1985), and VI (1990) reports, and data from ECE, ESCAP, indicators Eurostat, OECD, and U.N. World Bank. 1993. Purchasing Power of Currencies: Comparing National Incomes Using ICP Data. Washington, D.C. FAO, IMF, UNCTAD, World Bank data, and national sources. Human Atkinson, Anthony, Lee Rainwater, and Timothy Smeeding. 1995. Income Distribution in Advanced Economies: The Evidence resources from the Luxembourg Income Study (US). Paris: OECD. Bos, Eduard, My T. Vu, Ernest Massiah, and Rodolfo A. Bulatao. 1994. World Population Projections, 1994-95 Edition. Baltimore, Md.: Johns Hopkins University Press. Chen, Shaohua, Gaurav Datt, and Martin Ravallion. 1992. POVCAL, A Program for Poverty Measurement for Grouped Data. World Bank, Policy Research Department, Washington, D.C. Council of Europe. 1995. Recent Demographic Developments in Europe and North America. Council of Europe Press. Eurostat. Various years. Demographic Statistics. Luxembourg: Statistical Office of the European Community. Institute for Resource Development/Westinghouse. 1987. Child Survival: Risks and the Road to Health. Columbia, Md. International Labour Office. 1995. Year Book of Labour Statistics. Geneva. . 1995. Labour Force Estimates and Projections, 1950-2010. Geneva. . 1995. Estimates of the Economically Active Population by Sex and Age Group and by Main Sectors of Economic Activity. Geneva. Ravallion, Martin, and Chen, Shaohua. 1996. "What can new survey data tell us about recent changes in living standards in developing and transitional economies?" World Bank, Policy Research Department, Washington, D.C. Ross, John, and others. 1993. Family Planning and Population: A Compendium of International Statistics. New York: The Population Council. U.N. Administrative Committee on Co-ordination, Subcommittee on Nutrition. Various years. Update on the Nutrition Situation. Geneva. U.N. Department of Economic and Social Information and Policy Analysis (formerly U.N. Department of International Economic and Social Affairs). Various years. Demographic Yearbook. New York. . Various years. Statistical Yearbook. New York. Various years. Levels and Trends of Contraceptive Use. New York. . 1988. Mortality of Children under Age 5.. Projections 1950-2025. New York. 1994. World Population Prospects: The 1994 Edition. New York. . Various years. Population and Vital Statistics Report. New York. U.N. Educational Scientific and Cultural Organization. Various years. Statistical Yearbook. Paris. UNICEF. 1996. The State of the World's Children 1996 Oxford: Oxford University Press. United States Bureau of the Census. Various years. World PopulationRecent Estimates for the Countries and Regions of the World. Washington, D.C.: U.S. Government Printing Office. World Health Organization. Various years. World Health Statistics Annual. Geneva. . Various years. The International Drinking Water Supply and Sanitation Decade. Geneva. . 1986. Maternal Mortality Rates: A Tabulation of Available Information, 2nd edition. Geneva. . 1991. Maternal Mortality: A Global Factbook. Geneva. . Various years. World Health Statistics Report. Geneva. and UNICEF. 1995. "Modeling maternal mortality in the developing world". Geneva. FAO, ILO, U.N., and World Bank data; demographic and health surveys from national sources. Environmentally International Energy Agency. 1995. /EA Statistics: Energy statistics and balances. Paris: OECD. sustainable U.N. Department of Economic and Social Information and Policy Analysis (formerly U.N. Department of International development Economic and Social Affairs). Various years. World Energy Supplies. Statistical Papers, series J. New York. . Various years. Energy Statistics Yearbook. Statistical Papers, series J. New York. . 1994. World Urbanization Prospects, 1994 Revision. New York. World Resources Institute. 1994. World Resources 1994-95. New York. . 1996. World Resources 1996-97. New York. Economic International Monetary Fund. Various years. Government Finance Statistics Yearbook. Vol. 11. Washington, D.C. performance . Various years. International Financial Statistics. Washington, D.C. Organisation for Economic Co-operation and Development. Various years. Development Co-operation. Paris. . 1988. Geographical Distribution of Financial Flows to Developing Countries. Paris. U.N. Conference on Trade and Development. Various years. Handbook of International Trade and Development Statistics. Geneva. U.N. Department of Economic and Social Information and Policy Analysis (formerly U.N. Department of International Eco- nomics and Social Affairs). Various years. Monthly Bulletin of Statistics. New York. Various years. Yearbook of International Trade Statistics. New York. FAO, IMF, OECD, UNIDO, and World Bank data; World Bank Debtor Reporting System; national sources. 