TransitionEconomiesDivision * PolicyResearchDepartment * TheWorldBank Lessons and Consequences of-the Left's Victory in Poland Interview H with Leszek Balczerowicz S ince Leszek Balczerowicz gave munist officials, who have become the economy. In Poland specific circum- an interview to Transition in guardians ofeconomic well-beingover- stances contributed to the victory ofthe 3 September 1992, the political night Is the pendulum ofhistoryswing- presentrulingcoalition:partiesthatwere landscape has changed a lot in Cen- ingto the left again in Central and East- represented in the former government tral and Eastern Europe. Transition emEurope? were badly split, while opponents of editor Richard Hirschler revisited radical reform were able to organize Poland's "shock therapist" to ask his A. I do not want to speculate. Democ- themselves and profitfromthenewelec- views on the causes and repercus- racy can be shortsighted, but dictator- toral law. Thatlaw, by the way, is much sions of the Left's victory in Poland. ship is often blind. In Greece, for ex- better than the previous one in that it ample, the Socialists won the elections prevents the excessive fragmentation Q. Sinceyourfirstinterviewwith lTan- this year, although the very same team ofthe parliamentary system. sition (p. 4, September 1992) postcom- was voted out of office four years ago munist parties in Poland have won a on the grounds that it had ruined the landslide victory in the elections; in Lithuania reform-communists are sol- idly at the helm; and in Hungary the What's inside... Socialist Party is waiting for the next election (to be held probably in May Snapshot ofPoland (page 3) Alan Winters Comments on EC Trade 1994), as the second mostpopular party. Fanc*ngtheStom-Russia'slflation Policy (page I 1) Millions of voters all overthe region are Crisis yearniing for the lost benefits (subsi- To avoid full -scale hyperinflation, Russia Ho Chi Minh City is ready for a stock dized pnces, free education, free health should bring budget deficits under con- exchange. (page 13) care, job security, stable purchasing trol and cut subsidized credits to enter- power of pensions, and so on) and want prises according to W. Easterly and P. V. Conference Diary (page 14) change, this time for more social stabil- da Cunha. (page 4) ity. Many Polish citizens initially con- RussianLandR :Land Sale Has15) vinced that transition offered an easy Been Legalized (page 7) Milestones of Transition (page 17) ride toward democracy, economic af- fluence, and social safety, now find them- State Enterprises in China: Down from NewBooks andWorkingPapers selves losers and have become angry, theCommandingHeights (page 19) frustrated, and disillusioned. They are I.J.Singh and Gary Jefferson analyze (p 1 ready to vote into power former com- -China's economic successes, including Bibliography of Selected Articles the "neither state nor private" ownership (page 23) forms. (page 8) The World Bank/PRDTE Non eco- make thie transition process irrevers- upheavalassocialtensionsbecomeun- nobic is- ilSie It rapidly =ntr6lubs aum of bearable Canthew gove es: ~ ~ ~ ~~~~~cnomic and, instutonahangesthat Central and Eastern Europe focus on bvae,' R Z- act as policy constraints on any new growth and at the same time achieve ingrole of _go ' nt)taking over, whatevertheii macristabilizati6oi? basic ideology and value :inde- C h, u r c h ' 0 | pendence ofihe central bank, currency A. It is not enough to just speak' glow- and ' t2e' u I 1 | ojivertibiity, a strong prvatesector, ingyaboutgrowth. Thequestionis,what related and independence of the commercial kind ofeconomic strategyis bestto put 0 anti''abor-' _ i- ; 5 banks. In Poland these banrks are still the country on the path of long-term ionlegis- contrblled by the state, but we have growth? Only concentratedsupply-side a; lati'o-n,-' _ , - l succedin separatingthemfromte measures supplemented by a stable w'h i c'h politibAiinf luence of the ministries and macroeconomywillbringthesituation has been have introduced in'dpendent supervi- under control. The basic structures in adopted by the Sejm even though it is sory boards. Privatization 'of the com- the economyhaveto be changed. Con- disliked by the majori ofthe popula- mercial banks will, ofcourse, bethereal centratingondemandiswrong-demand tion-also contributed to the victory of built-in safeguard. AlthougK the con- management policies fail everywhere. the parties of the left. straintsIhave mentioned are not abso- They are inefficient in most socialist lute guarantees, they could help pre- countries,not onlyinthosethatinherited Astotheeconomic andsocialissues,in serve the reform. The effects of slow alighinfiationrate, such asPoland. Our 1 989-Polandonthebrinkoftotal eco- reform, on the other hand, are much basictaskisto restructurethe economy nomic collapse, experiencing easier to erase: as there is not much to in two ways: we have to change the yperinfiation and persivesho es erase. institutions,thatis,theeconomicsystem we had no choice but to introduce a itself; and, at the enterprise level, we radicali economic-reform program. It Q. Econormic decline is history in Po- have to change the composition of in- was cleartthb sc and social land-ifonebelieves itestatistics.But dustry (productranges and the like). It servicesprovidedbytheold communist the other former socialist econories is absurd to stimulate demand in the tegime were unsustainable. But such still struggle with recession or, even shadow of a high inflation rate and a reform transforms hidden unemploy- worse, inflationary recession. Macro- huge budget deficit. It is a popular no- mentintoopenunemploymentandpro-- stabilization means placing the growth tion, of course, because politicians are duces shifts in the relative pay andpres- i'ssue on the back burner. But without either ignorant or would like to avoid tige of many groups. Although many economic growth, the economy stag- difficult measures. But ultimately the akeatageOfthnestablished nates, inflaton accelerates and, in a key to growth will be to radically re- economicfreedom, others, such as min- worst-case scenario, there is political ers and steel workers, are resentful as they see their wages -and prestige de- clin'e inrelative terms. Those who feel theyareinlimbo'oftenlookwithenvyat - the new winners. Still, I donotthink h radical economicreforms should bere- jectedbecauseof theconsequences. Q. Why not? A. Because even if one can show that radical econonic fOr tm inadvertently helped the political opposition to gain influence, whois tosaythatotherpolicy solutions (suchas delayingccialeco-f nomic decisions and necessary adjust-. pnent) would not have been even more - hzardousto social weIlbem-g and eco- XC-- ; ; hazardoustorsociaelo welAl-beingandeco- V"Boilerroom?Preheat acauldronforihe politician on screen.183!" non-icdevelopmnenit? Also, radical eco- -pol_____________________________ '' nornic reiorm creatles safe~guards'to . ; nomic reform creats safeguFrom the Czech magazine Dikobraz 2 October-November. 1993 Transition structure on the supply side and to sta- A..Yes. Itis.trueithat muc.epends on Leszek Balkzeroqwi.cz, Poland- s. bilize prices on the demand-side. the particular circumstances ofacoun- nanceminister and deputyprime mip- ,,n' ' ly,-the polticalsituation, thestandtaken ister betweek, 199 and 1991, is the Q. Insome ofthe refornmingeconomies, by those who oppose rradical ,refor author, arg other works, of h foreign and domestic investors are sim- andtheprofessi6naii,dedin, and books 800.Days: Managed Shoclj plynotinspired withconfidencebygov- leadership qualities ofthereformers. and EasteriinEurope: Economic, So. emnment actions. The radical structural Theirpoliticalskillskandtheldndofstrat- cial and Pqlitical Dyn 'ics, 1993j changes thaty-oujust mentioned aren't egy they are able to draftand implement Universityondon. He is cur- gettingthrough. Ambitious projects to are crucial -elements in the s'uccess of rend .in ....,Was ,. , doing develop infrastructure and servicesbe- thetransitionprocess.aThus,postsc t resea.ifin cia Preform and come mired inthe governnent bureau- economies with roughly similarW initial macropolicyine tsion econo- cracy, casualties of the, turf war be- economic an,d politicalconditionswill mie&atthe eh *ePolic Re- tween different government agencies differ widelyin afew years-.Some will search Department and Financial and political organrizations. Something beinmuchbettershapethanoth'ers,-.n Sector, Development Department 4 else, then, is necessary for a successful questionaboutit. the World Bank. economicstrategy, don'tyou'think? Poland: expanding an already stretched budget? The first left-wing Polish government ment- of prime minister Hanna Suchocka. million pensioners, and 4 million farm- since the collapseofcommunist rule was Pawlaksaid he wished to.acquaint himsel ers. The 80 farmers now holdingseats- sworn in on October26. The twenty-one- with the program and its potential fiscal constitute., the. largest -occupational member cabinet of Prime Minister consequences and that a decision would be group in the Seirm (23 in the Senate). WaldemarPawlakseeks to maintain eco- made by December.20 about whether to Othecsignicantinterestgroupsinclude nomic growth but also "ensure that it is restart it. In a statement to parliament, the 70teachers, 20medicatdoctors,30jour- felt in each Polish household" (Pawlak). prime minister committed the government nalists, and aroutd So lawyers. These Meeting on November 2, Polands new to following stringent monetary policies can be expected to add their voices to government -decided to ask the parlia- supported by the International Monetary calls for an expansion of an already ment to postpone until December29 the Fund IMF), which is unlikely to approve stretched budget. Although: the new. deadline for submission of the draft bud- any increase, in next years budget deficit government-.is.pedged to continue the*: getfor 1994. The-statutory deadline is overthisyears target.ofSpercent ofGDP, reformprocess, itwillfacepressurefrom November i5, but the new cabinet called Pawlaksaid policies would aim "at reduc- its electorate to cushion the conse- this timetable unrealistic. The cabinet ing inflation. " (Poland is set on maintain- quences.Manyofthepublicsectorwork- also reviewed37ofthe 55 pieces of draft inggood relations with the IMFwith a view ers, the unem wed, andp enionershave legislation submitted to the lomei house to achievingfurther reductions in its $47:2 seen little benefitfiom economicrestrucs- of parliament (the Sejm) by Hanna billion foreign debt.) turing. They, like-othersegmenfisofPdl-. Suchockasoutgoinggovernmentandre- ish society, acknowledge the necessity solved to resubmit most of them, includ- In the September 19 general election, a offurther economic reform. but 4emand ing a copyrightprotection bill andfive of third of voters supported the two better protection agains.tJts negative the six bills constituting the "pact on 'postcommunist" parties-the Democratic social effects.s. state firms" negotiated with the trade LeftAlliance(SLD)andthePeasantsParty unions in 1992-93. But the cabinet de- (PSL). Together; ihey won a two-thirds ma- The postcommunist parties have inher- cided to withholdfor revision the bill on jority in the Seim. The SZD is a loose.coali- ited the most dynamic economy ;n Eu- the privatization of.state firms that is the tion of 27 parties, associations and trade rope:, GNP increased by 3.9 percent in heart of the "pact. "A communique indi- unions, Ormerly attached to the Polish 1992, and industrial output by 9.4 per-- cated that the cabinet will undertake a' Communist Par The .PSL is essentially. a. cent. Polands economy is expected to "broad analysis of privatization. !' Edu- .farers' lobby It received neorly 50 per- grow 4.S5percent-this year,. industrial cation Minister Aleksander Luczak said centofthe ruralvote. Inagricultural.policy, output.to increase 7 percent, and injla- apay raise for teachers is under consid- it is much more interventionist than the tion to slow to 37 percentftrom 43 per- eration, but not before 1994. SLD, demanding state-imposed minimum cent last year. The private sector now prices on agricultural products and limits employs 60 percent of the work force Pawlak has also ordered a halt to a pilot on food imports. - and accounts for more than 50 percent program designedto devolvepowersfrom of GDP Polandsold off 2,385 (28 per- the central government to elected self- The electorate that voted the coalition into cent) of8,441 stateent4rprisesfora totalt governing bodies in major Polish cities. power included some 4 million state enter- of $473 million, in the past three years. The program is part of a larger plan to prise employees, 2 million employees of the decentralize the state administration; it social sector, 2.9 million unemployed, 8.7 (Based on reports, of 'Oxford Analytca was set in motion by the former govern- and the RFE/RL Research Institute) Volume 4,Number 8 - 3 The