1 `0 2 2 9 THE NEWSLETTER ABOUT REFORMING ECONOMIES TRANSITION Volume 8, Number 5 October 1997 China's Great Enterprise: Reforming State Enterprises China is on the threshold of launching a major drive to transform its loss-making state-owned enterprises (SOEs) into modem stockholding corporations. Our authors from China and the World Bank, in separate articles, outline a possible road map for enterprise reform. China, in 25 years, could become an economic powerhouse, predicts the Bank in its recently published "China 2020"study-series, excerpted in the final piece of our survey. The Green Light Is On-A Perspective from China by Chi Fulin Reform has gradually unfolded in China's to overcome their current difficulties. As state-owned enterprises in recent years. a result the following steps are expected W hat's Ins ide Experiments with shareholding compa- in the near future, in support of enter- A Road Mapfor China's Enterprises 2 nies started quite a few years ago, and prise reform: early results were encouraging. More than China 2020: World Bank Proposals 5 600 companies are now listed on China's * A large number of SOEs will be trans- Albaniaandthe Pyramids 8 stock exchanges. Nevertheless, debate formed into limited liability shareholding continues as to whether clearly defined companies with a diversified ownership SupportforFiscalDecentralization 11 property rights are needed to overhaul structure. In certain companies the state Municipality Borrowers in Transition the ownership structure, and whether will maintain majority voting rights, and Economies 13 adopting a shareholding system could in a few others (for example, in the de- drain state-owned assets and trigger an fense industry) the state will retain full CreditNeedsofLocalGovernments 14 across-the-board privatization process. administrative and financial control. The Migration in Post Soviet Space 15 Disagreement on these and other funda- government is expected to support quali- mental issues have prevented a major fied SOEs being listed on the stock ex- Bye-byetothe RussianFarNorth... 18 breakthrough in SOE reform. change. Soon, SOEs will represent a Do CurrencyTroubles Await Eastern large portion of the enterprises listed on Europe? 19 Against this backdrop the Chinese Com- domestic or foreign stock exchanges. Ukraine Badly Needs Land Reform 20 munist Party's recent 1 5th Congress More interindustrial and interregional en- tackled important theoretical issues re- terprise groups will be encouraged to Pitfalls of Ukraine's Privatization 20 lated to SOE reform. It confirmed that transform into shareholding groups, with . . . public ownership can take many forms, investment capital serving as a link be- and that issuing and trading shares tween individual companies. In 1997 the WorldBank/lMFAgenda 27 helps modern enterprises raise capital. number of such groups will reach 100, Conference Diary 30 The Congress called for breaking away twice the number registered in 1996. from traditional ideology, experimenting At the same time, new state holding New Books and Working Papers 31 bodly, and expanding the shareholding companies will be formed. Reform of system. It gave ailing SOEs three years large SOEs, however, depends on the Bibliography of Selected Articles 39 Macroeconomics and Growth Division Development Research Group The World Bank goVernVnt-fte~ris erelationship. using their remaining assets. through in reforming SOEs is finally Large enterprises will not be able to * Mergers (integrating loss-makers with achieved, reform of public utilities, break away from their administrative re- successful SOEs) are preferrecl to bank- state-owned commercial banks, and the straints and become real corporations- ruptcies, which are proceeding in only a government itself will become an irre- legal corporate entities-unless property few enterprises assigned to experiment versible trend. rights are significantly reformed. with them. The author is vice chairman of the Chi- Between 70, and 80 percent of SOEs TO sum up, the modern enterprise sys- nese Research Society for Economic Sys- are small or medium-size. With the eiimi- tem advocated by the goverlnment is tem Reform and the executive deputy nation of state subsidies, most face seri- characterized by clearly defined property director of the China Institute for Reform ous diffculies Asrights, specified responsibilities, and the and Development, 57 Renmin Road enterprises sold their assets at a discount separation of administration from busi- Haikou City, Hainan Province, China, teL etorrss their employe mass athe shar- dness and management. When a break- 86-898-6258793, fax 86-898-6258777. to their employees-making them share- holders in their own shareholding coop- erative enterprises. Due to ideological and A Roadmap Ffor Reform policy constraints, this new enterprise form has not yet spread widely among by Harry Broadman small and medium-size SOEs. But the Party Congress gave a green light to the ost of China's state-owned en asset management bureaus, state as- new initiative. Preparations are being vv mdew initoadraft aPrespartondg law and terprises are technically ineffi set-operating companies, and supervi- made to draft a corresponding law, and V cient, burdened with "cradle to sory committees has emerged. local governments are encouraged to grave" social service obligations and a draft regulations. This will certainly ac- rising portion of redundant employees. These initiatives, while reflecting a seri- celerate the development of cooperative By the third quarter of 1996 their profits ous commitment to reform, have not enterprises, offsprings of township and had declined to less than 1 percent of been fully implemented. Managers do not village enterprises. GDP, from the late 1980s figure of 6 have the freedom to make business percent. In 1996, 50 percent of these en- decisions efficiently. Only 5 percent of tihe government supports the introduc- terprises incurred net losses (up from SOEs have been corporatized. Although tion of standard bankruptcy and merger 33 percent in 1994), totaling 1.3 percent economic and legal reforms have been procedures, the elimination of surplus Ia- of GDP. SOEs' capacity utilization for enacted, the implementation and en- bor, and various reemployment projects. major industrial products has fallen be- forcement of laws and regulations re- With a large proportion of small and me- low 60 percent. Although their financial main weak, and SOE property rights are dium-size enterprises on the edge of performance is worse than th,at of the not clearly defined. Government has not bankruptcy, these measures could nonstate sector, SOEs receive more than been separated from its enterprises; speed up the liquidation of unhealthy 75 percent of domestic credit and so government agencies serve as both SOEs, accelerate the restructuring of crowd out investment in nonstate firms- shareholders and administrators. The state-owned assets, and create favor- the engines of China's growth--and un- lines between government administrators able conditions for the growth of healthy dermineanalreadyweakstate-dominated and enterprise managers remain blurred. state enterprises. banking system; nonperforming loans to Many SOEs could not survive in a com- SOEs account for 20 percent of bank petitive environment. The reform has exposed two serious di- prflo lemmas: how to find new jobs for redun- porfolios. dant workers and what to do with the Moreover, government initatives have enormous backlog of bad debt The Attempts have been made to transform created new, unexpected problems. Lo- state enterprises into shareholding com- cal decentralization, for example, has government's policy responses so far panies (corporatize them), cdelegate eroded the old system of center-directed are as follows: greater autonomy to their mana(gers, and oversight, creating a vacuum in corpo- * Banks have been allocated some re- diversify ownership. Government author- rate governance. Unchecked insider con- serves to write off part of the bad debts ity has been decentralized-all but 2,000 trol of many large and medium-size that enterprises owe the banks. to 3,000 industrial SOEs have been SOEs has resulted in asset stripping (tak- e Bankrupt enterprises are obliged to re- placed under local government supervi- ing SOEs' good assets and leaving debt- train and compensate their employees sion, and a multilayered network of state ridden shells), decapitalization through * TRANSITON, August 1997 ©D 1997 The World Bank wage increases, accumulation of unpaid New Laws and Regulations * Enhance creditor rights to move debt, and tax evasion. In other words, as- lossmaking SOEs into bankruptcy-the sets are being privatized and liabilities * Clarify rules regulating SOEs' conver- new Insolvency Law should be promul- and losses are being socialized. sion into limited liability companies, the gated as soon as possible. transfer of state property, and the au- * Build credible commitment to more In their call to establish a modern enter- tonomous rights of managers. fundamental reforms and deliver from prise system early in the next century, * Draft a new, unified Contract Law to within a predetermined time frame. Broad China's authorities have focused on de- legislate property, contracts, and suc- ownership diversification should be car- veloping clearer property rights within a cession. A comprehensive Property Law ried out in the 1,000 priority SOEs within sound legalframework, streamlining the should define and enforce property rights five to seven years, reducing state own- organizational structure of state asset in all sectors of the economy. ership to a passive minority stake. More- management and the enterprises them- * Accelerate corporatization under the over, the enterprises should be controlled selves, strengthening corporate gover- Company Law-in force since 1994-of by independent, professional investment nance, and implementing financial 1,000 priority SOEs (the largest enter- management corporations-a reformed accounting procedures in line with inter- prises that operate in key sectors of the version of the current State Assets Op- national standards. The following policy economy) and, in the medium term, of erating Corporations. The state should recommendations correspond to these the remaining 14,000 large and medium- eliminate its involvement in SOEs that objectives: size industrial SOEs. operate in an inherently competitive China's State Sector: Bleak Facts and Figures Zhang Haoruo, deputy minister of the State Commission unsold, often poor-quality goods that are believed to exceed for Restructuring the Economic Systems, recently an- 500 billion yuan ($60.2 billion) in value. Other surveys sug- nounced that the state sector's share of China's economy gest that one-third of the 100 million state enterprise em- dropped to 41 percent in 1996, from 76 percent in 1980. ployees could be cut with no effect on output. The share held by the private sector has climbed to 24 percent. The rest was held by township and village enter- One in four SOEs have debts that exceed their assets. State prises. According to a Shanghai newspaper interview with enterprises receive up to 90 percent of the loans granted to Chinese economist Fang Gang published in July, the pri- enterprises by China's state banks. State banks have about vate sector accounts for 80 percent of economic growth 4,000 billion yuan in outstanding loans, many of them to the and 90 percent of new jobs. This dichotomy exists despite state sector. Some 20 to 30 percent of loans by China's four the privileged access that state enterprises have to loans largest banks to SOEs are believed to be nonperforming by and raw materials. international standards (and Chinese banks only register debt as bad when it is at least three years in arrears). A further About 70 percent of China's 100,000 large SOEs (there are problem is interenterprise debt, which rose by 17 percent to a total of 304,000) are loss-making, up from 50 percent in 900 billion yuan last year. 1995. Wang Zhongyu, head of the State Economic and Trade Commission, which oversees the reform of state-owned An infusion of 30 billion yuan ($3.6 billion) by the central firms, recently acknowledged that at least 30 percent of government this year will be used to convert debt owed by state enterprises are effectively bankrupt. Combined losses state enterprises into equity, said Wang Zhongyu. The eq- for the first two months of 1997 were up 11.8 percent over uity will be held by state holding companies that will act as the same period in 1996, to 19.3 billion yuan ($2.3 billion). middlemen between the debt-laden state enterprises and SOE output grew at an annualized rate of just 6.8 percent in banks, which are forbidden from owning equity. The money the first quarter, compared with a 14.7 percent expansion comes on top of a similar amount being used by banks to for foreign-funded firms. write off bad debt owed by companies declaring bankruptcy or being merged. Both programs are aimed at reducing the A large portion of state production goes straight into China's amount of money owed to banks by state enterprises. huge stockpiles. Between 1 and 2 percentage points of China's 1996 GDP growth rate of 9.7 percent consists of Source: News agency reports. 0 1997 The World Bank TRANSIMION,AugUst 1997 * industries manner. This would signal the * Increase "outside" participation, by ap- prevent nonstate firms from entering the government's commitment to imple- pointing nonstate representatives to market, simplify licensing and registra- menting deeper SOE reform and en- SOE boards, diversifying SOE owner- tion procedures, reduce import quotas couraging competition with nonstate ship through the sale of shares on na- and tariffs, rationalize the foreign direct enterprises. tional and international stock exchanges, investment policy regime, and promote and contracting out services (transport, competition across regions. Streamlining Organizations accounting, social services) to the . Grant managerial autonomy. If subsi- nonstate sector. dies are eliminated, competition strength- Simplify the network of state asset * Untie social and commercial functions ened, and debt service obligations met, management institutions, assessing the by transferring enterprises' social re- insider control can be held in check. costs and benefits of replacing interme- sponsibilities-housing, health care, and .Diversify SOE ownership, both on a diary government agencies with direct schools-to municipal or regional gov- regional and sectoral basis. The govern- representatives of the state on enterprise ernment or to NGOs. ment should ensure that ownership boards of directors. shares are transterable and that invest- * Reorient state asset management in- Corporate Governance Reform ments on behalf of the state are owned stitutions to focus more on financial management and less on administrative . Increase fiscal and financial discipline, supervised, or managed by independent control of assets. (To improve the man- Subsidies should be made transparent professionals whose remuneration is agement of local public utilities, major- and, over time, eliminated. A national linked to investment performance. ity shareholdings could be sold to local institution could restructure the stock * Foster market-oriented mergers and development companies or commer- of bad enterprise debts after halting acquisitions, provided that a social cially oriented entities. The funds to buy their flow. The institution could provide safety net is established for redundant these shares would be raised from pub- transition financing for uncreclitworthy workers. lic institutional investors and social se- enterprises while isolating them from curity funds.) the banking system. Banks should be The author is Senior Economist at the * Employ independent, professional man- prohibited from lending to enterprises World Bank; this article is excerpted from agers. Compensation and job security that are in arrears for more than 180 his study "China's Management of En- of managers must be closely linked to days. terprise Assets: The State as Share- enterprise performance. A robust "man- * Foster competition. The government holder,"1997, Email:HBroadman Eworld ager-market" must also be developed. should eliminate policy barriers that bank.org. State-owned Enterprises versus Modern Corporations In Chnese SZEs, Interral and eernal i renterves are buntec; . vMhereas the n-odem corporation is disdplined by intemal and social fuLtiors are integal to the firm.. external incentives; it has shared social responsibilities. Owners Intemal Incentives External Incentives Owners Internal Incentives External Incentives - t Slr <>|snrp y| 1 = superviesory [ l | snkiIt1 I ~~~~~~~~~~~hlesBoard Fnnpc !vianagenneirt E i } x ranagement; | - | L a~~F[bo7r | _[pons&Financial sector Govemrrert Fi l l Fnancial Sector reports -trrontors O Debt .............. ....i* Ecit.y nariagement t Equity ........ . .. ~ ~~~~~~~Board Markets Markets orates * Product ... ....... ..... .. / \ -Product~rte * Labor core --7]Labor cr* "Corporate Control" javis \1si)on .'Corporate Control' F". rNrcr)iNorcorz' 1 I_F_S_alFunctions Stte | Social Functions Pension Funds r Soosi Functions l Source: the author. * TRANsmoN, August 1997 1 1997 The World Bank China's Growth Path to 21st Century: Recommendations from the World Bank T he World Bank's China and becoming a middle-income developing Selling state assets, breaking up the big Mongolia Department, in coop country and the world's largest economy. state banks and allowing efficient private eration with Chinese scholars, banks to compete fairly, deepening the recently published a seven-volume se- Challenges that threaten the country's capital market, establishing the rule of ries, China 2020, to address the major achievements and continued progress law, ensuring macroeconomic stability, challenges that the country faces as it include a fragile financial system, the making markets more competitive, and heads into the 21st century. The series absence of meaningful rule of law, grow- harnessing new technology would enable deals with such wide-ranging issues as ing corruption, and staggering levels of China to grow by an average annual rate health, income inequality, food security, pollution. But by building on its strengths of 6.5 percent through 2020, and that pension reform, and environmental deg- of relative stability, a remarkably high would render its economy seven times radation. savings rate, a strong track record of larger than it is today. pragmatic reforms, a supportive Chinese Challenges in the New Century diaspora, and a growing administrative Old Age Security-Pension Reform capacity, China can carry its rapid growth China in 1978, when Deng Xiaoping set to 2020. China's pension system has two severe the country on its current course, was a problems. One is long-term: a rapidly ag- desperately poor, rural, and agricultural Continued rapid growth will require China ing population. The number of China's economy. Roughly 6 out of 10 Chinese to reform state enterprises, the financial elderly will rise from about 76 million in lived below the international poverty line system, and the labor market, and to 1995 to 300 million by 2050. At the same of $1 a day. Since then, growth has lowerimportbarriers, increase the trans- time, the ratio of workers to pensioners doubled per capita income every 10 parency and predictability of the trade is projected to decline to about 3 to 1 in years, faster than almost any other coun- regime, and integrate with international 2050 from 10 to 1 in 1995. Pension out- try in recent history. In scarcely two de- financial markets. lays are currently funded from current cades agriculture's share of the workforce worker contributions (pay as you go), has plummeted from 71 percent to about Government finances should be reshaped. which, if continued, would place an im- 50 percent, a result of migration to cities There are too many production and invest- mense burden on future generations. and the urbanization of the countryside ment controls and too little rule of law, mac- itself. In Japan a similar transformation roeconomic management, and provision The other problem is more immediate took 59 years. of public services. Among the major indi- and urgent: the pension crisis in the state- cators: China's budgetary revenues fell to owned enterprise sector. State enter- Table 1. Time it took to double income prises inherited heavy pension and reduce agriculture's share in labor 11 percent of GOP in 1995, from 35 per- obligations from the central planning era. forcedocerculture's shrenl cent in 1978. A similar drop in spending, With the transition to a market economy, (years) to 12 percent of GDP, is well below the employment in state enterprises is de- Per capita Agriculture, developing country average of 32 percent. clining, while the number of pensioners income share at 50 (Direct investment financing from the bud- is rising rapidly. In some areas the ratio doubles percent get was partly offset by extrabudgetary of pensioners to workers is more than (year) spending and government-directed bank one to one. Four essential principles United States 47 50 credits.) Thus spending on health, educa- should guide sustainable reform: Korea, Rep. of 11 20 tion, poverty alleviation, pensions, infra- * Unifying the pension system-bring- CKhoirna 9 17 structure, and the environment has not kept ing together enterprises and workers cur- pace with needs. Total spending on health rently covered under separate plans into Yet while China has made enormous care, for example, is 3.8 percent of GDP, a single system with common standards. progress, substantial obstacles stand in compared with nearly 10 percent in in- . Reducing the pension burden by the way of the country's progress toward dustrial countries. gradually increasing the retirement age, © 1997 The World Bank TRANsITION, August 1997 U lowering the wage replacement rate, and Incentives should elicit investments with drugs and high-tech diagnostic tests. indexing pensions to prices rather than major environmental benefits for future Health care costs have risen 11 percent wages. generations. Pollution enforcernent in ur- a year (in real terms) from 1986 to 1993. * Introducing funded individual accounts ban areas and regional water basins These costs will continue to increase as to end the problems associated with the should be improved. A strategy that China's income grows and its population current pay-as-you-go system, ensuring channels investment into cleaner pro- ages. an adequate real rate of return on pen- duction, promotes material and energy sion funds. efficiency, and encourages the conser- Better control over health care invest- * Including both funded individual ac- vation of scarce resources could reduce ments and more efficient risk pooling in counts and a defined-benefit basic pub- emissions in 2020 below today's levels. insurance can improve both coverage lic pillar in the new system (social Even as China grows by 6 to 7 percent and quality. Thus spending on public insurance scheme). A sustainable con- a year for the next two decades, it will health (as a share of GDP) should in- tribution rate should attach major impor- be possible to improve air and water crease by 2001. Public spending is also tance to long-term financial viability. quality and lower pollution-related health needed for new programs delivering es- costs by 75 percent. sential services to the poor. Clear Water, Blue Skies Financing Health Care The World Bank projects that China's The effects of excessive pollution-in GDP will double between 1993 and 2001, the form of premature deaths, sick- In 1950 life expectancy in China was allowing China to afford the financing ness, and damage to productive re- less than 40 years; by 1982 it had risen of the priority health programs. A 20 per- sources-are estimated to cost China to 69 years. This shift reflects dramatic cent increase in the tobacco tax would about $54 billion a year, or 8 percent improvement in the overall health of generate most of the amount that would of GDP. The country must pursue a China's population, linked to policies be needed. (In 1984, 56 percent of new pattern of growth-one that can that, by 1975, had brought health care China's adult male population were regu- both increase incomes and improve en- to nearly 90 percent of the population lar smokers.) vironmental quality. The strategy for fu- (see table 2). But access to health care ture environmental protection should became more difficult in rural areas, Sharing Rising Incomes aspire to: where coverage has declined rapidly since the late 1970s. Among the poor- China's impressive growth since 1978 * Increase substitution of cleaner fuels- est quarter of the rural population, in- has raised 200 million people out of pov- especially natural gas-for coal in house- fant mortality is 3.5 times greater than erty. But despite stunning growth, some hold cooking and heating. the rate among city dwellers. 