237 Table 1. Classification of economies by income and region, 1996 Sub-Saharan Africa Europe and Central Asia East and Asia Eastern Middle East and North Africa Income Southern East Asia Europe and Rest of Middle North group Subgroup Africa West Africa and Pacific South Asia Central Asia Europe East Africa Americas Burundi Benin Cambodia Afghanistan Albania Yemen, Rep. Egypt, Arab Guyana Comoros Burkina Faso China Bangladesh Armenia Rep. Haiti Eritrea Cameroon Lao PDR Bhutan Azerbaijan Honduras Ethiopia Central African Mongolia India Bosnia and Nicaragua Kenya Republic Myanmar Nepal Herzegovina Lesotho Chad Vietnam Pakistan Georgia Madagascar Congo Sri Lanka Kyrgyz Malawi Cote d'Ivoire Republic Mozambique Equatorial Tankistan Rwanda Guinea Republic Somalia Gambia, The Low- Sudan Ghana income Tanzania Guinea Uganda Guinea-Bissau Zaire Liberia Zambia Mali Zimbabwe Mauritania Niger Nigeria Sao Tome and Principe Senegal Sierra Leone Togo Angola Cape Verde Fiji Maldives Belarus Turkey Iran, Islamic Algeria Belize Botswana Indonesia Bulgaria Rep. Morocco Bolivia Djibouti Kiribati Croatia Iraq Tunisia Colombia Namibia Korea, Dem. Estonia Jordan Costa Rica Swaziland Rep. Kazakstan Lebanon Cuba Marshall Latvia Syrian Arab Dominica Islands Lithuania Republic Dominican Micronesia, Macedonia, West Bank Republic Fed. Sts. FYIV- and Gaza Ecuador N. Mariana Moldova El Salvador Lower Islands Poland Grenada Papua New Romania Guatemala Guinea Russian Jamaica Philippines Federation Panama Solomon Slovak Paraguay Islands Republic Peru Thailand Turkmenistan St. Vincent Tonga Ukraine and the Vanuatu Uzbekistan Grenadines Western Yugoslavia, Suriname Middle- Samoa Fed. Rep. Venezuela income Mauritius Gabon American Czech Greece Bahrain Libya Antigua and Mayotte Samoa Republic Isle of Man Oman Barbuda Reunion Guam Hungary Malta Saudi Arabia Argentina Seychelles Korea, Rep. Slovenia Barbados South Africa Malaysia Brazil New Chile Caledonia French Guiana Guadeloupe Upper Martinique Mexico Puerto Rico St. Kitts and Nevis St. Lucia Trinidad and Tobago Uruguay Subtotal: 165 27 23 25 8 27 4 10 5 36 238 Table 1 (continued) Sub-Saharan Aftica Europe and Central Asia East and Asia Eastern Middle East and North Africa Income Southern East Asia and Europe and Rest of Middle North group Subgroup Africa West Africa Pacific South Asia Central Asia Europe East Africa Americas Australia Austria Canada Japan Belgium United States New Zealand Denmark Finland France Germany Icdand Ireland OECD Italy countries Luxembourg Netherlands High- Norway income Portugal Spain Sweden Switzerland United Kingdom Brunei Andorra Israel Aruba French Channel Kuwait Bahamas, The Polynesia Islands Qatar Bermuda Non-OECD Hong Kong Cyprus United Arab Cayman countries Macao Faeroe Islands Emirates Islands Singapore Greenland Netherlands OAEb Liechtenstein Antilles Monaco Virgin Islands (U.S.) Total: 210 27 23 34 8 27 28 14 5 44 Former Yugoslav Republic of Macedonia. Other Asian economiesTaiwan, China. For operational and analytical purposes, the World Definitions of groups Bank's main criterion for classifying economies is gross These tables classify all World Bank member countries national product (GNP) per capita. Every economy is and all other economies with populations of more than classified as low income, middle income (subdivided into 30,000. lower-middle and upper-middle), or high income. Other analytical groups, based on geographic regions, exports, Income group: Economies are divided according to 1994 and levels of external debt, are also used. GNP per capita, calculated using the World Bank Atlas method. The groups are: low income, $725 or less; lower- Low-income and middle-income economies are some- middle income, $726 to $2,895; upper-middle income, times referred to as developing economies. The use of the $2,896 to $8,955; and high income, $8,956 or more. term is convenient; it is not intended to imply that all economies in the group are experiencing similar develop- The estimates for the republics of the former Soviet ment or that other economies have reached a preferred or Union are preliminary and their classification will be kept final stage of development. Classification by income does under review. not necessarily reflect development status. 