World Bank/PRDIE Financing the Storm: Russia's Inflation Crisis : ussiahas had high inflation 1993 summer harvest season ap- ciation of the Russian currency. The since the collapse ofthe com- proached, the central bank initiated a connection between the exchange rate tk.v%..munisteconomicsystematthe new wave of agricultural credits. And andrublemoneybalancesisplausiblein end of 1991. At the same time, major the Credit Policy Commission-the the increasingly dollarized Russian reforms have been undertaken, most government'swatchdogorganization- economy. Monetary expansion helps notably an unprecedented privatization approved large concessionary credits to finance-directlyorindirect"lhepur- effort and an ambitious, if incomplete, favored enterprises under the conver- chase of foreign exchange by enter- bout,of price and trade liberalization. sion and public investment program. prisesorhouseholds,drivingupthedol- Russia now faces the issue of how to lar against the ruble. The links between accelerate structural change, attract The inflation pattem has roughly fol- moneygrowthandinflationandbetween foreign capital, and advance the con- lowed these ebbs and flows of mon- money and the exchange rate support versiontoamarketeconomywhiledeal- etary growth with a lag of about four the view that the 1992-93 inflation in ingwithhighinflation. months (see figure 1). Forexample, the Russiahas been aclassic monetaryphe- ruble printing presses went into high nomenon. Money Supply Ebbs and Flows gearinthe sunirnerof 1992, and bythe fall of that year, inflation had acceler- Inflation Taxes Afteraninitiallytightmonetaiypolicyin ated.Followingtheintroductionofmod- the first quarter of 1992, the Central est monetary restrictions in late 1992, nflationinthepresenceoflownomninal Bank of Russia loosened credit for the price increases abated in early 1993. interest rates redistributes wealthfrom rest of the year. The floodgates truly Then, money supply rose again during ruble asset-holdersto rubleborrowers. opened in the third quarter of 1992, fu- the summer months, and inflation was The decline in the real value of loans, eled by huge credits to enterprises un- ready to take a ride-keeping the four due to negative real interest rates is a der a scheme for unraveling enterprise months' lag. boon to the borrower, who is at the arrears. The flow of new credits to the receivingend ofthe"inflationtax"paid government also reached large-scale There is an even closer link between by the asset-holder. Calculating who proportions in the second half of 1992. printing money and the dollar rate of the loses and who benefits can be done by Credits to other republics to finance ruble(seefigure2,p.5).Therapidmon- calculating the decline in real value of their deficits in trade withRussia added etary expansion through October 1992 each group's ruble assets and liabilities, fuel to the fire. was associated with a sharp decline in considering also the interest paid (see the ruble; the slower monetary growth tablel). Monetary policy was tightened, if only since then corresponds to areal appre- moderately, as t h e R u s s i a n Figure 1: Inflation follows money growth with a four-month lag economy approached hyperinflation at the end of 1992 and be- 35 ginning of 1993. In thespnrngofl993 the 30Correlation= 74 Ministry of Finance and the central bank agreed on the credit 25-A targets. Although di- / \ \ rect credit-mainly 20 / forenterprises-was sharply reduced, 15 credittogovemment 15 and to other repub- \ 7 CPI INFLATION lics was only mod- 10 - UB I _RO T estly checked. \/ The agreement was Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 lul-93 AUg-93 Sep-93 short-lived. As the 4 October-November, 1993 Transition Ofthe enormous inflationtax collected, As high inflation continues, there is ev- Table 1: Inflation tax paid and the Russian government received only ery reason to believe that the demand received on ruble assets and about 4 percentofGDP afternettin-g out for rubles will decline further. The inef- liabilities its own deposits. Othergovernments in ficientpayments systemhas propped up (February 1992-January 1993percentage thefornerSovietUnionreceived about money demand by forcing enterprises of GDP) 2 percent of GDP as inflation tax. and households to keep deposits tied up I ttw in the banks for months at a time. But Asserho . paid recivd A large part of the inflation tax was enterprises and households are fast Tota 30.90 30.90 receivedbackbyenterprisesintheform leamingthelessonofhighinflationand- Households 12.04 of highly negative real interest rates on by using dollars in transactions and en- Enterprises 18.86 16.31 subsidized credits, not to mention the gaging in barter or payment in kind- Government (net) 4.07 negative real interest rates that were they arebypassingthepayments system. ondeposits(-) 7.19 determined by the supposedly free fi-' Other republics 2.19 nancial market. Enterprises were net As the experiences of other countries Residual (monetary borrowers in rubles from the Russian indicate, ruble money demand can still system profits) 8.34 banking system; this financing helped decline further in Russia (table 2, p. 6). Of those countries with real interest them to accumulate foreign currency Inmost other countries that have expe- rates nearly as negative as Russia's deposits inthe banks (and presumably rienced episodes of severely negative BoliviaandChilehadM2yGDPratiosas abroad as well). Dollar-denominated real interest rates, M2/GDP ratios have lowasSto6percentofGDP.Whilethe assetholdings helped protectthe enter- been below the level in Russia. Argen- Russian M2/GDP ratio has so far held prises against the inflation tax. tina in 1976 had an M2/GDP ratio that steady because of inertia from the old was only slightly smaller than Russia's, system, we can expectthat itwill fall to On balance, the enterprises had most of but the Argentine ratio was elevated by match the low M2/GDP ratios Bolivia their inflation tax payments offset by domestic price controls. Ofthetwo coun- and Chile experienced with severely inflation tax receipts, althoughthere was tries with M2/GDP ratios higher than negative real interest rates. Several probably redistribution between enter- Russia's, Yugoslaviain 1982-84 was an countries (see table 2) later produced prises. The main losers were house- obvious case of prereform monetary extreme inflation (defined as greater holds holding deposits at the Savings overhang, whileTurkeyin 1979-80 ap- than 2000 percent ayear), a pointthat Bank (Sberbank) who ontheirfinancial, pears to have been a genuine outlier Russia has not yet areached Financial assets paid aninflation tax correspond- (perhaps Turks anticipated-correctly- systems, weakened by highly negative ingto 12 percent ofGDP, which repre- thatstabilizationwasbegininginl980). real interest rates, are vulnerable to sents about a quarter of household in- extremeinflation. come. Shrinking Tax Base Figure 2: Intimate links between money supply and the real exchange rate (Ruble real exchaVe re, April 1991=100) 50 0.26 The base for the infla- tion tax is the ruble money supply (M2): 45 - - - - Ra exdnge rat (depriation 0.24 this "tax base" is fall- is up) ing. Not surprisingly, Ruble M2RGDP, lagged one 0.22 enterprisesareholding 40 month moreandmoreforeign currency deposits to 0.2 F protect themselves 35 against inflation. / ," - Q.18 Households are shed- dingrubledeposits and 0- reducing their mon- , etary assets to a core 25 of currency holdings |caoni=.s2 ., 0.14 necessary for transac- tions. 20 - v . I I I i -0.12 Au.92 Aug-92 Sep92 Od-92 Nov92 De-92 hJn93 Feb>S3 M-93 Apr-93 My-93 Am-93 lu-93 Aug93 Volume 4,Number 8 5 The World Bank/PRDTE Table 2: International comparisons of high-inflation periods, Russia'shighinfationhasalreadylasted Russia in 1992 and other selected countries -v- tw:nty-two mbonths, and some may Average real Ratio ofM2 Year of Yearlhy conclude thatthe country can live with ,::f .-itnrte.rest ra,te toG,DP in 0 .extreme , \ rateof. high inflationindefinitely. This conclu- during final. year of inflation, (iffinal extremenfla sion would be a mistake. As the mon- Coutn Year ..period period any) inflation etaxyauthontiestaxrublemoneythrough Russia (second h8If of 1992) n-:: -78 :; 17% -;rapid money growth and inflation, the base forthat tax-the demand forruble Peiods withseverelynegativevreal interestrates flowerthan 20/ fortwo ormoreconsecutiveyears) money-is disappearing. Iatonwill Developingcoauftriese - : : -:. :X : Argenelina countr -69 ies n 0; 0 accelerate if the current rate of mon- Argentina 1975-76 -69 13% financingofenterprises of 1982-84 -32 90/0. 1989 4923% e~~~tary fncigoetrissand gov- Agenina . - 0 : 198284 : :.817/° 01 emment continues. The clock is ticldng: Bolivia ~~~1982-4 ~ -75 6%/ 95 10/ Chile - - 1972-74 .-61r ; 5% -- : n . monetary financing will have to be re- Peru ' :; ' 19i78-79 At' - ,-22 i 13%; 0 ; duced if the economy is to avoid full- Pwll - :f; 1, l; 1983-84 : ,aJ-3, Y ; 9% 1990 0 7650)% scalehyperinflation. Turkey : 1979)n-8 -35 19%0/o William Easterly, Policy Research EasternEurope, Department, and Paulo J'ieira da Poland,, 19 9 -46 9%o0 Cunha, Europe and CentralAsia, De- Yugoslavia 1 982-4 -23. 31% partmentIII - Yugoslavia j9 &88 ;f d -24 S 0 15% : :Z. . N11043, 1818 H Street, N.W., Wash- ington, D.C 20433J .-Russia-inflation on-the run. lion would go to the government. In 1992, Russias gross domestic product (GDP) cent by the end of 1994. Finance Minister central bank cdit e n w fell by 11 percent in thefirst nine months Boris Fedorov is even more optimistic, pre- equivalent to about 40 percent of nomi- of 1993 compared with the same period dieting a 15 percent inflation rate in De- nal GDP A ffth of this credit went to the in -1992, according, to official figures. cember 1993, 10Opercent in February 1994 government, more than halwent to in- Industrial production declined by 17 and a monthly price expansion of) to 3 dustry and a quarter went to support percent and capital investment by 10 percent by-December 1994. purchases from Russia by otherformer percent, while interenterphise debt grew to RII,300 billion (to be converted into Finance Minister Fedorov on November P tradable short-term notes in November 10 submitted o the government the final- The central bank will raise its key dis- un,der a, new presidential decree). GDP ized budgetsfor thefourth quarter of 1993 countrate to a new high of 210 percent forthefullyear could decline byas much andforthe yearas a whole. Plannede4en- Under Russia:s complicated way of cale as 18 to 20percentfrom 1992. The trade ditures are set at R43.9 trillion. The pro- culating interest rates, banks will actu- 'surplusjfor4this year is expected to be jected maximum defiit of RI 7 trillion i's ally pay an annual rate of almost 700 around S21 billion'(even after drastic said to be equivalent to 10 percentofGDP percentforfundsfrom the central bank pruning of impon#; - - :- \ -- 0 Thee visagedfourth-quarterdeflcitofR5.5 Russia unveiled aforeign exchange con- pruning of imports); - trillion will be financed by central bank trolsystemdesigned toforce exporters to Runaway inflation has, continued to rock bonrowing and by the issue of short- and troasyste deigdorea epotes To the Russian economy, risaingto monthly mid-termigovernment bonds, andgoldcer- r iheir do earnings.nTheynew scheme will go into effect in January for rateof24.5percentinOctober, compared tifcates. The finance ministry warned that with 21 percent in September. Inflation the 1993 budget, deficit could widen to 14 inMarch forallotherexporters. Export i for theyearshouldpeakat 1300 percent, percentofGDPwithoutactionto cutfourth-- dutiesfor raw materials and agricultural however, well below last year ' rate, ac-, quarter spending. - produce will rise in the new year, but cording to Y4ktor Gerashchenko, chair- t export dutiesfor indusrialproducts will man of the cesiral bank (In theA st nine Fedorov said recently that there would be be reduced The new export tariffs were months of993, pricesinRussiarose 478 no more subsidized credits from the central g in a draft list circulated by the percent) Prime Minister Chernonyrdin banktonihdusoy He also seta ceilzngof R6 Russian Ministry of Foreign Economic foresees a decline in inflation to 16 per- trillion -on total central bank credits in the Relatons. cent by nextMarch-and to around 5 per- fourth quarter of 1993, of which R4.6 tril- (Based on news agency reports) 6 October-November, 1993 Transition Land Ownership in Russia, P residentYeltsinonOctober27 shops. Small plots average only 0.06 the basis ofjob and seniority. The cer- signed a decree legalizing the hectares-(about 0. 15 acres), while large tificates are then used in an auction that purchase and sale of land. The stateandcollectivefarmnsaverage8,'000 determines whichfinersgetwhiftaid. decree marks another step toward the hectares. Gaidar indicated that policies to break pnvatization ofagriculture. (Currently, up-state and collective farms should more than 90 percent of Russia's 620 Earlierthisyear, anew decreebyPresi- spread across Russia.