270 million Chinese-about one-fifth of * Improve energy efficiency and diversify the world's poor-live on less than $1 a energy supplies into noncoal sources. Inefficiency has grown in Chinai's health day. And income inequality-between * Reduce emissions from industrial boil- services. For example, health care pro- city and rural dwellers, the coast and in- ers and furnaces. viders are allowed to offset losses on land areas, and men and women-is in- * Curb indoor air pollution in rural house- fixed prices by charging high prices for creasing with growth. holds. * Increase wastewater collection and treatment from cities and towns and in- Table 2. Under-5 mortality rate in China and other Asian economies dustrial enterprises, especially small en- (deaths per 1,000 live births) terprises. Year China Hong Kong I'ndia Indonesia Japan Sri Lanka Vietnam * Phase out lead from gasoline by 2000. 1960 173 53 235 214 37 140 105 • Promote public transit systems. 1965 144 n.r. n.r. n.r. n.r. n.r. n.r. * Use environmental "master plans" to 1970 115 n.r. n.r. n.r. n.r. n.r. n.r. shape the growth of cities. 1975 85 17 195 151 11 69 68 * Promote environmental education. 1980 60 n.r. n.r. n.r. n.r. n.r. n.r. 1985 44 n.r. n.r. n.r. n.r. n.r. n.r. To achieve these outcomes, prices 1990 44.5 7 127 111 6 22 46 should be adjusted to cover economic, and social costs through pollution taxes. n.r. Not reported. * TRANSITION, August 1997 © 1997 The World Bank Urban-rural disparities can be attributed * Eliminating policy biases and strength- farmers. But it will require major invest- to the failure of rural income growth to ening government regulations, redress- ment in China's ports and bulk grain keep pace with the increase in urban ing the urban bias and removing the handling systems, as well as more out- incomes. Publicly provided services- coastal bias in economic policies, and ward, market-oriented policies govern- housing, pensions, health, and educa- countering gender bias in the market- ing imports. tion-have augmented urban incomes place, education, and the workplace. by an average of 80 percent. The large * Dealing fairly with the rich, combating Integration with the Global Economy gap between urban and rural incomes corruption, reducing bureaucratic discre- results from imperfect mobility for la- tion, establishing clear and transparent China's share in world trade will more bor. Despite increasing migration, con- rules for public decisionmaking, and than triple by 2020, reaching 10 per- tinuing impediments to mobility reflect stamping out access to insider informa- cent. At that level China will be the the government's desire to control the tion through the proper regulation of fi- second-largest trading nation after the pace of migration and ensure grain self- nancial markets. United States. To realize the benefits sufficiency. The absence of a housing of increased integration, China should market and limited access to social ser- Food Security Options dismantle nontariff barriers, remove vices in urban areas pose additional con- restraints on foreign trade, eliminate straints to labor mobility. China can continue to feed its popula- export restrictions, and move import tion over the next two to three decades, policies toward a transparent system Widening disparities between coastal and and domestic food production can with low tariffs and no quotas. China's inland areas are linked to coastal areas' largely keep pace with population accession to the World Trade Organiza- greater access to global markets, bet- growth. To achieve food security, China tion would favorably affect both its indus- ter infrastructure, and an educated la- must overcome obstacles to growth in trial structure and overall welfare. bor force, as well as to the government's agriculture and infrastructure, and inte- preferential treatment, which has at- grate its agriculture with global markets. The "China 2020"series is available from tracted foreign investment. Perhaps the World Bank publications: World Bank, greatest damper on broad, equitable The best estimate of China's grain de- PO. Box 7247-8619, Philadelphia, PA growth is unequal access to opportuni- mand in 2020 is about 697 million tons, 19170, United States, tel.202-473-1155, ties to improve income and welfare, re- of which the country will likely produce fax2O2-676-0581; orvisit the World Bank sulting in differential access to education 90 percent. International grain markets bookstores, in the United States, 701- and health care, rising discrimination could accommodate a 5 percent hike in b against women in the labor market, and China's grain imports with little impact 18th Street, N. W, Washington, D.C., or imperfect labor markets. on prices. That would benefit China and in France, 66 avenue d'lena, 75116 its trading partners through lower pro- Paris, Email: books@worldbank.org, The benefits of growth-which depend duction costs and higher incomes for Intemet: http://www.worldbankorg. on people's education, mobility, and land-are being distributed unevenly, as NEW GOVERNMENT JOB indicated by the rise in China's Gini co- efficient (a common measure of income inequality) from a low 28.1 in the early 1980s to 38.8 in 1995. While emerging inequality often accompanies growth and can help nourish creativity and produc- . tivity, high rates can impede growth, weaken poverty alleviation, and contrib- ute to social tensions. To ensure that the - benefits of growth reach all of society, the report recommends: * Targeting assistance programs that fo- cus on education, health, and employ- ,He is a writer of great Imagination. He has already Invented a tax for ment to protect the poor and provide using the crosswalk and a luxury tax for breathing.. safety nets for the vulnerable. Source: The Hungarian Economy. © 1997 The World Bank TRANSOJN, August 1997 * Albania under the Shadow of the Pyramids by Carlos Elbirt A lbania's fate seems tied to pyra deposits must grow fast in order to keep all $250 million, in part to protect the mids. Ismail Kadare, the famous the system running. One woman offered depositors but also to protect the bank- Albanian contemporary writer investors 20 to 30 percent interest ing system. The system could not have and several-time nominee for the Nobel monthly, and was never asked how she survived a sudden withdrawal of those Prize, wrote a book called Piramida (The could afford it when the annual inflation deposits. The government later returned Pyramid). The story unfolds in ancient rate was only 13 percent. Before her ar- the $250 million to the depositors, with- Egypt, where the pharaohs, much like rest, she was able to amass $50 million out interest. their communist dictator-successors, from naive depositors. She built a "pure" use a totalitarian mechanism of myth or fund pyramid and didn't bother to in- Owners of liquidated investor pyra- creation. In Albania, after the death of vest the money. (Investor pyramids, on mids were also reimbursed, on aver- the communist despot, Enver Hoxha, the other hand, carried out some real in- age, at around 50 percent of their a pyramid-shaped building was built and vestments. They financed the construc- investment, in cash or deposit certifi- dedicated to his memory. The cates, although the actual people called it "the pyramid." value of their assets is un- But Albanians also learned The Ponzi Scheme known. Many may not have about pyramids of the Ponzi- been viable businesses and scheme variety (see box), as In the summer of 1920, Charles Ponzi had collected $9.5 may have served only as bait depositing money with the million from 10,000 investors by selling promissory notes to capture more depositors. A hope of reaping record inter- with the pledge of paying a 50 percent profit in 45 days. He company in southern Albania est rates became a national based this promise on his postal coupon enterprise in invested in afew hotels and gas sport. Boston. As Ponzi paid the matured not:es held by early stations. It collected an esti- investors, word of enormous profits spread throughout the mated $100 million and then After the fall of communism, community, whipping greedy and credulous investors into collapsed. It went up in smoke, the young, yet vibrant private a frenzy. But there was no profit-earlier notes were paid as did its property after the en- sector was generating an in- at maturity from the proceeds of later ones. That scheme raged crowds took to the creasing amount of domestic linked Ponzi's name with this particular form of fraud. A streets. savings, along with remit- swindle of this nature is referred to as a "Ponzi scheme." tances from about 400,000 Another company-the mighti- Albanians working abroad, est pyramid scheme-may mainly in Greece and Italy. In 1995 pri- tion of supermarkets, office cornplexes, have received as much as $500 million, vate savings reached almost 15 per- and gas stations.) which it invested in supermarkets, travel cent of GDP, or $350 million (up from agencies, and real estate, and even in practically zero two or three years ear- Two fund pyramids put their money building and operating its own television lier). Those savings, combined with re- in commercial bank accounts. At the station. Its assets exceeded $6 billion, mittances from abroad, totaled more height of the pyramid fever in the last at least on the books. Another enterprise than $600 million in 1995 and more quarter of 1996, more than $250 million collected more than $50 million that was than $700 million in 1996. had accumulated in those accounts. Due allegedly invested in the mining indus- to the high interest rates, those depos- try. Nobody was able to find those mines. The new class of inexperienced ac- its represented just 40 percent of the Nevertheless, reports claim that this count owners became easy targets for pyramids' total liabilities. Luckily, the company enjoyed the support of high swindlers, who promised exorbitant in- swindlers didn't try to shift the a[ccumu- officials at the mining ministry. There terest rates for those who joined their lated funds outside the banking system. were other small companies so myste- schemes. At the beginning they kept One can only guess why. Probably, the rious that it was difficult to classify them their promises, paying their obligations banking system was their only option as as either investor or pure pyramids. They from the next wave of investors' money. pyramid money poured in from all cor- definitely have some real investments, This is why such schemes are called ners of the country. In early 1997, as however: their owners moved into new, pyramid schemes: the bottom layers of the crisis erupted, the central bank froze expensive houses. i TRANSITION, AUgUst 1997 C) 1997 The World Bank The total value of deposits that the 16 from collecting deposits.This would have Why did people blame the govern- pyramids received before the crisis been possible legally, since the banking ment? The government did not ask or exploded in early 1997-excluding the law rules that deposit collection is a advise the public to invest in the pyra- accrued interest at the time of the esti- monopoly of licensed banks, and the mids. But it tolerated, and even legiti- mate-reached an astonishing $1.2 bil- pyramids were not licensed. But by the mized, these activities, according to lion, or 50 percent of the country's GDP, end of 1996 judges appointed by the critics. True, the finance minister issued at least according to some calculations. president ruled that the money collected a formal, timid warning about the risks The links between criminal activities and by the pyramids constituted "bilateral of investing in the pyramids (in retro- pyramids are still not clear. Legal activi- loans," which were subject to the civil spect, it looks as if the warning was ties undertaken by pyramids could hardly code, not the banking law. aimed more at satisfying the IMF and have paid the unrealistic interest rates the World Bank, than at actually stoping they promised their clients. In the last quarter of 1996 interest rates the pyramids). But the public could not paid for by the pyramid schemes believe that a scheme involving every Money, unfortunately, does not grow started to spike rapidly-30 percent, other Albanian family would not be guar- on trees. For the author of this article to then 40 percent, and even 50 percent anteed by the government. Moreover, predict in October 1996, in a local news- per month. The annual inflation rate was pyramid managers were seen at official paper, that the pyramids were doomed still below 20 percent. It was clear that receptions, and they were interviewed to collapse, was not that difficult. The collapse was imminent. Finally, in early daily by the government-controlled tele- World Bank had been alerting the high- 1997 all but four of the pyramids ad- visionstations.Theirassociationwiththe est authorities about the pyramid dan- mitted insolvency. People blamed the Democratic Party of President Berisha ger since mid-1996. Even earlier, Bank government, and the pyramids' final was obvious (and later acknowledged). staff familiar with this phenomenon collapse provoked an antigovernment Many protesters even claimed that the warned high government officials of the uprising and widespread civil disorder pyramids were the creation of the gov- expected consequences. The central in February and March. That eventu- ernment, or more precisely, of the presi- bank governor urged the Cabinet and Presi- ally brought down the president and the dent. But the pyramids also reached dent Berisha to ban pyramid operations government. other parties and other interest groups. After all, was their goal to gradually grind The Pyramid Scheme up everybody. The pyramid story is far from over. Four investor pyramids have survived, though they do not receive deposits because nobody dares to invest in them. But they reimburse a few depositors every day and have succeeded in creating the illu- sion that they are sound and will pay back everybody-one day. The World Bank has drawn up a $6 million program (financed from the Bank's earlier techni- cal assistance project and other donor contributions) to audit, shut down, and dispose of the last of Albania's pyramid schemes. Foreign firms will audit and /N / manage the remaining investment pyra- 70 0 $N 70 0tt,\ N t 700 N 70 *t S N mids. Big international accounting firms are expected to bid on this task. Until all pyramids come under external "He who laughs first laughs best?" administration (as established by a re- cent law passed by the new parliament), _ the pyramids assets are recovered © 1997 The World Bank TRANSITION, August 1997 (where possible), their accounts are au- about 17 percent.The currency (the lek) tions, its public sector, and its civil so- dited, their depositors are identified, and was stable. Relative to the country's ciety, it should not be surprising that the capital is distributed among depositors size and wealth, foreign investment has Albania had tremendous problems. The using some kind of formula, Albania's fate started to pick up significantly. But in- country will continue to have problems will continue to be tied up in the pyramids. stitutions were extremely waak, and if institutions such as the judiciary and they were not improving or gaining the bureaucracy remain weak. It is not Albania was doing well until the cri- strength. Civil society was basically true that development is a problem of sis exploded-at least it appeared so nonexistent, with the exception of some institutions in the first place-it is a on the surface. Its GDP was growing foreign foundations. The private sector problem of institutions in the first place, fast (albeit not so fast as claimed by was vibrant, but the public sector was the second and the third...! the government), inflation had dropped unable to deliver what it was supposed to single digits, and even after surging to. Since the fate of a society depends, The author is head of the World Bank's in 1996 it remained relatively low, at in the end, on the strength of its institu- Resident Office in Tirana, Albania. World Bank: Coordinating Recovery Efforts The European Commission hinted that $100 million of emer- vices, such as electricity and water supplies. (About 230 gency aid will be released for the reconstruction of Albania schools were destroyed by looters, who also pulled up and after the international donors conference in Brussels held on sold the rail and telephone lines for scrap). The crisis in Al- October 22. Earlier, in Rome, delegates from 36 countries bania has led to a major slowdown in economic activity and and international organizations renewed their pledge to assist to supply shortages. Estimates of likely economic contrac- Albania's reconstruction. "Large amounts of aid without con- tion for this year range from 7 percent to 20 percent, while ditions will be a crucial mistake. From 1991-1996, Albania inflation is expected to be 45 to 50 percent. The lek exchange received more aid per capita than any other country in East- rate had depreciated nearly 40 percent against major curren- ern Europe. The result was economic corruption and political cies since early 1997 before starting to recover in Septem- collapse," the Commission's statement said. The Commis- ber. A sharp decline in tax revenues has increased the already sion and the World Bank are serving as coordinators for do- substantial budget deficit, which stands at over 13 percent of nors who expect Tirana to make a commitment to national GDP and is expected to top $280 million this year. The trade reconciliation, restoration of law and order, and stabilization deficit so far this year has reached around $150 million. For- of the economy. World Bank Vice President Johannes Linn eign investment has virtually halted. Political and investment (ECA) said, that the amount needed for Albania's reconstruc- risk has increased significantly. Most foreign investors lost tion is about $1 billion over seven years, provided Albania not only financial but also physical assets. respects the constraints drawn by the international financial institutions. In early October Albania signed a letter of intent The government is about to launch an emergency austerity with the IMF about postconflict emergency assistance of $12 plan to curb the state budget deficit and bring inflation down million, which could be followed by a comprehensive pro- to 15 percent a year in 1998. It hopes to launch a stabilization gram of macroeconomic reforms to be supported by a three- program by April 1998 that would include lowering the budget year enhanced structural adjustment facility (ESAF). deficit and launching across-the-board privatization-includ- The World Bank is assessing the status of its current projects ing in the banking sector, mining, and utilities. in Albania to determine how they should be restructured in the postcrisis environment. Since the country joined the World Thed Bank itn to are three project soon, Bank and IDA, its concessional lending arm, in 1991, it has vanl ed ar $40 million. ' ' ~~~Bank loans signed by Albania since 1996. About $20 million received 22 IDA credits totaling $273 million. IDA has con-' would go for budgetary support, $10 million for guarantees centrated its resources in transport, infrastructure, and en- a ergy supply, as well as agriculture, health, education, and aantnnomril(oiia)rss n bu 5ml ergy s , llion for technical assistance to help restructure the banking housing. The most recent IDA credit was approved in April sector. As the prime minister pointed out, continued coop- 1996 for a $25 million National Roads project. eration with the Bank and the IMF not only directly assists The country's most urgent needs are to repair infrastruc- Albania but also acts as a guarantee of security for foreign ture, schools, and clinics and to maintain essential ser- investors in Albania. * TRANSITION, August 1997 © 1997 The World Bank World Bank Supports Fiscal Decentralization by Robert Ebel and Karen Hotra Economic decentralization has been a fund and disburse grants in response to Macedonia, Romania, Slovakia, and defining feature of Central and Eastem proposals made by experts in selected Slovenia) participate in the program, Europe's dramatic reform. Equally crucial countries. The grants typically range which also attracted Canada, Denmark, has been the decentralization of govern- from $2,000 (for research papers) to Germany, and Italy as donors. Funds are ment itself. Indeed, if transition made available only if the pro- economieswanttoachievetheir hat Is Fiscal Decentralization? posals-be they for policy reform goals, a well-functioning study, research, or national or decentralized (intergovernmen- regional seminars that dis- tal) system is key. This system The term fisca/ decentralization is cumbersome, inelegant, seminate best practices-are affects macroeconomic stabil- and often misunderstood and misused. And there is good designed to contribute to the ity, the provision of social ser- reason for that, since it covers a wide spectrum of what knowledge base and build lo- vices, the pace and depth of public sector economics is about. In its most common in- cal institutional capacities in privatization, and the ability of terrpretation, it refers to the politics and economics of the the recipient countries. The