239 Table 2. Classification of economies by major export category and indebtedness, 1996 Low- and middle-income Low-income Middle-income Moderately Not classified High-income Severely Moderately Less Severely Less Group indebted indebted indebted indebted indebted indebted by indebtedness OECD Non-OECD India Armenia Bulgaria Russian Belarus Canada Hong Kong Pakistan China Federation Czech Republic Finland Israel Georgia Estonia Germany Macao Kyrgyz Korea, Dem. Ireland Singapore Republic Rep. Italy OAP Korea, Rep. Japan Exporters of Latvia Sweden manufactures Lebanon Switzerland Lithuania Malaysia Moldova Romania Thailand Ukraine Uzbekistan Burundi Albania Mongolia Bolivia Chile Botswana American Iceland Faeroe Islands Cote d'Ivoire Chad Cuba Namibia Samoa New Zealand Greenland Equatorial Malawi Peru Solomon French Guiana Guinea Zimbabwe Islands Guadeloupe Ghana Suriname Reunion Guinea Swaziland Guinea-Bissau Islands Guyana Honduras Liberia Madagascar Mali Exporters Mauritania of nonfi4el Myanmar prima), Nicaragua products Niger Rwanda Sao Tome and Principe Somalia Sudan Tanzania Togo Uganda Vietnam Zaire Zambia Congo Algeria Venezuela Bahrain Brunei Nigeria Angola Iran, Islamic Qatar Gabon Republic United Arab Exporters Iraq Libya Emirates offliels Oman (mainly oil) Saudi Arabia Trinidad and Tobago Turkmenistan Cambodia Benin Bhutan Jamaica Cape Verde Antigua and Martinique United Aruba Ethiopia Comoros Burkina Faso Jordan Dominican Barbuda Kingdom Bahamas, The Mozambique Egypt, Arab Lesotho Panama Republic Barbados Bermuda Yemen, Rep. Rep. Greece Belize Cayman Gambia, The Morocco Djibouti Islands Haiti Western Samoa El Salvador Cyprus Nepal Fiji French Grenada Polynesia Exporters Kiribati Kuwait of services Maldives Monaco Paraguay Seychelles St. Kitts and Nevis St. Lucia Tonga Vanuatu 240 Table 2 (continued) Low- and middle-income Low-income Middle-income Severely Moderately Less Severely Moderately Less Not classified High-income Group indebted indebted indebted indebted indebted indebted by indebtedness OECD Non-OECD Afghanistan Bangladesh Azerbaijan Argentina Colombia Costa Rica Australia Netherlands Cameroon Lao PDR Sri Lanka Brazil Hungary Dominica Austria Antilles Central African Senegal Tajikistan Ecuador Indonesia Guatemala Belgium Republic Mexico Papua New Kazakstan Denmark Kenya Poland Guinea Malta France Diversified Sierra Leone Syrian Arab Philippines Mauritius Luxembourg exporters" Republic Tunisia South Africa Netherlands Turkey St. Vincent Norway Uruguay and the Portugal Grenadines Spain Yugoslavia, United States Fed. Rep. Croatia Bosnia and Andorra Macedonia, Herzegovina Channel FYR.c Eritrea Islands New Caledonia Guam Liechtenstein Not classified Slovak Isle of Man Virgin Islands by export Republic Marshall (U.S.) category Slovenia Islands Mayotte Micronesia, Fed. Sts. N. Mariana Islands Puerto Rico West Bank and Gaza Number of economies: 210 36 15 11 17 16 55 15 22 23 Other Asian economiesTaiwan, China. Economies in which no single export category accounts for 50 percent or more of total exports. Former Yugoslav Republic of Macedonia. Definitions of groups These tables classify all World Bank member economies Severely indebted means that either of the two key ratios is plus all other economies with populations of more than above critical levels: present value of debt service to GNP 30,000. (80 percent) and present value of debt service to exports (220 percent). Moderately indebted means that either of Major export category: Major exports are those that the two key ratios exceeds 60 percent of, but does not account for 50 percent or more of total exports of goods reach, the critical levels. For economies that do not report and services from one category in the period 1990-93. detailed debt statistics to the World Bank Debtor Report- The categories are: nonfuel primary (SITC 0, 1, 2, 4, plus ing System (DRS), present-value calculation is not possi- 68); fuels (SITC 3); manufactures (SITC 5 to 9, less 68); ble. Instead, the following methodology is used to dassify and services (factor and nonfactor service receipts plus the non-DRS economies. Severely indebted means that workers' remittances). If no single category accounts for three of four key ratios (averaged over 1992-94) are above 50 percent or more of total exports, the economy is clas- critical levels: debt to GNP (50 percent); debt to exports sified as diversified. (275 percent); debt service to exports (30 percent); and interest to exports (20 percent). Moderately indebted means Indebtedness: Standard World Bank definitions of severe that three of the four key ratios exceed 60 percent of, but and moderate indebtedness, averaged over three years do not reach, the critical levels. All other classified low- (1992-94), are used to classify economies in this table. and middle-income economies are listed as less-indebted. 