- nillionhectares offannlandis stillinthe dent Yeltsin allowed the sale of small state sector. See l?ansition, Septem- plots andtookotherfarmoreiimportant Themovestoprivatizelandandincrease ber 1993, p. 9.) steps: agnrculraloutputte'importantforthe * Landownershavetherighttobuy,sell, reform process. Russia is the world's A law on private property passed in lease, ortransferland, as well as to use largest purchaser of grain, importing March 1990 formally ended the state's it as collateral for loans. approximately 15 percent of its annual monopoly on ownership of land in the *W orkersonstateadcollectivefamrswill grain needs. This drains precious for- formerSovietUnion.TheRussianpar- be given a land-share certificate that eign eurrencyreserves. Although esi- liament adopted a land code in April will, in effect, makethem landowners. mates at the beginning of the season 1991 thatreiteratedtherights ofcitizens *Foreign investors can purchase and- predicted abumper-rainharvestof125 to acquire and resell land. In spite of throughajointventureand,althoughthe milliontons,thisfigh ewasreviseddown some subsequent amendments, the leg- decree is not clear, will apparentlyhave by the Ministry of, giculture to last islation suffered from serious defects:- the right to buy out their Russian part- year's level of approximately 107 mil- Inordertoprevent"speculalion,"land- ners. lion tons. The most recent figures are ownerswereprohibitedfromseUingtheir *Thestatecanlayclaimtolandonlyfor- evenworse,howeverLthetotalharvest land freely for a ten- year period if the strategic purposes and is required to pay as ofNovembe'r;1 isonly96.7tons,withi land was given to them by state or col- market prices for that land. only a fraction of crops still to be gath- lective farms, or a five-year period ifit eredc Bad-weather and farmers' finam- was purchased from a local council. In The decree also permits local authori- cial'problems have beenblamed-forthe. the initial period, land could only be left ties to transfer landfrom agricultural to, lowoutput. to relatives or returned to local authori- cornuercial- use. This is important be=-- ties. cause of the growing demand for land Based on reports from- Oxford * Stateandcollectivefarmscouldeffec- formanufacturingandstorage. Analytfca, the Oxford (UK)-based tivelyblockthetransferoflandtomem-' research group. bers wishing to leave. In the case of The decree, however, is not without collectivefarrns,thosedesiringtobreak problems. It did not establish any pro- - away were often offered money in- cess to allocate land from collective. stead of land, at grossly undervalued farms. Furthermore,thedecreeewi 'e Joke from the Brezhnev Er rates. in force only until the new parliament * Stateandcollectivefarmsretainedcon- institutes permanent legislation. And Soviet agricultral experts are trol over machinery, creating numerous because of high inflation -and the ab- isuig the latestc appallng problems for underfinanced individuals. sence ofland banks and mortgageinsti- . - . . p tutions, it will bedifficult for farmers-to, grawnharvestfigure5. In the summer of 1993 private farners obtain the long-terrn loans necessar-y TWehave identifiedfourmajor M accounted for only 600,000 of the 9.9' for the effective use of their land.- millon agricultural workforce, covering - foes of etu 3.8 percent of stock farmland and 2 Initialstepsarealsobeingtakentospeed l percent of sown land. Private farrns and thebreakup ofstateand collectivefarms. _ small family plots, which together con- Just prior to Yeltsin's decree, the Inter- stitute about 8 percent of agricultural national Finance Corporation and Rus- l spring, the sumer, the land, produce as much as one-third of sianFirsiDeputyPrime Mini'sterYegor fall, andfinally, thewinterl- the nation's agricultural produce. The GaidarannouncedapilotprogramonsLx . small familyplots inparticularhave long collective farms inNizhniyNovgorod. served as a key source of food, given The program allocates land and-prop- the regular shortages in state-owned erty certificates to farm members on Volume 4, Number 8 7 The World Bank/PRDTE ,State Enterprises in China: Down to Earth from Commanding Heights C hina's economy is one of the ledtoendlessbargainingoverprofitshar- Enabling Policies fastest growing in the world. ing, state investments, bank credits, Between 1978 (the year re- prices, forinputs and outputs, state de- Enterprise reforms inChinahavebeen forms were introduced) and 1990, real liveries of essential inputs at controlled supportedbyanumberofenablingpoli- GNP (gross national product measured prices and so on. State revenues de- ciesthathavetransformedtheenviron- at constant prices) grew by 8.8 percent cined. ment in which enterprises operate: a year and industrial output by 10 per- cent a year. Between 1984 and 1990 From 1983 to 1987, the state moved *Gradualprice reforms. A two-tiered industrial production increased by 13.5 fromprofitsharingtotaxationthrougha price system was used as atransitional percent, and in 1991-92 by 16.5 percent series of fiscal reforms designed to as- device. Starting with a system domi- ayear. (Figures quoted in this article are sure enterprise contributions to declin- nated by controlled prices, thestatehas based on official statistics. The editor.) ing state revenues and to put all state graduallyallowedalargershareofgoods The question is, how has China man- enterprises onanequalfooting. Alllarge to be traded at market prices, thus al- aged to achieve such exceptional re- and mediumsize state-owned enter- lowingproductionandconsumptionde- sults intransformingits economy?What prises-whichconstitutethebulkofthe cisions at the margin to be based on specificpolicieshavecontributedtothis statesector-wererequiredtopaya55 market prices. As a consequence of success? percent share of their profits as tax. thegradual price reforms, price distor- Since after-tax profits were divided tions persistedand rents and arbitragein ReformingState-ownedEnterprises through a government-enterprise bar- the system were tolerated. However, gaining process, there were large dis- producers gained time to adjust andthe At the start of its reforms, China's in- parities in after-tax profit remittances. shockto producers and consumers (in- dustrial sector was dominated, as in all The state then levied additional adjust- herentinarapidpricereform)wascush- centrally planned economies, by state menttaxes to level the playingfield. But ioned. Currently, only 6 percentofstate ownership of industrial enterprises su- since the state remained the owner of industrialproductionistransactedatcon- pervised through vertically organized assets and continued to interfere with trolledprices,insteadmarketpricesplay industrial ministries or bureaus at cen- key managerial decisions-mainly thecentralroleinallocatingresourcesin tral or provincial levels. China's state- through its control overplannedinvest- the economy. owned enterprises (SOEs)-defined as ment credits-the differentiation be- those "owned bythe whole people"- tweenprofitsharingandtaxationbecame * "Open doorpolicy "in trade.In 1979 arevariouslyaffiliated with central, pro- meaningless. Decentralizationdid,how- China rapidly liberalized its trade re- vincial, prefecture, or county govern- ever, grant managers considerable au- gime by decentralizing exports from a ments. These accounted for 80 percent tonomy in running their enterprises. dozen or so highly centralized foreign of industrial output in 1978. In 1991 tradecorporationstoover3,500compa- thereweresome 104,700 SOEsin China, Since 1987, attempts havebeenmadeto nies (still withinthepublic sector). Spe- which accounted for 52 percent of in- separate ownership andmanagementin cific measures include: dustrialoutputandmorethantwo-thirds state-owned enterprises: *Liberalizing access to inputs for ex- ofindustrial investments. . The Contract ManagementResponsi- ports. bility Systemspecifiedprofittargetsand * Aggressivelypromotingdirectforeign Enterprise reforms were experimental, profit remittance quotas and technologi- investments and laborintensive exports. gradual, and phased. Between 1978 and calimprovementsinnegotiatedcontracts HongKongplayedacriticalrolein 1992, 1982, state-owned enterprises were with managers, in order to provide in- providing 70 percent of foreign direct granted the right of self-management centives for better performance. investment (of nearly $10 billion) and (alongthelinesoftheYugoslaviamodel), . Joint-stock companies were set up purchasing or transhipping 50 percent and the state started to share profits with shares for employees and some- of China's exports of over $85 billion. with them. The grant of expanded au- times local residents (Shenyang prov- * Graduallyallowingexporterstokeepa tonomy over investment, wages, and ince is a leader in this regard). larger share of their foreign exchange bonuses contributed to "investment Enterprise groupings were formed as earnings and allowingatwo-tierforeign hunger," due in part to the soft budgets the state intervened to enforce closures, exchange market to develop in which inherent in the arrangement and pres- mergers, and restructuring in the same exporters could swap their foreign ex- sure to raise wages and bonuses. This productgroups. change at market rates. Imports remain 8 October-November, 1993 Transition controlled and tariffrates-although low- *Ailowing the spontaneous emergence tertiarysectors includingtransport, dis- ered-remain high for many products, and rapid growth of rural nonstate tribution and construction) and account providing a degree ofprotection to key enterprises in both industry and ter- for a quarter of China's total industrial state-owned domestic industries. tiary sectors. The spectacular growth output and exports. Thieir growdt rate of the township and village enterprise has exceeded 20 percent a year in the As a result, merchandise exports have sector has been perhaps the greatest past decade, easily surpasssing the grown at 12.5 percentand imports at 9.5 achievementofChina's reforms. Atfirst growth rate of the state sector. percent annually in real terms between resisted and latertolerated, the develop- 1980 and 1992. China's total two-way ment of TVEs has occurred spontane- tradehasgrownfrom$38 billionin 1980 ously at the local level and has been What is Different about TVEs? to$135billioninl992. relatively unhindered. TVEs employ more than 90 mnillion workers (60 per- TVEs are the most significant and rap- *Macroeconomic stability. Compared cent in manufacturing and the rest in idlygrowingcomponentofthenonstate to mosttransition economies, Chinahas enjoyed a high degree of growth and price stability. Nonetheless, China's Chinese Ownership Maze: Non State, Yet Not Private. macroeconomic managementhas had a "cyclical" character-that is, episodes In China nonstate industrial enterprises employees, have been allowed to operate ofhighgrowthandinvestnentsfollowed .are grouped into ownership categories since 1978 and account for about 5 per- described as "4urban collectives," "town- cent of industrial output In 1991, 92 per- by rapid deceleration ofcredit creation ship and village enterprises," "individual cent of the nearly 6.3 million individual and direct administrative controlsto re- business," and "other types": businesses in China were in rural areas. duce aggregate demand and bring infla- (The number of individual businesses is tion under control. [This is happening *Urban collectives are enterprises affili- closer to 17 million if one includes house- right now: the Chinese government is ated with municipalities or counties hold and private ventures in agriculture trying to moderate inflation by cooling ("large" collectives) or with a district and in the tertiary sectors.) down anoverheted ecoomy tht is (small" collectives) and include .urban down an overheated economy that is cooperatives. In 1991 about 190,000 such -The uOtherTypes"categoryincludespri- growing at a 13 percent annual rate- enterprises-including those jointly vate enterprises hiring more than seven The Editor. I The highest rates ofinfla- owned by cities and townships-ac- employees, foreign enterprises, joint ven- tion were experienced in 1987-88 when counted for about 5 percent oftotal indus- tures with foreigners, other types of joint official price indices showed increases trial output. These collectives are essen- ventures (say, between state and nonstate of23 percent on average. Still, between tially extensions of second-class and foreign partners), and joint stock 1980 and 1992 prices rose less than 8 state-owned enterprises with inferior ac- companies. Some 10,800enterprisesinthis percent annually. cess to capital and human resources. category account for less than 5 percent Many urban collectives are subsidiaries of industrial output of state-owned enterprises from which *Gradual, experimental and innova- they received start-up capital