Transition Economics Division * Poicy Research Department TheWorldBank "Our Assistance Includes Ideas As Well As Money" Interview with Michael Bruno,Vice President and Chief Economist of the World Bank What role should the World Bank play In 1994 these differences seem to cialistpasts. Second, policymaker's ap- in promoting reforms in the transition deepen further, even between the proachdifferentlysuchmajoreconomic economies? What are the major issues parties to the Visegrad Agreement- issues as stabilization, privatization, and the research staffshould focus on? How Poland, Hungary, the Czech Repub- restructuring. Three years ago for ex- important is the new drive within the lic, and Slovakia. What could be the ample, Hungary seemed to have gained Bank towards glasnost [openness]? major factors behind this uneven the title of "best macroeconomic per- These are some of the issues Michael evolution? former" in the contest with Poland and Bruno, Vice President and ChiefEcono- Czechoslovakia. But now Hungary's mist ofthe World Bank discussed in the A. Let me list a few. First of all, initial macroeconomic indicators are trailing following interviewwith Transition edi- conditions are important. For example, somewhat behind, though the country is tor Richard Hirschler. Mr. Bruno has the Czech Republic didnothave to deal still the preferred Eastern European been appointed to oversee the Bank's withthe foreign debts, that are apainful destinationofforeigndirectinvestments. research activity in September, 1993. legacy of Hungary's and Poland's so- Poland was the only single transition Earlier he served as Governor of the Bankoflsraelfrom 1986to 1991, after What's inside... playing akey roleinthe design oflsrael's BanidngReformintheTransitionEcono- Bartlomiej Kaminsky's recent article on successful stabilization program. Mr. mies Central European Access to EC Markets. Bruno has contributed several pieces to Huge state-controlled commercial banks, (page 12) the development literature and has been burdened with bad debts, need to con- published widely . in topics of solidate their portfolios, recapitalize, and VietNamIsChallengedbyMounting sources macroeconomic theory, the design of privatize. But how? (page 5) Financing should not become a substi- stabilization policies and the experience CzechBanking: PerformancewithNon- tuteforreformin VietNam ,whereextended oftransition economies. performing Assets (page 7) tax revenues, foreign aid, and commercial HungaryandPoland:HowtoMakeBad credits mnake the government's life easier. Q. In your analysis of the road from Debts Good? (page 8) (page ) Marx to market, you have always ConferenceDiary(page 16) cautioned researchers and QuotationoftheMonth:TheGoveimnent Cneec ir pg 6 dcautionmaked researcherst unimity of aTransforning Country Is theWorst World Bank/lMFAgenda (page 17) decisionmakers against uniformit mgnbegnorsrcurg in dealingwith the individual econo- VIclav Klaus summarizes the Czech Milestones of Transition (page 19) mies of Central and Eastern Eu- privatization experience. (page 11) New Books and Working Papers rope. You were getting at the LetterstotheEditor (page2l) "marked differences of the initial An Exercise in Trade Management? Jon Bibliography of Selected Articles micro-structures and institutional Stem from NERA, London, responds to (page24) environment" of these countries. The World Banc/PRDTE economythathad apositive growth rate this happened in Russia. Some argue ceed without waiting for stabiliza- last year. The Czech Republic has a thatRussiahadawindowofopportunity tion? Can privatization continue balanced budget, checked inflation, and to stabilize in 1993. I am much less sure amid price instability? perhapsthemostadvancedprivatization about this-one disturbing feature all program. Interestingly, Czechoslovakia along has been'that the government (in- A. Russiacould certainly go ahead with traditionally had prudentfiscal policies cludingthe central bank) did notseemto privatization. Progress in this area had and low debt. Soon after the Austro- be of one mind about stabilization. At been quite impressive to date. Mr. Hungarian empire splintered, following any rate I do notbelieve that foreign aid Chubais has done a greatjob and could World War I, it introduced its own cur- was the limiting factor. continue doing well under the new rency and stabilized its economy. There government.The questions is whether must be sometraits thathavestuck with Bythe end of 1993 theRussian economy structural changes are being done in the themthroughthecomrnmunistera Itdoes was running a monthly inflation rate of right way? And, what distortions occur seem, in fact, that since the collapse of 12 percent. This did not seem sustain- in the economy as a result of inflation? Eastem Europe's communist regimes, able since the exchange rate was kept Our cumulative experience from Latin certain characteristics that were basic stable for quite a while, while prices America, Israel, and other countries to these countries prior to the commu- confirms that sustainable growth under nist takeover have reemerged. high inflation is hardly possible. There maybe periods of increased economic Furthermnore, the ability of a govern- .... activity, but theeconomydoesn't really ment to form a coalition of different takeoff. So it'snotaquestionofshifting forces in the society, plays a role. In emphasis from inflation to restructur- other words; can the government build ing. Falling back on the inflation front in broadly-based publicsupportforstabi i- Russia would eliminate the efforts and zation duringhard times with the prom- sacrifices made so far. ise of better times ahead? In a demo- cratic society that type of consensus is Q. Is there a lesson to be learned vital to a great extent and determines fromtheapproachChinahastaken? economicperformance. That is, the "two-track approach" in which radical reformn is under- Q. The big bang seems to have back- taken in the nonstate sector, while fired in Russia-the country's politically essential but apparentl economy iussina tsmess rig wasteful subsidies are provided to now....Why? inefficient state industries? Can this justify A more lenient policy toward A. Russia did not have its act together Russia's industrial heavyweights? when it launched its version of the big bangin early 1992. The countryhad not continued to increase. The budget was A. Many experts who are familiar with dealtwith its monetaryoverhang during accumulating-and continues to both countries'economic development the Gorbachev era. In Poland before accummulate-large arrears. And now agree that comparison of China and the Balcerowicz program was intro- the ruble is losing ground again against Russia is a tenuous one. They point out duced in 1990, prices went wild and Western currencies. So if fiscal and that, unlike Russia, China is still a pre- hyperinflation, to a large extent, "ate monetaryfundamentals arenotin place, dominantly agricultural economy. About up" the monetary overhang. But Rus- and if large subsidies continue to be 70 percent of the labor force is em- siain 1992 did not decontrol allprices- pour6d into the enterprise sector, infla- ployed in agriculture, whichtraditionally for example energy prices remained tion will accelerate. It doesn't look like has been self-financing. The post-1978 fixed. Anotherproblemisthatthegrow- serious stabilizationis inthe cards right liberalizationresultedinaone-timehuge ingfiscaldeficithasnotbeensufficiently now jump in agricultural productivity. Sur- checked. In Poland and Czechoslova- plus workers easily foundjobs in labor- kia,stabilizationmeasures-takeninthe Q. Now that Gaidar and his team intensive but stillhighly productive ex- contextofmonetaryrestrictionsandfis- have gone, can the Russian govern- port industries, many of them in the cal discipline-were supported as part ment shift economic policy away town and village enterprises (TVEs) of a multiple anchor approach that in- from fighting inflation toward more that employ about a fifth of the labor cluded fixing the exchange rate and emphasis on investment and pro- force andaccountforroughlyaquarter getting wages under control. None of duction? Can structural reform suc- 2 January 1994 Transition of China's total industrial output and subsidies,(typically smaller enterprises) The Czech Republic seems to be mov- exports. are faster to adjust. ing in this direction, and Hungary may follow suit. The Baltic states are doing In Russia initial conditions have been Experience from Israel has shown that relatively better than other new coun- completely different. The country is companies oftheHistadruthtrade union tries of the former Soviet Union. One overindustrialized, with only 14 percent federation, which are formally private factor is their proximnity to the Western ofthe labor force employed in a highly sectorenterprises, behaved like publicly markets. Had Western Europe come inefficient agricultural sector. In the past owned firms when operating under soft out of its doldrums more intensively I nearly the entire labor force was em- budgetconstraints. Only afterhard bud- think we might have seen a stronger ployed in state enterprises and organi- get constraints were imposed on them, revival and growth in exports for some zations, enjoyingsubsidized employment were they ready to undertake decisive of the countries of Central and Eastern and job security, thanks to soft budget restructuring efforts. Privatization can Europe. constraints. The oversizedheavy indus- also fall short if privatized firms fail to try has to be restructured-and partly get offthe budget hook and continueto Q. As the World Bank prepares for dismantled-presenting anincompara- keep government credit lines open. In its golden anniversary in 1994, some blymoredifficulteconomicandpolitical those cases, enterprises will not alter critics claim that the Bank cannot challenge to the Russian government their behavioral