the public sector to mobilize and transfer of fiscal power from central to subnational (e.g., best products are replicated allocate resources. local) governments. But in fact, it could just as well be, and and disseminated. The deci- often is, about the redesign of fiscal roles and responsibili- sion to fund a client-proposed Decentralizing countries with a ties from smaller (e.g., local) to larger (e.g., regional, cen- event is made by a review com- limited tradition of self-govern- tral) governments. Thus it encompasses the political, mittee of the donors. All pro- ment must sort out local and economic, and institutional underpinnings of intergovem- grams require the client to central government roles and re- mental fiscal relations, and ranges from examining the ef- share 10 to 15 percent of pro- sponsibilities and develop effec- ficiency of public institutions and developing sustainable gram costs. tive subnational (local) fiscal and infrastructure finance, to rationalizing fiscal transfer mecha- political institutions. Local govern- nisms and supporting the social safety net. One feature of the initiative that ments should be able to plan and increases its acceptance and administer expenditures and When properly done, fiscal decentralization is a remark- attests to its proven success raise revenues, thereby be- ably powerful tool. Its virtues are all critical elements in is that all funded activities coming more responsive and ac- economic development and poverty alleviation. Fiscal de- must be identified and carried countable to their constituencies. centralization can be a vehicle for: out by experts of the client country. This is not a program To help transition economies *Reducing the public sector. that "recycles" funding to con- carry out intergovernmental " Addressing the political imperative of a democratic sys- sultants from donor countries. reform and create a corre- tem, empowering people to understand and control it and sponding knowledge base for have more confidence in it. Clients range from local gov- disseminating best practices, a * Mobilizing otherwise untapped public revenues while at ernments and central govern- joint multiyear program called the same time reducing public service costs. ment institutions responsible the Fiscal Decentralization Ini- * Increasing transparency and political and fiscal account- for legislating, implementing, tiative was launched in 1995. Ini- ability, thereby minimizing opportunities for corrupt prac- regulating, and monitoring de- tiated by the Council of Europe, tices. centralization to universities, Organisation for Economic Co- * Providing the "glue" for nation building across heterog- research institutes, and asso- operation and Development enous regions and populations in some countries. ciations of local authorities. (OECD), U.S. Agency for Inter- When an invitation is received national Development (USAID), and the $20,000 (for a national or regional con- to operate in a country, it is reviewed by World Bank's Economic Development ference). EDI and its partners. Once an invitation Institute (EDI), the initiative coordinates is accepted (not all are), the program donor activities and serves as a devel- Eleven client countries (Albania, Bosnia- typically starts by convening a confer- opment and dissemination learning cen- Herzegovina, the Czech Republic, Es- ence called the National Forum on Fis- ter. The donors have established a trust tonia, Hungary, Latvia, Lithuania, cal Decentralization, organized by © 1997 The World Bank TRANSMON, August 1997 m experts in the client country. The forum Another common theme is the need for group to develop regulations relating to helps explore the issues and identify an local governments to find ways to bridge borrowing by Lithuanian municipalities; agenda for research and training, as well the information gap not only between initiation of national forums in Albania, as promote the initiative's grant process. them and the central government, but Bosnia-Herzegovina, Macedonia, Roma- also among themselves. For example, nia, Slovakia, and Slovenia; and repli- Although each country has its own policy a recently approved proposal from cating the Budapest conference on research agenda, several common con- Latvia will compile official financial and municipal creditworthiness and the finan- cerns have emerged: demographic data that have not been cial risks of local authorities, experts * Ensuring that subnational expenditure sharedwith municipalities.Thebookwill from Latin America and Central and responsibilities correspond with avail- also enable local governments to for- Eastern Europe will be brought together able financial resources (including how mulate and analyze their budgets. to share common experiences. to structure central-local transfers). *Strengthening own-sourcelocal revenues. Grants have also supported:: If fiscal decentralization is done cor- * Consolidating the large numbers of * A workshop on historic preservation rectly, there are significant benefits in newly created small municipalities (for and the revitalization of the Vilnius terms of enhanced economic efficiency example, those with fewer than 5,000 (Lithuania) city center. and increased fiscal and political ac- people) with a view to creating regional * A seminar on the operational problems countability. If implemented badly, how- governments or special districts. of transferring a state-run district heat- ever, the efficiency and accountability * Promoting intergovernmental coopera- ing company to the city of Kaunas outcomes can be perverse. The Fiscal tion in service delivery. (Lithuania). Decentralization Initiative is designed to * Facilitating the privatization of locally * Budget training in Tartu (Estonia). achieve effective fiscal decentralization. controlled "socialist style" state-owned * A regional conference on the role of enterprises. associations of local authorities in the For additional information on the Fis- * Establishing the conditions by which process of decentralization and the cal Decentralization Initiative contact local governments can gain access to strengthening of local governrnent. RobertEbelorKarenHotra, at theEco- private credit markets. * A conference on the relevance of the nomic Development Institute of the "top down" Japanese model of fiscal de- World Bank, Room M-8096, tel. 202- Municipalities in transition econo- centralization for the still centrally domi- 473-0740, Email: khotra @worldbank mies-small and large alike-com- nated postsocialist economies. .org; Alessandro Mancini, Council of plain that their views often are not Europe, Email: Alessandro.Mancini adequately considered when central gov- New activities include: support of a se- @dela.coe.fr; or Michael Engelschalk, ernments draft legislation affecting local ries of economic studies in thie Baltic OECD, Email: Michael.Engelschalk governments. In Hungary, for example, countries; assisting a Lithuanian working @oecd.org. the 1996 Act on Municipal Debt-which will have a profound effect on municipali- ties-was enacted without much prior Simplified Administration consultation with local governments. To discuss this and other problems, last _l July the Council of Europe hosted a three- 3 day regional Fiscal Decentralization Ini- tiative seminar in Budapest (see next articles). It brought together central and local officials to examine topics ranging from reviewing the credit needs and fis- cal characteristics of a local government, to the more technical issues of measur- ing municipal creditworthiness and the cre- ation of central-local monitoring systems. Attention was also given to the changing "Those viith bribes come first!" role of multilateral lending institutions. From the Hungarian magazine Hq6cip&. M TRANSmON, August 1997 © 1997 The World Bank Assessing Municipality Borrowers in Transition Economies by Charles Jokay E valuating the creditworthiness of tutional rights and duties and public func- Are independent audits and public an- local governments is a formi- tions assigned to a country's municipali- nual reports required and available? Is dable task. Municipalities are to ties. Does a municipality ever need to there sufficient public support for mu- a large extent hostage to the fiscal and borrow for infrastructure investment nicipal investments funded by borrow- monetary policies of national govern- within that legal framework? For ex- ing and bond? Are rating agencies and ments. ample, if certain environmental and pub- rating services available? Can munici- lic health functions are required of palities own for-profit businesses? Is Municipal creditworthiness is too municipalities, but central authorities there institutional demand for municipal closely related to the creditworthiness fund only part of them, then the munici- debt? of the central government in highly regu- palities need credit for the investment. lated or centralized political systems, Thus the main question is not whether The Hungarian Case where local borrowing requires the ap- local governments should borrow or be proval of a central government body. allowed to borrow but, given a legitimate In Hungary the Law on Local Govern- Once approvals are required, political need to borrow, what uncertainties and ments states explicitly that municipali- considerations distort pure municipal risks do they need to mitigate in dealing ties can borrow at their discretion within creditworthiness issues, and risky mu- with the financial sector? certain debt service limits set by the nicipalities can receive credits based same law; the state, however, provides on the virtues of their central govern- Comparing Borrowing Environments no guarantee for municipal borrowing. ment sponsors. Approval serves as an Similarly, since 1996 Hungarys' Law on implicit guarantee unless statutes Using the example of the legal and eco- Municipal Debt Adjustment (Bankruptcy) clearly state, and practice demon- nomic environment in Hungary as it has defined an explicit procedure for strates, otherwise. evolved between 1994 and 1997, a num- working out debt, rescheduling debt, and ber of questions arise over direct bor- reorganizing municipal business activi- The issue of municipal creditworthiness rowing by municipalities that have to ties during bankruptcy. in Central Europe and in other transition fund mandatory investments. Can a mu- economies is complicated by significant nicipality borrow for capital investment, Furthermore, the 1996 version of the differences in constitutional structures, with maturity over one year? Does a mu- Securities, Capital Market, and Stock legal environments, commercial codes, nicipality ever have to borrow on its own Exchange Law calls for specific disclo- the situation of banking and financial sec- for this purpose? Who or what law au- sure requirements in the case of public tors, and degrees of historical self-gov- thorizes each borrowing (city council, issues of municipal bonds. A growing ernment or self-rule on the part of ministry)? For what purpose may a mu- circle of Hungarian municipalities falls municipalities. Any direct comparison of nicipality borrow over the long term? under a statutory independent audit re- municipal borrowing across transition Who sets borrowing or debt service lim- quirement, and the results of the audits economies must take into account its? Are borrowing terms (currency, ma- as well as the annual budget report are whether municipalities are the proper turity, interest rate, and the like) set to be made public. borrower for projects that may be handled by statute? What are legal sources of by regional or even national governments collateral, security, and repayment? The market in Hungary, however, has elsewhere. What types of transfer payments and not regarded municipal debt with much assets are off limits for debt service? enthusiasm. Simply put, Hungary's Central and Eastern Europe is blessed Does the state offer any implicit or ex- largely privatized banking sector has with a multitude of centralized and de- plicit guarantee of payments or service decided not to compete for municipal centralized postcommunist political sys- provision? Are there any remedies for business, because of the preponder- tems. Therefore, when comparing default, nonpayment, or bankruptcy ance of the former statutory monopo- municipal creditworthiness among coun- (debt adjustment, reorganization, and list, OTP, the National Savings Bank. tries, it is important to clarify the consti- so on)? Municipal finances are under stress due © 1997The World Bank TRANSITION, August 1997 U to declining real levels of transfer pay- and 1997, some creative Hungarian in- sume more risk, municipalities will be ments and the rising costs of providing vestment banks have begun to market assessed along the lines of traditional basic mandatory services such as edu- fixed-interest-rate, multiyear Hungarian credit analysis. cation, public health, and welfare. On municipal bonds, a market destined to the investment banking side, privatized grow as inflation continues to fall and The author is director of the Center for Hungarian banks are seeking the busi- the stock market becomes overpriced. CivicandMunicipallnnovation, Budapest, ness of blue-chip multilateral and Hungary tel. 361-153-3886, fax 361-302- emerging domestic firms, while perhaps Once the structural uncertainties unre- 4518, Email: jokayEmaildatanethu. unfairly abandoning municipalities as lated to the national budget and stabili- bad potential clients. Despite their risky zation policies have been addressed, it This article is excerpted from his presen- image, Hungarian municipalities are free is inevitable that more Hungarian and tation at the conference on Municipal to change their bank once a year, and international financial institutions will see Creditworthinessandthe Financial Risks there is competition for the business of municipalities as borrowers of capital on of Local Authorities, organized by the the largest and best-managed cities. their own merits. As inflation declines World Bank's Fiscal Decentralization ni- After a two-year hiatus between 1995 and the financial sector begins to as- tiative in Budapest (June 30-July 2, 1997). Credit Needs of Local Governments by Gabor Peteri Local governments' borrowing needs are influenced by sev- have to reach a minimum size; otherwise, lending institu- eral key factors, including: tions do not spend time and money on project assessment * Structure of local government revenues. If national and evaluation. This is especially important in Central and grants and subsidies are available to finance local capital Eastern Europe, where the fragmented local government investments, municipalities will accept them rather than system does not support large projects. Clear regulations burden themselves with borrowing. Too much dependence on municipalities cooperation can help solve this problem. on national grants can render municipal revenues unpre- * Traditions in public borrowing. Still reeling under the dictable. Limited revenue-raising power also restricts the debt burden of their national governments, local borrowing potential of local governments. decisionmiakers in most CEE countries are reluctant to * National policies, through priorities In preferred sec- borrow. That is why some loans are considered a burden tors. These are typically public services with high exter- on the city budget, while other forms of debt, like munici- nalities orspillovers (environment, education, hospitals, and pal bonds, are more attractive and are considered a vali- so on). Earmarked matching grants for capital investments dation of trust in a city's economic and financial health. are typically used in water and sewerage projects. Some- * Type of capital Investment projects to be financed. In times these national programs-pushing one-time, large in- transition economies a large part of local government in- vestments-have undesired side effects. International aid vestments, mainly in public utility and city management programs also may influence the need for local borrowing, services, were typically provided by their own companies. as donor agencies often apply cofinancing requirements. Local governments may provide guarantees to their com- * Local political cycle. Municipal decisionmakers often panies or borrow directly from the banks. More recently, launch capital investment projects in the later part of their they have been working with private businesses-contrac- terms. This increased demand for funds is clearly reflected tors and operators-as partners through concession and in midterm changes in municipal borrowing. BOT (builcl-operate-transfer) schemes. * National regulatory environment. Loan needs are gen- erally higher if there are no limits on municipal borrowing The author is an economist in Hungary. He can be con- but each local government request is evaluated individu- tacted at 1H-2094 Nagykovacsi, Kolozsvar utca 22/a, Hun- ally. Clear bankruptcy procedures and widely used tender gary, tel./fax 36-1-138-9390, Email:gabor_peteri@ regulations make credits for local governments more eas- compuserve.com. ily available, as they offer security for lenders and guaran- tee the proper and transparent use of the borrowed money. This article is excerpted from his presentation atthe Budapest * Size of local government projects. "Bankable" projects conference on Municipal Creditworthiness. * TRANSmnON, August 1997 . 1997 The World Bank Mass Migration in Post-Soviet Space by Timothy Heleniak T he Soviet Union was a country migration. Those states most troubled were declining in 9 of the 15 former So- of unparalleled territorial and eth- by ethnic violence have lost enormous viet states due to negative natural in- nic complexity. Since its breakup shares of their Russian populations- crease, emigration, or both; only in the there have been massive movements about 40 percent in Azerbaijan and Geor- high-fertility Central Asian countries are of people among and within the newly gia and about 50 percent in Armenia and populations still growing. There was no independent states and be- flood of migrants to Western tween them and the rest of the Europe and North America world. This mass migration is World Bank Targets Refugees when the formerly Soviet states one of the largest since the end liberalized their migration poli- of World War II and further ex- The World Bank may be called on to play a larger role in cies as some in these regions helping involuntarily displaced people in the former Soviet ,e. . acerbates political and social ...had feared. About 2 million instabily in the region. Large- Union, as assistance moves from emergency relief to re- scale population movements construction and development, including rehabilitation of people,1or9lesslthann1.percent scale pouainmovements scainrsrcuerasnthstdrdolvngndef-of the 1989 popoulation, have ml- are intertwined with the liberal- social infrastructure, raising the standard of living and salt grated beyond the borders of the ization of the former Soviet sustainability of refugee populations, and housing construc- former Soviet Union. Three societies, the economic trans- tion. Moving to this phase is difficult because many refugees for ietGUnin Three and displaced persons want to return home and do not have cntries-era, asrael formations that the successor . .. ..and the United States-re- states have embarked on, and a vested interest in building a life in areas they have fled to. ceived the bulk of this flow, the the state-building processes of While many World Bank operations are designed to benefit first two because of the active these nascent states. Espe- entire populations, some projects are targeted at refugees resettlement programs provided cially when they are involuntary and displaced persons. Following from work on the for compatriots. and forced-as many in the Azerbaijan Poverty Assessment the Bank and the United region have been-these Nations Development Programme (UNDP) established the The most detrimental population movements greatly hinder de- Azerbaijan Reconstruction and Rehabilitation Agency and displacements have been velopment efforts. started a pilot project with components for infrastructure re- caused by ethnic and territorial construction, income generation, and community participa- violence. The situations in Involuntary Movements tion activities for returnees. In Tajikistan the 800,000 people Tajikistan, Chechnya, Nagorno- displaced by hostilities are the most likely to fall into pov- Karabakh, and elsewhere in the Some 9 million people-about erty. The Pilot Poverty Alleviation project provides credit for Transcaucasian states (Arme- 1 in 30-have moved within and microenterprise development and income generation to ben- nia, Azerbaijan, Georgia) have among countries of the former efit returnees. Armenia's Social Investment Funds have been contributed to the nearly 4 mil- Soviet Union since 1989, most used to help migrant populations rehabilitate infrastructure lion refugees and internally dis- of them involuntarily, according and generate employment. These are rather small-scale placed persons in the region. In to the United Nations High efforts; larger projects await more durable solutions to eth- Azerbaijan refugees make up 10 Commissioner for Refugees. nic and territorial conflicts. to 12 percent of the population, These movements, combined most displaced from Nagorno- with other unprecedented demographic Tajikistan. And not just Russians are Karabakh and the surrounding region by trends, are having a profound effect on leaving: members of all ethnic groups the ongoing conflict with Armenia. the size and composition of the former are leaving these states in droves. Soviet states. Since 1989 the three One factor complicating the region's Slavic states (Belarus, Russia, and In more recent years, since 1994, migration is that the breakup of the So- Ukraine) have been the only ones to Russia has been the only country in viet Union transformed what was for- have more people arrive than leave (see the region to have more people arrive merly internal migration into international table). Kazakstan and Kyrgyzstan, with than leave. The three Baltic states and migration. This has especially affected their large Russian and German popula- three Slavic states are experiencing three groups-the Crimean Tatars, tions, have experienced the largest rela- more deaths than births (negative Meshketian Turks, and Volga Germans- tive declines in their populations due to natural increase). In 1995 populations previously deported by Stalin and only © 1997The World Banik TRANSITION,August 1997 X Selected data on migration in the former Soviet Union (1989-96) Net migration Refugees and lDPs Net migration of Russians (percentage (per thousand (percentage of of 1989 cf 1989 1989 Russian (thousands) population) (number) population) (thousands) population) Russia 2,318 1.6 974,401 6.6 2159.6 8.5 Ukraine 382 0.7 1,161 0.0 -151.9 -1.3 Belarus 65 0.6 1,698 0.2 -16.3 -1.2 Moldova -166 -3.8 6,000 1.4 -36.8 -6.5 Latvia -123 -4.6 .. .. -80.2 -8.9 Lithuania -18 -0.5 .. .. -42.7 -12.4 Estonia -74 -4.7 .. .. -51.0 -10.7 Armenia 27 0.8 282,000 74.9 -28.6 -55.4 Azerbaijan -389 -5.5 1,453,682 192.9 -164.3, -41.9 Georgia -238 -4.4 281,694 52.1 -134.1 -39.3 Kazakstan -1,310 -7.9 14,000 0.8 -652.6 -10.5 Kyrgyzstan -370 -8.6 16,707 3.7 -199.5 -21.8 Taiikistan -268 -5.2 900,000 153.0 -187.6 -48.3 Turkmenistan -1 0.0 22,000 5.2 -54.8 -16.4 Uzbekistan -721 -3.6 38,000 1.7 -359.2 -21.7 .. Zero or insignificant. Source: UNICEF, TRANSMONEE Database; UNHCR; Goskomstat Rossii; and the author. now able to return to their ancestral home- rule. Most of the 15 successor states that the new states are adopting. Esto- lands. When the Soviet Union broke up, took independence as an opportunity to nia and Latvia adopted a "restored state" its effective frontier control system disin- assert the rights of titular ethnic groups model that automatically granted citizen- tegrated. Occupied with other aspects of over what they perceived to be their eth- ship to prewar residents and their de- state building, the newly independent nic homelands. This caused overnight scendents. Many states opted for a "zero states were slow to erect their own border changes in ethnic stratification. Faced option," where all those present in the control systems. In addition to contribut- with a loss of social status, which often territory on a certain date were automati- ingto easier movements among the states, translates into reduced economic sta- cally granted citizenship. Others granted the porous borders also led to a large in- tus, migration was one strategy a[dopted citizenship to all diaspora members any- crease in illegal and transit migration from by many of the 43 million people who where in the world. The language laws Asia, Africa, and the Middle East. Between suddenly found themselves outside their that were drafted and implemented also 600,000 and 1,000,000 people from these ancestral homelands. Moreover, the affected migration. Faced with having to regions, including more than 200,000 from Soviet Union granted territorial aultonomy master titular languages in order to re- Afghanistan, have entered formerly Soviet to many smaller, more compactly tain jobs, participate in civil society, or states illegally or used them as a transit settled ethnic groups below the level of gain access to educational institutions, route to reach the West. At the same time, the 15 formerly Soviet state nationali- many people have chosen to return an estimated 700,000 "ecological"migrants ties-and it is at that level that some of "home." In addition, different rates of have fled disasters such as the Aral Sea, the worst episodes of ethnic violence economic reform and recovery drive or the Chernobyl nuclear meltdown, and the have occurred, spawning large numbers discourage migration. (The slow rates of Semipalatinsk (Kazakstan) nuclear test of refugees from Abkhazia and South reform in Belarus and Ukraine have sight. Ossestia in Georgia, the Transdniestria turned them into net emigration states region of Moldova, and the Nagorno- in recent years.) "More Equal" Citizens Karabakh region of Azerbaijan. Post-Soviet migration is contributing to These population movements have rap- The preferential rights accorded to titu- social instability and having other effects idly reversed the ethnic mixing that re- lar ethnic groups are explicitly embod- that differ depending on whether coun- sulted from seven decades of Soviet ied in the citizenship and language laws tries or regions are donors or recipients. * TRANSITION, August 1997 © 1997 The World Bank Migration tends to be selective: most mi- Migration-related Action Program issues, and formulating a comprehen- grants are young, urban, and male. As a sive strategy for coping with current and result countries with large outflows are The newly independent states were future types of involuntary movement. complaining of a brain drain. Many mi- forced to rapidly create legislation and Finally, an action program was approved grants are skilled professionals whose government agencies to deal with such that should enable the CIS states to sudden departure undermines their issues as citizenship, refugees and dis- cope better with population displace- country's social, economic, and politi- placed persons, asylum seekers, tran- ment in their territories, and with man- cal stability. sit and illegal migrants, and related aging and regulating migratory migration issues. Although it has been movements through emergency assis- There are reports that teachers, doc- nearly six years since independence, tance, repatriation and resettlement, tors, and other professionals are leav- many of the new states have not cre- and integration of returnees. ing the Russian Far North in the largest ated the necessary structures and leg- numbers (see box). From Armenia, islation, such as effective border In most former Soviet states migration 400,000-700,000 have left in search of controls and reliable migration informa- peaked during 1992-94. Ithas declined con- economic opportunity elsewhere, depriv- tion systems. siderably since then because some of the ing that country of valuable human re- main causes of migration have either dis- sources. Many have tried to move to the A Commonwealth of Independent sipated or stabilized. For example, emi- west but are increasingly being denied States (CIS) conference was convened gration from the Baltic states in 1995 was entry or residence and being urged to re- in May 1996, bringing together migra- less than one-quarter of its level in 1992, turn. New arrivals often find that there is tion experts from the former Soviet and their first year of independence. Immigra- no place for them in the declining econo- other interested states, international and tion to Russia in 1996 was only 40 per- mies of recipient countries and regions. local nongovernmental organizations, cent of its peak level in 1994. While the In Russia many of the returning migrants and international organizations, includ- numbers have gone down, migration in the are from the urban areas of non-Russian ing the World Bank. The conference fo- region will continue because most of the states, but they are being told to settle in cused on involuntary population underlying causes of migration persist. rural areas, creating a skills mismatch. movements and had three major objec- An often unseen effect is the psychologi- tives -gathering data on and analyzing The author is in the Development Data cal impact that rapid migration and so- population movements of concern, pro- Group of the World Bank's Development cial change has on people, especially viding a nonpolitical forum to discuss Economics Vice Presidency. This article forced migration from war-torn areas. refugee and population displacement is partly based on his earlier articles. Components of Population Change in Russia, 1960-96 2,000 .......0._._.. 1,500-v-;l ~~~~~~~~~~~~~~~~~~~~~~~~~.. . . ... .. . .. . .. . *. 1 000 - . . . .......... . ........ . (U E~~~~~~~~~~~~~~~~0Net migration C) 500 0 I Natural .':::::::............ ''increase -500 ....... snn ..... ..........~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~......... .............~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~......... . , :H lN .'-?? ; -1,000 o t cO CcM ED 0 4 co CM CD (0 to D 1C - 1`. 00 0o cO 0 0) a) 0) a) 0) 0) 0) 0) 0) 0 0) Year 0 1997 The World Bank TRANSITION, August 1997 I Bye-bye to the Russian Far North As the largest and most populous of former Soviet states, dent in the patterns of net migration over the past seven Russia dominates migration patterns in the region. The out- years. For example, two regions located in the far north- ward migration from Russia to the non-Russian states east of Russia, bordering on Alaska, lost significant shares peaked in the late 1950s. In 1975 Russia went from net of their populations: Magadan lost a third of its population emigration to net immigration (see figure). Within this over- to emigration in the 199Cs, while Chukotka lost nearly half. all trend there was an important regional distinction. While Economic geographers point out that the Russian Far North Russians were leaving most of the southern states (Cen- was overpopulated by 20 to 30 percent compared with other tral Asia and the Transcaucasus), they continued to move northern latitude regions in the world, and development of to the northern states (the Baltics and the other Slavic the region was neither economically, nor environmentally states). Thus the dissolution of the Soviet Union acceler- sustainable. With the introduction of a market economy, ated emigration from the southern states while reversing Russia could no longer afford its northern periphery. migration from the northern countries. From 1975 until 1991, when the Soviet Union broke up, Accelerated Privatization immigration to Russia fluctuated between 50,000 and 300,000 people a year. Starting in 1992, return migration to Russia increased dramatically, peaking in 1994 when more I)j? ' than 1 million people returned from the non-Russian states. k A Even these large migration streams did not balance or ex- ( / l,.) ceed the excess of deaths over births (negative natural increase), however, and Russia's population began declin- ing in 1992 and has fallen ever since. Since peaking in 1994, immigration to Russia has declined considerably. In 1994 there was a net migration of 871,000 persons, while \ in 1996 return migration was 444,000. Since 1989 about two-thirds of return migration has been from Central Asia, W. with about 30 percent of the total coming from Kazakstan. 1LJ The largest relative flow of migrants has been from areas ° that experienced the worst episodes of ethnic violence. In many ways internal migration patterns within Russia are similar to the return migration from other former Soviet states. Both represent a return migration from the periphery to the V core of Russia. During the Soviet era much of the outward migration within Russia was to an area designated as the Far North. This region encompasses all of the northern tier of Russia and most of Siberia; 60 percent of the land mass of Russia but only 8 percent of its population. This region con- tains most of Russia's energy, mineral, and forest resources. To encourage development of this region, wage bonuses of up to 100 percent of base salaries were paid to induce work- ers to migrate there. With price liberalization, decentralization of fiscal responsibility, and the removal of implicit and ex- plicit subsidies for the region, migration patterns to the region began to reverse themselves in the 1990s. I "Wonderful shot Mr. Miller! You are now the only Between the late 1980s and the first half of the 1990s, 8 of caindidate left to buy the steel mill:' Russia's 11 economic regions reversed their direction of net migration. The rapid depopulation of the north is evi- -rom.the__lungarian_magazine_H6c_p_ * TRANSITION, August 1997 i) 1997 The World Bank Trouble Ahead in Eastern Europe? Early Warning Signals of the London-based Journal, The Economist When their exchange rate crises struck, both Mexico and with care. Poland's forecast budget deficit of 3 percent of Thailand had current-account deficits of 7 to 8 percent of GDP in 1997 is flattered by the inclusion of privatization GDP. This is an ominous precedent: 18 of the 26 former proceeds. If these are excluded, as they should be, the true communist economies had current-account deficits of above budget deficit amounts to 6.5 percent of GDP. 7 percent of GDP in 1996, and several topped 10 percent. If the current account deficit is financed by flighty short-term The other sign of impending trouble is rapid monetary growth. capital rather than long-term foreign direct investment, a This can fuel a consumer boom, causing the current-ac- country is vulnerable to sudden capital ouff lows. The Czech count deficit to widen, and may also inflate the prices of Republic, Estonia, Lithuania, and Slovakia all look highly shares and property. Fast growth in bank lending is a clear dependent on hot money. sign of such an asset-price bubble, and throughout Eastern Europe lending has been expanding far too quickly. If a currency starts to wobble, foreign reserves are a cen- tral bank's first line of defense. Hungary and Poland have The Economist has assembled the latest figures for these plenty of ammunition. But this does not mean much.Thai- six indicators in eight East European economies. For pur- land also held lots of foreign reserves on the eve of its poses of comparison, it gave similar figures for Mexico in currency crisis, far more than most East European coun- 1994 and Thailand in 1996. No single indicator can reliably tries.They were dissipated quickly when theThai baht came predict a crisis, but economic studies suggest that, if sev- under serious attack. eral early-waming signals are flashing red, then there is a high risk that a currency crisis may follow. The final column The more an exchange rate has risen in realterms, and hence, of the table gives a crude overall measure (out of a maxi- the less competitive a country's exports, the greater the risk mum possible score of 12) of how many of the early-wam- that speculators will attack. Like Mexico and Thailand, most ing indicators are flashing. A country scores 0, 1, or 2 on East European countries peg their currencies to one of (or a each indicator, and then these scores are added together. combination of) the main currencies. But since their inflation The table suggests that Estonia, Latvia, Lithuania, Poland, rates are higher than in America or Germany, their real ex- Slovakia, and Ukraine could face exchange-rate crises. Only change rates have appreciated, albei from undervalued lev- Hungary and perhaps the Czech Republic, which has al- els. Only Hungary, which has seen a big devaluation since ready abandoned its currency peg, look to be safe. 1994, looks safe by this test. All the other currencies have seen real gains of between about 20 percent and 100 percent Early-warning signals are for policymakers as well as inves- against the deutschemark over the past three years. tors. All of Eastern Europe's governments still have time to avoid currency crises. But budget cutting and monetary tight- A country whose current account deficit reflects a big bud- ening are always painful. It is easierforgovemmentsto cross get deficit is likely to have the greatest difficulty holding its their fingers and publicly deny the warning signs. Of all the exchange rate. By this criterion, the worst offenders are indicators of trouble ahead, this may be the most reliable. Hungary, Slovakia, and Ukraine, which all have budget defi- cits of 5 to 6 percent of GDP. But figures need to be handled From the Economist, October 18, 1997. Currency risk indicators Current- Current- Reserves, Rise in Budget Moneysupply Currency account account import cover real balance % increase risk deficit as % deficit minus months exchange as % GDP over past 12 (1=low Country GDP, 1997 FDlas % GDP 1997 rate' 1997 months 12=high) Poland 5.6 2.3 4.4 20 -3.0 28 8 Czech Rep. 9.8 6.6 3.8 19 -2.0 8 6 Slovakia 10.4 9.1 2.7 21 -4.6 14 10 Hungary 4.2 n.a. 5.6 10 05.1 26 5 Estonia 13.7 9.0 1.8 60 -1.0 61 9 Latvia 9.5 4.5 2.8 59 +0.1 38 9 Lithuania 9.0 7.1 1.6 92 -1.9 29 11 Ukraine 3.3 1.1 1.0 103 -6.1 36 8 Mexico (1994) 7.0 4.4 0.8 13 -0.3 36 10 Thailand (1996) 8.0 6.7 5.5 25 +2.3 13 7 Source: EIU; IMF; Datastream/ICV. a. =Overthe past three years. © 1997 The World Bank TRANSIT1ON, August 1997 A Ukraine Badly Needs Land Reform by Britta Bjornlund L and relorm, agricultural enterprise land privatization could provide the im- as collateral against loans. Under cur- privatization, and farm restructur- petus for farm restructuring and manage- rent conditions, farms are left with little ing are important components of ment changes. It would: choice but to barter their future produc- a successful transition to a market * Strengthen the profit motive and raise tion for inputs offered by the state. economy. The process in Ukraine, as in productivity. Official data show, for ex- many countries of the CIS and the Baltic ample, that while private household plots Ukraine's Land Reform: AThree-Stage region, has proven difficult and slow. Al- in Ukraine occupied only about 1,2 percent Process though the distribution of land shares of agricultural land in 1996, they produced within collective farms is nearly complete, over 47 percent of agricultural output. Land reform in Ukraine begins when land land ownership rights remain unclear. * Foster the development of a lunction- is denationalized and ownership is given While acceleration of land and farm inglandmarket,wherebylaborandother to the transformed collective farms. privatization is on the agenda, piecemeal resources could enter or exit farms. Land Each farm receives a deed reclassify- legislation continues to impede progress plots could be freely bought, sold, or ing the farm into collective ownership. It in land reform., rented, allowing the most efficient use also receives an official list of members, of available resources. Without land re- who have rights to the land and prop- Despite the lack of hard budget con- form in Ukraine, labor remains immobile. erty. With the approval of the district straints on farms and agribusinesses, * Prove an invaluable asset for farmers (raion) administration, this list can be Pitfalls of Ukraine's Privatization: Foreign Business Biding Its Time Privatization in Ukraine has so far involved mainly small the state and the speed with which inflation eroded enter- trade and services companies. It has proceeded in two prises' working capital, survival-rather than growth and phases, according to the type of company formed: development-became the goal of many enterprises. * Most Soviet-era managers retained their positions during Closed joint-stock companies (shareholders are not free this phase of privatization. to sell their stakes). From 1992 to 1994 privatization pro- ceeded chiefly on the basis of leasing arrangements, which Open joint-stock companies. Since the end of 1994 closed then led to purchase. In practice, this did not so much amount joint-stock companies have been transformed into open to the privatization of enterprises as to their partial collec- ones, with their shares tradable on the stock exchange or tivization and distancing from the state. Ownership was di- through auctions involving compensation checks and vided between the state and the enterprise workers. The privatization certificates. However, few shares have actu- enterprise workers purchased their shares on concession- ally been sold. Few investors with sufficient cash are inter- ary terms. Given the country's very high inflation rates at ested in Ukrainian stocks, while the voucher process has the time, they in effect received their shares for free. But been impeded by the fact that Ukrainian vouchers (unlike this had a number of negative consequences: their Russian counterparts) are not bearer certificates: they * The state, having retained 20 to 100 percent of the shares in must be used by those to whom they are issued, and can- enterprises, remained responsible for financing them. This not be sold to intermediaries nor circulated on financial mar- contributed to the budget deficit and to the weakening of com- kets.This represents a major impediment to the concentrated mercial banks, which were pressured by the authorities to outside ownership of enterprises. lend to enterprises. The partly privatized enterprises failed to behave as though subject to hard budget constraints. The State Property Fund legalized some intermediary ac- * The enterprises remained effectively cut off from outside tivities with vouchers, in order to prevent excessive disper- investors (which often suits enterprise insiders, who are wary sion of ownership. As a result, more than 700 firms received of restructuring), even though they are supposed to develop licenses to work with vouchers, purchasing them through on the basis of their own funds and with state assistance their subsidiaries. Although it is now easier for an investor (directly or through banks). Given the limited resources of to accumulate vouchers in order to secure a substantial * TRANSITION, August 1997 C 1997 The World Bank amended to include, for example, work- Slightly Restructured Collectives Also, there are numerous ambiguities in ers in the social sphere (kindergarten the current notion of private land owner- teachers, medical workers). Although the majority of Ukraine's ship. Farm members receive a certifi- farms, as in Russia, have been offi- cate guaranteeing their right to a share In the second stage farm members re- cially transformed into joint-stock com- of land rather than title to the land itself. ceive their right to land and property panies called collective agricultural The farm worker, having received a land shares. Property is allocated differently enterprises (as of January 1, 1997, 75 share certificate, faces two common than land. Property shares are calcu- percent of state farms and 99 percent options: take the land share in kind and lated based on the individual's tenure of collective farms), they have under- exit the collective to start a private farm, and salary level. The Land Code states gone little change in management, pro- or remain a general shareholder in the that each individual is entitled to an duction choices, or resource allocation. collective. Although the majority of farm equal share of land. The ralon adminis- Most large-scale farms are unprofit- workers have chosen to start a private tration issues certificates, guarantee- able and are falling deeper into debt. farm, most remain unaware that their ing the right to land, to each member right to a land share can legally be sold, on the list. While many restructured farm mem- given as a gift, exchanged, leased, or bers received paper certificates con- inherited. In addition, leasing and con- The third stage of land reform envisions firming their rights to land and property tractual rights, estimation of the value of new collective enterprises evolving into shares, these entitlements have not a land share in the collective charter joint-stock, reformed collective, or other created a real relationship between stock, and rights to dividends are com- ownership enterprises that operate on farmer and farmland and have done plex and unclear. In essence, land reform the basis of private land ownership. little to strengthen the profit motive. policy, rather than creating a class of land- stake in an enterprise, outside investors' role increased only of state assets faster and more efficiently. The cabinet has modestly, and there were no management changes. Mean- approved a list of large enterprises that are of "strategic signifi- while, industrial contraction continues. cance" to the economy and that are to be privatized according Overregulation of the privatization process partially expla'ins to enterprise-specific plans this year. The government intendeds Overeguatio ofthe rivtizaionprocss artillyexplinsto sell at least 26 percent of the shares in each of those enter- the lack of progress. Prospective purchasers-including for- eign investors-apply to the State Property Fund for approval. prises and, in many cases, a controlling stake. Privatization