and hire The "private" sector in China thus in- tive reforms. The ruling principles of surplus employees (or spouses and chil- eludes-at the most-the last two catego- China's reform program have been to dren). Most urban collectives suffer from ries, although some rural enterprises clas- work at the margin, trying a variety of bureaucratic inertia, interference, ineffi- sified as TVEs are dominated by a given reforms and ideas, experimenting to ciencies, and lack of clear autonomy (the group of individuals. Cooperatives are see what works in practice, and evalu- same problems suffered by state-owned more in the nature of "partnerships" hir- atingresultsbeforetzi,ngthenextsteps; enterprises). ing many employees and should be con- sidered private. Altogether, about 12.5 to reinforce the changes thatwork, dis- *T ownship and village enterprises (P VEs) percent of total industrial output in 1991 carding those that fail; and then to are rural collectives affiliated with town- was produced by "privately owned" en- slowly replace old institutions and ways ship or village governments and include terprises using this classification, up from of doing things with new ones. The rural cooperatives. In 1991, of nearly 1.6 5percentin 1985. Chinese leadership has placed great million collectively owned enterprises, emphasis on avoiding "chaos" and over 1.39 million were TVEs accounting The rest of China's nonstate enterprises large-scale unemployment, attempting for 24 percent of total industrial output. are collectively and hence publicly owned large-scale unemployment, attempting Thus, among all the nonstate forms of and cannot be considered private by nor- wherever possible to minimize the so- ownership, the largest share of industrial mal definitions of ownership. In China cial and economic costs of change and output is accounted by TVEs. there is still a lack of legal protection for displacement. property rights and no clear commitment *Individual Businesses, owned by fami- to private ownership. lies or individuals, with a limit of seven Volume 4, Number 8 9 The World Bank/PRDTE sector in China (see box p.9). Com- are thusfreefrom-the "iron rice bowl" The nonstate sector's share in total in- pared with tradtiAnal staowneden- iht reduces-fctor mobit and cor- dustrial- output has increased from 21 terprises, the operations of the TVEs promises workincentives. I percent in 1978 to over 48 percent in have been characterizedb: Gi-aterc mpetifion TVEsnumberand 1991. Employment and exports have *Better governance. TVEs are better smaller average size, coupled with the expanded much faster. TVE's share of able to overcome many ofthe principal growth of domestic demand and reduc- industrial employment had increased owner-agent (manager) problems be- tion ofbarriers to internal trade, ensure from 22 to 39 percent in the same pe- cause they are locally owned,.super- growinganddever-fiercerdomesticcom- riod, andtheirshare ofexportsbad grown vised and managed, instead of being petition. Each year thousands of new from 4.8 percent in 1985 to 24 percent supervised by far off central bureaus TVEs enter the market, whilethousands in 1990. State-owned enterprises that andminisr es, I a of old and failing ones exit from it. The oncedominatedthecommandgheights * tonmy BecauseTVEs are greaterconcentration ofrVEsincoastal of the centrally planned economy and closer to the-market,.-they are more provinces and the stronglinks toinves- accounted for 90 percent of industrial market responsive.-By changing ,jre- tos fromHongKongandTaiwan-as- outputin 1966 havebeenslowlyturned sourceandproductmix, adaptingto new siduously cultivated by Chinese local mto islands in a sea of thriving and dy- technologies and market opportunities, and provincial officials, even in inland namic nonstate enterprises. and increasing investnents (from own provinces-have enhanced competitive earnings) or disposing of fixed assets, factorsbybringinginnewtechnologies, So far there has been no widespread they have demonstrated an impressive and managementmethods,'markets for changeinfonralownership rights within awareness of market realities. Com- exports, and a "kindred model" to China's state sector. State-owned en- paredto StateOOwnedEnterprises,TVEs emulate. Being very competitive, TVEs terprises continuetobepubliclyowned are morefreetohireandfirelabor, link have actually increased the pressures -by central, provincial, or county au- wages to performance, rent and buy on state owned enterprises for better thorities. But"publicownership"is elas- land locally, construct, and transactbusi- performance. tic enoughto allow ownership diversifi- ness with buyers. and sellers, of their - cation-including joint ventures with own choice. In short, TVEs operate in ahighly com- privateforeign investors and ownership Clear-cut incentives. The majorin- petitive environment in whichmanag of shares by other publicly owned mu- centive for the local governments that ers, local workers, and local officials tual and pension funds and insurance own TVEs is to maximize post-tax re- appearto behave as shareholders:with companies. turns to their capital-investments, while consistent objectives. I. J: Singh,lTansitionEconomicsDi- takiyng care of their "own" labor force vision, PolicyandResearchDepart- (as distnctfromm,igrant casual labor). ment, Te World Bank, and The state owned enterprises have no Gary Jeffron, Department of Eco- such clear and simple optimizing-goals. nomics, Brandeis University Hawi budget constraint. TVEs rely mostly on capital generated from their China's grwth rates from 1979 to 1993 own earningsoron local and household (a7 m upe aousjea.) resources. (only 8-percent of all bank loans go to TVEs, while state-.o.wned 60 enterprises capture at least 80 percent.) . sa a TVEs receive neither the subsidized -. bank credits nor the centrally allocated materialscommonlyavailabletostate- 40 U To*iship and viage owned enterprises. They buy and sell inputs and outputs at market prices and 30 .___:____ generally operateunderhard budget con- straints. . :- "Less regulations and social obfiga- tions. Unlike state-owned enterprises, 0 TVEs are not obligated to, provide a plethora of social services inpluding ° housing, healthcare, education, and life- 1984-90 1991-92 1992-93 time employmenta nd pensions to their employees and their dependents. They (Based on official statistics) (Preliminary, January-June only) 10 October-November, 1993 Transition Should- Eastern Europe Feel Privileged with Its,- Limited Market Access to the Eu uropean`fi;-- --- Community? Alan Winters Responds to Bartlomiej Kaminski on EC Trade Policy: B arlorniej Kaminski's article in is precisely thatthey come from the same nontariffbarners and that agncultural the September issue ofEansi- mold as the earlierpreference andAsso- exportshavegrownslowlyfordomestic B tion implies-althoughit does ciation Agreements and that one recog- reasons. Butonecannot concludefrom notstate-thattheEuropeAgreements nizes in themthe influence of exactly the these developmentsi-that'the Eurffpe between the EC and the transitional same set of EC producer interests, in- Agreemen ts are benigri.' economies of Central and Eastem cluding coal, steel, agriculture,, textiles, - Europe (CEE) represent good and fair and clothing. First, export growth per se is not a con- policy on market access. He reasons - - : clusiveindicatorofeconomicbenefit- that: - . - consider, for example, EC exports of C GEE shares of the EC market have This Is the EC I'7eW... cereals-andexportgrowthfromsucha grown substantiallysince 1988. lr low base as that ofthe CEE countries in . "There is no evidence ofdiscrimina- DQ as We say, not as 1988 is not so spectacular. What mat- tion despitetheeconomic slump inthe we do" tersisthattheexportsstimulatecompe- EC." = tition and efficiency in the exporting .The Agreements offerthe CEE coun- country, an aimthatis seriously under- tries more privileged market access TheEC does deserve some credit--it of- mined ifthey aresubjectto quantitative than almost any otheroftheEC's trade fers the CEE countries a more attractive managementorimplicitpressuresfrom partners. He supports this last claim trade regime than does, say, the United importing governments and industry with an account of mostoftherelevant States orJapan and ithas overcomesome associations. - components oftheEuropeAgreements ofthepressuresfromsomeoftheinterest and their implementation. groups insigningthe Europe Agreements. Second, Hungary, Poland, Bulgaria, and But given the CEE countries' needs, the Romania are all potentially strong ex- I disagree. Not with the facts that Mr. Agreements are hardly adequate. It is porters of some agricultural products, Kaminski presents but withhis selec- perverse to encouragethe CEE countries and the EC's restrictions inthese areas tion and interpretation of them. Mr. to throw offthe chains ofeconomic plan- willcertainlyconstra ithemeventually. Kaminski frankly admitsthathe "pre- ningin favor offree markets only to tie up Certainly, that is, unless these countries fers to look at [the CEE countries' some oftheir principal exportsinthe red take theEC's implicit, and occasionally- market access] in the context of EC tape ofquantitative restrictions and man- explicit, advicetomanage outputfirmly.' preferential trading arrangements," aged prices. The advice "do as we say, Current agricultural exports are smnall and from that viewpoint they are, in- not as we do" is not provirng very con- and have recently been disrupted, but deed, not bad at all. But why consider structiveforCentralandEastemEurope's rationalization and improved perfor- the issue from this standpoint alone? policymakers as they struggle with their mance rlthis sector-represents:some of Are the-Alps small mountains because own farmers' and steel workers' de- the more obvious and more eas-ly- Everest is higher? Is havingthe flu fun mands forsupport. To followthe lead of achievedstepstowardeconomnicgrowth because having pneumonia is worse? the EC CommissionerforTaxation, Mrs. over the next decade. To be excluded EC preferential trading arrangements Scrivener, and plead EC "economic cri- fromtherichneighboringECmarketof generally offer trading partners rela- sis" as a reason for not liberalizing im- more than 300 million people is a poor tivelylittlemarketaccess inthegoods ports from the GEE countries does not incentiveforrationalagriculturalrestruc- they can produce efficiently and even help the case for adjustment in econo- tuing. less when the goods in question are mieswhereoutputhasfallenby20to30 sensitive in the EC. The EC thus cur- percent. Manufacturing is subject to fewer re- tails partners' abilitytogainfromcomr- strictionsundertheEuropeAgreements parative advantage and imposes costs Mr. Kaminski is right to note that CEE- than is agriculture, even for most sensi- on EC industry and consumers. The manufactured exports to the EC have tive products. For examnple, although problem with the Europe Agreements grown strongly despite the identified quantitative restrictions will remain in Volume 4, Number 8 11 The World Bank/PRDTE force for at least five years on textiles Agreements. Broadly speaking, to Mr. Kaminsldis rightto remindusthatthe and clothing imports, thequotas forthe qualify for free market access to the ECisnotallvillaininthematterofmarket CEE countries have been significantly EC, Central and Eastern European ex- access for Central and Eastern Europe. increased since 1988. The problem, ports must contain at least 60 percent Butgivenits historical and geographical however, is that continued access is not local or EC content (and "local" does role inthe area, the CEE countries'needs, guaranteed. The Agreements abound not even include all of the Central and and the costs of restrictions to EC con- with safeguard clauses that are easier Eastern European countries in every sumers, and consideringthat expanding to apply and offer more restrictive "so- case). This is fine for EC firms setting CEE-EC exports would do so much for lutions"thando safeguards under GATT up plants inthe CEE countries, but what Central and Eastern Europe and impose rules. Moreover, even thoughthe CEE aboutnon-EC firms? Manyplants have so little adjustmnent on the EC (Central countries have agreed to adopt the en- torelyheavilyonimportsofpartsintheir and Eastern Europe currently accounts tire EC competition law within three earlyyears, especiallyinhostcountries for about 4 percent of EC imports), the years, they are still to be subject to withweakindustrialbases.Thus,these Europe Agreements fall well short of antidumping actions. True, the ECwill rules effectively preclude many non- what should have been offered. not use its draconian antidumping rules EC firms from establishingviable plants for nonmarket economies (a conces- in the Central and Eastern European Alan Winters is Professor of Econom- siongranted onlyafterthesigningofthe countries. ics, University ofBirmingham, firstEurope Agreements), butthe CEE and