norns, despite owner- play a leading role in the growth of than the streamnlining of China's much ship changes. the private sectors in developing smaller state sector. Furthermore, per- countries. Do you think that the sonal freedom and political democracy Q. After the'dram4ifc hndunprec- Bank, needs to adopt new strate- in Eastern Europe and in countries of edented output fall -in Central and gies that allow it to promote eco- theformerSovietUnionmeanthatreach- Eastern Europe, can we expect a nomic reforms in the developing ing consensus within these societies is definite turnaround in 1994-95? world, but also in the transition more complicated that in a one-party economies? state. And expectations are high: the A. We are already witnessing the public is looking for rising living stan- changes. The Polish economyhit rock- A. The World Bank can lend to the dards, which will certainly imply an in- bottom, andnowits outputis increasing. privatesectorwithgovernmentguaran- crease in public expenditures. Q. Can the public sector be viable in In the tunnel a transition economy? Can it be dis- ciplined by hard-budget constraints i and become profit oriented? Light at the endoftheTunne. # Switch was at the Entrance A. In China, although public sector en- / terprises have lower productivity than, say, the TVE sector, there is evidence fri ::- that more binding financial constraints lead to improved performance. In my view, the move from a state-owned r/j,: enterprise to private enterprise has in- i-,4. 9i termediate stages in which the intensity ofthebudgetconstrainthas key signifi- cance. ThestudybyBrianPinto,Marek Belka, and Stefan Krajewski on the S 4/ 4,-. adjustment of Poland's state manufac- turing firms to market conditions argues that the present management and work force in state firms, expecting owner- ship changes, exercise greater disci- pline on wages, and become more cost- sensitive. This is also clear from the many surveys of Russian enterprises. Those without access to soft loans and From the Khabarovsk (Russian) daily Tikhookeanskaya Zvezda Volume 5, Number 1 3 The World Bank/PRDTE tees, and in principle that is something that can be done in any country. How- Conference on Development general audience have a high reader- ever, the Bank cannot and should not Economies? ship. The World DevelopmentReports, evmer,the Bncaotndsecor.d no A and our flagship reports, the Asian -compete with the private it A The ABCDE conference will take a Miracle Study and the forthcoming Af- working with governments to enable tie fresh look at macroeconomic outcomes rican Adjustment Study, are receiving a private sector to operate more effi- in the EasternEurope countries and the lot of attention. I would encourage re- ciently, andto develop all aspects ofthe fiormer SovietUnion. With three-to-four searchers to spend partoftheirtimeand infrastructure, including the marketing years hindsight we will have something resources to promote dissemination of institutions, the fmancial sector, and the to say on enterprise restructuring, on their fmdings. This implies dissemnina- legal system particularly the laws regu- China's experience and on institutional tion within and outsidetheBank. Docu- lating contractual relations, property economics. ments should address problems ofcom- mon interest and should be set and written rights, and bankruptcy. These improve-moitrsadhubetnwitn rights,illando bankruptcy.Theseiprove- Q. Would you comment on the new in language everyone can read. We ments will also attract more privatefor- drivewithin theWorld Banktoward shouldfocus on adviceto policymakers openness and increasing dissemi- inourclientcountries. TheWorldBank's Q- What are the major transition nation of research findings? assistance includes not only money, but issues, the research staff should also-and this iS increasingly impor- focus on? A, Dissemination is of primary impor- tant-ideas. I'm not sure that we have tance. Some ofthe Development Eco- really reached the optimum in this re- A. We have learned alot from looking at nomius(DEC) studieswrittenforamore spect. comparative experiences in different Bottoming Out--For Some: Predictions from Vienna countries overthepastfewyears. There is alot moretobelearned. Forexample, Some Central and East European coun- spectively. In Croatia it remains to be seen restructuring is handled differently in tries should enjoy renewed economic whether the initial successes of the ambi- various countries. An important ques- growth: in 1994, showing that the region tious stabilization program introduced ,ion is, who picks up thie tab for enter- bottomed out of its postcommunist reces- in late 1993 will hold. Unemployment will losses and who mediates for sion in 1993, according to predictions by worsen everywhere exceptHungary where the iennaInstituteforComparativeEco- a steady rate of 12 to 13 percent of the them? In the Czech Republic the own- nomic Studies. Even countries whose work force will be due not only to people ers ofthe new enterprises are expected gross domiestic product (GDP) does not dropping out of the jobless registration to do this, in Poland the banks, and in growshould see a slower decline. The system but to an improvement in employ- Hungary the government, through the only country that will not show some im- ment. liquidationprocess regulated inthe bank- pro ement is Romania whose GDP is ex- rguptcy law. Privatization, too, is an area pectd to contract 2 percent in 1994 as The institute provided the following eco- 0 for further research. The approach tighter credit policies bite. nomicestimatesforl993andforecastsfor 1994. across countries differs. As to the ef- Poland will again lead the region in eco- fectsofchanges inownership, littlesys- nomic growth, with GDP rising another 4 Economic indicators intransition econo- tematic analysis has been done. As tran- percent in 1994. The Czech Republic and mies, 1993 and 1994 sition progresses, we will learn more Slov.enia shouldalsoenjoymodestgrowth, (percent) sitin prgreses,we wll lam mre Hungary w'ill stagnate .and in Slovakia andwew illhavemorecountriesto com- and Bulgaria the decline in GDP should GDP Inflation Unemploy- pare. I think the Bank's comparative slow markedly Growth in Croatia, still Country 93 '94 93 94 93 e94 advantage is its ability to do serious embroiled in.war, will slump by5 percent, CzechR. 0 +2 21 11 4 7 cross-country analysis, based on solid but that is an improvement over 1993 J 9 Slovakia -6 -2 23 18 15 18 empirical work, to find out what has percent drop. Inflation will slow down in Hungary -2 0 24 25 12 12 worked, and why. Another important most countries, holding steady 11 to 20 Poland -4 -14 39 28 15.5 18 researchareaisthelabormarket. What percent in the Czech Republic, Slovakia, Slovenia -1 +1 30 20 15 18 do differences across countries in tran- and Slovenia. A higher 25 percent rate in Bulgaria -5 -2 75 55 17 18 sition tell us, with regard to thernature toHunarf aepoicy ond doland, which Romania 0 -2 3100 2a 9.5 120 and size of unemployment, and related only a few years ago was suffering issues-the social safety net, and the hyperinflation, isforecast to show 28per- Notes: GDP and inflation percentages measure degree of social consensus? cent inflation for 1994. the changefrom year to year. Inflation figures are based on consumer prices. Unemployment fig- Inflation in Bulgaria and Romania will ures measure the percentage of the work force Q. What is likely to be the major slow, but only to 55 and 200 percent re- unemployed at the end of the year. debate at this April's Annual Bank January 1994 Transition Banking Reform in the Transition Economies: A Hard Nut to Crack F ollowing the fall of communism tor), the result is high inflation and dete- distributive transfers to many throughout Eastern Europe and rioratingliving standards; which, in turn, unsalvageable enterprises. F theformerSovietUnion, debates, cause popular discontent and could un- both public and professional, focused dermine the democratic institutions. *Debt transfer. Debt obligations remain mainlyonthemacroeconomicstabiliza- in the firms' books, but bad assets are tionand privatizationissues ofthetran- Most CEE countries, as well as the transferredfromthecommercialbanks' sition process. Relatively little attention Baltic countries and Russia, setup stock balance sheets to a "bad debt" bank. was paid initially to the reform of exchanges;thesearestillrelativelysmall, Thebookvalueofthecommercial banks' postsocialist finance and banking, and however, and have only alimited role to assets is reduced and government secu- related topics, including bad debts, cor- play because of institutional barriers, ritiesareissuedto recapitalizethe banks.' porate finance, and govemance. But lack ofappropriate legislation, inexperi- This technique has been adopted by the experience of the past three years ence,andtheslownpaceofprivatization. several Central and Eastem European has shown that financial institutions and Newfinancial intermediaries-mutual countries. In the Czech Republic, the instruments play a critical role in the funds, private pension funds, and insur- Consolidation Bank is agood example rapid growth ofthe new private sector; ance companies-can also play auseful of a specialized bad debt institution. both small and strategic investors need role, but this will take time. Access to access to credit, investment capital, and capital and credit is still dominated by *Debt repayment Banks, which accu- convertible currency, whether to start the large banks, which probably will mulate provisions against bad loans to new businesses or to transform large, retain, for years to come, their role as meet capital adequacy requirements, are state-owned enterprises into profitable the major source of extemal funding. encouraged to obtain repayment from private ventures. [See also a review of This makes fundamental reform of the their clients, either through debt work- the paper "TheRole ofFinancialInsti- banking sector even more urgent. But outs or bankruptcy procedures. Com- tutions in the Transition to a Market the process is hampered by large mercial banks arepresumablyinagood Economy" on page 21. The editor.] nonperforming loan portfolios held by positiontodeterminetheviabilityoftheir commercial banks. By intemational ac- debtors. In this case, however, profit- Remains of the Socialist Days counting standards, many banks and able companies carry the burden of re- large state enterprises are technically structuring throughhigher costs ofbank It is early-1994 and the financial and insolvent. services. MostEastern European coun- banking sector is still the Achilles heel of tries are using a combination of debt the transition economies. The payment Variation to a Theme transfer and debt repayment, systems in most countries are ineffi- cient; the bank portfolios are deteriorat- The best known policy options for the The indebtedness of banks and that of ing; bad debts and interenterprise cred- financial restructuring of commercial enterprises are closely linked-enter- its are accumulating. Despitethegrowing banks and enterprises are the following: prises' inability to repay debts threatens number ofprivate banks (in many cases the solvency of the banks. Financial with full or partial foreign ownership), -Debt cancellation. "Let bygones be restructuring needs to include debt-eq- huge commercial banks, detached from bygones."Govemmenteliminates bad uity swaps between banks and heavily thesocialistmonobanksystem, stilldomi- debt legacy with astroke, canceling out indebted enterprises. As part of the re- nate both the loan and deposit market bad debtfromthebalancebooks ofboth structuring program, public enterprises (see ensuing article on Hungary and the banks andthe delinquent enterprises. can be divided into three categories: Poland). In most countries these spin- This solves a problem for which the *Candidatesforrestructuringandsub- off banks are still owned or at least presentadministrationisnotresponsible. sequentprivatization (manufacturing controlled by the state. Regulation and If both lender banks and debtor enter- enterprises). Their debts should be re- supervision are inadequate, as proved prises are state owned, it is assumed ducedbefore, orasapartofprivatization. by a recent series of bank scandals. If that no net-losses are involved. Never- .Candidates for closure (enterprises banks cannotfunction as proficientve- theless, this policy optionhas so far been battered by ongoing financial crisis). hicles of resource allocation (for ex- used to a limited extent only because A clear timetable should be drawn up, ample, iftheyareunable orunwillingto debt cancellation means enormous re- and explicit subsidies provided for provide credit to the new private sec- Volume 5, Numberl 5 The World Bank/PRDTE gradual labor shedding, if inmmediate clo- a transp4tent mnner. After the cleapup) banking, changes in enterprises owner- sure is not feasible. recapitalize banks by issuing govern- ship structure((mainlyprivatization), and *Candidates for transformation into ment bonds, financed fromthe budget. early adaptation ofrmarket-based finan- public utilities and regulated state *Restructure and partially recapitalize cial legislation. enterprises. (This applies mostly to en- banks at the earliest possible date terprises in the service sector.) Govern- (through either state write-offs of bad Boris Pleskovic ment regulations should be established debts or debt-for-equity swaps); then, Research Advisory Staff to restructure these enterprises into irnmediatelyprivatize state enterprises, The World Bank commercial public services. leaving any additional restructuring to the ivate owners in order to6improve The article is based on the study Activating the System the incentive structure and avoid the "Financial Policies in Socialist moralhazardproblem. Countries in Transition," published Mosttransitioneconomies,initially,have *Inifieadofrecapitalizingtheoldsystem, as a Policy Research Working Paper assigned a passive role for the banks, usethe6samre"pubicfundstodevelopan (no. 1242, 1994). To order: Mani and opted for a gradual reform of their entirely new banking system. Cutback Jandu, the World Bank, N-9037, financial system. But the banking re- existingstatebankstoaviablecore,and tel.# (202) 473-3103. (An earlier ver formcannotwaitforenterrpriserestruc- create new private financial institutions. sion was presented last year in Rome turing and privatization, as bad debts. at the October symposium on Transi- burden both state enterprises and banks. No matter what strategy or combination tion in Formerly Communist Coun- The financial and banking sectorshould of strategies the policymilakers select, tries, held at the Vatican s Eastern play an active role in transition, allocat- financialregtructuring shouldbe'comple- Institute, Research and Study Center ingcreditefficientlythrough screening mented withimprovements inthepay- "Ezio Alet." borrowers, monitoring and sanctioning nients system, the demonopolization of enterprises, and providing both public and private enterprises with access to credit. The government and the central Whistle blower inEastern Europe bank should limit their own activities to regulating and supervising. (For ex- ample, governments may encourage the establishmentoffinancial instutions to servicesmall private.businessesandmay introduce temporary quotas for com- T mercial bankstolendtotheprivatesec- tor.) Factors that determine the speedy and proficient restructuring of the financial sector include the~ progress of reform in macroeconomic stabili- zation, trade reorientation, and pnvatization; the availabilityof skilled banking professionals; access to technical assistance from abroad; fiscal osrans and country., spe- cific conditions. To sum up the proposed measures un- derdiscussion: *Simultaneo sly restructure banks and enterprises,startingearlyin,the transi- tion process; ensure an active role for the commercia1 banks in the financial restructuring of enterprises; and finance . 0 you elaim in your anonymous letter thatweput our cronies in managerial bad debt write-offs from the budget, in positions? Butyou had no ideathatwe had also hired agraphologist." From the Hungarian daily. Nepszabadsag 6 January 1994 Transition Czech Banking: ImpressivefPerfomance with Nonperforming Assets Following the 1990 collapse of .At the end of 1991 the commercial percentstakisintheConimercialBank Czechoslovakia's socialist monobank banks were provided with-bonds worth the Investment Bank, and the Czech system, six successor financial institu- Kcs.50 billion, issued by the National SavngsBank. TheZivnostenskaBanka, t e g o m a k O Fun4 (the Goveraent agency a relatively srnall but well-established tions emerged-four commercial banks Property bank, wstholdGff 100percenttoapri and two savings bank. [These are the in charge ofadministering and monitor- vate,invstors (Th nerntto Fi- Komercni Banka (Commercial 3ank), ing the privatizationofstate-owned as- thelnvesticniBanka(InvestmentBank), sets) for partial debt write-offs (Kcs 38 nance Corporation took a 12 percent the Ceskoslovenska Obchodni Banka billion) and recapitalization (Kcs 12 bil- stake in that bank.) (CSOB, Czechoslovak TradeBank), and lion). Debt write-offs were targeted at theVseobecnaUverovaBanka(VUB), potentially viable enterprises with bad Couponprvatization,however,couldnot which became. Slovakia's major com- loans accumulated before 1990, solve the crucial problem of attracting mercialbank;andtheCeskaSporitelna the old sy$tem. As a result, the "Big strategic private investors. The and Slovenska Sporitelna (the Czech Four" (the commercial banks) and the privatued banks are still awaiting capi- and Slovak savings banks)]. To facili- savings banks reached capital adequacy tal injections from strategic investors, tateprivatizationofthelargestate-owned ratios of 4.2 percent and 3.2 percent, althoughinvestmentftndsownsignifi- banks,theauthoritiestookseveralsteps respectively. (The capital 4equacyra cant portions of the shares of some between 1990 and 1993: tio measures a bank's ability to cover banks Itilhoteworthy that five ofthe bad loans, by comparng"adjusted capi six largest investment funds are owned In 199 1,simultaneouslywiththelaunch- tal" to "risk-weighted" assets. The y anks. ing of Czechoslovakia's radical trans- internationally accepted ratio is 8 per- formation program, loans worth Kcs cent, set by the Bank for International Atpreseh(morethanfiftybanks, many 110 billion (approximately one-fifth of Settlementiin Basel.) fully orpartlyforein owned, arecom- total loansheldbythebankingsectorat peting for clients. The Big Four, how- that time) were carved out of the com- :The commercial banks were also pro- ever, still account foralmost 70 percent mercial banks' balance sheets. These vided with a relatively small amount ofalloutstandingloanswhilethe Oech loans accounted for the bulk of the so- (Kcs 1 billion) to cover:debt write-offs SavingsBankholds aboutSOpercentof called permanently revolving loans on on inventory loans in the armaments all deposits. Large margins-have en- abled most banks to make sufficient inventories. (totalina Kcs 180 billion), industry. p i1 a nd 19 and their that enterprises had Cbeen forced to.as- sume during the 1970s-with infinite In late 1992 the Consolidation Bank financial positions have improved. At maturities andtnonmnarketinterestrates. -, again purchased nonperforming loans the end of 1992 their capital adequacy These enterprise webtswere then trans- fromthe commeicial banks; the loans, ratio tood, onaerage,atalmost7 per- fed newly created Consolida- with a nominal worth of Kc 15 billion c,ntand die targetlevel of 8 percent is tionBank, astate-ownedholdinginstitu- were purchased at a discount. expected to be reached in 1996. tion fortheadministration of bad debts. - These measures set the stage for