The Property Fund reviews each application and decides can proceed on the basis of both commercial competition, t . O a where the highest price predominates and conditions are sec- whether to place the firm on the privatization list. Official grounds for refusal are few and well specified. But additional ondary, and investment competition, where the investor pledges government approval is required if the firm is undergoing mili- to effectuate substantial investment over a defined period of tary conversion, if its line of business is food processing, if it time, and obtains stocks at low prices. has a monopoly position on the domestic market, or if a for- The strategic sales are to be preceded by tenders from con- eign investor is the prospective buyer. sulting firms, investment banks, and other interested parties After approval the privatization is announced in the State Prop- for the right to manage the privatization. The tenders are to be erty Fund's bulletin or in other official publications, and the open to foreign firms, but foreign participants are likely to have Property Fund appoints a privatization committee. The com- much greater chances of success if they are bidding as part of mittee members draft a privatization plan that contains infor- a consortium involving Ukrainian partners. Enterprises likely mation on assets valuation, stock distribution, and the to be sold under the new program include the Nikolayevsk preferential rights of employees and citizens to obtain vouch- Alumina Plant, the Kherson Oil Refinery, major hotels in Kiyv's ers (privatization certificates), as well as any alternative meth- downtown, as well as the car manufacturer AutoZaz. ods of privatization. This article is excerpted from reports of the Chicago (Illinois)- based Frishberg & Partners Ltd., 10 Gorky Street, Suite 8 The government has finally agreed to the State Property Fund's 252005, Kiev, Ukraine, tel. 38044-220-4952,225-1208,224-8314, proposals to begin selling off substantial stakes in major enter- fax 38044-220-1406,225-6342, Email:fp@fp.carrier kiev.ua, and prises for cash, showing an awareness of the need to dispose of OxfordAnalytica, the UK-basedinternationalresearchgroup. C 1997TheWoridBank TRANSITION,AUgUst 1997 owners, is creating a class of sharehold- in 1994 and 1995 outlined the free trans- plots is kept for personal use or sold for ers who have little understanding of their fer of land from the state into collective profit. The share of agricultural output rights and options. and private ownership. The constitution, from household plots is growing continu- passed in June 1996, guarantees the right ously, and these plots could be the foun- Those who choose to exit the collective to private property and land plots. The dation for an expanded and successful agricultural enterprise receive a plot of presidential decree of April 1997 legal- private sector. land from the collective. Few choose this ized the lease and sale of both land par- option perhaps due to the high degree cels and land shares, to be paid with Uncertain Future of risk involved. A farmer might receive currency, in kind, or in labor services. an unproductive lot or one far away from Several land-leasing arrangements have In recent years a small number of pri- local infrastructure. Furthermore, be- emerged throughout the country and are vate farms have emerged (on 835,000 cause farmers have yet to receive legal setting precedents for the development hectares, or 2 percent of arable land). title to the land, they face the risk that of leasing markets for farmland and farm The growth of private farms was the land might one day be confiscated. property. Nonetheless, because of exist- considerabe early in the decade, from The owner's right to lease or sell the land ing uncertainties in land legislation as well 2,000 in 1990 to 32,000 in 1995, but in is also unclear. Although President as a certain apprehension among farm- the past two years the increase has Kuchma submitted a decree repealing ers toward private land ownership, it is been negligible: as of January 1997 the six-year moratorium on the sale of unlikely that Ukraine will have function- there were 35,400 private farms. agricultural land inherited by the state, ing land markets in the near term. in practice, the moratorium still serves Unclear legislation is not the only to obstruct land sales and impedes the Ambiguities in land reform policies have hindrence to private farming in Ukraine. transition to a functioning land market. allowed some local governments to pur- Other obstacles include lack of initial sue different courses of action. Lead- capital, difficulties getting credit, uncer- Certainly, the land reform program has ers of the Lviv and lvano-Frankivsk tainties surrounding land titles, official reduced the amount of state-owned land. oblasts (regions) took a radical position limitations on farm size, inexperience, Some estimates show that more than and the two oblasts decided that land and little access to services once pro- 64 percent of land is currently in some of collective agricultural enterprises vided by the collective. In addition, pri- form of nonstate ownership. As of Au- should not be distributed to collective vate farms cannot rely on stable input gust 1, 1996, landwasdistributedtoover ownership. Instead, the land has been or output markets, as both remain un- 9,500 collectives and other forms of divided into equal plots and distributed derdeveloped. Private and household plot nonstate ownership. Approximately 21.9 among individual owners. They dis- farmers, for the most part, market their million hectares, or 60 percent of agri- bursed local certificates that guaran- goods themselves through such chan- cultural farmland, were transferred from teed individuals private ownership of nels as farmers' markets and trade or- state to collective ownership, and about specific land parcels. Currently, many ganizations. Those channels will likely 0.8 million hectares are private farms. new landowners lease their land to other grow in importance as Ukraine phases In the collective agricultural enterprises, farmers. Data from those oblasts show out its state procurement system and more than 2.5 million citizens have re- that production declines were signifi- moves toward a market economy. ceived land share certificates. In addi- cantly less than the Ukrainian average. tion, other Ukrainians had an opportunity Ukrainian agricultural production de- The author is an agricultural economist to get land from the State Reserve Fund clined an average of 29 percent from with the Economic Research Service to start or expand private household 1992-93 to 1994-95, whereas output in (ERS), of the United States Depart- plots or private farms. Lviv and Ivano-Frankivsk declined by ment of Agriculture. This review is 18 and 11 percent, respectively. based on Ms. Bjorniund's recent article Timid Rules and Bold Experiments "Ukrainian Land Reform and Farm Many Ukrainians farm small sulbsidiary Ukraine does possess a basic legal or household plots (on 12 percenit of ar- framework for land ownership. The Land able land). Data for 1996 show that published in the ERS InternationalAg- Code of 1992 gives individuals the right household plots produced 95 percent of riculture and Trade Reports-Newly In- to obtain land forfamily and private farms, the total volume of potatoes, 82 percent dependent States and the Baltics- private plots, gardening, and summer of vegetables, 59 percent of eggs, and Situation and Outlook Series, May 1997. home construction. Presidential decrees 51 percent of milk. Produce frorn those Email: brittabomailbox.econ.ag.gov M TRANSITmON, AUgust 1997 ©D 1997 The World Bank NIieso e ofForeign direct investment in institution in the field of microenterprise Milestones of transition economies, 1995 and financing. The repayment rate of loans 1996 to women entrepreneurs is as high as Transition (millions of U.S. dollars) 95 percent. Talks have started on pos- Region! sible cooperation between WWB and the Private capital flows into Bulgaria, the county 1995 1996 Soros Foundation, which plans to launch Czech Republic, Hungary, Poland, Ro- microfinance programs in the region. mania, Russia, Slovakia, and Turkey Central and Eastern Europe are expected to exceed $57 billion in Albania 70 72 Central bank governors from Hun- 1997, a 36 percent increase over 1996, Belarus 7 18 gary, Poland, and Ukraine received a according to the Washington, D.C.-based Bosnia-Herzegovina n.a. n.a. grade "A"from the NewYork-based maga- Institute of International Finance (IIF). Bulgaria 90 150 zine GlobalFinance. Hanna Gronkiewicz- By comparison, financial flows from of- Croatia 81 300 Waltz of Poland helped prevent a zloty ficial sources, such as the International Czech Republic 2,568 1,200 crisis; Gyorgy Suranyi of Hungary drafted Monetary Fund and the World Bank, will Estonia 202 138 a law on central bank independence and decline by nearly 29 percent, dropping Hungary 4,519 1,982 built the bank into a solid and indepen- from $8 billion in 1996 to an expected Latvia 180 292 dent institution; and Victor Yushchenko $5.7 billion in 1997. The IIF, an interna- Lithuania 73 152 of Ukraine played a major role in lower- tional organization of commercial banks, Macedonia 14 8 ing inflation, introducing the hryvna, draft- insurance companies, and stock mutual Moldova 64 46 ing foreign investment rules, and funds, says the portfolio equity invest- Poland 3,659 5,196 reforming Ukraine's banking sector. ment (that is, purchases of shares of Romania 419 624 stock) portion of the flows into Central Russia 2,017 1,800 PHARE,the European Union's aid pro- and Eastern Europe will rise from $1.3 Slovakia 183 150 gram to Central and Eastern Europe, billion in 1996 to about $5 billion in 1997. Slovenia 176 160 was launched in 1989 to help Hungary Much of that increase is in Russia, Ukraine 267 440 and Poland through their change of po- which the institute says may receive $4 Total 14,686 12,832 litical systems. By the end of 1996 the billion, up from $900 million in 1996. Central Asia program had provided ECU 6.6 billion Armenia 12 34 ($7.7 billion) in support to 10 countries. The Czech cabinet recently approved Azerbaijan 275 601 The most successful PHARE programs an incentive package for the U.S. Georgia 6 40 have involved privatization, transforma- semiconductor giant, Intel, and hopes Kazakstan 280 310 tion of the banking sector, establishment to lure the company's next European Kyrgyzstan 30 16 of market regulations, and public admin- chip-assembly plant, valued at between Tajikistan 13 13 istration reforms. Some of the programs $300 million and $500 million. In 1996 Turkmenistan 100 80 underway involve European integration, Poland offered free infrastructure and a Uzbekistan 120 55 company restructuring, small business, 10-year tax holiday to General Motors's Total 836 1,149 trade, and regional development. Adam Opel AG unit to build its $300 mil- n.a. Not available. lion plant in the southern Katowice; the Source: UNCTAD World Investment Re- At a meeting on 12-13 September in offer was accepted. The Hungarian gov- port 1997. Slovenian Portoroz, the six Central ernment is expected to approve legisla- European Free Trade Agreement (CEFTA) tion lengthening tax holidays from 5 years At theWomen's World Banking (WWB) states (the Czech Republic, Hungary, Po- to 10 years for major investments. The Conference in Budapest, 70 delegates land, Romania, Slovakia, and Slovenia), Czech Republic and Poland are battling from 17 countries discussed the cre- agreed to open accession talks with Bul- to win Toyota Motors's second major Eu- ation of an institutional network in Cen- garia and to further liberalize trade. ropean manufacturing plant, a facility tral and Eastern Europe for financing Slovenia was given until 2000 to liber- estimated to cost $1 billion. The United microbusinesses. A nonprofit organiza- alize its farm trade. CEFTA is encour- Nations Conference on Trade and tion aimed at improving the access of aging regional trade and boosting its Development's latest World Investment low-income women entrepreneurs to fi- members' EU accession prospects. Report details foreign direct investment nance and information, the WWB has 45 Officials from six countries seeking flows in transition economies (see table). affiliates in 37 countries. It is a leading membership-Bulgaria, Croatia, Latvia, I 1997 The World Bank TRANSITION, August 1997 Lithuania, Macedonia, and Ukraine- Czech Republic in credit, Poland's retail sector is were guests. CEFTA was established in booming. Household spending was 20 1991 to abolish trade barriers and es- The economy grew by just 1.3 per- percent higher in the first half of 1997 tablish a free trade area by 2001. Bul- cent in the first half of 1997. In Au- than in the first half of 1996. But the jump garian membership would enlarge gust inflation reached an annualized rate in spending has come at a price: Poland CEFTA to a trade area of 100 million of 9.9 percent. Gross foreign debt is $21 now has one of the largest trade gaps in people. billion, or 46 percent of GDP (in 1994 it the region. The trade deficit is expected was less than $11 billion or 26 percent to swell by 50 percent in 1997, to more Central and Eastern Europe of GDP). The daily Mlada Fronta Dnes than $12 billion.Thecurrentaccountdefi- quotes Czech National Bank spokes- cit-the measure of trade in goods and Bulgaria man Martin Svehla as saying that in- services plus certain financial trans- debtedness has reached the point where fers-swung from a surplus in 1995 to There is resistance from the state investors are starting to doubt the Czech an expected deficit of $6 billion in 1997. administration to speeding up economy's health and could startthreat- But Poland expects to attract $3 billion privatization, said Deputy Prime Min- ening the country's relatively good credit to $4 billion in foreign direct investment ister Alexander Bozhkov. To counter it, rating. The foreign trade deficit for 1996 in 1997, funding about 60 percent of the the government was designing sell-off is expected to total $4.5 billion, with current account deficit. schemes that would involve minimal export growth outpacing import growth participation by the administration and by 3 percent. Romania prevent it from interfering in the deals. Resolving an acute grain crisis and re- Hungary For 1997, 140 percent inflation, 15 storing financial stability through a re- percent unemployment, a $9.8 bil- strictive fixed exchange rate regime Year-on-year GDP growth in the first lion foreign trade deficit, and a 4 are the government's main achieve- half of 1997 was 3.2 percent. Industrial percent drop in industrial output ments after 100 days in office, but production rose 7.9 percent in the first relative to 1996, that is the prediction cracking down on organized crime and seven months, driven primarily by ex- of investmentbank Austria. By the end speeding up privatization turned out to ports, according to the Central Statistics of 1997 foreign investment in Roma- be more arduous than expected. The Office. Industrial exports were up 29 per- nia is expected to reach $2.9 billion. outdated legal system provides limited cent over the same period last year, while The central bank envisions ito 2 per- support to efforts by law enforcement domestic sales dropped 3 percent. The cent real economic growth in 1998. In agencies to counter a soaring crime construction industry experienced growth another development, at the end of rate. of 7.5 percent. The current account defi- September, the State Ownership Fund cit came to $764 million, some $203 mil- sold majority shares of the steel pro- The population of Bulgaria is ex- lionlessthaninJanuary-July1996.About ducer Otelinoxto to Samsung (Repub- pected to fall by 1 million by 2020 2.3 percent fewer people had jobs at the lic of Korea). owing to a low birth rate and wide- end of July than a year earlier. A total of spread emigration, both of which are 463,000 people were registered unem- The senate amended the 1991 law on consequences of the country's eco- ployed at the end of the period. At the land restitution on September 16 with- nomic crisis. Kiril Gatev, deputy direc- same time, the ratio of output to capital out specifying how much land can be tor of the National Statistics Institute, increased by 11.7 percent. Gross wages restored to former owners. Under the told a press conference in Sofia that in industry rose 3.3 percent in real terms. 1991 law a maximum of 10 hectares of the trend "is exceeding even the most Real incomes were up 2 percent overall, farmland and 1 hectare of forestland pessimistic forecasts." Bulgaria's popu- with wages rising 5.5 percent, and pen- could be restituted per family. Parliament lation of 8.3 million is expected to fall sions rising 1 percent (in real terms). will decide on the limits on restituted land to some 8.1 million by 2000 and to Consumerpricesrose18.5percentinthe by March 31, 1998, following a survey between 6.9 million and 7.4 million in first eight months of 1997. of the total land available for restitution. 2020. The death rate has far out- stripped the birth rate, and by 2020 one Poland Slovakia in four Bulgarians will be a pensioner. Some 650,000 (mostly young) people Fueled by higher wages, a new taste Current Slovak budget expenditures left Bulgaria between 1989 and 1996. for foreign goods, and an explosion will be slashed by 5 percent. In the * TRANSITION,August 1997 (D 1997 The Word Bank first half of 1997 the budget deficit government's minority stakes in nine Vietnam, and Yemen. All incurred debts reached Sk 13.2 billion (Sk 78.5 billion in blue-chip companies, according to to the Soviet Union before its breakup revenue stood against Sk 91.7 billion in National Securities Commission Chair- in 1991. Moscow expects to recover spending), more than twice as much as man Grigory Marchenko. The 9 compa- $600 million a year from its debtor coun- in the same period in 1996. The Slovak nies belong to a group of 13 from the oil, tries-about three times what it recoups crown came under pressure but the na- gas, metals, telecommunications, and now. tional bank maintained the exchange rate banking sectors that the government has ($1=Sk 34), causing higher interest rates selected for privatization and listing on Errors and miscalculations were and a depletion of currency reserves. the new Kazakstan Stock Exchange. made during voucher privatization Most of these companies already have in Russia, First Deputy Prime Minis- The Slovak government approved a a strategic partner with a significant eq- ter Anatoliy Chubais admitted during proposal that would sharply limit the uity stake in their operations. The gov- a press conference on October 1, powers of the national bank and trans- ernment hopes that once the minority 1997, the fifth anniversary of handing fer some responsibilities to the ministry stakes are sold, the 13 companies will out the first privatization vouchers offinanceandparliament.Underthepro- establish themselves as the new stock (checks that entitled the holder to posed law the number of governors on exchange's blue-chip stocks. It also ex- acquire a state property item). Most the central bank board would rise to 10 pects the offerings to raise several hun- of the 450 voucher investment funds from the current 8. Of the 10 members, dred million dollars in foreign investment; lacked oversight and proved incapable 5 could be appointed by the ministry of to date Kazakstan has received $3.5 of working professionally, Chubais finance, after consulting with the cen- billion in foreign direct investment. said. However, thanks to voucher tral bank. Half of the board of governors privatization, private property now will not be allowed to be employees of Russia generates 75 percent of Russian GDP. the bank. The decline in production has been Russia and the London Club of com- halted, and inflation has declined CIS and Baltics mercial creditors signed a landmark since 1995 and will fall to between 5 agreement on October 7 to restruc- and 7 percent next year (compared Azerbaijan ture billions of dollars of Soviet-era with projected inflation of 13 percent debt, which officials said would open the in 1997). The ruble has stabilized and Azerbaijan has signed a $500 million door to a wave of new investment in the foreign reserves total $25 billion, com- contract with the U.S. consortium RV Russian economy. The deal-involving pared with less than $1 billion sev- Investment Services to explore and some 430 foreign banks that are sitting eral years ago. The Russian stock mine nine gold, silver, and copper de- on 27,000 separate outstanding loan market's capitalization tripled during the posits-the country's first major foreign agreements-allows Russia to pay off first nine months of 1997, from $30 bil- contract outside the oil sector. The con- $33 billion of Soviet debt over 25 years. lion in January to almost $100 billion in tract, signed by Azergyzyl, a state-owned Russia inherited the massive debt un- September. enterprise, on behalf of the government, der a deal with former Soviet republics envisages the extraction of 400 metric that gave Moscow control over all So- The health of Russians has been de- tons of gold, 2,500 tons of silver, and 15 viet foreign assets. Russia defaulted on clining since the mid-1960s, because million tons of copper ore. The venture is the loans in 1991, however. The agree- of factors such as alcohol and tobacco expected to create 10,000 new jobs. The ment could pave the way for Russia to consumption and a declining health care agreement foresees that the U.S. group raise a planned $3.4 billion through system. What was a gradual decline will finance exploration, while Azerbaijan eurobond offerings in 1998. turned into a freefall in the first years will receive 80 percent of the revenues. after the breakup of the Soviet Union, Azergyzyl owns 51 percent of the shares The London Club deal came after Rus- according to a report released in early in the new company and RV Investment sia joined the Paris Club of official credi- October by the London School of Hy- Services owns 49 percent. tors in September, following an agreement giene and Tropical Medicine, Russia's to reschedule $40 billion in Soviet debt Center of Demography and Human Ecol- Kazakhstan owed to foreign governments over 25 ogy, and France's National Institute for years. Debts owed to Russia are esti- Demographic Studies. Decline in life Institutional investors have offered mated to be about $140 billion. Russia's expectancy in the early 1990s, particu- $2.8 billion in bids for the Kazakh chief debtors are Algeria, Mozambique, larly among men, was the steepest and © 1997TheWorldBank TRANsITION,August 1997 * most severe ever documented anywhere portions, claims Aleksandr Potemkin, a move that analysts say will slow the in the world, says British researcher chief of the Russian State Tax Service growth of foreign exchange reserves and David Leon. Administration. In his recent article in relieve upward pressure on the yuan, the Rossiyskaya Gazeta he cites data: In 1996 domestic currency. The new rule has At current mortality