Co-Director of the International countries will stillbetreatedinthesame Trade Program, Centre for delicatefashion as, say, Japan orKorea. Economic Policy Research, London. Steel is a good example. Steel quotas Fruitful ties: manager and advisor were relaxed for 1992, and CEE ex- ports to the EC boomed. The result was antidumping action that was followed, despite the promise of unrestricted ac- cess under the Europe Agreements, by the imposition of quotas; those for the Czech Republic and Slovakia will re- duce exports significantlyin 1993 rela- tive,to 1992 (seep.20 on CEPRDiscus- sion Papers, the Editor). Steel is not the onlyindustryfingeringtheantidumping trigger, even ifit is the worst. Moreover, it is far from obvious that a shift into more sophisticated goods will, as Mr. Kaminski suggests, avoid further prob- lems. Central and Eastern Europe is worried that any serious expansion in theirexportswillencounterrestictions- consider, for example, colortelevisions, carradios,DRAMs, photocopiers, and outboard motors, all ofwhich currently . face EC antidumping duties on imports from some sources. The issue is not that all commercial successes will neces- sarily be thwarted, but that the threat that any of them might be so treated deters risk-taking, preventing success from emerging in the first place. Finally, consider the complex and ar- cane rules of onrgin that constitute a large part of the text of the Europe From the Hungarian magazine Hocipo 12 October-November, 1993 Transition Quotation of the Month: "The Goal is a Capital Market, Which Viet Nam Technically Never Had" Global Investor Reports on the Preparation of Ho Chi Minh City's Stock Exchange let Nam is growing up. As re- ingto Lich, 'ofthe487joint-stockcom- keeptheirsavings athomeoringoldand cently as eighteen months ago, panies inHo Chi Minh City, onlytwo or have a deep distrust ofbanks. The take- V a Western visitor could walk three would qualify. We require the it-slow approachhas supportinvarious down the streets of Ho Chi Minh City financial status of the companies to be circles, even from the governor of the accompanied byyoung children shout- good in that the company has to have South Viet Namese central bank, ing "Lien Xo!" meaning Soviet. No twoyearsofprofitstobecomeeligible. Nguyen Xuan Oanh. Oanh, who was longer. Economic reforms emanating WealsorequireaaminimumofdonglO also the deputy prime minister for from a government dedicated to doi billion ($1 million) in equity and good economy and finance and was acting moi (renovation), plus the collapse of strongmanagers." prime minister in the Saigon govern- the U.S.S.R, has led to a bustling ment, is now an adviser to the current economypoinfingtheSocialistRepublic Thesecondphase,notscheduledtotake government and a director ofthe Beta of VietNam on the road to the status of place until 1995, depends onthedevel- VietNamFund. Asia's newest tiger. opment ofmorejoint-stock companies. Lich predicts that between 1995 and "As forgovermmentdebt,"says Oanh, One ofthegoals ofthegovernmentand 2000 the listing process should attract "settingupanopenmarketoperationis the newly emerging private sector is a about 100 qualified companies. His task very much needed. I don't think the capital market-something Viet Nam force also leaves open the option of stock market is something we have to technically neverhad. Looking around listing foreign orjoint-venture compa- do immediately. We have to first insti- at Shanghai, Shenzhen, and other seem- nies. tutionalize shares and makejoint-stock ingly brand new markets is seductive companies work correctly. Weneedto butmisleading. Shanghaihadthirty-five While even the pilot plan seems small- set up a capital market system through stock markets and informal trading cen- scale, anumber of issues remain. Only moneymarkets. Therestis threeto five ters all over China. VietNam has never one company, Legamex, anaggressively years off.". had a stock market. managed diversified garment and foot- wear manufacturer, has gone through In fact, the whole concept of financial Meanwhile, the state bank appointed the process ofequitization, withtheflo- institutionsinVietNamisstillquitenew. the Institute for Economic Research, an tation taking place the first week of The Saigon Finance Company was es- arn oftheHo ChiMinhPeople's Com- August 1993. tablishedinlate 1991 with capital of$1 mittee (the local government), to set up million and a charter to perform finan- a task force to formulate a pilot stock Thetwo-year-oldVietNamAuditCom- cialservices. ClaimingtobeVietNam's exchangeproject. ChairedbyTranDu pany of the Ministry of Finance has firstfinancial company,.thefirmis only Lich, a member oftheNational Assem- been charged with valuingthe potential now getting off the ground. While the bly and a lawyer by training, the task equitized companies. Up to this point firnhopestobegintradinggovemment force presented its working paper in fourcompanies-Legamex,BinhMinh securities soon, itis doing abriskbusi- January of this year. Plastic,IHiepAnFootwear,andtheUnion ness in issuing and making a market in of Transportation Agents-have been short-term promissory notes, says Ta The paper recommended a two-phase officially assessed by the audit com- HongGioifinancedirectoroftheSaigon approach where initially the exchange pany. Finance Company. would include the trading of govern- ment bonds, plus the listing of five to TheInternationalSecuritiesConsultancy Indeed, the tiny private sector, which seven firms drawn from state-owned [engaged by the World Bank's IFC to was recognized by the Viet Namese companies that have gone through the make recommendations on establishing government only inthelastyear, repre- process ofequitization(theVietNamese a stock exchange] is more conserva- sentsonlyabout5 percentofthecountry's government's preferred word for tive, advisirig that the capital market enterprises. Compoundingtheprobleni, privatization). Other firms that would establish first a-money market to pro- many of the state-owned enterprises qualify would bejoint-stock or private vide for trading of short-term debt and arenotprofitable-someareevenbank- shareholding companies. But accord- otherinstruments. MostVietNamese rupt AccordingtoLeTrang,industrial Volune 4,Number 8 13 The World Bank/PRDTE management directorofthe State Plan- othernewlymarket-orientedeconomies, includes a'distinction between shares ning Committee's Central Institute for financial reports are not produced with and bonds, preferred shares, and bearer Economic Management, in 1989 there an eye to presenting information to out- and registered shares. The decree also were 12,084 state-owned enterprises, siders. With only this type of informa- covers securities companies, brokers, but since the government's market re- tion to draw on, accountants agree it is sharetrading, listing, issuingofshares to forms have takenhold, 5,000 have closed difficultto determinethefinancialstatus thepublic, managementoftheexchange, their doors. Many ofthese companies ofacompanyfromaninvestor'spointof and the responsibilities oftheNational had their subsidies cut by provincial view. Securities Commission. [As agreed, it authorities, while others aretoo small or willbelocatedat l7BenChuongDuong, poorly managed to be competitive. Asasteptowarddealingwiththeprob- the former headquarter of Banque "Onlythebigenterprisesarepositioned lem, the Ministiy of Finance has just d'IndochineintheFrenchcolonialdays. well. The small ones are difficult-no- approved ashort-listofaccountingfirms FrontingtheSaigonRiver,hecommnmd- body would buy them," says Trang. for aUnited Nations Development Pro- ing buildingnow proclaims itselfas the gram-fundedplantobringVietN-amese State Bank of Viet Nam] Apartfromthelack of cohesive corpo- accounting standards up to internation- rate, conmmercial, property, and bank- ally recognized standards. From Betsy Massar s recent article ruptcy laws, Viet Nam's accounting "Taking Vietnam to Market," pub- systemisstillbasedonthesocialistsys- A primer ministerial decree that would lished in the Global Investor, a temofaccountingforproductionrather establish aNational Securities Commis- Euromoney publication in the United than costs or profits. As with many sionisbeingprepared.Thedraftdecree ingdom Conference Diary foreign technical assistance for Annual Bank Conference on De- privatization; and new horizons of velopment Economics Privatization in Central and Eastern privatization in Central and EastemrEu- April28-29,1994,Washington, D.C. Europe rope. December34, 11993 Ljubljana, Slovenia Information: CEEPN, Dunajska 104, Organized bythe World Bank, inaugu- 61109 Ljubljana, PO. Box 18 rated by President Lewis T. Preston, International conference organized by Slovenia, tel. (386 61) 1683 396, fax with Vice President Michael Bruno's the Central and Eastern European (386 61) 346 660. keynote address on aspects of adjust- PrivatizationNetwork(CEEPN). Spon- ment, transition, and reform. Several sorsincludetheEconomicDevelopment Labor Market Changes in Central sessions willfocus on'TransitioninSo- Institute(EDI) ofthe WorldBank Com- Europe: Lessons for Social Policy cialistEconomies." Discussions will in- mission oftheEuropean Conmnunities - January 21-23, 1994, Vienna, Austria clude: Macropolicy-TheoryandPrac- PHARE, and UnitedNations Develop- Information: Institutefor Human Sci- tice(LeszekBalcerowiczandAlanGelb, ment Programme (UNDP). Attending ences (IWM), Vienna, Spittlauer Stanley Fischer, Janos Kornai), The will be senior officials, directors and Lande 3, A-1090 Vienna, tel. (431) EconomyoftheFSU-Retrospectand expertsfromprivatizationministriesand 313-580, fax (431) 313-583. Prospect(JeffreySachs,AndersAslund, agencies in Albania, Bosnia and Maxim Boycko); Property Rights in Hercegovina, Belarns, Bulgaria, Croatia, Centralization and Decentralization Transition (Andrei Shleifer, Oliver the Czech Republic, Estonia, Germany, of Economic Institutions: The Role Blanchard, Roman Frydman); Chinese Hungaxy,Kazakhsti, Latvia,Lithuania, in the Transformation of Economic Reform Experience with State and Macedonia, Moldova, Poland, Roma- Systems NonstateEnterprises(ThomasRawski, nia, Russia, Slovakia, Slovenia,.Ukraine, February28-Marchl, 1994,Trento,Italy Gary H. Jefferson, Nicholas Stern, and Uzbekistan. Vaclav Klaus, prime Information: BrunoDallago, Depart- ShahidBurki). minister ofthe Czech Republic,will at- ment of Economics, University of Information: Boris Pleskovic, the tend the meeting. Discussions will in- Trento, ViaInarna, 38100 Trento, World Bank, RAD, tel. (202) 473- clude:privatizationthroughrestructur- Italy, tel. (39-46) 882-211, fax (39- 1062, fax (202) 477-0955. ing; investment funds in privatization; 461) 882-222. 14 October-November, 1993 Transition The Economy of Ukraine in Transi- EconomicDemocracyafter the Cold Information: Vice President Milica tion: Reforms, International Rela- War and Self-managedYugoslavia Uvalic, L4FESM, Borgo Santa Croce tions, Ecology June 16-18, 1994,Portoroz,Slovenia 17, 50122 Florence, Italy, tel. and May 23-27,1994, Odessa, Ukraine The Seventh Conference of the Inter- fax (39-55) 244-895. Second Congress of the International national AssociationfortheEconomics Ukrainian Economic Association. Calls of Self-Management (IAFESM). The Twenty-sixthNational Conven- forpapers (to be delivered inUkrainian, Papers dealing withworkers' participa- tion of the AAASS English, orRussian). tion, self-management, and economic November 17-20,1994, Philadelphia, Information: VN Bandera, Econom- and industrial democracyarewelcome. Pennsylvania ics Deptartinent, Temple University, More specifically: economic theory, Information: TheAmerican Associa- Philadelphia, PA 19122, tel. (215) empiricalevidence,institutionalandhis- tion for the Advancement of Slavic 204-5039, fax (215) 204-8173. torical studies, and experiences in Cen- Studies, Jordan Quad-Acacia, 125 tral and Eastern Europe in both devel- Panama Street, Stanford, CA 94305- oped and developing economies. 