the Total bank'credits to the private sector The commercial banks also transferred most unorthodoxelemtent ofthe Czech rose by 42 percent from January to matching liabilities, mostly "redistribu- transformation programw the coupon October 1993, and by the end of 1993 tion loans" provided bythe central bank privatization ofthe majorbinnks in 1993. theprivate sectorheld three-quarters of (CzechNationalBank)atdiscountrates, Between 37 and53 percentofthebanks' themedium-term creditextended bythe as well as deposits from state-owned shares were distribi4ed tl6rough cou- banks. (In the first halfhof 1993 the insurancecompaniesandsavingsbanks. pons (vouchers) 'dring Sthe first banksreportedatotalofKcs10billion Hence, the banks were able to improve privatization wave. Teuge demand pretax profits, on revenues ofKcs 85 their balance sheets, asset structures revealed that the publikxg well awae billion.)Theshifttoprivatesectorlend- and capital-assetratios, and atthesame of these banks' prospective worth, al- mg-much of it now collateratized-' time became less dependent on-the re- though bad loans still made up.asignifi- should, overtime, result in asignificant sources of other financial institutions, cant share of the total portfolios (even drop in the share of bad loans in the such as the savings banks and the cen- underCzech accounting standards). The banksportfolios. However, somenewly tral bank. - state-throughtheCzechN tional-Prop- established private banks, with clients erty Fund-retained between 40 and 45 Volume 5, Number 1 7 The World Bank/PRDTE exclusively from the private sector, are terprises. Most banks do not push delin- sector, the Czech approach has been experiencing portfolio difficulties. quent companies into bankruptcy; rather, very simnilar to the one applied early on they tend to roll over bad debts. So far, in Czechoslovakia's overall transforma- Contraiy to widely held expectations, a only one small bankhad gone bankrupt; tion process: namely, to proceed quickly waveofbankruptcieshasnottakenplace last October the Industrial Credit Bank with privatization; and to convince en- in the wake ofprivatization. More than was taken over by the Czech National terprise and bank managers early on 1,000 bankruptcy procedures have been Bank. More typically, in December the that they are responsible for the conse- initiated, butonlythirtybankruptcieshave government agreed to pay Kcs 1 billion quences oftheirlending and restructur- actually taken place, compared with toAgrobankato coverbadfarm debts.] ing decisions and cannot shift this re- thousands in Poland and Hungary. This sponsibility to the government and the may be explained by the fact that sev- It is too early to say whether this overly budget. The actors participating in the eral banks, through their own invest- cautious approach to restructuring will bank restructuring and debt work-outs ment funds, are not only lenders, but squeeze the private sector out ofmuch- have to accept that theyjointly share the also owners ofenterprises. Also, banks needed bank credits. But it is safe to burdenandcostsofmovingfromtheold may reason that the costs associated predict that once the European econo- banking system to the new one. In ex- with bankruptcy procedures outweigh mies rebound, an export-led recoveryin ceptional cases only, the government the potential benefits. the Czech Republic could accelerate a manage the process in an attempt to shift into the high-productivity sectors, minimizes the costs offriction. [The London-based The Economist of- which, in turn, would significantly im- fers another argument: banks, encour- prove the across-the-board fimancial Ulrich Hewer aged by past bailouts, assume that they position of the Czech banking sector. Europe and CentralAsia Country De- run little risk in piling up bad loans to Finally, itis importantto pointoutthatin partment II companies that are (or were) state en- reforming and restructuring the banking The World Bank How to Make Bad Debts Good? The Banking Sector;in Hungary and Poland The banking sector in Hungary and HUF 140 billion ($1.4 billion); and to either write off bad debts, declare a Poland, for that matter in most CEE increase theiroat-present negative capi- moratoriumonrepayment,ormakedebt- economies, is still struggling with the tal adequacy ratio to at least 4 percent for-equity swaps with their clients. Al- massive debt buildup of state-owned by the middle of 1994. The program's though the banks will have to deal with industrial giants over the years. (In Po- goal is tofacilitateprivatization. Starting some 10,000 to 25,000 small and large land, however, pre-big-banginflationhas in January 1997 the state is not to hold private and state-owned enterprises, wiped out a large part of the debt.) In morethan 25 percent ofabank's regis- most experts agree that the bulk of bad both countries the cleaning up of the tered capital, eitherdirectlyor indirectly, debt is concentrated in 70 to 100 large portfolios ofthe large commercial banks as stipulated in the Hungarian Bank Law state enterprises. has been accompanied by recapitaliza- of 1991. tion and at least partial privatization. All The bank consolidation program has as these measures require extrabudgetary To finance the program, government its long-term goal of reaching the inter- expenditures atatimewhenfiscal poli- bondswithatwenty-yearmaturityhave nationally accepted 8 percent capital cies are stretched to limit. Eventually, been issued. Inthelastdays of 1993 the adequacyratio. The short-termtargetis thetaxpayers are theoneswho will pick governmentincreasedtheassetsofeight a more modest 0 percent-a vast im- up the tab. leadingcommercialbanksbyHUF 110 provement over the current -15 per- billion (about $1.1 billion): the Hungar- cent. At the end of 1992, bad assets Hungary: Permanent Recapitaliza- ian Credit Bank-the largest commer- totaledHUF 186.4 billion (11.5 percent tion cial bank-received HUF 56 billion, the of outstanding loans), while atthe end of Commercial and Credit Bank HUF 37 June 1993, they stood atHUF 229 billion Inlate 1993 theHungariangovernment billion, and the Budapest Bank HUF 5 (13.2 percent of the total). announced a two-stage operation to billion. Thegovernmentis planning an- Nonperforming loans are primarily con- recapitalizemajorstate-ownedcommer- otherinjectionofHUF 30billionbymid- cial banks and savings cooperatives for 1994. Beginning in March the banks will 8 January 1994 Transition centrated in the largest state-owned Bank.TheBudapestbankisalsopoised socialistmono-banksystem. TheHun- banks where they sometimes represent forprivatization. garian Bank Law of 1991 obliged com- more than a third of all claims. mercialbankstoobtainaminimumcapi- Since setting up the new two-tiered taladequacyratio of7.25 percentandto (A growing number of small commer- banking system in 1986, a total of 300 increase it to 8 percent by end-1993. cialbanks-notburdenedbybadloans- billion forints has been invested or Many banks were unable to meet these are entering the market. Foreign banks pledged to improvethesolvencyofstate- requirements, however, and refinanced are also rapidly increasing their market owned financial institutions. (In March overdue interest and principal on share. While the large state-owned 1993, for example, the Ministry of Fi- nonperformingloanssoastoavoidbal- bankslostHUF 16.21 billionaftertaxes nance, as part ofacredit-consolidation ance-sheet recognition of associated in 1992, foreign-owned banks posted a scheme, initiated in 1992, handed over losses. HUF 3.22 billion profit. The latter also to the banks treasury bonds worth HUF maintained extremelyhigh-32.78 per- 80billion,inexchangefornonperforming As a result of the cleanup operations, a cent-capital-assetratios.) bank loanswith anominal value ofHUF large chunk. of the nonperforming as- 103 billion.)Noneofthe recapitalization sets will be transferred to the Hungarian In support,ofthe program, the state will exercises, however, has sufficed to clean InvestmentandDevelopmentCorpora- temporarily increase its equity stake in up the bank's balance sheets. A large tion, which isjointly owned by the State the banks. Currently the state-through part ofthe loan portfolio claimed against Holding, Ltd., and the State Property the State Holding Ltd.-holds 35 to 65 state enterprises, have been in default Agency. These agencies are respon- percent of the Hungarian Credit Bank, for protracted periods, a legacy of the sible fornegotiatingwork-outsolutions the Budapest Bank, the Hungarian For- eign Trade Bank, and the Commercial and Credit Bank, and wholly owns the After privatization National Savings Bank. In the National Savings Bank the state's share will be 50 percent, plus one vote. After January 1997 in accordance with law, the state will hold only 25 percent, plus one vote (to ensure a veto right), in the Hungarian Credit Bank, the Com- mercial and CreditBank, theBudapest Bank, andtheHungarianForeignTrade Bank. In the Postabank the A government's stake will be reduced to / 20 percent. As to private owners, ac- 4\ cording to the latest government plan, professional strategic investors (mean- ing foreign banks in most cases) could acquire a 30 to 50 percent stake and, exceptionally, a more than 50 percent stake; other investors, including Hun- garian and foreign insurance compa- nies, pension insurance funds, and in- vestmentcompanieswouldbepermnitted stakes between 2 and 10 percent. Stocks - will be issued on the Budapest Stock / Exchangeforbetween 5 and 10 percent of the share capital. In late January the 7 - - - English-language Budapest Sun re- . .t.