241 World Development Report 1996: From Plan to Market Development Report 1996: From Plan to Market steps back from the extra- World ordinary array of recent events and policy changes in 28 former centrally planned economiesthose in Central and Eastern Europe and the newly independent states of the former Soviet Union, along with China, Mongolia and Vietnamto ask what we have learned about the key elements of any successful transition and how they should be pursued. Available June 28, 1996. 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(Please include purchase order) Charge myj VISA I, st Account Number Expiration Date Signature (required to validate all orders) Note: If you are paying by check or credit card, shipping and handling charges are US$5.00 per order. For air mail delivery outside North America, add US$8.00 for one item plus US$6.00 for each additional item. Prices may vary by country and are subject to change without notice. Ship to: Name and Title Address City State Postal Code Country Telephone Please send the World Bank products listed below: Quantity Language Title Stock # Price Total Price World Development Report 1996 Subtotal cost $ 5.00 Shipping and handling $ Airmail surcharge outside USA $ Total $ THE WORLD BANK 1917 and 1950, countries containing one-third of the world's population launched a vast experiment to centralize control of economic resources and allocate them by planning. Recent years have seen another fundamental transformation, as the same countries change course, seek- ing to rebuild markets and reintegrate themselves into the global economy. Their transition from Between plan to market has reached a point at which it is worth taking stock of their achievements. How securely have market processes and institutions taken root? What lessons do the short but turbulent reform histories of the vanguard countries hold for those following them? And what does transition mean for the rest of the world, including the many countries whose market economies rest on weak foundations? This nineteenth annual World Development Report steps back from the bewildering tumult of events and policies now transforming economies in Central and Eastern Europe, the newly independent states of the for- mer Soviet Union, and East Asia and assesses the progress and prospects of these economies in transition. The assessment takes the form of two complementary sets of questions. First, how have countries grappled with the initial dilemmas of transition? How do they free prices, markets, and market participants from state control without giving free rein to inflation? How do they set appropriate incentivesto encourage efficient responses to market signalswhile creating an effective social safety net that does not abandon the losers in the marketplace to destitution? The Report also examines how countries' histories and starting conditions affect the approach to transition and its speed and progress. The bottom lineand the Report's central con- clusionis that despite these very different points of departure, sound policy, wherever firmly and consis- tently applied, has yielded rich benefits. Second, how can countries best consolidate these initial reforms, creating institutions that can support a thriving market economy? One essential institution is well-crafted legislation and the rule of law. Another is an active financial system, no longer the passive repository of state-channeled funds but an efficient inter- mediary between savers and investors. Also needed are reformed education and health care systems, capable of preserving and retooling these countries' rich reservoirs of human capital, and, perhaps most important, a rightsized government with the strength to be effective in a market economy. The answers to these questions must be incomplete, but their broad dimensions are already taking shape. And the answers, even if preliminary, matternot just for the countries concerned but for many others that are making similar, if less pervasive, reforms toward wider markets and deeper international engagement. This Report includes, in a newly revised format, selected World Development Indicators, offering current data on some 120 indicators of social and economic development for more than 130 countries and territo- ries, with basic indicators for some 70 more. The Indicators are also available on diskette. An appendix to the Report provides additional statistics on economies in transition. 90000 9 780195 211078 ISBN 0-19-521107-3 Cover Illustration by Glenn Pierce/The Magazine Group