4130, eL (415) 723-4438 World Bank/IMF Agenda Mongolia receives $30 million from Donors Back Viet Nam doublingannualgrossdomesticproduct, IDA currently$9.1 billion,by2000,accord- Sponsored by the World Bank and ingtoanofficialreport. Acreditof$30millionfromthelntema- United Nations Development tionalDevelopmentAssociation(IDA), Programne,adonors'Vconference,held IDA Credits to Viet Nam approved October29, willhelpMongolia in Paris onNovember9-10, pledgedaid pay for imports and technical assistance worth atotal of$ 1.86billionto VietNam On October 26, the IDA approved two needed to keep coal and copper output to help it with economic reforms next creditstoVietNamntotalingabout$228 thriving duringthe next twelve to eigh- year. Roughly 60 percent ofthe money million. Acreditof$70millionwillsup- teen months. It will also improve willcomefromindividualgovernments, port primary education while another Mongolia'srailways,providehigh-grade led by Japan, while the rest will be pro- credit of$158.5 nillion will be spenton lubricants for tractors and trucks, and vided by such internationAl bodies as the highway repair. The credits are the first buy newer, more environmentally World Bank and the Asian Develop- Bank lending to VietNam since 1978. friendly gas pumps. Mongolia's large ment Bank. Do Quoc Sam, the chair- Theprimaryeducationprojectwillim- copper industry, which accounts forhalf man ofVietNam's State Planning Com- provethequalityofeducationandman- of the country's export earnings, will mission, told aid donorsthathis country agementin grades one through fivena- alsoreteiveassistancefromthecredit. plans to double its GDP by the year tionwide, while more than 10,300 Prices forcopperhavedropped world- 2000. Viet Nam adopted a policy of classroomswillberepaired oraddedto wide, so Mongolianeeds to boost pro- "doimoi,"orrenovation,in 1989. Doi existingfacilities and some 12,000 la- duction to make up for lost income. moi measures include rural reforms; trines and safe water supply systems exchange rate, fiscal, and interest rate will be provided. Recognizing that the World Bank Loan to Master reforms; promotion of private sector transportation infrastructure urgently Shanghai's Traffic Congestion growth; changes in foreign trade regu- needs upgrading, highway 1-A, atwo- lations; and programs to minimize the lane highway that is the countly's main A $150 million World Bank loan, ap- "social costs" of economic reforms. north-south link, will be repaired and proved end-October, will support the Real GDP has grown an average of upgraded. (Only about 10 percent of economic and social development of 7.25 percent ayear between 1991 and the country's roads are paved, and a Shanghai, China's largestport and one 1993, and inflationihas decreased from recent survey of that 10 percent found oftheworld's densest cities. Chinaaims more ihan 500 percent to the current that almost 40 percent were in poor to use the loanto improve theefficiency rate of about 10 percent.Viet Nam's condition.) The Asian Development ofthecity's urbantransportsystem ard deputyForeignMinisterVuKhoantold Bank (ADB) for its part approved a to improve the system's planning and reporters the aid would be used to de- $76.5 millionflood controlprojectloan management. velop infrastructure and support social and predicted thattwo more loans would projects. The country needs to raise be approved inNovember, bringingthis about $40 billion to meet its goal of year's total lending to $261.5 million. Volume 4, Number8 15 The World BankIPRDTE The World Bank and ADB have each World Bank-sponsored Consultative Aid Pledges to Africa estimatedihattheywilllend$300million Group meetings for the two countries. to $350 million annually to Viet Namn World Bank Director Basil Kavalsky Emerging from athree-day meeting in during the next few years. said afterthemeetingthatBelaruswould ParisonOctober19-21,17donorsagreed need extemal financing on the order of on the program and the target of $8 ... and to Cambodia $600 million next year and Moldova, billionin donors' adjustmentassistance $150-$200 million. The Bank will seek for the third phase of the Special Pro- The IDA on October 26 approved a over the next few weeks to firm up gram ofAssistance (SPA) coveringthe credit of$63 million to help Cambodia supportattheselevelsfromdonorcoun- period 1994-96. Undertheprogram, do- rebuild crumbling essential services. tries. BoththeBankandthevIMFexpect norswillcontinuetoprovidequick-dis- The credit marks the first IDA lending afurthermodestdeclineinoutputofthe bursing balance of payments support to Cambodia since the countiy joined two economies nextyear, butaccording for reform in 27 eligible countries in the institution in 1970. (IDA is aWorld to Kavalsky, the recession triggered by conjunction with assistance from IDA Bank affiliate thatlendsonconcessional thebreakupoftheSovietUnionappears and the IMF. SPA donors pledged ap- terms to thepoorest countries.)The $63 to bebottomingout, withthe beginnings proximately $5.5 billion in adjustment millionwillhelppayforimportsneeded of a turnaround expected in 1995. assistance. Donors' ability to support to keep Cambodia's badly deteriorated Kavalsky also remarked that it was of African development efforts are con- servicesmoving-andcritical-economic criticalimportancethatproducersinthe strained bythe slow economic recovery productionalive-duringthenexttwelve formerSovietUnionbegiventheoppor- in the industrialized countries and by to eighteen months. The bulk of the tunity to trade effectively and to pen- many new competing demands for as- funds,some$38million, will purchasea etrate western European markets; oth- sistance elsewhere inthe world. World specific list ofgoods aimed at rehabili- erwise, those countries will need Bank Vice President for Africa, Ed- tatingservicesintheagriculture,trans- "enormous" aid for a long time. (In ward Jaycox, who chaired the meeting port, health, education, power, and wa- other developments, Belarus devalued of donors, stressed that everybody has tersupplysectors. The other$25 million the Belarus payment certificate by 27 to make further efforts to close the re- will cover the cost ofimporting critical percent to 4.1 rubles, while Moldova mainingfinancinggap. "Wewillneed commodities, includingfuel, spareparts, will introduce a national currency, the tolooktoallsources offinancinginclud- and machinery. Due to the partial eco- leu, byNovember29.) inganexpandedESAF(EnhancedStruc- nomic reforms launched in 1991, eco- tural Adjustment Facility of the IMF) nomic output rose from 1.2 percent in IMF, World Bank Bolster Baltic and for more concessional debt relief 1990 to 7.6 percent in 1991, and to 7 Economies from the Paris Club, as well as greater percent in 1992. Barely half of selectivityinallocatingassistancelinked Cambodia's 8.6nillionpeoplehaveac- On October 28 the IMF approved $32 much more closelyto the implementa- cess to health care, only 12 percent of million to support economic reform in tionofreformprograms. the rural population has safe drinking Estonia. The credit is split equally, with water, and electricityis for many athing $16nmillionin stand-bycredittosupport of the past. thegovernment's 1993/94reformpro- WE. WERE gram (to be drawn until March 1995) PLYIN Donors Support Moldova and and $16 million under the Systemic Belarus Transformation Facility (STF), which is available immediately. The IMF also c l TheWorldBankannouncedonOctober approved $71.2 million in credits to 22 a $60 million loan to Moldova to Lithuania, divided equally between a support the country's economic reform seventeen-month stand-by and an STF. rl \J The loan will help pay for imports such Valdis Freidenfelds of the Latvian-Fi- as medical supplies and heatingfuel. In nanceMinistyannouncedthattheWorld another development, Western donor Bank has agreed to help Latvia imple- l nations and international financial insti- mentacomplexprogramnofbankingand tutions endorsed efforts byMoldova and industry reform. The debts of state- Belarus to stabilize their economies and owned industries to the Bank ofLatvia , accelerate market-based reforms. The will betransferredto one institution and endorsements came at separate meet- restructured; once the indebted enter- ings end-October in Paris-the first prises are able to resume production, they will have to repay their debts. Frm t R d I 3From the Russian daily, lzvestia 16 :October-November, 1993 Transition Milestones of Transition Ukraine's central bank chairmanViktor Members of the Coordinating Com- Trade and Economic Cooperation Yushchenko said monthly inflation av- mittee forMultilateral Export Con- showedthatpledgedforeigninvestment eraged 36 percent in thefirstthree quar- trol (Cocom) decided attheirNovem- in the first nine months of the year ters of the year, an acceleration that he ber 3 meeting in Oslo to replace Cocom amouhted to just over $83 billion for blamed in part on credits issued by the with a new body by the end of 1993. nearly 63,000 ventures, a 170 percent government. The entire financial sys- The new organization is expected to increase compared to the same period temisin disarray, hetold parliament. He includeRussia, withthepossibleproviso last year. Funds actually disbursed be- proposed stem measures to control in- that it first establish an effective export tween January and September came to creases in money supply. He called for control system. Cocomwas established $15 billion. new taxes and lower government out- in 1951 tomonitorandrestrictexportsof I - lays to narrow the budget deficit and high-technology goods ofpotentialmili- The Romanian National Bank an- urged freeing prices and speeding tary or strategic value to the former nounced on October 26 that interest privatization. He faulted the govern- "Communist bloc" nations. The new rates on overdrafts allowed to commer- ment for ordering the central bank to organization is expepted to focus on cial banks will be raised from 150 per- issue credits to failing industries, controllingexportstonationsthatspon- centannuallyto 250 percent Inanother Yushchenko saidinflationhad been run- sor or tolerate terrorism and to those development, Radio Bucharest an- ningat50percentamonthsinceJuly. A countriesthatmaybeillicitlydeveloping nounced that in negotiations with the presidential decree extended the state- weapons of mass destruction. tradeunionsthegovernmentmadenew ordering system into 1994. Under the proposals, including an offer to raise system, both state-owned firms and The European Union agreed to wide- minimum wages to 38,500 lei (about quasi-private companies are obliged to ranging trade concessions to Russia as $38) and index salaries to the cost of sell part oftheir production to the gov- part ofadriveto secureanewtradeand livingatarateof6Opercent. TheRoma- emnment at set prices. political pact with Moscow before De- nian cabinet also approved a draft law cember elections. The European Com- providing money to help the poor pay The EBRD executive board in early munity agreed to seek a more liberal theirheafingbillsfromNovemberhrough November approved a proposal by trade accord with Russia by year-end April. Theaid would amountto between EBRDpresidentJacques deLarosireto and offer Moscow the prospect of a 4,000 and5,0001eiamonthforpeople reorganize the bank along regional lines free trade agreement as early as 1998. earning as little as 17,000 to 25,000 lei by ending its distinction'between mer- monthly. Themoney will be raised by a chant and developmentbankingactivi- Chinese economists, in a report pre- newlevyontravelabroadwherebyRo- ties. De Larosire said the shift to a pared by the Academy of Social Sci- manians will have to pay 5,000 lei for country focus was a way ofreinforcing ences and the State Statistical Bureau, each trip. The levy for local cross-bor- the EBRD's private sector mandate. arepredictingthatinflationinChinawili dertraffic will amountto 2,500 lei. The Ron Freeman, current head of mer- moderate to about lOpercentnextyear bill is expected to be passed in emer- chant banking, will be in charge of the compared with 14 percent in the first gencyproceduresbyRomania'sparlia- newNorthZone, and developmentbank- three quarters of this year. They are ment. ing head Mario Sarcinelli will head the also forecasting that the country's South Zone. The number of specialist growth will slow in 1994 to 10 percent ThelHungariangovemmentistolaunch bankers assignedto aspecific country is from the 13.3 percent recorded in the a small investor shareholder program expected to rise to nearly 120 from nine months to September. (Growth of (SISP) inJanuary 1994. About 100-120 * around 40. In his first press briefing industrialoutputreachedl9.1percentin billionforintsworthofsharesin70com- sincetakingoveratthebank, deLarosire the first nine months of this year. Bank panies will beinvolved. EveryHungar- said he could not have gone on for an- savingsroseto$240billionbytheendof ian citizen over the age of 18 may open otherweekwiththeproblemstheEBRD September, and infrastructure invest- aninvestInentaccountofIO0,000forints was facing. In a report to the board he ment rose by 107.5 percent. However, whichwouldentitlethem(foraregistra- described a confusing organizational the cost of living inrthe 35 biggest cities tionfeeof2,000forints)to obtainstate- structurethat lacked operational focus. rose by 20.7 percent). owned shares of equivalent value. De Larosire praised the quality of the Shares wil be available for cash, com- EBRD's staff. China expects pledged foreign invest- pensation coupons, orfiveyears' credit. ment in 1993 to hit arecord $100 billion. Atender wiU beinvited soonto lead the Statistics from the Ministry of Foreign program. The initial wave of sales will Volume 4,Number 8 17 The World Bank/PRDTE see shares worth5 billionforints ineight MinisterValentinKarabashevsaidinan Preparations are under wayforthestart profitable companies floated on the interviewwithFrankfurterAllgemeine of a massive repatriation program to Budapest stock exchange in January.l Zeitung onNovember 2. He was quot- return refugees from Mozambique to ing recent econornic statistics showing theirhomeland. The three-year, $1 mil- A new Hungarian company, Invest- a 9.8 percent drop in output during the lion program is part of the U.N. High mentandTradeDevelopment, Ltd. (ITD first eightmonths of 1993. In 1991 and Comrmuissioner for Refugees' regional Hungary), has been set up by the Min- 1992 the annual decline constituted planto repatriate 1.5millionpeoplewho istiy oflnternational Trade to promote around one-fifth of total production, fled Mozambique because ofa sixteen exports and attract more foreign invest- causing the unemployment rate to rise year civil war and will also involve the ment to the country. Currently, some above 16 percent. Karabashev warned 100,000 refugees inthe country. 