-7 portedthefirstpartial sell-off: theEBRD - - --- and the Munich-based Bayerische Landesbank are ready to buy a minority "Row faster people! At last we are all traveling on our own boat..." stake in the Hungarian Foreign Trade From the Hungarian weekly 168 Ora Volume 5, Number 1 9 The World Bank/PRDTE with debtor enterprises (among-them inthe,bankfor$ 13.million. Bank Sleski- ' tomobilizecapital forthisoperationfrom some ofthe "Dirty Dozen," that is, the (Silesian Bank) was privatized just re- $1 billion in unused stabilization funds, twelve and later fourteen largest indus- cently with the Dutch Intemationale (the stabilizationfund was established in trial dinosaurs). These flagships of so- Nederlanden Groep taking a 25.9 per- 1989, initially asa contingent pledge by cialist industry, including the cent stake and gaining control over the twenty countries to support convertibil- busmanufacturer, Ikarus, have accumu- bank's managementand operations. The ity of the Polish currency). latedatotalbankdebtofHUF37billion Polish treasury retained a 34 percent and closed last year with a loss ofHUF stake in Bank Slaski, while a 30.1 per- Following the debt-cleansing and re- 8 billion. They eniploymorethan 55,000 centstake was sold to the public for 1.23 capitalization, the large commercial workers and representacombined reg- trillion zloty ($57.3 million) and a 10 banks areto be privatized by 1996. But istered capital ofHUF 100 billion. Their percent stake was set aside for bank the govemmentintends to keep a 20 to fate has not yet been decided. emrployees. Bank Przemyslowo 30 percent stake in the banks. A senior Handlowycouldbethenexttoprivatize. official in the Ministry of Finance re- Anotherfifty-fivelarge,indebtedindus- Credit Suisse First Boston has won a cently explainedAthat "while the gov- trial companieshavebeenrequestedto tenderbidandwilladviseonthebank's eminent does not want to become a submit by end-March comprehensive privatization. controllingshareholderintheprivatized rescue programs, outlining their plans banks, it wants to safeguard the strate- for restructuring and cash flow and (Several foreign banks already operate gic interests ofthe stateand to hold onto market development; plans are to be inPolandthroughwhollyownedsubsid- profit-makinginvestment.s" fileddwiththelenderbanks, therelevant iaries. The Chase Manhattan, Banque; branch ministries, and all state credi- Nationale deParis, and Dresdner Bank In 1992 the nine "target banks" set up tors. This accelerated reorganization have recently applied for licenses. By special work-out departments to deal process is to be completed by May. A 1993 about eighty new private banks withsome3,000(enterprises whoseloans "juiy"involvingtheMinistryofFinance wereoperafinginPoland,includingeight had been declared substandard or will decide the companies' future. Those with at least partial foreign ownership. nonperforming by the banks' auditors.; that fail to make the grade will sink, These new private banks are small and Debtor enterprises have to present a those that are considered viable will accountforless than 15 percentoftotal proposal for restructuring, including debt either remain clients ofthe relevantbank credit.) rescheduling, partial write-offs, and or will have their debt sold to the State loans-to-equity conversion. Should a Property Agency. Theremainingsevencommercialbanks, company prove unable to conclude alongwithsuchlargespecializedbanks agreement with its creditors on restruc- Poland: Privatization Deadline 1996 astheBankHandlowy (theformerfor- turing by March 31, the bank has to eign trade bank), the Agricuiltural Bank, initiate a forced liquidation or sell the Nine Polish cormmercial banks, spinoffs and the Savings Bank, are still state assets. About 200 loss-making state- from the National Bank of Poland, in- owned. Theirloanportfolioshadsteadily owned industrial giants were granted a hen'ted substantial bad debts when they deteriorated, leadingup to theibeginning reprieve of several years; gradually started operation as regional state com- of 1992, when the volume of substan- declining budget subsidies will be avail- mercial banks in 1989. (In order oftheir dard, doubtful, and bad loans amounted able for their restructuring efforts, pro- size of capital, they are: Bank Slaski, to $1.5 billion, aboutathirdoftheirtotal videdtheyshedlabor, upgradeimanage- Wielkopolski Bank Kreditowy, Bank assets. Sinceearlyl993,however,their ment, and *adopt other stringent Przemyslowo-Handlowy, Pomorski portfolioshave improved. The improve- measures. Bank Kreditowy, Powszechny Bank ment is the result of the Enterprise and Kreditowy, Bank : Zachodni, Bank Financial Restructuring Act, ap- Compiled from reports of the EBRD Powszechny Bank Gospodirczy, Bank provedbytheParliamentinMarchl993, (EconomnicReview,"CurrentEconormic Gdanski, and Bank Depozytowo- whichauthorizedpreprivatizationingjec- Issues", July 1993), the Oxford Kreditowy). These banks account for tionofnewcapitalintothesevenspinoff (U.K.)-based Oxford Analytica, the about 65 percent of all the bank debt, commercial banks as well as the Agri- English-language weekly Budapest accumulatedso farbystate-owned en- cultural Bank and the, Savings Bank. Sun, the World Economy Weekly terprises. t i 00 \ The banks received long-term goverm- (HVG), Budapest, Euromoney, London ment bonds worth up to 21 trillion zlotys ("Central Europe: How to Rebuild a Wielkopolski Bank Kreditowy was' (about$1 billion),halfofwhich wentto Banking System," December 1993), privatizedinSeptemberl993, withthe the seven commercial banks to increase and various news agency reports. EBRD purchasing a28.5 percentstake their capital adequacy ratio to br above 12 percerit. The govemrnent were able 1 0 January 1994 Transition Quotation of the Month:,The,vgovern,ment of a transforming country is the worst imaginable agent to take care of restrutcturing" Vaclav Klaus on the Czech Privatization Experience Perestroika-style economic thinking Revenues. The government's objec- ness through public auctions, and suggests that the shift from soft to hard tive should beto accomplish economic privatizationofmedium-andlarge-scale budget constraints can be achieved, and transformation ratherthan to maximize enterprises through direct sales, joint that economic behavior can be modi- the proceeds coming from the sale of ventures, tenders, and so on. fied, by changing formal rules and intro- government's assets. To understand that, ducingrationalmacroeconomicpolicies. paradox is absolutely crucial. Organization. The effectiveness and Those measures, however, represent speed of privatization depends greatly necessarybutinsufficientconditionsfor Speed. Meager proceeds are usually on the organization and administration thetransformation. Itisprivatizationthat believed to be the price paid for the of the process. It makes sense to con- moves an economy past perestroika to speedy privatization. We have found, centrate privatization initiatives at the a real systemic change. however,thatintheCzechRepublicand nicrolevel,notatthegovernmentlevel. elsewhere the correlation between pro- Planning, organizing, restructuring, di- In some industrial and developing coun- ceeds and time, if any, is the reverse of viding, and demonopolizingfunctionsfor tries where privatization has taken what;has beenihypothesized for, stan- the enterprises should not be imposed place-the best known of which is the dard privatization. In other words, the from above. (This approach is thus en- Thatcherian privatization ofGreatBrit- slowerthe privatization, the smallerthe tirely opposite to whathas been done by ain in the late 1970s and early 1980s- proceeds. For one thing, the true value theTreuhandanstaltin.theformnerGDR) privatizationrepresentedaapartialchange ofthe privatized enterprise rapidly de- in an already existing, properly defined creases due to,: its unavoidable Foreign Involvement. The presence property rights structure, that is a shift preprivatization agony and to the ab- of foreign investors in the Czech Re- ofpropertyrightsbetweentwo (ormore) sence of a real owner during such a publichasalwaysbeenconsideredben- well-defined economic agents. This kind process. eficial and, therefore, most welcome. of privatization has almost nothing in We are quite content with,the continu- common with the task we are facing.- We looked for privatization techniques ous inflow of foreign capital and now that were faster than the standard ones. want to accelerate it artificially. It is one Privatization in [Central and Eastern Ournonstandard voucher privatization of our fundamental theses that foreign Europe] means the establishment of a scheme proved to be rapid and efficient. capital will enter the country on a mas- previously nonexistent property rights It is based on selling vouchers (quasi- sive scale after privatization have been structure. Privatization intheWest may moneyapplicableonlyinthepnivatization carried out since the decisions that will be viewed as a "reform" process. In process) to everyadultcitizen atasym- promote the inflow will arise from the, the East, however, privatization is the bolic price. The vouchers are redeem- private initiative of real owners rather road to themostfundamental objectives able for shares of privatized firms. than the irresponsible decisionmaking of a systemic transformation. It is the Voucherprivatizationturned-morethan of government bureaucrats (irrespon- process within which the nonowner or 75 percent of Czech adults into share- sible ipthesense ofafailure oflogic). In quasi-owner (the government) trans- holders, with shares either in,the 1,500 keeping withthis philosophy;weresisted fers nonassets to their first (initial) pro- privatized companies or in the invest- strong temptations to introduce a spe- prietor, and in doing so "creates" the mentprivatization funds. The voucher cial foreign investment law that would assets. In organizing the privatization scheme has also facilitated application have accorded better treatment to for- program ofatransformingeconomyitis of standard privatization techniques in eign investors than to domestic ones. always import.ant to understand that the rest ofthe economy and, indirectly, peculiarities ofthat economy. The spe- speededtheirimplementation.Theover- Restructuring. Privatization