rates, a 20-year-old the volume of fixed capital investments been in effect since October 1, the China man has a just better than 50 percent in private and state-owned enterprises Securities Times reported on September chance of surviving to age 60; in coun- was 25 percent of the 1990 level. Invest- 25. The central bank's decision confirms tries such as Britain and France nearly 9 ment's share in GDP fell from 22.4 per- that China is committed to achieving con- of 10 men age 20 are expected to sur- cent in 1990 to 16.4 percent in 1996. In vertibility under the capital account. vive to 60. In 1995 a Russian man could the first half of 1997 only 32 percent of China'.,yuan has come under strong expect to live to only age 58. The figures planned state investments were funded. upward pressure over the past year amid for women are far better-72 years-but Meanwhile, $1 .5-$2 billion in ceapital is record foreign capital inflows. Exporters still well below U.S. and West European leaving the country every month. last year racked up a trade surplus of standards. Unreleased data for 1996 will nearly $20 billion, and through the first show that life expectancy for men grew Ukraine half of this year notched up an additional by two years, to 60, and that women $17.8 billion. Added to that is more than gained one year, bringing their average A disagreement with the International $40 billion in foreign direct investment life expectancy to 73 years. This trend Monetary Fund (IMF) on the size of in 1996. A similar investment figure is appears to be continuing in 1997. Ukraine's 1998 budget deficit might expected for 1997. China's foreign ex- be solved by offering commitments to change reserves now total $131 billion- Russia's draft budget for 1998 provides further structural reform in areas such second only to Japan's. for 340 billion new rubles ($58.4 bil- as privatization, announced Victor lion) in revenues and 472 billion new Yushenko, head of the Ukrainian cen- Mongolia rubles ($81.2 billion) in expenditures. tral bank. The 1998 draft budget recently The budget assumes that GDP will grow presented to Parliament forecasts a Mongolia hopes to auction off almost by 2 percent in 1997 and that the Duma deficit equivalent to 5.5 percent of GDP, its entire state sector within the next will approve the new tax code and that it compared with an IMF ceiling of 4.5 per- two years under a radical privatization will go into effect on January 1. (Even if cent. The ceiling was a condition of a plan aimed a jump-starting the economy it is passed, the new tax code may only one-year, $542 million standby credit and opening the rich mineral sector to for- yield its full benefits in 1999. Daniel facility that the IMF agreed in Akugust. eign exploitation. The sales will include McGovern of Merrill Lynch has predicted Because of the dispute, the $50 million Erdnet,.the copper mining company, another difficult year ahead as the gov- first tranche has been delayed. Tlhe high which has sales of $250 million and ac- ernment struggles with tax collection. He projected deficit in 1998 is linkedi to the counts for 70 percent of Mongolia's for- calculates that the 1998 budget will need parliamentary elections scheduled for eign exchange revenues, as well as Gobi tax revenues equivalent to 12.4 percent March: By then the governmerit must Cashmere, which is responsible for a fifth of GDP, compared with 11.5 percent this have made some progress in paying of world output of raw cashmere, accord- year.) The government also expects to $3.3 billion in wage and pension Earrears. ing to Oleg Gorelik, adviser to the state receive $1.25 billion from countries that In 1996 Ukraine met a targeted budget privatization committee. The state will borrowed from the former Soviet Union. deficit of 3 percent, but did so partly by retain control of only a few assets, such ThegovernmentacknowledgedthatGDP not paying salaries and penisions as military hardware and the railway- in 1997 will at best be flat and could de- equivalent to 3 percent of GDP. A third hard to sell because it is owned jointly cline by up to 2 percent. Duma Labor and of the country's 51 million people earns with Russia. (With a population of only Social Policy Committee Chairman Sergei $30 to $50 a month. 2.3 million people and a territory the size Kalashnikov complained that the draft of France, Germany, Italy, and the United budget does not change Russia's overall Asia Kingdom combined, Mongolia boasts one economic policy; he suggests cutting of the world's largest reserves of mineral planned spending on industry and con- China resources.The government has abolished struction in half. all tariffs, making Mongolia the only coun- China's central bank unveiled new regu- try in the world to levy no import duties. The investment crisis In Russia is lations giving exporters the right to We appreciate the contributions from Ra- reaching increasingly threatening pro- keep their foreign currency earnings, dio Free Europe/Radio Liberty Newsline. TRANSIrON, August 1997 © 1997 The World Bank World Bank/IMF Agenda MIGA Capital Increase the partial risk guarantees being devel- joined the IMF since SDRs were last oped by the IFC could become its most distributed in 1981. Russia, for instance, The Development Committee (that is important risk-sharing product. The re- will get about $1.7 billion worth of SDRs, the Joint Ministerial Committee of the port also recommended that IDA guar- which it can use for any purpose. Board of Governors of the World Bank antees be made available to support and International Monetary Fund) private sector projects in low-income Prague Getting Ready for 2000 agreed on MIGA's need for additional countries. capital during its annual meetings in In 2000 the IMF/World Bank Annual Hong Kong in September.The three-part New IMF Job: (Safe)Guarding Free Meetings will be held in Prague, capital funding package would comprise a Capital Flow of the Czech Republic, The 52nd Annual $150 million grant from the World Bank World Bank-IMF Meetings in Hong Kong andanother$150millionofpaid-incapi- The IMF Interim Committee 1997 meet- drew nearly 20,000 direct participants tal from shareholders; an-additional $700 ing in Hong Kong backed moves that from the 181 member countries, and million would be available in callable would enable the Fund to promote the another 10,000 to 20,000 private bank- capital. Ministers expressed their view freeflowofcapital.Thecommitteecalled ers; financiers, and business people. that the funding package would relieve on the IMF Executive Board to complete Just to operate the meetings, $63 mil- MIGA's short-term financial constraints work on a proposed amendment to the lion was paid from the city's budget. Still, and would permit the Agency to respond IMF Articles that could make the liber- Hong Kong says it was well worth the to the expanding demand for its ser- alization of capital movements one of cost. Hong Kong hote!s, which have seen vices. the responsibilities of the IMF. However, a decline in tourist occupancy since the it offered reassurance that countries will British handover, were filled, at prices MIGA is the private sector arm of the not be told to dismantle their capital con- that shocked even seasoned world trav- World Bank that promotes foreign di- trols too quickly. The liberalization of elers. And local businesses, from res- rect investments to its developing mem- capital flows was an essential element taurants to shops, reported a significant ber countries by providing foreign of an efficient international monetary increase in business. investors guarantees (insurance) system in the age of globalization, the against major political risks, and by of- committee said. SPIL and SPAL to Russia fering technical assistance to host gov- ernments to attract foreign investment. IMF Increases Quotas, Allocates SDR On October 7 the World Bank approved MIGA's outstanding guarantee portfo- a $28.6 million social protection imple- lio has increased from $132 million in Responding to the increasing number mentation Loan (SPIL) to Russia that will 1990 to $2.5 billion as of September of global financial crises, the IMF Ex- provide technical know-how, including 30, 1997. ecutive Board agreed to a 45 percent monitoring systems and data analysis increase in members' quotas worth a capabilities to the Bank's $800 million IIF Urges More Money to MIGA total of $88.4 billion. Correspondingly, social protection adjustment loan it will boost the IMF's capital base by (SPAL), approved in June. Private sector financial institutions urged 45 percent. The Board also gave the the World Bank's shareholders to pump green light to a one-time allocation of SPIL's components range from assist- more money into MIGA. In a report re- special drawing rights (SDRs), valued ing Russia's pension fund, and manag- leased at the World Bank/IMF Annual at about $28 billion. (The special draw- ing individual workers' accounts, to Meetings in Hong Kong, the Institute of ing right, a global reserve currency, was creating a monitoring system of all re- International Finance (IIF) argued that created by the IMF in 1969 to supple- gional and national social transfers, and supporting MIGA would make the best ment countries' foreign-exchange re- implementing pilot programs for the available use of part of the Bank's sur- serves.) The new allocation would transfer of child allowance payments plus income. "Increasing MIGA's re- double the total SDR stock, and bring from enterprises to local social assis- sources soon is essential in order to SDR holdings of all IMF members up tance offices. The loan will also help to extend its operations into countries and to the equivalent of 29.3 percent of their establish a system to monitor unemploy- sectors where the development benefits IMF quota. It is designed particularly ment changes. "Together the programs are relatively large."The IIF predicted that to compensate 38 countries that have under both loans will improve the lives 6 1997The World Bank TRANSITION,August 1997 * of more than 15 million people over the from the IMF during the 1997 fiscal year Central Bank Governor Svetoslav medium and longer term," project man- and are not expected to draw during the Gavriiski said Bulgaria will meet its for- ager, Betty Hanan pointed out. current fiscal year either. (Estonia has eign debt payments over the next year been granted access to $95 million in and hopes for a longer-term agreement Johannes Linn on Russia Lending IMF financing, but has drawn only $53 with the IMF when its 14-month standby million to date. Since 1994 the IMF has accord expires next June. Finance min- Russia is the World Bank's largest bor- granted Latvia access to $272 million, istry figures show debt payments for this rower in terms of new disbursements, but it has only drawn $96 million.) year totaling $1.3 billion and the minis- said Johannes Linn, World Bank Vice Lithuania, meanwhile, is plarning a try forecasts payments of $950 million President for Europe and Central Asia, nonlending memorandum with the IMF, in 1998. Finance Minister Muravei Radev speaking in Hong Kong at the First Rus- currently the country's largest creditor. told reporters that this could not be ser- sia-East Asia Investor Forum on Sep- (the IMF has extended $404 million to viced without new IMF support. tember 30. To date the Bank has made Lithuania, of which $233 million has been 36 loans to Russia, and total commit- used.) Georgia and Kyrgyzstan both were New World Bank Loans in Kazakhstan ments of around $8 billion have been approved for new lending programs in approved, with close to $4 billion of this March, but had not drawn any of the The World Bank acknowledged amount already disbursed. The share of money as of April 30. Kazakhstan's great progress in trans- active projects rated "satisfactory" by the forming its economy to a market-ori- Bank's internal evaluation department During fiscal year 1997, 12 transition ented system. This has allowed the has risen from only 40 percent in 1996 countries borrowed around $4.r3 billion Bank to approve a new country assis- to more than 80 percent today. The Vice from the Fund. (Russia was the largest tance strategy. Inflation is expected to President anticipates a substantial ex- single borrower, drawing about $2.8 bil- fall below 20 percent, and economic pansion in the Bank's Russia program, lion from the three-year extended loan; growth will reach 1.5 percent in 1997. based on continued improvement in Ukraine drew $807 million.) At the same Bank restructuring, price and trade lib- policyand project performance, with new time, 17 nations in the region repaid the eralization, and privatization are signs commitments of up to $3 billion annu- IMF $1.2 billion on previous loans. of progress. Lending over the next three ally over the next two to three years. years could reach nearly $1 billion. The World Bank Loan to Bulgaria Bank approved a $230 million public New Role of the IMF in CEE sector adjustment loan in late August, World Bank officials and representa- to help Kazakhstan develop its admin- The IMF's role in several countries of tives of the Bulgarian government istrative structure and civil service, re- Central and Eastern Europe is shifting agreed on a $100 million financial and formthebudgetaryprocesses,including away from lending and toward advising enterprise sector adjustment loan taxation; and strengthen public sector on technical and economic issues. Rus- (FESAL) to further support the country's investment. The loan is also to help sia is preparing for a "graudation" from economic reforms. Loan negoliations develop housing and utility services. So the IMF, as it has achieved monetary were concluded on September 25. The far the Bank has committed a total of stability, according to Russian Central proposed loan will be presented to the almost $1.2 billion for 14 projects to Bank Chairman Sergei Dubinin, speak- Bank's Board on October 30. Alberto Kazakhstan. ing at a press conference during the Musalem, the World Bank's resident rep- Bank/Fund Annual Meetings in Hong resentative in Sofia, said that Bulgaria Armenia: World Bank Is Optimistic Kong. But additional areas in Russia's had made significant progress in elimi- interaction with the IMF would open, nating losses in the enterprise sector In Armenia annual inflation fell to un- such as cooperation in the settlement improving efficiency and governance der 8 percent in 1996-one of the low- of international financial problems. through the privatization of banks and est rates in the countries of the former enterprises. "The government com- Soviet Union. After years of collapse, Hungary and some other countries don't pleted implementation of the first stage GDP grew by 5.4 percent in 1994, by draw IMF money anymore, even though of its structural reform program. There nearly 7 percent in 1995, and by 5.8 it was offered to them through mutually still remains a long list of reforms and percent in 1996. The Bank made the agreed lending programs. (Hungary re- we encourage the government to con- assessment following the approval of paid a $190 million debt well ahead of tinue implementing it quickly and deci- two IDA credits on August 25, totaling schedule.) Estonia and Latvia didn't draw sively," he added. about $65 million. The larger $60 million M TRANSITION, AUgUSt 1997 © 1997 The World Bank SAC II (structural adjustment credit) will does not need to borrow much money Vietnam will need to embark on a second be used to accelerate the growth of the from abroad. But there will not be a great generation of reforms, tackling the finan- private sector, and strengthen the so- decline in the annual amount to be lent cial sector and state enterprises and pro- cial safety net to ensure essential health to Hungary," the Vice President added. moting competitiveness. Do Que Luong, and education services. The credit will Vietnam's new central bank chief, told IMF help to introduce a private pension IMF On-site Inspection in North Korea and World Bank representatives that new scheme, improve tax collection, and banking laws would be put in place soon accelerate privatization of the electric The IMF conducted an on-site inspec- and that the fragile and unwieldy private power industry. The second credit of $5 tion in North Korea in early Septem- banking sector would be streamlined. million is to finance technical assistance ber, at the country's request. The projects such as computerizing the State three-member IMF delegation entered Newly appointed Country DirectorAndrew Tax Inspectorate, starting a pilot North Korea on September 6 for a Steer,whohastakenupresidenceinViet- privatization program through public of- week-long stay to collect basic eco- nam, noted that the country is rapidly ferings, and promoting judicial reforms. nomic data for its fact-finding work. becoming the largest recipient of World North Korea is not an IMF member. Bank Group concessional assistance $75 Million to Help Uzbekistan Save Earlier, North Korea informally inquired among the IDA-only countries worldwide the Aral Sea Basin about membership in the IMF, with en- and expected to receive almost $600 try to coincide with its hoped-for ad- million this year. Since 1994 the World The World Bank on August 21 approved mission to the Asian Development Bank Group has provided Vietnam wilth a $75 million loan to Uzbekistan in sup- Bank. The North Korean economy con- almost $1.6 billion in concessional loan port of a water supply, sanitation, and tracted for the seventh straight year in and grant assistance. Over $475 million health project. The project is designed 1996, amid a deepening food crisis. hasbeen disbursedsofarfor 14projects to reverse the severe health and envi- "Seoul supports North Korea's acces- in infrastructure, agriculture, basic health ronmental damage caused by the deg- sion to the IMF and the World Bank," andeducation,andeconomicreform.The radation of the Aral Sea. "The immediate South Korea Finance Minister Kang World Bank, through a program o1 policy impact will be safe and reliable water Kyong-shik said in an address at the advice, technical assistance, and invest- supply services for about 1.5 million Annual Meetings in Hong Kong. ment projects, wants to focus on eradi- people in Uzbekistan's western region. cating poverty in Vietnam. Total cost of improving water supplies World Bank to Speed Up Support for in the region had been put at between Vietnam World Bank, IMF Halt Cambodian Aid $500 million and $1 billion," Roger Program Batstone, project task manager pointed In an effort to speed up its support for out. Since Uzbekistan joined the Bank Vietnam, the World Bank is shifting deci- The IMF and the World Bank have sus- in 1992, Bank commitments have totaled sionmaking and additional staff to its of- pended their financial support programs $327 million for five projects. fice in Hanoi, making Vietnam one of the in Cambodia, citing the country's inabil- 18 key countries worldwide that will have ity to meet economic conditions. The World Bank to Lend $600 million to locally-based directors for the first time. suspensions are a blow to Cambodia's Hungary ailing economy, which has sunk into re- World Bank Managing Director Caio cession. About 40 percent of Cambodia's The World Bank will lend up to $600 Koch-Weser, during his recent visit to government expenditure is financed by million to Hungary over the next three Vietnam, noted that "with decentralized foreign aid, amounting to between $400 years, with its support to the country decisionmaking and additional staff in million and $500 million annually. An IMF increasingly shifting to advising the the member country, we will be able to spokesman, in Hong Kong, confirmed government on economic issues. be more responsive to our clients' thattheESAFprogramlapsedattheend World Bank Vice President Johannes needs for knowledge and capital trans- of August, but technical assistance to Linn disclosed told a press confer- fer. From now on, the country director the country continues. ence in Budapest. During his visit, he in Hanoi will be calling the shots and met with senior government officials Washington will be responding, rather China to Become IFC's Largest Client from Hungary, including Finance Minis- than the other way around." The manag- ter Peter Medgyessy. "The government's ing director pointed out that, to achieve The International Finance Corporation borrowing strategy has changed, as it its growth and poverty reduction targets, (IFC) expects China to become its larg- © 199 7 The World Bank TRANSITION, August 1997 U est client, the China Daily Business Co f - Weekly reported. "China's campaign to onuerence lary transform small and medium-size state eterpnsforises into n tedfirm-si leaves Foreign Investment in Russila: Im- Languages: German and Polish. enterprises into nonstate firms leaves much space for the IFC to amplify its pacts on Corporate Governance and Information: Dr. Heinrich Machowski, business," the newspaper quoted IFC Russia's Regions Cooperation Bureau for Economic Re- China Office Director Davin Mackenzie November 17, 1997, Washingtorn, D.C., search on Eastern Europe, Konigin- United States Luise-Str. 5, 14195 Berlin, Germany, tel. as saying. Mackenzie said that he ex- 49-30-897708-36, fax 49-30-897708-99, pects China will fast become the IFC's Organizer: Kennan Institute for Ad- ' largest client, up from ninth place, vanced Russian Studies. Email: coop@ diw-berlin.de. overtaking Brazil, Thailand, and the Information: Kennan Institute!Woodrow The Regional Policy of Ukraine: Sci- Philippines. The IFC, Mackenzie Wilson Center, 370 L'EnfantPromenade, entific Foundations, Methods, and added, would promote foreign invest- SW, Suite 704, Washington, D.C., 20024 Mechanisms ment in China by encouraging devel- tel. 202-287-3400. May 21-22, 1998, Lviv, Ukraine opment in the nongovernment sector. Organizer: Ministry of Economics of It approved $2.8 billion in investment The Restructuring and Privatization Ukraine. funds for 33 projects in China in the of Banks, Bad Loan Portfolios, and Information: Ministry of Economics of last fiscal year. Their Impact on Enterprise Restruc- Ukraine, NationalAcademy of Sciences turing in Early Transition of Ukraine, Institute of Regional Research IFC officials discussed a cooperative December 12-13, 1997, Tirana, Albania of Lviv, Kozelnytska Street 4, 290026 project with China's first nongovern- Lviv, Ukraine, tel. 380-322-427-168/100, ment bank, the Minsheng Bank Cor- Organizers: Staffordshire University fax380-322-427-168. poration, at the Annual Meetings in Business School, Faculty of Econom- Hong Kong. Appraisal work is sched- ics, Tirana, and the Albanian Training Participation and Change in the Glo- uled to begin in November. The IFC Centre for Bankers. bal Economy would offer technical assistance to Information: Dr. Iraj Hashi, Staffordshire June 26-28, 1998, University of Bristol, the Minsheng Bank, arrange some University Business School, Stoke-on- United Kingdom long-term loans, and become one of Trent, ST42DIj UnitedKingdom, faxO044- Organizer: International Association for the bank's shareholders. 