15,000 Hungarian companies are in- that further jobs would be lost as volved in foreign trade as compared to privatization eventuallygains momen- TheEuropeanBankforReconstruc- 41inthemid-1980s.Thecompanysees tum. He nevertheless disputed official tion and Development (EBRD) in good possibilitiesforforeigninvestors in figures indicatingtatmorethan90per- earlyNovemberannounced itwill make areas such as manufacturing, food pro- cent of the economy remains state- a$59 million (5.7 billionforints) equity cessing, and the tourist industry. owned, referring to the fact that 40 per- investment in MATAV, the Hungarian cent offoreign trade and 60 percent of telephone company. The EBRD said it Atend-Octoberthe Slovakcabinetap- retail trade are currently run by private will purchase convertible preference proved abudgetproposalthatplansfor entrepreneurs. Speaking about shares inMATAV (astake ofabout 1.8 a zero growth rate and a 5 percent Bulgaria's need to achieve a settlement percent) if a government decree links budgetdeficit(16billionkoruny)in 1994. withforeignbanksonits$13billiondebt, telephonetariffswiththeproducerprice An earlier draft had set the unemploy- Karabashev said his govemment has index, akey measure ofinflation. (Cur- ment rate at 20 percent, butthenew one been showing a maximum amount of rently, telephone rates are set by the forecasts unemployment of no higher flexibility but that a deal. must take Ministryoffransport,Telecomnmunica- than 17 percent. Thebudgetwillnowgo "[economic] realities" in his country tions, and Water Management.) The to parliament for discussion. into account. EBRD intends to make MAIAV's fi- nances more attractiveto bidders inthe Multilateral development institu- tions are claiming an increasing share of development countries' $1.4 trillion , debt, according to a U.N. study. The . study, "The International Debt Strat- egy as of Mid-1993," says that while official and private creditors have sought torestructuredebtin:collectiveforums, multilateral development institutions have maintained their preferred credi- tor status and remained exempt from A debt restructuring. At the end of Janu- ary 1993, 10countriesaloneowed$4. t billion in debt-service obligations to the h IMF. However, since then, the report \d1) says, a considerable amount of arrears __; have been paid back also to the World - Bankandthielnter-AmericanDevelop- ° r mentBank. By contrast, the amount of ( ) _K arrears owed to the African Develop- ment Bank nearly doubled in 1992 to $119 million, the study says. ThefallinBulgaia'sproductionin 1993 "It's our parent company. We're not to drink too much, appearstobelessdramaicthaninpre- and we must be home early." vious years, Trade and Deputy Prime Williams/Squib/London 18 October-November, 1993 Transition upcoming sale of a 30 percent stake in large Western competitors. Finance official employment center, while the thetelephone company."Thepreference Minister Boris Fyodorov published a "invisible"'unemploymentisestimated shares will be converted into ordinary statementthathisministrywoulduphold at 5 percent ofthe work force, or close shares in 1994 at a rate that matches the current restrictions on granting licenses to40,000 persons. rate paid by the eventual winner ofthe to foreign banks and disagreed with the tender. MATAV will be able to offer central bank's policy of bolstering the The final draft ofRussia's new consti- telephone service to an estimated numberoflicenses. Several seniorgov- tution,signedbyPresidentBorisYeltsin, 400,000 new customers as a result of emnmentofficials,includingFirstDeputy makesthecentralbankindependentand the EBRD investment.An earlier audit PrimeMinisterYegorGaidar, agreed on says the bank's main task is to protect determined thatthetelephone company theneedtolirnitforeignbankingopera- the ruble. The head ofthe central bank hadamarketvalueofabout$3.3 billion. tionsinRussia,whichcouldhave"dan- will be appointed or dismissed by the MATAV has assets totaling 122.7 billion gerous consequences if allowed to ex- lower chamberofRussia's newparlia- forints ($1.3 billion) and registered capi- pand unchecked." ment on the president's recommenda- tal of59.3 billionforints. tion, the draftadded. The drafthas been Over 60,000 Belorussians have be- described byWestern experts as giving Russia intends to restrictforeign bank- comeunemployedthisyear,Belarussian Russia a strong executive presidency ingup to three moreyears to protect the TV reported on November 1. Over and restricting the powers of its con- countiy'sdomesticbankdngindustyfrom 10,000 are seeking work through the stituentregions. New Books and Working Papers The PRDTE unit of the World Bank regrets that it is unabte to supply the publicasions listed WorldBankPublications a great impact on reducing Russia's offers a snapshot ofthe 15 countries in level of poverty. their transition to market economies, To receive publications of the World presenting a wide range of Bank, order from World Bank Publi- Jane Holt, Transport Strategies for macroeconomic data, drawn from na- cations, PO. Box 7247-8619, Phila- the Russian Federation, SET no. 9, tional statistical offices, other govern- delphia, PA 19170-8619. Tel. (202) Washington, D.C., 1993,253 p. mentagenciesandBankstaffestimates. 473-1155, fax (202) 676-0581; or visit the World Bank bookstores: in Russia's transport system, built for a EBRD WorkingPapers fromLon- the US., 701-18th St. NW Washing- command economy, is "ill- suited" for don ton, D.C, or in France, 66 avenue a market system. The system has also d'Iena, 75116 Paris. been hurt by Russia's economic woes Leila Webster and Joshua Charap, A and the breakup of the FSU. Its finan- Survey of Private Manufacturers in Monica S. Fong, The Role of Women cial performance has declined because St. Petersburg, WP no.5,1993,82 p. in Rebuilding the Russian Economy, of reduced demand and increases in Studies of Economies in Transforma- fuel prices. So far, the government has PhillippeAghionandOlivierBlanchard, tion (SET), no. 10, Washington, D.C., covered the system's losses. The task On the Speed of Transition in Cen- 1993,p. 50. ofsubsidizingthesystemandpayingfor tral Europe, WP No. 6,1993,26 p. unproductive investments could soonbe- WomenmakeupthemajorityofRussia's comeunsustainableforthegovemment. J an Wi n i e c k i," H e t e r o d o x" populationand laborforce. They.handle Stabilisation in Eastern Europe, most domestic work and do most ofthe Statistical Handbook 1993: States WP no. 8,1993,29 p. caretakingforthe country's young, old, oftheFormerUSSR, SETno. 8,Wash- and disabled. By keeping women ac- ington,,D.C., 1993,504p. Zhen Kun Wang and L. Alan Wmters, tivelyinvolved intheworkplace,Russia's EC Imports from Eastern Europe: economy can only gain. Because GovernmentofficialsinmanyFSUcoun- Iron and Steel, WP no.9,1993,41,p. womenoutnumbermenamongtheun- tries have made modest progress in employedandothergroupsfacingpov- changing their statistical systems to Larry Karp and Spiro Stefanou, Do- erty, aside from the economic benefits matchintemationallyappliednorms.This mestic and Trade Policy for Central of women's contributions to the second annual edition, holdingawealth and Eastern European Agriculture, economy, assistancetowomenwillhave of economic information on the FSU, WPno. 10, 1993,37 p. Volume 4, Number 8 19 The World Bank/PRDTE Leszek Balcerowicz, Common Falla- AsEastemEuropeliberalizedinl989- slovakia, and as aresultiimport quotas cies in the Debate on the Economic 91, the EC started to -grant market were imposed onthese specificflows. Transition in Central and Eastern access. Since March 1992 trade rela- Even in the absence of formal agree- Europe,WPno. 11, 1993,37 p. tions between the two groups have ments, East European suppliers could beengoverned bytheinterim compo- feel obliged to exercise self-restraintin PhillippeAghion, OliverBlanchard, and nents of the Europe Agreements be- their steel exports. RobinBurgess, TheBehaviourofState tween the EC and Czechoslovakia, Firms in Eastern Europe: Pre- Hungary, and Poland. Underthe iron PreferentialliberalizationofECimports privatization,WP no. 12,1993,24 p. and steelprotocol oftheseagreements, of iron and steel from Eastem Europe the EC eliminated its quantitative re- would putmild pressure onECproduc- To order: Publications Unit, European strictions onimports ofEuropeanCoal ers' profits but generate great benefits Bank for Reconstruction and Devel- and Steel Community (ECSC) prod- fortheEC consumingindustries. East- opment, One Exchange Square, Lon- ucts from the three countries effective ernEuropecouldgainsubstantiaUyfrom don EC2A 2EH, tel. (4471) 338-6541, immediately, and tariffs will be com- EC trade liberalization, with potential fax (4471) 338-7544. pletely abolished by the end of 1996. increases in employment and output in the iron and steel industry. CEPRDiscussion Papers from Lon- EC steelimportsfromEasternEurope don have been rising fast since 1989, but Barry Eichengreen, A Payments EC trade in iron and steel will not be Mechanism for the Former Soviet Istvin P. Szdkely, Economic Transfor- free for a long time. Falling internal Union: Is the EPU a Relevant Pre- mation and the Reform of the Finan- demand in 1991 and 1992 led to com- cedent? DP no. 824, 1993, 54 p. cial System in Central and Eastern plaints about the quotas offered to Europe, DP no.186, 1993,45 p. EasternEurope, resistance to the steel The European Payments Union (EPU) clauses of the Europe Agreements, ofthe l950sisfrequentlyinvokedasthe The lack ofa properly designed and well- and increased lobbying by EC steel modelforpaymentunions. Intra-Euro- functioningfinancial system is one ofthe producers. As late as August 1992, peantrade, whichhad collapsed during major obstacles to relatively fast eco- afterthe Europe Agreements came in the course of World War IL, was re- nomictransformationintheCEEregion. force, Germany and Italy requested started on the basis of unconvertible The banking sector is expected to that the Commission adopt safeguard currenciesandbilateralagreements,but *Deal with the bad loans inherited from measures to protect them from im- thevolumeoftraderemaineddepressed. the past and eventually find a relatively portsofsteelpipesfrom(then)Czecho- Then came the EPU. It featured multi- painlesssolutionforwritingoffthesedebts. -T ake part actively in the process of en- terpriserestructuringandprivatizationaand PRIVATIZATION become importantinstitutions exercising control over enterprise management. -Increasethe efficiency ofcredit alloca- -tionbyrealisticevaluationofcreditappli- cations. *Create a modern retail sector and the necessary financial instruments to meet both investors' and borrowers' prefer- ences. The bankingsector could eventually be- , ' . come amain booster supportingeconomuc ~ ~ recovery and increase its share of GDP ~ ~ ~ andemploymentintheregion. 