is usually cial characteristics of transforming all-privatization program also includes initiated with the goal of bringing effi- economies in Central and Eastern Eu- transfers of state property to munici- ciency and prosperity to individual rope call for special, nonstandard palities, restitutions to.original owners, privatized enterprises. It is a common privatizationmethods: transformation of"Soviet-type" coop- myth, shared by many, that privatization eratives into cooperatives of real own- in apostcommunist country cpuld,.and ers, privatization of small-sQalebusi- should, have the same objective. But Volume 5, Number 1 11 The World Bank/PRDTE what that really matters in our case is techniques and develop perfect own- try-specific and system-specific knowl- theeffectofprivatizationontheeconomy ers. Such an objective is beyond the edge. as a whole. The question is not "Is the capacity of postcommunist govern- enterprise restructured?" but "Is the ments. Besides, the first (initial) owners It has been observed-at least in the economy restructured?" of privatized firms may not be the final Czech Republic-that the meaning of ones. privatizationmay differ substantially in Individual restructuring must follow different sociopolitical environments. I privatization. We have no doubt that it In the early weeks and months of 1990 am convinced ourapproach is correct- will be the new owner, not the govern- the Czech approach [to privatization] the results speak for themselves. Mar- ment, who is motivated to findthe ideas, provokedharsh criticism from all imag- garet Thatcher privatized three or four time, and resources for the necessary inable sources. By now, however, even firms a year; we have been privatizing restructuring. The Czech government the most prominent intemational fman- twice that many each day. has never listened to the advice that cial organizations have realized that state ministries and agencies should at- government of a transforming country Excerpts ofthe Czech prime minister s temptto increase the efficiency ofstate- is the worst imaginable agent to take presentation at the fourth CEEPN owned enterprises before they are care ofrestructuring tasks. Moreover, it Annual Conference on Privatization privatizated. Furthermore, we consider has been recognized that internationally in Central and Eastern Europe, held it unnecessary to design legislation and renowned consulting firms, which are in early December in Ljubjana, veryexpensive,lackthenecessarycoun- Slovenia Letters to the Editor CEE Trade Access to EU Markets: sell in quantity to the EU over the next pared to 2.3 percentin 1987. Of course, An Exercise in Trade Management? 5-10 years. we project corresponding increases in EUexportstoCEEcountries. Weproject Most economic commentators have The EU countries and the Commission a moderate EU surplus in total trade argued whether the Association Agree- may or may not choose to apply these with the CEE countries and a substan- ments between the countries of Central safeguards aggressively. However, their tial EU surplus in manufacturing trade and Eastern Europe (CEE) and the existenceandtheuncertaintiesoverhow which could be around $40 billion by EuropeanUnion(EU)--astheEuropean they right be used must increase pri- 2010 (in 1991 prices). CEE countries Community is called since January 1 vate sector investment risks, particu- could, if EU countries are prepared to 1994-- represent a glass that is halffull larlyfrom potential non-EUforeign in- hold off on the contingent protection, or a glass that is half empty. According vestors. It is very revealing that the represent an addition to the EU export to Bartlomiej Kaminsky ("Central Eu- words "contingent protection", "safe- market the size of its current level of ropean Access to EC Markets: Hard or guards" and "anti-dumping" never exports to the U.S. Easy?", Transition, September 1993, appear in Mr. Kaminski's article. p.6) it is clearly at least three-quarters The potential for amutual expansion of full. In a major study carried out by the Na- trade and the resulting gains could pro- tional Economic Research Associates videasizeable boostto EUexportgrowth The problem is not so much the tariff (NERA), for the European Commis- and welfare as well as greatly assistthe levels discussed by Mr. Kaminski as the sion, (titled "Trade and Foreign Invest- chances of successful reform in CEE tariffquota arrangements, the plethora ment in the Community's Regions: The countries. The NERA study shows that of safeguard clauses, the potential for Impact ofEconomicReforminCentral much of the increase in trade could be anti-dumping actions and, as rightly ar- and Eastern Europe") we have shown expected to be growth in intra-industry gued by Alan Wmters, (Transition, Oc- that the EU can expect to have sizeable trade rather than inter-industry trade. tober-November 1993, p. 11) the rules gains both in export volumes and in eco- This is true of many of the sensitive of origin. The EU now has a powerful nomic welfare from free trade with CEE products like chemicals and textiles. The setofcontingentprotectionmechanisms countries. Giventhe Geographical loca- corollary is that, to achieve these poten- in place, which can effectively limit the tion, they are natural trade partners. tial gains, EU co:untries must be pre- export growth ofvirtually any products CEE countries could be expected to pared to accept greatly increased im- that CEE countries might conceivably account for around 6 percent of EU portsofagriculturalgoodsfromtheCEE. manufactured imports by 2010 com- All ofthese changes will inevitably im- 12 January 1994 Transition pose short term adjustment costs and tries appear to act as if opening access formation in CEE countries and to meet present political difficulties, considering to CEE producers inevitably meant ex- the best interests of EU citizens. the unemployment situation in western port losses to their producers. Hence, Europe. However,theprospectivegains there is a tilt towards managed trade Jon Stern are large, whilethelikelycutback inthe even though the EU's own interests as Senior Consultant production of sensitive products is small, well as those of CEE countries are best National Economic Research Associ- even in the short term. served by freer trade, The growth in ates (NERA), London, UK CEE imports will be largely determined Much of the reluctance to open up EU bytheirexportgrowth. Everyextraunit On China's Growth Rate markets to CEE exports comes from of CEE exports, particularly over the I would like to warn our friends and the poorerEURegions--Portugal, Spain next few years will increase their im- ourselves not to overestimate China's and Southern Italy But these regions ports byan equivalent amount. economic growth which isrobust atany can be the main gainers from open ac- rate. The State Statistical Bureau of cess. CEE demand for EU goods, par- EU countries and the Commissionface China calculates GNP in current prices ticularly capital goods, is much more a choice. They can limit the use of the and uses some unpublished price defla- likely to be supplied from these areas contingent protection mechanisms and tor or deflators to make it comparable than from the richer EU countries. The fulfil the expectations ofMr. Kaminski with the GNP of last year. Hence the NERAstudyshowsthattheCEEecono- and the hopes of many more. Or, they growth rates are very sensitive to the mies, ifsuccessful, could generate extra can use these mechanisms to such a numerical value ofprice indices. exports from the poorer EU regions, way that impede the necessary indus- increasing their manufacturing output trial restructuring in transition econo- The published growth rates between relativetoearlierexpectations,byaround mies, and limit the growth in CEE-EU 1979 and 1992 averaged to an annual 2 percent in the next 15 years. This trade. Thatis the easieroption, particu- rate of 9.0 percent(see column I). Cal- contrasts with a gain of around 1 per- larly in aperiod ofrecession. TheNERA culating the growth rates with the retail cent for the EU as a whole. study and much other research sug- price indices, the average rate will be gests it is the wrong option. A generous less; 8.1 percent (Column II). Using the The key point is that international trade interpretation ofthe AssociationAgree- urban cost ofliving indices, the average is not a zero-sum game. Some EU coun- ments is needed both to assist the trans- rate will slow to an annual 7.2 percent. (Column III) For comparison, see the followingtable: Happy New Year! China's annual GNP growth, using different deflators (percent): . 5 '~~~~~.' I I1 III 1979 7.6 9.2 9.3 1980 7.9 5.5 4.0 __ , > . 1981 4.4 4.3 4.2 4. / * jj * . . 1982 8.8 6.8 6.78 {-W f t.1983 10.4 10.3 9.7 '4~~~ ,' f'111. . ~~~~~~1985 12.8 13.0 9.8 ___ ~~~~~ 1986 8.1 6.9 5.9 | fi glill 15 . Average1987 10.9 8.6 7.1 1988 11.3 5.1 3.1 1989 4A4 -3.5 -2.2 1990 4.1 8.3 9.2 1991 8.2 11.2 8.8 I ~~~~~ ~~~~~~~~~ ~~~~~~~~~~1992 13.0 12.7 9.4 Average 9.0 8.1 7.2 ,. 