1782-747-006, Email: bsalh 1 staffs.ac.uk. the Economics of Participation. Topics: Employee ownership and the Anticorruption Guidelines The Envisioned Enlargement of the transition to a market econoy; Employee European Union and Its Globalisation participation in transnational corpora- At a board meeting on September 5 the January 3-5, 1998, Chicago, Illinois, tions; The stakeholder economy: partici- World Bank approved guidelines for pre- United States tion, Trustandhocial icon. venting corruption in developing coun- ~~pation, trust and social Inclusion. venting corruption in developing coun- Organizer: European Association for Call for papers: Send abstracts to Will authorit to grant specl pis Comparative Economic Studies (EACES) Bartlett, School for Policy Studies, Uni- authoritlly ta specia prie Executive Committee. versity of Bristol, Rodney Lodge, Grange potentiabollyhn suriceo cortruption, it nP- Information: Vladimir Andreff, University Rd, Bristol BS8 4EA, United Kingdom. poses abolishing price controls and in-' of Paris 1, Pantheon Sorbonne Sciences Information: Fran Boyd, Course and dsryubstionandipowes Reducbingveranment Economiques, 90 rue de Tolbiac, F;75634 Conference coordinator, SPS, Rodney regulation and power establishes an en- --Lde rneRa,Bitl S Paris Cedex 13, France, tel. 33-1- Lodge, Grange Road, Bristol, BS8 vironment wherein the market principle 40771848, fax 33-1-45847889, Email: 4EA, United Kingdom, tel. 44117-974- can operate. waroses rgrenetfr. 1117, fax 44117-973-7308, Email: We appreciate the contribution of RFE fran.boyd@bris.ac.uk. correspondent Robert Lyle. Transformation in East Germany and We appreciate the contributions of the Poland: Two Different Roads toward a Cooperation Bureau for Economic Re- European-Style Market Economy search on Eastern Europe, Koenigin- January 30-31, 1998, Warsaw, Poland Luise-Str. 5, D14195, Berlin, Germany, tel. 4930-897708-68, fax 4930-897708- Organizer: Friedrich-Ebert-Foundation, 99, Email: tribakova@diwberlin.de, or representation in Poland. dbowen @ diw-berlin. de. TRANSITION, August 1997 (D 1997 The World Bank New Books and Working Papers The Macroeconomics and Growth Division regrets that it is unable to provide the publications listed. World Bank Publications Federal transfers have less effect on To order: Priscilla lnfante, room F6P-204, regional subsidies in agriculture, which tel. 202-473-7642, fax 202-522-3198, To receive ordering and price information are influenced more by the regions' own Email: pinfante@worldbank.org. for World Bank publications, write: World tax base, or by local political interest Bank, PO. Box 7247-8619, Philadelphia, groups. To accelerate structural reforms, Dimitri Vittas, Private Pension Funds PA 19170, United States, tel. 202-473- the federal government might consider in Argentina's New Integrated Pen- 1155, fax202- 676-0581; or visit the World reducing the number of recipients of fed- sion System, 1820, August 1997, 34 p. Bankbookstores, in the United States, 701 eral budget transfers and changing the 18th Street, N.W., Washington, D.C., or rules of allocation of the transfers, in Private pension funds (AFJPs) in in France, 66 avenue d'lena, 75116 Paris, particular by introducing conditional Argentina's new integrated pension sys- Email: books@worldbank.org, Intemet: transfers linked to increases in cost re- tem have shown a vigorous response http://www worldbank.org. covery. and a robust performance in a highly To order: N. Campos, room H12-089, tel. uncertain economic environment. But Working Papers 202-473-8541, fax202-477-0288, Email: despite their success in mobilizing long- mcampos@worldbank.org. term funds and in earning high real in- Raquel Fernandez, Returns to Region- vestment returns, this second pillar has alism: An Evaluation of Nontraditional Dimitri Vittas, The Argentine Pension suffered from high operating and mar- Gains from Regional Trade Agree- Reform and Its Relevance for Eastern keting costs, low effective coverage, ments, 1816, August 1997, 34 p. Europe,1819, August 1997, 47 p. and regulations that are too draconian, To order: Jennifer Ngaine, room N5-056, to keep the system stable, transparent, tel. 202-473-7947, fax 202-522-1159, Argentina's experience with pension re- and safe. The author finds that Email:jngaineE worldbank.org. form offers important lessons for East- *The private pillar by June 1996, had ern Europe. A balanced reform is attracted 67 percent of workers partici- Lev Freinkman and Michael Haney, What politically feasible, while prolonged de- pating in the new integrated system. It Affects the Russian Regional Govern- lays in implementing pension reform can also represents 60 percent of those who ments' Propensity to Subsidize? lead to the collapse of traditional, un- are active contributors. It has attracted 1818, August 1997, 41 p. funded pension systems. Argentina re- many younger workers and has begun formed its pension system in 1994, when to mobilize a large, fast-growing pool of Both regional wealth and federal budget it created an integrated, multipillar pub- long-term financial resources. (Effective transfers to regional governments are lic-private pension system. Its old sys- coverage of the total labor force, how- important determinants of regional pro- tem had suffered from a vicious circle ever, is quite low. Affiliates represent only pensity to subsidize. Federal budget of unrealistic promises, high payroll about 40 percent of the labor force, and transfers are distortionary, encouraging taxes, widespread evasion, and grow- less than 60 percent of eligible workers.) regional governments to continue sub- ing deficits. But the reform program, -The AFJPs have earned very high real sidy policies and postpone structural enacted through the democratic pro- investment returns, offset by very high reforms. Federal transfers tend to con- cess, suffered from many weaknesses, operating costs. Individual affiliates have centrate in regions with the most the most important of which were the so far earned negative real returns be- distortionary policies. Housing receives continuing wage indexation of pensions cause of high commission charges. But the lion's share of total regional subsi- and the retention of a public, unfunded, in the long run, net returns are likely to dies, and there are greater disparities in defined benefit component in the sec- be positive as assets accumulate and housing subsidies than in agricultural ond pillar.The Argentine authorities were operating costs are better controlled. subsidies. Housing and transportation forced to take corrective measures, first *Because the new system is young, the subsidies are strongly counterequalizing: by abolishing indexation with the pas- number of beneficiaries is small, mostly (i.e., rural populations have less access sage of the Pension Solidarity Law in recipients of survivorship and disability to those subsidies), so up to 30 percent March 1995 and then by integrating pro- pensions. of regional subsidies are questionable vincial pension schemes into the national *Market concentration is high, although in terms of equity. system. lower than in Chile. The top three (7 1997The World Bank TRANSITION,August 1997 m companies account for 47 percent of af- To order: Minerva Patena, room NV5-047, the old pay-as-you-go system and its filiates and assets; the top six account tel. 202-473-9515, fax 202-522-1159, replacement by a defined-contribution for 78 percent. Email:mpatena ! worldbank.org. system based on individual capitaliza- * In March 1997 asset allocation was 51 tion accounts and managed by the pri- percent government bonds, 23 percent Yair Mundlak, Don Larson, and Ritz vate sector. The pensions of the old corporate equities and mutual fund Butzer, The Determinants of Agricul- system will be covered by the Bolivian shares, 17 percent bank deposits, and tural Productions, 1827, September Treasury. Workers will receive compen- 7 percent corporate bonds. Equity hold- 1997 40 p. satory pensions for their contributions ings' share has been rising, mainly at To order: Pauline Kokila, room N5-030, to the old system. the expense of bank deposits. tel. 202-473-3716, fax 202-522-3564, * Real rates of return average over 15 Email: pkokila@worldbank.org. Bolivia has entrusted management of percent a year, although high commis- the system to two groups selected sion charges substantially reduce the Roman Frydman, Cheryl W. Gray, Marek through international competitive bidding. net real returns to individual workers. But Hessel, and Andrzej Rapaczynski, Private Individual accounts have been costs are coming down sharply as a Ownershipand Corporate Performance: preallocated to those two groups on a percentage of average assets. Net real Some Lessons from Transition !Econo- regional basis or, in large cities, on the returns for a worker's full career are ex- mies, 1830, September 1997, 38 p. basis of the birthdays of affiliated work- pected to be highly positive so long as ers. Competition for individual accounts gross investment returns remain strong. Data on mid-size firms in three transi- will be allowed in the year 2000 and the To order: Priscilla Infante, room F6P-204, tion economies provide strong evidence market will be opened to other private tel 202-473-7642, fax 202-522-3198, that private ownership-except for pension-fund administrators (AFPs) in Email: pinfante@worldbankorg. worker ownership-dramatically im- 2002. Proceeds from the "capitalization" proves corporate performance. And the program will be used to pay an annuity Itzhak Goldberg, Gregory Jedrzejczak, privatized firms' ability to generate rev- to all Bolivians 65 and older. Funds from and Michael Fuchs, The IPO-Plus: A enues allows those firms to sustain or the program will also be managed by the New Approach to Privatization, 1821, expand employment. Among outsider two selected AFPs. Custodianship has August 1997, 25p. (See Transition, June owners, privatization funds seeni to do been entrusted to a multinational group 1997, Vol. 8, no. 3, p. 20). as well as strategic investors at revital- offering global custodial services. Boliv- To order: ltzhak Goldberg or Michael izing the privatized companies. Foreign ian pension reform faces major chal- Fuchs, tel. 202-473-6289 or 202-458- investors' impact appears no stronger lenges, however: 5875, Email:igoldberg @ worldbank.org or than that of major domestic "outsiders." * To create a competitive market for man- mfuchs@worldbank.org. To order: Bill Moore, room N9-038, tel. agement of pension fund resources and 202-473-8526, fax202-522-1155, Email: hence achieve competitive returns on Jun Ma, Intergovernmental Fiscal gmoorelIworldbank.org. investment and higher pensions. Transfers in Nine Countries: Lessons * To eliminate the requirement of invest- for Developing Countries, 1822, Sep- Wolfgang Keller, How Trade Patterns ment in treasury bonds. tember 1997, 78 p. and Technology Flows Affect Produc- * To insulate the system from attempts To order: Chiharu Ima, room G8-004, tel. tivity Growth, 1831, September 1997, to use AFP funds and capitalization pro- 202-473-5856, fax 202-676-9879, Email 34 p. ceeds for public projects (for example, cima @ worldbank. org. To order: Jennifer Ngaine, room N5-056, by transfering ownership of the capitali- tel. 202-473-7947, fax 202-522-1159, zation proceeds to individual Bolivians). Raj Krishna, Antidumping in Law and Email: jngaine worldbank.org. To order: Cecilia Pavlak, room 15-030, tel. Practice, 1823, September 1997, 37p. 202-458-2099, fax202-334-0113, Email: To order: Ana Maria Bobbio, room D6- Hermann von Gersdorff, Pension Re- cpavlak@worldbank.org. 053, tel. 202-458-1518, fax 202-522- form in Bolivia: Innovative Solutions 1573, Email: abobbio@worldbank.org. to Common Problems, 1832, Septem- Pedro Belli, The Comparative Advan- ber 1997, 26 p. tage of Government: A Review, 1834, Sherry M. Stephenson, Standards and October 1997, 16 p. Conformity Assessment as Nontariff Bolivia's program of pension reform went To order: Luis Schunk, room MC10-360, Barriers to Trade, 1826, September beyond the Chilean prototype, as it in- tel. 202-473-1779, fax 202-522-3253, 1997, 101 p. volved the immediate closing down of Email:.lschunk@ world bankorg. M TRANSITION, August 1997 ©D 1997 The World Bank Discussion Papers lending policies; and a list of selected China, India, Indonesia, and Russia as- World Bank Group publications. sume more central roles in the global Csaba Csaki and Zvi Lerman, Land Re- marketplace. The so-called "Big Five," form in Ukraine: The First Five Years, Ira W. Lieberman, Raj M. Desai, and which currently account for less than a Discussion Paper no. 371, 1997, 126 p. Stilpon S. Nestor (eds.), Between State tenth of global output and trade, could and Market: Mass Privatization in Tran- doubletheirshareoftheworld marketand Lou Jiwei, Macroeconomic Reform in sition Economies, Studies of Econo- surpass the European Union by 2020. China: Laying the Foundation for a mies in Transformation. Over the next 25 years developing coun- Socialist Economy, Discussion Paper tries could grow at an average rate of be- no. 374, 1997. Belarus: Prices, Market, and Enterprise tween 5 and 6 percent a year. In the Reform, a World Bank Country Study, formerly communist economies of Cen- Anjali Kumar, David R. Gray, Mangesh 1997, 226 p. tral and Eastern Europe, better conditions Hoskote, Stephen von Klaudy, and Jeff in export markets and continued strength Ruster, Mobilizing Domestic Capital Mar- China: Higher Education Reform, in investment should fuel a rebound in kets for Infrastructure Financing: Interna- 1997, 186 p. growth to 4 or 4.5 percent a year over the tional Experience and Lessons for China, next 10 years. There is a risk of back- Discussion Paper no. 377, 1997, 104 p. Vietnam: Education Financing,a World tracking in some regions of the former Bank Country Study, 1997, 220 p. Soviet Union, but economies there are Nicholas Prescott, Poverty, Social Ser- stabilizing, and growth could reach 5 to 6 vices, and Safety Nets in Vietnam, Dis- In Vietnam 91 percent of children be- percent by 2000. cussion Paper no. 376, 1997, 76 p. tween the ages of 5 and 10 are enrolled in school, and 88 percent of the country's Peter D. Ehrenhaft, Brian Vernon Hindley, Nicholas Prescott and Menno Pradhan, working-age population is literate. How- Constantine Michalopoulos, and L. Alan A Poverty Profile of Cambodia, Dis- ever, emerging market forces, as well Winters, Policies on Imports from cussion Paper no. 373, 1997, 94 p. as competition from its economically Economies in Transition: Two Case vibrant neighbors, raise important new Studies, Studies of Economies in Trans- Other World Bank Publications challenges for the country's education formation, no. 22, 1997, 56 p. and training system. William A. Delphos, Inside the World Although the European Union and the Bank Group: The Practical Guide for Michael.Walsh and Jitendra J. Shah, United States have greatly increased International Business Executives, Clean Fuels for Asia:Technical Options access to their markets for products Delphos International, 1997, 242 p. for Moving toward Unleaded Gasoline from transition economies, they con- and Low-Sulfur Diesel, World BankTech- tinue to treat many of their new trad- The guide serves as a resource for pri- nical Paper no. 377, 1997, 122 p. ing partners as "nonmarket" economies vate (and public sector executives to iden- and use different procedures in deter- tifyparticularWorld BankGroup programs, Air pollution has become a serious is- mining whether exporters from those and the appropriate person(s) to contact sue in many Asian cities. A major cause countries engage in "dumping."Authors about them. Organized by types of prod- is the expanding motor vehicle popula- conclude that the procedures may not ucts and services offered; it provides an tion, with growth rates as high as 23 per- be significantly more stringent than overview of all five agencies of the World cent in rapidly growing economies like those used against market economies, BankGroup,followedbychapter-by-chap- China. Experienceworldwidehasshown and may not result in significant addi- ter descriptions of the Group's information that the use of clean fuels (low-lead or tional obstacles to trade. However, they services, procurement opportunities, ad- unleaded gasoline and low-sulfur diesel) question whether the transition econo- visory services, public and private sector is a cost-effective way of reducing ve- mies that have adopted market insti- financing, investment funds, and insur- hicular emissions. tutitJns and practices in the conduct ance. Six appendixes supply information of trade should be classified as on the Bank Group's environmental pro- Global Economic Prospects and the nonmarket. grams and compliance standards; the Developing Countries, 1997. Luis Landau, Poland Country Assis- Group's field offices worldwide; industry- tance Review: Partnership in a Transi- and country-specific contacts at the IBRD, The world economy will change fundamen- tion Economy, a World Bank Operations IFC, and MIGA; IBRD and IDA country- tally over the next 25 years as Brazil, and Evaluation Study, 1997, 152 p. ( 1997 TheWorld Bank TRANSITION, August1997 M IMF Publications economies-participating in the training Roger H. Gordon and David Li, Taxes courses offered by the IMF Institute- and Government Incentives: Eastern To order: IMF Publication Services, 700- with a guidebook to the core miacroeco- Europe Versus China, Discussion Pa- 19th Street NW, Washington, D.C.20431, nomic ideas that underlie the formulation per 1657, June 1997, 27 p. United States, tel. 202-623-7430, fax 202- of economic policies. The manual cov- 623-7201,Email:publications@imf.org, ers accounting and analysis for the real, Roger H. Gordon and David D. Li, Gov- Intemet:httpf://www.imf.org fiscal, monetary, and external sectors, ernment Distributional Concerns and as well as interrelations among those Economic Policy during the Transi- Working Papers sectors (the flow of funds). The analy- tion from Socialism, Discussion Paper ses are based on up-to-date accounting 1662, June 1997, 34 p. Robert Towthorn and Ramana methodology, primarily the 1993 System Ramaswamy, Deindustrialization: of National Accounts and the Fifth Edi- Thorvaldur Gylfason, Tryggvi Thor Causes and Implications, Working Pa- tion of the Balance of Payments Manual Herbertsson, and Gylfi Zoega, A Mixed per 9742, 1997, 38 p. (1993), and include a discussion of dif- Blessing: Natural Resources and Eco- ferences between the new accounting nomic Growth, Discussion Paper 1668, Ernesto Herndndez-Cata, Liberalization system and its predecessors. The de- July 1997, 26 p. and the Behavior of Output during the sign of the volume was motivated by the Transition from Plan to Market, Work- IMF Institute's efforts to meet the unique WIIW Publications ing Paper 9753, 1997. needs of officials from IMF member countries in transition. To order: WIIW, Vienna Institute for Com- Ishan Kapur and Emmanuel van der parative Economic Studies, Oppolzer- Mensbrugghe, External Borrowing by CEPR Publications gasse 6, A-1010, Vienna, Austria. the Baltics, Russia, and Other Coun- tries of the Former Soviet Union: De- To order: Center for Economic Policy Michael Landesmann, Emerging Pat- velopments and Policy Issues, Working Research, 25-28 Old Burlington Street, terns of European Industrial Special- Paper 9772, 1997, 43 p. London WIX 1LB, United King,iom, tel. ization: Implications for Trade 44-171-878-2900, fax 44-171-878-2999, Structures, FDI and Migration Flows, CIS and Baltic states are increasingly Email: cepr@cepr.org. WIIW 168, June 1997, pp. 49-58. borrowing on international capital mar- kets, a development that generally re- Coming to Terms with Accession, Gabor Hunya, Foreign Direct Invest- flects their success in achieving financial Forum Report of the Economic Policy ment and Its Effects in the Czech Re- stabilization. In view of the low level of Initiative, no. 2, 1996, 113 p. public, Hungary and Poland, WIIW no. domestic saving and large capital re- 168, June 1997, pp. 137-80. quirements, recourse to foreign borrow- Martin Rein, Barry L. Friedman, and ing may of course generate significant Andreas Worgotter (eds.), Enterprise Rumen Dobrinsky, Transition Failures: benefits for those economies in transi- and Social Benefits after Commu- Anatomy of the Bulgarian Crisis, tion. However, the rapid increase in ex- nism, 1997, 316 p. WIIW 236, April 1997, 58 p. ternal debt suggests that consideration also needs to be given to the risks from Fabrizio Coricelli, Marek Dabrowfski, and Sandor Richter, European Integration: too great a dependence on foreign sav- Urszula Kosterna, Fiscal Pclicy in The CEFTA and the Europe Agree- ing, including the risk of postponement Transition: Forum Report of the Eco- ments, WIIW 237, May 1997, 24 p. of needed structural reforms. nomic Policy Initiative, No. 3 (pub- lished with the Institute for EastWest WorldTrade Executive Inc., Other IMF Publications Studies), 1997, 84 p. Publications Abdessatar Ouanes and Subhash Thakur, Macroeconomic Accounting Carmela Martin and Francisco J. To order: WorldTrade Executive Inc., PO. and Analysis in Transition Econo- Velazquez, The Determining Factors Box 761, Concord, Massachusetts mies, June 1997, 183 p. of Foreign Direct Investment in Spain 01742, United States, tel. 508-287-0301, and the Rest of the OECD: Lessons fax 508-287-0302. Using a case study on Poland, the for the CEECs, Discussion Paper 1637, Doing Business in Ukraine, 1997. manual provides officials from transition June 1997, 28 p. M TRANSITION, August 1997 © 1997 The World Bank Financing Your Business in Eastern needed correction. Macroeconomic sta- Editors-authors choose the Talleyrand Europe, 1997. bilization, therefore, has always been a motto "History teaches nothing, only majoringredientofthetransitionprocess. punishes those who do not learn its Real Estate and Land Use Regulation lessons," to make transition and de- in Eastern and Central Europe, 1997. Macroeconomic stability is rarely sustain- veloping countries aware of the impor- ablewithout microeconomic restructuring, tance of studying the earlier history of Representative Offices in the Russian particularly at the level of the state-owned financial development and drawing on Federation, 1997. enterprise. Without adequate structural those lessons. That includes introduc- reforms, supply responses will be less ing incentives that encourage banks Frankfurter institut Fur Trans- favorable than in a more fundamentally to lend prudently and to diversify their formationsstudien changed economy with a large private risks and discourage politicizing the sector in place. Weak supply responses banking system. To order: Fl. T., Europa-Universitat and long-lasting contraction can politically To order: Cambridge University Press, Viadrina, Posffach 776, D-15207 Frank- weaken the reformers and reduce the 110 Midland Avenue, Port Chester, New furt (Oder) Germany. chances of success. If old central plan- York 10573-4930, United States, tel. 914- ning institutions are not completely abol- 937-9600, fax 914-937-4712. Zbyszko Chojnicki, Methodological ished, if quasi-monopolistic market Problems of Polish Economics in the