1 I.I I I Zhen Kun Wang and L. Alan Wmters, EC Imports from Eastern Europe: Iron and Steel, DPno. 825, 1993, 40 p. From the Hungarian daily Mai Nap. 20 :October-November, 1993 Transition lateral clearing and credits for countries StephenPudneyandWangLimin,Hous- MarketReforms inBulgarian Industry in temporary deficit against the union. ing and Housing Reform in Urban held in Sophia May 18-20,1993. The From its inception in mid-1950 to its China: Efficiency, Distribution and ten papers are: dissolution and the restoration of cur- the Implications for Social Security, .The Bulgarian Labour Flexibility rent-accountconvertibility in late 1958, no.9303, 1993,29 p. Survery:Introduction intra-EPU trade expanded vigorously, .Employment Dynamics in Bulgarian helpingtofueltherecovery oftheEuro- ChristopherDoyle, TheEconomics of Industry pean,economy. Mobile Telephony in East and Cen- .ExtemalLabourFlexibility:TheDrift tral Europe: The Case of the Czech toCasualisation? The EPU is in fact an inappropriate Republic, no. 9304,1993, 14p. .OccupationalRestructuringinBulgar- model for organizing intra-FSU trade ianIndustry andpayments. Credit-based settlements To order DPETworkingpapers: Uni- .TrainingandHumanResourceDevel- -a central feature ofthe EPU-will not versity of Cambridge, Department of . opment befeasiblepriortomacroeconomicsta- Applied Economics, Austin Robinson .RecruitmentandtheEmploymentSer- bilization. The only multilateral clearing Building, Sidgwick Avenue, Cam- vices union that is currently feasible, there- bridge CB3 9DE, tel. (0223) 335- .VulnerableGroupsinTransitionLabour fore,isonebasedoncontinuousmulti- 200, fax (0223) 335-241. Markets: Bulgaria and Hungary lateral balance (current-account con- .Industrial Wages, Payment Systems vertibility) among the participating OtherWorkingPapers andEamnings countries. The effective choice for the oProduct Innovation, Technology and FSU prior to stabilization is therefore Guy Standing, Gyorgy Sziraczki, and WorkReorganizationChanges between bilateralism and convertibility. James Wmdell, Employment Dynam- .Patterns of Industrial Relations. ics in Bulgarian Industry, Intema- To order: Active LabourMarket Poli- The newly designed Interstate Bank tional Labour Office, Geneva, WP no. cies Branch, Employment and Devel- (ISB) is to provide clearing services for 63, August 1993,28 p. opment Department, International ten founding members (Azerbaij an, the Labour Office, 4, route desMorillons, Baltics, and Georgiahavenot yetagreed Amid the econornic revolution occur- CH-1211 Geneva 22. to join). ISB accounts should be de- ring in Central and Eastern Europe in nominated inhard currency, i.e. credits the 1989-92 period, perhaps no country New Books should beheld in abeyance until stabili- was as adversely impacted by the sud- zation occurs. This is tantamount to cur- den changes in trading patterns and in- Zoltan J. Acs and David B. Audretsch, rent-account convertibility. It would be put prices as Bulgaria. Small Firms and Entrepreneurship: preferable therefore forthe FSU coun- An East-West Perspective, Cam- tries to move directly to this option. So far, industrial employment in Bul- bridge University Press, Cambridge, garia has declined to a much greater NewYork, 1992,240p. To order: Centerfor EconomicPolicy extent than in most other central and Research, 25-28 Old Burlington eastern European economies prior to Jan Adam, Planning and Market in Street, London WIX ILB, tel. (4471) anysubstantial privatization. Therehas Soviet and East European Thought, 734-9110, fax (4471) 734-8760. beendownsizing-withoutrestructuring 1960s-1992, St Martin's Press, New Indeed, itisnotablethatemploymentcut York, 1993,320p. Discussion Papers on Economic swere negativelyrelatedtothe number Transition (DPET), CambridgeUni- ofyears establishments had beenin op- JanW. Bossak, Poland: International versity eration. This is striking evidence of a Economic Report 1992/93, Warsaw relative absence of restructuring, espe- School of Economics, Warsaw, 1993, MiroslavHrncir, Economic Recovery cially as large-scale establishments had 230 p. and Foreign Exchange Rate generallybeenoperatingformuchlonger Regime:The Case of The Czech Re- than average. Michael Bruno, Crisis, Stabilization, public,no. 9301, 1993,46 p. and Economic Reform: Therapy by In 1992thelnternational Labour Orga- Consensus, ClarendonPress, Oxford, Miroslav Hmcir, Financial Interme- nization (ILO) undertooktheBulgarian 1993,300p. diation in the Czech Republic: Les- Labour Flexibility Survey (BLFS) of sons and Progress Evaluation, no. industrial employers. Theinitialresults 9302,1993,34 p. ofthe BLFS were presented in a series often papers at aConference on Labour Volume 4, Number 8 21 The World Bank/PRDTE JanuszW Golebiowski (editor), Trans- Mark Tourevski and Eileen Morgan, ;-Vietnamn Business Intelligence, a forming the Polish Economy, War- Cutting the Red Tape: How West- fortnightlyreportontrade,projectsin- saw School of Economics, Warsaw, ern Companies Can Profit in the vestment, andmarketopportunities. 1993,348p. New Russia, Free Press, New York, Information: Vietnam Business Intel- To order: World Economy Research 1993,310p. ligence, Box 7188, Fairfax Station, Institute, Warsaw School of Econom- Virginia 22039, US., tel. (703) 425- ics, 24 Rakowiecka Str 02-554, War- I. A. Zaprudnik, Belarus: At a Cross- 1322, fax (703) 425-7911. saw, tel. (48-22) 48-91-32, fax (48- roads in History, Westview Press, 22) 49-53-12. Boulder, 1993,278p. InsightEastEurope,anewsletterthat focuses onbusiness, economic, and po- Peter van Ham, The EC, Eastern Eu- Newsletters litical developments inEastemEurope. rope and European Unity: Discord, Information: Asya-Rep-Ltd., 10/F Collaborationand Integration Since European Economic Perspectives, Vogue Building, 67 Wyndham Street, 1947, Printer Publishers, New York/ a publication of the Centre for Eco- Central, Hong Kong,' tel. (852) 877- London, 1993,277 p. nomic PolicyResearch, October1993. 8011, fax (852) 877-8016. Information: CEPR, 25 Old V. L. Kvint andNataliaDarialova, The Burlington Street, London WIXILB, Barefoot Shoemaker: Capitalizing tel. (44) 71 734-9110, fax (44) 71 on the New Russia, Arcade Publish- 734-8760. ers,NewYork, 1993,234p. Axel Leijonhufvud, Problems of So- cialist Transformation: Kazakhstan 1991-from The Political Economy of I | the Transition Process in Eastern Eu- rope, Edward Elgar Publishing Com- fk o pany, Aldershot, 1993. l ? gO To order: Centerfor Computable Eco- nomics, Department of Economics, UCLA, 405 Hilgard Avenue, Los An- geles, California, 90024-1477 or call (310) 825-1011. Kenneth Lieberthal and David M. Lampton, Bureaucracy, Politics, and Decision Making in Post-Mao \ China, University of California Press, Berkeley, 1992,379p. Anatol Lieven, The Baltic Revolu- tion: Estonia, Latvia, Lithuania and the Path to Independence, Yale Uni- A versityPress,NewHaven, 1993,454p. M. R Myant, TransformingSocialist Economies: The Case ofPoland and Czechoslovakia, Aldershot, England/ Vermont, 1993,297 p. ChristopherThomas Saunders, theRole ( of Competition in Economic Transi- tion, St. Martin's Press, New York, 1993,245 p. ____-__________ MartinIToronto Sun 22 October-Noveober, 1993 Transition Bibliography of. Selected Articles Asia'. Boulton,Leyla. Moscow Offers Three Litvack, J., and C. Wallich. Economic Options to CIS. Finan- Intergovernmental Finance: Carter, Holly Ornstein. Field of cia?llmes(U.K),p. 3,August27,1993. Critical to Russia's Transforma- Dreams in Northeast Asia. tion? Finance and Development Choices: TheHumanDevelopment Chashkov, M. A. Third WorldNature (International)30:6-9,June1993. Magazine/United Nations Devel- of Russia: A Transitional Situation opment Pro gramme (International) or a Structural Quality?Problems of Mellow, C. BankinginRussia. Cen- 2:10-13, June1993. Economic Transition: A Journal of tralEuropean (U.K) 25:62-68, Sep- Translations from Russian (U.S.) tember 1993. China's Perpetual Revolution. 36:22-31,Mayl993. Economist (U.K) August 14-20, - Nakhodaka's Free Economic 1993, pp. 29-30. Gooding, K Russia Is in the Market. Zone. Russian Far East Update Financial 71mes Survey (U.K), p.1, (U.S.)3(8):6-7,August1993. Freeman,N.J.U.S.EconomicSanc- October19,1993. To order: Russian Far East Up- tions against Vietnam: Interna- date, P.O. Box 22126, Seattle, tional Business and Development Gorst, Isabel. EBRD Plans Lending Washington, 98122, tel. (206) 447- Repercussions. Columbia Jour- Spree. Petroleum Economist (U.K) 2668, fax (206) 628-0979. nal of WorldBusiness (U.S.) 28:12- 60, May 6,1993. 22, Summer 1993. New Constitution for the Kyrgyz Hockstader, L. Russian Joblessness Republic. Central Asia Monitor Hirsch, M. China's Financial Low, but Officials Warn of Crunch. (U.S.)3:2-3, August1993. Revolutionaries. Institutional In- Washington Post (U.S.), p. A26, Au- vestor (international edition;U.S.) gust29,1993. Robinson, A. The Slovak Repub- 18:48-51, July1993. lic. Financial Times Supplement Kazakhstan: Independents Call on (U.K),p. 9,November2,1993. McCormac, Susan. Foreign Bank Government to Stop Playing Soli- Branches on the Move. China taire, Central Asia Newsfile (U.K), Russian Land. Financial Times Business Review (U.S.) 20:40-43, 1993. (U.K), p. 19, November 2,1993. May-June 1993. To order: Central Asia Research Fo- rum, School of Oriental and African Rudnick, D. Slovenia: Building an Rogers, John. Vietnam Getting Studies, Thornaugh Street, Russell Independent Economy Ready to Seek Infusion of For- Square, London WclHOXG, tel. (071) Euromoney Supplement (U.K.), eign Aid, Investment. Journal of 323-6300, fax (071) 436-3844. pp. 1-28, May 1993. Commerce (U.S.), p. 5A, July 26, 1993. Khoros, V. 0. Russia Confronts a Samsonov, Kirill Petrovich, and 0. Choice. Problems ofEconomic tan- A. Khokhlov. Privatization as a Walker, T., and E. Balls. Big Chop- sition: A Journal of Translationsfrom Source of Self-financing of Con- per Falls with a Thud. Financial Russian (U.S.) 36:31-38, May 1993. version Processes. Problems of 7imes (U.K.), p. 19, November 2, Economic Transition: A Journal of 1993. LeVine, S., B. Tett, and J. Lloyd. Translations from Russian (U.S.) Turkmenisan Leads New Rouble 36:59-74,May1993. CIS and the Baltics Refugees. Financial limes (U.K), p. 4,November2,1993. Seifulmulukov, I., and E. Whitlock Borozdin,TuriiVladimirovich.AnAl- Deregulation in the Russian Oil ternative Is Needed and Is Avail- Leijonhufvud, A. The Nature of the Industry.RFE/RLResearchReport able. Problems ofEconomic Tan- Depression in the Former Soviet (U.S./Germany)2(34):58-63,August sition: A Journal of Translations Union.NewLeftReviewl99:120-26, 27,1993. from Russian (U.S.) 36:39-58,May May-June 1993. 1993. Volume4,Number 8 23 The World BankIPRDTE Bibliography of Selected Articles (continued) Simex, D. Waffling and Wavering Capek, A., and G. Sazama Czech and Schlesinger, Helmut. Relentless on Russian Aid. New York Times SlovakEconomicRelations.Europe- Pursuit of Excellence. Interna- (U.S.), p. E15, June 27,1993. AsiaStudies (45)2:211-35,1993. tional Economy (U.S.) 7:48-51,64, July-August 1993. Sizov, A. E. Deepening Crisis in the Germany: A Financial Times Sur- Livestock Sector in Russia and the vey. Financial 7lmes (U.K), October Tabakov, TodorD. TaxReformPro- CIS. FoodPolicy (U.K) 18:248-49, 25,1993. posals forBulgariaExamined. Tax June1993. NotesInternational (U.S.) 7:495-99, Hoffman, M., and M. Koleva. Hous- August23,1993. Solonitskii, A. S. Possible Aspects WingPolicyReforminiBulgaria. Cities of Comparing the USSR and Its (U.K) 10:208-23, August 1993. TYmewell, S. Catch a Falling Star: SuccessorStateswith Third World Once the Focus of Western Ex- Countries. Problems of Economic Hungary: A Financial Times Sur- pectations, Hungary is Struggling lYansition: A Journal of lTansla- vey. Financial 7lmes (U.K), Novem- to Make Good at Home and tions from Russian (U.S.) 36:6-18, ber 17, 1993. Abroad. Banker (U.K) 143:27-28, May 1993. July1993. Jones, C. Where Patience Is a Vir- Whitlock, E. Obstacles to CIS Eco- tue: With Continued Recession, Vachudova, A. M. The Visegrad nomic Integration. RFE/RL Re- HungariansMustWaitforEconomic Four: No Alternative to Coopera- search Report 2(27):34-38, July 2, Improvements to Trickle Down. tion? RFE/RL Research Report 1993. Banker (U.K) 143:28-34, July 1993. (U.S./Germany)2(34):38-47,August 27,1993. Zukovski, R Stabilization and Re- Kingsley, G. T., P. Tajcman, and S. cession in a Transition Economy: Wmes. Housing Reform in Czecho-. Valencia,M.,andP.Frankl.Powerto The Case of Poland. World Devel- slovakia: Promise NotYetFulfilled. the People? Mass Privatization opment (U.S.) 21(7):1163-78, July Cities (U.K) 10:224-36, August1993. Special. Business Central Europe 1993. (U.K)1(5):60-61,October1993. Pomahac, Richard. Administrative CentralandEasternEurope Modernization in Czechoslovakia Cuba between Constitutional and Eco- Bonner, Raymond. Armenia amidst nomic Reform. Public Administra- Muller, Carl H. Castro's Cuba: Sur- Wars:EnvironmentalPuzzles.New tion (U.K.) 71:[55]-63, spring-summer viving the Collapse of the Soviet York limes (U.S.), p. A2, August 17, 1993. Bloc. Caribbean Affairs (Trinidad) 1993. 6:104-12,April-June 1993. Robinson, Anthony. BrealdngUp Was Bragina, E. A. Post-Soviet Society theEasyPart.Financiallimes(U.K), Prevost, Gary. Communist Cuba's and the Third World: Economic p. 11,August6,1993. Defiance. World Today (U.K.), Aspects. Problems of Economic 49:142-44,August-September 1993. JJansition: A Journal of IJansla-. tionsfrom Russian (U.S.) 36:18-22, May 1993. TRANSITION is a regular publication of the World Bank's Transition Economies Division, Policy Research Department. The findings views, and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliates organizations. Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent. Richard Hirschler is the editor and production manager. Jennifer Walker is the research assistan and Desktop Publisher. If you wish to receive Transition, send name and address to Jennifer Walker, Room N-i 1023X The World Bank 1818 H Street NW, Washington, D.C. 20433, or call (202) 473-7466, or fax (202) 676-0439. nformation on upcoming corferences or transforming economies, indication of subjects of special interest to our readers, letters to the editor, and any other reader contribution are appreciated. 24 October-November, 1993