8 *Wang Mongchang _______________________________:_____________________________ Institute of Quantitative and Techno- From the Croatian cartoonist Felix logical Economics, CASS Volume 5, Number 1 13 The World Bank/PRDTE Vietnam's Economic Options--Coping with Mounting Resources I n 1993, Vietnamhas recorded government's investmentprogramba- istrative resources to complete all of an economic growth rate of 7.8 sically cameto ahalt. Itwould nothave them in atimelyfashion. A large portfo- percentandan.inflationrateof5.2 been feasible or desirable to maintain lio of slowly implemented projects will percent. Recently,therehasbeenaturn- thiskind ofausterityforlong. By 1991 have little positive impact on the around in the country's access to inter- investment in infrastructure and provi- economy. There is yet time for Vietnam national finance, including IDA credits sion of social services had fallen to lev- to correcttheseincipientproblems in its from the World Bank (see box). The els that threatened long-term growth. fiscal policy. While the fiscal deficithas first Donor Conference for Vietnam, increased sharply over the past two held in the World Bank's Paris office, Beginning in 1992, increased resources years, inflationisstilllow anditwouldbe resulted in aid commitments of $1.86 from taxes, oil revenue, and aid have premature to fault the government for billion from multilateral and bilateral been available to the government, which its macroeconomic management. donors, has been faced with the new challenge of increasing expenditure in a rational ManagingCapital Inflow Vietnam has grown surprisingly well in and sustainable manner. This may be a the absence of aid. The resumption of more difficult task than simply cutting. Conceming Vietnam's external policies, financing creates thepotential to do even everything in orderto stop inflation. there is an analogous shift in the tasks better. The resources being offered to facing its,policymakers. Between 1989 Vietnam represent both an opportunity In the area of the civil service, for ex- and 1991 the government had to man- and a challenge. Between 1989 and ample, Vietnam has a large and poorly age arapid decrease in its extemal defi- 1991 the government had to reduce its paid bureaucracy. To get better public cit resulting from the collapse of the fiscal and external deficits to virtually services while maintaining stability, it Soviet Union (previously the main sup- zero owingto the lack offinancing. With needs to focus its activities moresharply, plier of aid) and the lack of financing the resumption of aid both fiscal and reducethe numberofworkers, and raise from the west. Beginning in late 1992, external deficits have widened; this is salaries. This strategy requires making appropriate given the strong revival of choices about priorities for public ser- bothpublic investmentto infrastructure, vices. and private investment to productive rhe Hungarian Sisyphus activities. The challenge forthegovem- During the adjustment period, on the mentnow is to manage these deficits in other hand, costs were held down by a sustainable way. letting real salaries erode in the face of LI inflation, with relatively little change in ManagingFiscal Expenditures the number of workers. The numberof J1. forint civil service workers declined by only 8 ThetumaroundinVietnam's fiscal bal- percent. As more revenue has become . ance between 1989 and 1991 was re- availablein 1992 and 1993,thegovern- V markable. During that two-year period, ment has restored real public sector totalgovernmentspendingvwasreduced wages, with the predictable result that from27.9percentto 18.9percentofthe expenditure has risen rapidly. GDP. With revenue roughly stable, the fiscal deficitdeclined from 11.9 percent There is a comparable concern on the to 4.1 percent of the GDP. The fiscal capital side ofthe budget. Virtually ev- discipline was atthe heart ofVietnam's eiything was cut during 1990-91. Since disinflationprogram. Obviously thegov- then the government has expanded its ernment displayed afirm commitment investment, with an appropriate focus to fight inflation and reduce a range of on infrastructure. There has been aten- %re expenditures, Subsidies to state enter- dency, however, to start too many dif- prises were elimninated; real public sec- ferent projects, with the danger that tor wages declined sharply; and the therewillnotbethefinancialandadmin- From the Hungaian Economy 14 January 1994 Transition increasing external finance has been expanding economy. There is also the available to the country-both aid and Managing Reform danger, however, thatfinancing will be- commercial credits-and the challenge come a substitute for reform. Vietnam for the government now is to manage To sumup, Vietnam's macroeconomic is at a critical juncture in its reform this capital inflow. management was Oaccurate during an program at which the central govern- era ofdeclining resources. The country mentneeds to assertcontrol over public Just like the fiscal deficit, the current has now entered a new phase in which expenditure and borrowing. Otherwise, account deficit quickly dissipated: from the government has a growing volume borrowing and spending by government more than 9 percent of GDP in 1989 to of resources at its command-from ex- at different levels and by public firms less than 1 percent in 1992. The falloff panded tax revenue, aid, and foreign couldtakeoffinanuncontrolled manner inforeignfinancing-inconjunctionwith commercial borrowing. These resources and undernine macroeconomic control. liberalization ofthe trade and exchange can potentially make the process of regimes-resultedinalargedevaluation adjustment smoother. It is easier, for David Dollar (73 percent) ofthe real exchange rate in example; to lay offcivil service workers East Asia and Pacific, 1989. This helped to spur a surge in or to privatize state firms in a rapidly Country Department I exports and to restrain imports during the next few years, leading to a steady decline in the external deficit. s Focusing On Rubber and Rice-IDA Credits to Viet Nam T'he growth ofimports picked up shaiply in 1993. Theincreased demandforim- On January 25, 1994 the lnterna- tilizer, seeds, and insecticides. ports was the result of the more rapid tional Development Association Longer-term loans averaging growth ofthe economy and the increase (IDA)-concessionary credit arm of $1,000 will be. made available to in investment, including foreign invest- the World Bank-approved a credit farmers to buy agricultural machin- ment. As a consequence, a current ac- of $96 million in support of a new, ery, including small tractors, fish- eount deficit haseemerged that maycbe three-year $106 million agriculture ing equipment, and motor tillers. project aimed at improving.the lives difficult to finance. The public sector of VietNam sfarmfamilies. Farmers Viet Nam 's one-hundred-year-old has had recourse to borrowing on com- should more than double their in- rubber industry will be also revital- mercial terms that it can ill afford. comes, from $40 to $96 per person ized with the help of the IDA-sup- or $480 per family. (The new credit ported project: the Rubber produc- The prudent macroeconomic policy was preceded by two IDA credits for tion of nine state companies would be to utilize highly concessional primary education and highway re- covering some 160,000 hectares in aid esorce an diectforigninvst- pai.r approved in October 1993 the country' southeastregion should aid resources and direct foreign invest lt/:>o ii'Sfmlin he 3; hl hy1 9 adbt mu totaling about $228 million, three double by 1996, and bringing in an ment o fiancethe alane ofpay- credits were the first IDA loans to extra $60 million in export earn- ments. Mostoftheaidmoneypledgedin Viet Nam since 1978) ings. Also, 1,000 staff at VietNam ' Paris, however, is for projects and will agricultural ministry will receive disburse gradually; the sarne is true for The agriculture projeet will make it training to assist them in carrying direct foreign investment, where large easier for Vietnamese rice farmers out agricultural reforms. commitments are slowly turning into in forty provinces to obtain credit disbursements. . -and agricultural extension services. Viet Nam s agricultural reform was (Some 4,300 villages with 4 million launched back in March 1989, when farm households will be targeted the communes were dismantled and After several years of austerity Viet- under the plan.) EEven though the family farming was restored. Rice nam has shown a desire to get on with Vietnamese Bank of Agriculture production soared, transforming Viet growth and has been willingto borrow (VBA), formed in 1990, had raised Namfrom a rice importer in the mid- at fairly high cost to start the process. available creditfrom $33 million in 1980s, to one of the world 's top While understandable, this strategy en- 1991 to. $236 million in 1993 funds three rice exporters in 1991. In re- tails the risk of undermining still fell short. Only 10 percent of centyears, however, military demo- macrotheonoric si. Thertask f Viet Nam 's 10 million farmers have bilization and cuts in the state work macroeconormicstablity. The task for, been able to obtain the credit they force have brought about one mil- the governmentnow is to getthis exter- need. Wth$52million fromtheIDA- lion people to the fields and put nal borrowing under control and to shift supportedproject, the VBA will make pressure on agriculture to generate to low-cost sources of financing as aid short-term loans averaging $100 to more jobs, according to a report on and directforeign investment disburse- finance farmers' purchases offer- January28 in the World Bank News. ments pick up. Volume 5, Number 1 15 The World Bank/PRDTE Conference Diary or Drought for American Invest- lective Enterprises (Thomas Rawski and ment? Gary H. Jefferson, Nicholas Stem, April 21,1994, Russian Federation Mis- Shahid Burki). Doing Business in Russia: New sionHall(tentative) Information: Boris Pleskovic, the Opportunities and Recent Devel- Information: US-NIS Chamber of World Bank, Research Advisory Staff opments Commerce and Industry, PO. Box Room N 9037, 1818 H Street, N. W, February24-25,1994,NewYork 1178, Central Islip, New York 11722, Washington, D.C. 20433, tel. (202) tel. (516) 582-9102, fax (516) 582- 473-1062, fax (202) 477-0955. The conference is sponsored by the 2159. American Conference Institute. Experts Global Countertrade: Strategy and will present current views on the legal, Credit Guarantee Schemes forSmall Implementation accounting,andeconomicregimesand and Medium-size Enterprises in May8-11,1994,Philadelphia the investment climate in Russia. Par- Poland ticipants include business persons and March 21-22, Warsaw This conference sponsored by the govemment officials with hands-on ex- American Countertrade Association