structures are common, and if prices as Wolfgang Keller, From Socialist Show- Postwar Period, Arbeitsberichte Dis- well as access to hard kurrencies have case to Mezzogiorno? Lessons on the cussion Papers no. 2/97, 1997, 19 p. not been totally deregulated, the economy Role of Technical Change from East will be vulnerable to inflation. Germany's Post-World War II Growth Thomas Eger, Reform of Bankruptcy To order: Cambridge University Press, Performance, Working Paper 6079, from an Economic Perspective [in The Edinburgh Building, Cambridge, CB2 National Bureau of Economic Research, German], Arbeitsberichte Discussion 1RF, United Kingdom,or 40 West 20th Inc. Publications, July 1997, 24 p. Papers no. 4/97, 1997, 24 p. Street, NewYork, New York 10011-32 11, To order: NBER, 1050 Massachusetts United States. Avenue, Cambridge, Massachusetts Klaus Mangold, Investment Decisions 02138, United States, teL 617-868-3900, in Central and Eastern Europe from Jose Luis Bobadilla, Christin A. Costello, fax617-441-3895, email:subs@nber.org. the Perspective of Daimler-Benz AG and Faith Mitchell (eds.), Premature [in German], F.I.T. Vortrage no. 1/97, Death in the New Independent States, Michael James Douglas, A Change of 1997, 12 p. National Academy Press, Washington, System: Housing System Transforma- D.C., United States, 1997, 404 p. tion and Neighborhood Change in Other Publications Budapest, Netherlands Geographical One of the most startling demographic Studies, Netherlands, 1997. Mario Blejerand MarkoSkreb(eds.), Mac- trends of the second half of the twentieth Toorder:Netherlands Geographical Stud- roeconomic Stabilization in Tran- century is the reversal of improvements ies, P0. Box 80115, 3508 TC Utrecht, sition Economies, Cambridge University in life expectancy for adults in the Com- Netherlands, fax 3130-253-553. Press, United Kingdom, 1997, 338 p. monwealth of Independent States (CIS). This volume brings together the work of Zdenek Drdbek, Miroslav Hrncir, Andras "Stability is not everything, but without American and European demographers lnotai, Piritta Sorsa, and others, Re- stability, everything is nothing" (Karl and public health specialists. gionalism and the Global Economy: Schiller, Former German Minister of the To order: NationalAcademy Press, 2101 The Case of Central and Eastern Eu- Economy). Macroeconomic stabilization Constitution Avenue, NW, Box285, Wash- rope, Forum on Debt and Development, involves a reasonable degree of price sta- ington, D.C. 20055, tel. 800-624-6242. Netherlands, 1997, 254 p. bility and external balance, as well as a The full textis available on Intemet: http:/ sensible rate of economic growth. All the /wwwnap.edu. * The Europe Agreements have not been postcommunist economies emerged entirely successful in eliminating all of from their previous regimes with vari- Gerard Caprio, Jr. and Dimitri Vittas the trade restrictions against the CEECs ous-and sometimes significant-de- (eds.), Reforming Financial Systems, exports. The presence of restrictions on grees of macroeconomic imbalance (with Cambridge University Press, United the so-called sensitive products is a pri- high inflation and output collapse) that Kingdom, 1997, 222 p. mary example of the problems at hand. t 1997 The World Bank TRANSInON,AUgust 1997 U * CEFTA can play an extremely impor- While trade unions are still overwhelm- Katajanokanlaituri 6 B, 00160 Helsinki, tant role in helping the individual CEECs ingly the most important channel for Finland, tel. 3589-615-9911, fax 3589- to strengthen their negotiation power workers' voices in Russia, employees 615-99333, Email: wider@wideruunu.edu. versus the EU. as shareholders are attracting increas- o Neither the Europe Agreements nor ing attention and assuming rising impor- Lake Baikal Region Business Guide, CEFTA are instruments of protection tance. There is an urgent need for United States Agency for International against third countries. As free trade technical assistance to guide the evolu- Development, New York, 1997, 177 p. agreements, those regional and subre- tion of institutions in the industrial rela- gional arrangements do not coordinate tions area. In Russia the spread of With careful planning and responsible the external tariff (and trade policy in substantial employee ownership surpris- management, the Lake Baikal region can general) toward third countries. Moreover, ingly has been accompanied by a de- develop new commercial and industrial with the exception of Bulgaria, the cline in employee influence. activities, bringing needed jobs and eco- CEECs are members of the WTO and To order: Hamilton College, Department of nomic improvement, while preserving could not, therefore, change their exter- Economics, Clinton, New York 13323, United one of Russia's-and the world's-most nal tariffs unilaterally. States, Email: dwoodwar@hamilton.edu. prized natural environments. To order: FONDAD, Noordeinde 107a, To order: Ecologically Sustainable De- 2514 GE, The Hague, Netherlands. Natalija Kazlauskiene and William H. velopment, Inc., 2 Church Street, Meyers, The Baltic Free Trade Agree- Elizabethtown, New York 12932, United Carola Gebhard, The Role of the D- ment in Agriculture: Issues and Po- States, tel. 518-873-3200, Email: Mark in the Multicurrency System tential Impacts, Baltic Report 97-BR 25, esd@igc.ape.org. and the Transition to the Euro, Cen- August 1997, 11 p. tral Banking Publications, United King- Ivan Miklos, Viktor Niznansky, and dom, 1997, 94 p. Latvia has the highest prices for many Elena Zarska, A New System of Fund- agricultural products, which at early ing Local Government Institutions: Withtheongoingchangesin Centraland stages may stimulate imports from the Proposal for a Radical Change, Eastern Europe, the importance of the member countries. Estonia may have an M.E.S.A. 10, October 1996, 118 p. D-mark has been growing further as advantage as an intraregional exporter of Germany has crucial trading relation- processed products because of the tar- Central governments should consider ships with those countries. Several iff-free imports of raw materials and the the following principles in order to cre- Eastern European countries have relatively advanced levels of processing ate a healthy environment for local (re- pegged their currency to the D-mark or facilities and higher foreign investment. gional) governments: to a currency basket that is, in most Lithuania has the largest production and * Increasing the share of locally retained cases, dominated by the D-mark; Es- consumption base and may be able to tax revenue. tonia (kroon), the FR Yugoslavia (dinar), take advantage of economies of scale, if * Improving incentives to collect and the Czech Republic (koruna). Slovakia's the private sector is not hampered by administer taxes more efficiently. koruna is pegged to a currency basket government intervention. All three coun- * Developing closer links between local consisting of 60 percent deutsche mark tries could benefit from the Agricultural economic performance and tax rev- and 40 percent U.S. dollar. The D-mark Free Trade Agreement. enues. is the anchor currency for the Bosnian To order: Center for Agricultural and Ru- * Introducing a new system-based on dinar. The Polish zloty targets a basket ral Development, Iowa State University, incentives, solidarity, and equity-to of five currencies that include the D- Ames, Iowa 50011-1070, United States, equalize economic differences between mark (35 percent). teL 515-294-1183, fax 515-294-6336. regions and between communities within To order: Central Banking Publications a region. Ltd., 27 Chancery Lane, London WC2A Grzegorz W. Kolodko and D. Mario Nuti, * Motivating local governments to for- 1PA, United Kingdom. The Polish Alternative: Old Myths, Hard mulate long-term development strate- Facts and New Strategies in the Suc- gies. Derek C. Jones, Privatization and In- cessful Transformation of the Polish * Enhancing the efficiency of financial and dustrial and Labor Relations in Tran- Economy, Research for Action 3:3, UNU capital markets to encourage foreign as- sitional Economies: Evidence from St. World Institute for Development Econom- sistance and cooperation. Petersburg, Working Paper 97/6, June ics Research, Finland, 1997, 56 p. Toorder:M.E.S.A. 10, Center for Economic 1997, 33 p. To order: UNU/WIDER Publications, andSocialAnalysis, Hviezdoslavovo nam. * TRANSmON, August 1997 ( 1997 The World Bank 17, 811 02 Bratislava, tel. 421-533-4009, overall, governments in Central and East- Bert van Selm, The Economics of So- fax 421-533-2189. ern Europe do not provide much funding viet Break-Up, Routledge, Ltd., United for the environmental movement, with the Kingdom, 1997, 161 p. Political Parties and Democracy: Con- exception of Hungary, where nearly ev- ference Report, International Forum for ery NGO receives financial support. Before 1991 little was written or known Democratic Studies, National Endow- About one-third of NGOs receive some of the individual states that made up the ment for Democracy, June 1997, 31 p. money from their members, but member- Soviet Union, and their identities were To order: Intemational Forum for Demo- ship fees are usually very small. Other subsumed into the Russian monolith.This cratic Studies, 1101-15th Street, NW, funding possibilities include sponsorship book analyses how the states of the So- Suite 802, Washington, D.C. 20005, by private businesses and sales (of pub- viet Union functioned before the dissolu- United States, tel. 202-293-0300, fax lications or research results, for example). tion, the effects of breaking up into 15 202-293-0258, Internet: http://www. Corporate sponsorship seems to be more independent states, and the degree of ned.org. popular in Croatia, Slovenia, and the possible future economic integration. Visegrad countries, but it still provides Problems, Progress and Possibilities: only a very small part of the NGOs' bud- The economic consequences of the A Needs Assessment of Environmen- gets. Self-sustainability is not a real al- breakup show that political borders mat- tal NGOs in Central and Eastern Eu- ternative yet for the NGOs. Most NGOs ter; each independent state can now de- rope,The Regional Environmental Center perceive themselves as inefficient velop its separate transition strategy. As (REC) for Central and Eastern Europe, fundraisers and at the same time, regard the ruble area was unraveling, various sub- Hungary, April 1997, 96 p. contacts with local governments, busi- groups of the Newly Independent States nesses, and external founders as a mat- signed several economic and monetary Out of approximately 3,000 environmen- ter of survival. treaties-aimed at the Customs, Mon- tal NGOs located throughout Central and To order: REC, Ady Endre ut 9-11, 2000 etary, and Payments Union. Thus far, Eastern Europe, some 62 percent re- Szentendre, Hungary tel. 3626-311-199, nonehasbeenimplemented.Buttheyare sponded to the REC's call for informa- fax3626-311-294, Email: rec-info@?rec.hu. unnecessary as long as rational eco- tion, assisted by the REC's network of nomic policies are pursued (for example, local offices in 15 countries. The report Peter S. Rashish (ed.), Developing a adopting convertible currencies would reveals that NGOs continue to need as- New Consensus for the International render the Payments Union unneces- sistance, including financial support. The Treatment of Investment, Report of the sary). Renewed political integration would vast majority of NGOs (approximately 75 European Institute Sixth Transatlantic change the situation, but this would make percent) are in an unstable, poor, or very Seminar on Trade and Investment, No- everybody worse off. The author hopes poor financial state, while nearly half of vember 1996, 55 p. that "The Economics of Soviet Return" the individual NGOs have annual budgets will never be written. of less than $1,000 per year. Negotiations are under way in the OECD To order: Routledge Ltd., Cheriton House, to conclude a Multilateral Agreement on North Way, Andover, Hampshire SP10 Two-thirds of the responding NGOs, ap- Investment (MAI). Once it is completed, 5BE, United Kingdom, Internet: http:// proximately 2,000, are located in the it will be open to accession by non- www.routledge.com/routledge.html. Visegrad countries (the Czech Repub- OECD countries that can meet its re- lic, Hungary, Poland, and Slovakia). quirements. By taking part in the MAI, Bertram Silverman and MurrayYanowitch, Major goals of almost all NGOs include these countries will accelerate the pro- New Rich, New Poor, New Russia: Win- environmental fieldwork, education and cess of globalization. Foreign invest- ners and Losers on the Russian Road training, and the dissemination of envi- ment requires bending certain aspects to Capitalism, M.E. Sharpe, United King- ronmental information. of economic sovereignty to accommo- dom, July 1997, 176 p. date international rules, for instance by Nearly every group receives money from eliminating the preferential treatment of Russia is moving along a path that is foreign donor organizations, the most domestic investors during privatization. haunted by the specter of inequality. Over important source of funding, followed by To order: The European Institute, 5225 a period of four years the country ceased support from various government bod- Wisconsin Avenue, NW, Suite 200, being a relatively equal society and be- ies. Local authorities actively support Washington, D.C. 20015-2014, United came a society more unequal than any environmental NGOs, often by giving States, tel. 202-895-1670, Email: of its European or East Asian counter- them office space and supplies. But info@europeaninstitute.org. parts. If the trend continues, the social © 1997 The WorldBank TRANSITION,August1997 * and economic division in Russia will re- Newsletters/Special Publications Goals, Developing Administrations un- semble that of the developing, rather der Law, French Public Finances and than the industrial economies. This pro- Georgian Economic Trends Quarterly Europe's Demands, and Using NGOs to cess has not been countered by signifi- Review: First Quarter 1997, (3eorgia, Improve Public Policy. cant government social programs or 1997, 79 p. To order: PMF, SIGMA-OECD Informa- grass-roots political movements sup- To order: Dr. Julian Hancock, Director, tion Services, 2, rue Andre-Pascal, 75775 ported by the intelligentsia, for the fol- Centre for European and International Paris Cedex 16, France, tel. 331-4524- lowing reasons: Consultancy, De Montford University, 7900, fax 331-4524-1300. * The fragility of state bureaucracy and Bosworth House, Leicester, LEI 9BH, devolution of political and economic United Kingdom, tel. 440-116-250-6293, Severnaya Pacifica [in Russian], Rus- power to regional and local authorities fax 440-116-257-7264. sian Far East Update, Washington, D.C., reduced the state's capacity to collect 1997, 152 p. taxes and support social programs. Journal of Comparative Economics, To order: Sergei Vakhrin, Editor in Chief, * Many professionals-who helped a bimonthly publication by Academic Severnaya Pacifica, g. Petropavlovsk- topple the Soviet system-are shying Press. A special edition on "Bank Kamchatskii, ul. Kurchatova, 58, away from advocating reform alterna- Privatization in Central Europe and Rus- Kamchatrybvod, 683049, Russia, tel. 7- tives; 70 years of Communist Party ter- sia' vol. 25, no. 1, August 1997. 50901-94019, fax 7-415-2-11-72-62. ror is too deeply ingrained in the historic memory of the intelligentsia to turn them Creating several commercial banks al- Trends in Organized Crime [Special against present reformers. lows competition to develop onice the Section-Corruption and Organized * Old trade unions have been compro- banks are effectively privatized. Recapi- Crime], a quarterly publication of Trans- mised, and new independent labor move- talization and privatization of the banks action Periodicals Consortium with the ments are absent. An implicit social should be closely linked. Bank National Strategy Information Center. contract between enterprise workers and privatization is more likely to result in good To order: National Strategy Information managers provides nominal employment banking if effective mechanisms for cor- Center, 1730 Rhode IslandAvenue, N. W, in exchange for labor-peace-workers porate governance are in place. If the Suite 500, Washington, D.C., 20036-3 101, are ready to accept a pay cut in ex- government is a large shareholder, the United States, teL 202-429-0129, fax202- change for retaining their jobs. alignment of government and manager 659-5429, Email: nsic@ix.netcom.com. To order: M.E. Sharpe, Inc., Publisher, interests can lead to the continued allo- 80 Business Park Drive, Armonk, New cation of credit based on considerations Russian Economic Developments (a York, 10504, United States, teL 914-273- other than the maximization of profit. Stra- monthly), Institute for Macroeconomic Re- 1800, fax 914-273-2106. tegic foreign investors can contribute to search and Forecasting Publications. the efficiency and health of privatized To order: RF State Committee for Statis- Pyotr Joannevich van de Waal-Palms, banks, bringing both expertise and capi- tics, Ministries of Economics and Finance, Understanding Russian Banking tal into the bank. Competition is an im- IMRF HSE and INIOR Partner of CEPSI Mossbusinessbank, Promstroibank, portant complement to the privatization INSTEAD, 412M. Gnezdnikovskyper., Mos- Bank Saint Petersburg, and Petrovsky of state-owned banks. Impending mem- cow 103009, Russia, tel. 095-923-6745, fax Bank, forthcoming, 1997, 300 p. (Index bership in the European Union should 095-928-9317, Email: imiphse@glas. http://www.aa.net/-russia/banking! accelerate banking sector reforms. apc.org, Internet: htp.://www.ru/imrf book.html) To order: Joumal of Comparatitve Eco- nomics, Academic Press, 6277 Sea Har- Suggested Websites: Anke van de Waal, Personal Develop- bor Drive, Orlando, Florida 32887-4900, ment and Transformation for Russian United States. http://www.elsevier.n1/hes Business Managers, forthcoming, 1997, 100 p. (Sample chapter available at: Public Management Forum (PMF), a The First Electronic Handbooks in Eco- http://www.eskimo.com/palbank.) bimonthly newsletter for public adminis- nomics, introductions to all 51 chapters To order: Anke van de Waal, 515 Lake tration practitioners in Central and East- of the first 4 volumes, including more than Street South, #103, Kirkland, Washing- ern Europe, published by SIGMA. Vol. 3, 200 pages of introductory content. Key- ton 98033, United States, tel. 1 425 no. 3, 1997 includes the following topics: word search facilities. (Marten Stavenga, 828-6774, fax 1-425-827-5528, Email: Think Tanks Offer Options, Elfective Publishing Editor, North-Holland/Elsevier hi@aa.net. Communications Support Government Science, Email: m.stavenga@elsevier.nl). M TRANSITION, August 1997 (D 19 9 7 The World Bank Bibliography of Selected Articles Postsocialist Economies and Economic Transformation (United Cilluffo, F. J., and R. Johnston. Kremlin Kingdom) 9(2):209-18, 1997. Kapitalism. The International Economy Boeri, T. Heterogeneous Workers, (United States), pp. 58-61, July-August Economic Transformation and the Lubyova, M., and J. Van Ours. Unem- 1997. Stagnancy of Transitional Unem- ployment Dynamics and the Restruc- ployment. European Economic Review turing of the Slovak Unemployment Mabbett, D. Reforming Social Security (International) 41(3-5):905-14, April Benefit System. European Economic in Economies inTransition: Problems 1997. Review (International) 41(3-5):925-34, and Policies in the Former Soviet April 1997. Republic of Moldova. Intemational So- Rondinelli, D. A., and M. A. Berry. Case cial Security Review (Switzerland) 50(1/ Study: Sonoco's Materials Recla- Mondschean, T. S. Banking Reform in 97):41-55, 1997. mation Improves Environmental a Transition Economy: The Case of Performance through Quality-based Poland. Economic Perspectives: A Re- Moscow as a Business Centre: Finan- Management. Environmental Quality view from the Federal Reserve Bank of cial Times Survey. Financial Times Management (United States), pp. 1-9, Chicago (United States) 21:16-32, (United Kingdom), pp. I-X, September 1997. March-April 1997. 17, 1997. Tax Exemptions, Tax Breaks-When, Orazem, P. F., and M. Vodopivec. Value Asia forWho,underWhoseAuthority?Rus- of Human Capital in Transition to sian Far East Update (United States) Market: Evidence from Slovenia. Eu- Devereux, J. and B. Roberts. Direct 7(6):8-9, June 1997. ropean Economic Review (International) Foreign Investment and Welfare in the 41(3-5):893-904, April 1997. Transforming Economies: The Case Central and Eastern Europe of Central Asia. Joumal of Comparative Slovakia. Financial Times Survey Economics (United States) 24(3):297- Bulgaria. Financial Times Survey (UnitedKingdom),pp.27-29,October28, 312, June 1997. (United Kingdom), pp. 25-28, October 1997. 21, 1997. China Smyth, R. The Township and Village Boltho, A., W. Carlin, and P. Scaramozzino. Enterprise Sector as a Specific Ex- Hanstad, T., and L. Ping. Land Reform Will East Germany Become a New ample of Regionalism-Some General in the People's Republic of China: Mezzogiorno? Joumal of Comparative Lessons for Socialist Transformation. Auctioning Rights to Wasteland. Economics (United States) 24(3):241-64, Economic Systems (Germany) 21(3):235- Loyola of Los Angeles International and June 1997. 64, September 1997. ComparativeLawJoumal(United States) 19(3):545-83, April 1997. Czechs Emerge from Financial Crisis. Sundhaussen, H. Transformation of Vil- East/West Commersant (United States) lages and of Agriculture in the Balkans, Wu, F. Hong Kong's Strategic Alli- 5(14):1-2, July 31, 1997. from 19th Century to World War II [in ances. The International Economy German]. Sudosteuropa Mitteilungen (Ger- (United States) 11 (5): 46-49, September- Gjonca, A., C. Wilson, and J. Falkingham. many) 36(4):319-36, 1996. October 1997. Paradoxes of Health Transition in Europe's Poorest Country: Albania CIS and the Baltics Yao, S. Profit Sharing, Bonus Pay- 1950-90, Population and Development ment, and Productivity: A Case Study Review (United States) 23(3): 585-610, Braguinsky, S. Producer's Behavior in of Chinese State-owned Enterprises. September 1997. a Transition Economy-Theoretical Journal of Comparative Economics and Empirical Analysis with an Ap- (United States) 24(3):281-96, June Konopielko, L. Reserve Requirements plication to the Russian Economy. 1997. as an Implicit Tax: The Case of Poland Economic Systems (Germany) 21(3):265- and Hungary. Communist Economies 95, September 1997. © 1997The World Bank TRANSTON, August 1997 U Subscribe to TRANSITION To day Your subscription for calendar year 1997 will include four issues (June, August, October, TRA N SITIO N and December) at a rate of US$20. In 1998 the rate will be $30 per year for six issues. You may subscribe now for four issues in 1997 and six issues in 1998 for $45, or $5 off the full rate. The February and April 1997 issues of TRANSITION are distributed on a complimentary Editor: Richard Hirschler basis and will be supplied free of charge to all new subscribers. 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