will perience in projects. Discussions will This meeting coorganized by the be the third biannual meeting of the focus on case studies involving health OECDILE Programn and the PHARE countertrade organizations ofthe world. care, technology transfers, oil and gas PIL will focus on the organizational, Information: ACA, 121 S. Meramec investments, and various manufactur- legal, and conceptual dilemnmas encoun- Avenue, #1102, St. Louis, Missouri, ing initiatives. Specific topics include: tered in the first Polish Guarantee 63105-1725, tel. (314) 727-5522, fax investment and trade laws and regula- Scheme and ways to solve them. Par- (314) 727-8171. tions; current projects with practical les- ticipantsinclude Polish practitioners and sons learned; tax issues; financing in- smallandmedium-sizeenterprise(SME) 1994 Conference on Economic Re- vestment and trade; the role of financial specialists working in the form: Latin America and PCPEs multilateral agencies in financing OECD and developing countries. May 12-13,1994, Washington, D.C. projects; U.S. government loan, equity, Information: Martin Frost, OECD at insurance andfeasibility programs, cur- the Initiativesfor Local Employment Thisconference,hostedinMay 1994by rencyregulation and convertibility; trade Creation Program, tel. (331) 4524- Georgetown University, will deal with regulation by the Russian federation; 9170, fax (331) 4524-9098. the critical issues facing transitional intellectual property protection; account- economies, drawing from the Latin ing; the $2 billion oil and gas framework Sixth World Bank Conference on American experience, but focusing on agreement; regional perspectives; and Development Economics lessons that are relevant to previously countertrade as an innovative market- April28-29,1994,Washington D.C. centrally planned economies, PCPEs. ingtool. Academicians and policymakers ofna- Information: American Conference Organized by the World Bank, inaugu- tional and international renown will be Institute, 175 Fifth Avenue, Suite ration by President Lewis T. Preston, selected for debate and discussion. The 2182, New York, N. Y 10010, tel. (416) with keynote address by Vice President conference will be organized around 927-7936 or fax (416) 927-1563. Michael Bruno on Development Issues three issues: privatization; monetary inaChanging World: NewLessons, Old control and financial institutions; and U.S.-Newly Independent States Debates, Open Questions. One major safety nets and labor markets. Chamber of Commerce and Indus- theme "Transition in Socialist Econo- Information: Pew Economic Free- try Series: mies" includes Macropolicies in the dom Fellows Program, 1304-36th Transition to a Market Economy: A Street, N. W, Washington, D.C. 2000 7, Technology on the Volga Three Year Perspective (Leszek tel. (202) 687-5277, fax (202) 687- February 24, 1994, City University of Balcerowicz and Alan Gelb, Anders 5288. New York Graduate Center Aslund, Janos Kornai) Russia's Struggle Ukraine: Planting Now for Future withStabilization (Jeffrey Sachs, John Ukraine in Transition: Reforms, Harvest Williams,MaximBoycko);Establishing International Relations, Ecology March 24,1994, City University ofNew PropertyRights (Andrei Shleifer, Oliver May 23-27,1994, Odessa, Ukraine York Graduate Center (tentative) Blanchard, Roman Frydman); Chinese Russia in the Year 2000: Watershed Reform Experience with State and Col- 16 January 1994 Transition Second Congress of the Intemational Osteuropakunde. ASEER, anew, inter- 0083, fax (901) 726-3718. Ukrainian Economic Association. Calls national professional working group forpapers (to be delivered in Ukrainian, based inthe U. S., is dedicated to foster- The Economy of Defining Economic English, orRussian). ing comparative and collaborative re- Democracy after the Cold War Information: V N. Bandera, Econom- search and policy analysis on East Eu- June 16-18,1994, Portoroz, Slovenia ics Department, Temple University, ropean, Russian, and Eurasian Philadelphia, PA 19122, tel. (215) education. Conference themes include: SeventhConferenceoftheInternational 204-5039, fax (215) 204-8173. new information technologies for edu- AssociationfortheEconomics ofSelf- cational research and exchange; new Management (IAFESM). Papers deal- Contemporary East European, Rus- approaches to the history of East Euro- ing with workers participation, self-man- sian, and Eurasian Education: Com- pean, Russian, and Eurasian education; agement, and economic and industrial mon Legacies and the Struggle for the effects of Sovietization on national democracy are welcome, (from the Reform education systems; attempted educa- perspectives ofeconomic theory, insti- June 15-18,1994,NewYork tion reforms since 1989 (or 1991); the tutional and historical studies, experi- revival and uses of comparative and ence in Central and Eastern Europe, This conference is organized by the international education studies in the and experience in developed and devel- Association for Slavic and Eurasian former Soviet bloc; and the role and opingeconomies.) Educational Research (ASEER), inco- prospects for Western technical assis- Information: Vice President Milica operation with the Institute on East tance and cooperation in fostering edu- Uvalic, IAFESM, Borgo Santa Croce CentralEuropeofColumbiaUniversity cation reform. 17, 50122 Florence, Italy, tel. and and the education section of the Information: Mark S. Johnson, Deutsche Gesellschaft fur ASEER, 246Hawthorne Street, Mem- phis, Tennessee 38112, tel. (901) 272- World BankIIMF Agenda The World Bank Fosters Latvia's ..and the IMF its Economic Pro- Kazakhstan.About$170millionisavail- Agriculture ... gram able over the next twelve months under a standby credit, and about $85 million A$25 millionWorld Bank loan approved The IM approved credits of$64 million immediately, as the second drawing on January 11 aims to speed up the to Latvia, to support the government's under the systemic transformation fa- recoveryofLatvianagriculture;theloan, 1993/94economicprogram. Ofthetotal cility. Japan has announced that it will which is part ofa $45.1 million agricul- $32 million may be drawn under a fif- provide Kazakstan with financing that tural developmentproject, is targeted at teen-month standby, and a further $32 matches the support ofthe IMF, the first the country's emerging private farmers million is available under the systemic time they have done so in conjunction and entrepreneurs. Most oftheloanwill transformation facility (STF). The eco- with a standby. Kazakhstan's austerity help make it easier for Latvia's 52,000 nomic program aims at holding the program, which is awaiting parliamen- private farmers to borrow money-or monthly inflation rate at between 0.5 tary approval, proposes to tighten credit average $5,000 each-to invest in their and 1 percent and at accelerating and money, and slow the decline in in- farms. (Declining demand and crum- privatization. dustrial output to between 3 and 5 per- bling trade links with the former Soviet cent in 1994, down from the 13 percent Unionhave cutfood output by one-third Kazakhstan To Receive Massive experienced in 1993. every year since the Baltic country de- Aid clared its independence in 1991.) The Blocking the Locust Invasion in newloan-whichisforseventeenyears, Representatives from sixteen countries Algeria including afour-years grace period, and and eleven international organizations carries avariable interestrate, currently metinParis onJanuary 14 and commit- TheWorld Bank approved a$30 million 7.27 percent (down from the 7.43 per- ted-atotalof$1 billionforKazakhstan's emergency loan to help fight a locust cent charged in the previous six developmentneeds in 1994. New com- invasioninthefood-growingregionsof months)-markstheflrstBank-supported mitments,togetherwith disbursements Algeria. The emergency loan, to be investment projectinthe Baltic. from last year's pledges could reach supplementedbya$20millioncontribu- $1.5 billion. On January 26 the IMF tion bytheAlgeriangovernment, would approved $255 million in financing for bolster surveillance and warning sys- Volume 5, Number 1 17 The World BanklPRDTE tems. The project would also help signed to help make the telecommu'i- concessional terms). Japan is strengthenregional cooperationbetween cations sectormore competitivethrough cofinancing the project with $400,000. Algeria and other countries in North accounting and pricing reform and the The earthquake took the lives of an AfricaandtheSahelRegion,whichfaced establishment of a legal and regulatory estimated 25,000to 30,000 peopleand simnilarthreats. (Inanotherdevelopment, framnework. leftmorethanahalf-millionpeoplehome- Algeriaseta 1994 budgetdeficitceiling less. The quake also took an economic of 125.3 billion dinars or 9.6 percent of Helping Armenia'sEarthquake Vic- toll by destroying about 40 percent of GDP, onspendingof535.3 billiondinars. tims Armenia's manufacturing base. Indus- The 1993 deficitis 192billion dinars, or trial output fell by half in 1992 and the 12 percent ofGDP. The narrower defi- OnFebruary 1, the International Devel- country's average incomenowamounts cit will be achieved by~ an improving opment Association (IDA) approved a to about one-third of its 1989 level. This revenues and imposinggreater budget- credit of$28 millionto Armeniain sup- new project marks the second loan to ary rigor, head of state Ali Kafi said.) port of efforts to reconstruct housing, Armenia since the Bank made its first factories and municipal infhastructure in loantothecountryinMarch, 1993. The Supporting FYR Macedonia the northwestern corner of the country first loan aimed to improve Armenia's that was&affected by the 1988 earth- ability to carry out economic reforms, Witbhelpfroma$40 millionWorldBank quake. (IDA is the World Bank affiliate manage aprivate market economy, and loan and acreditof$40 millionfromthe that lends to the poorest countries on build up a private sector. International Development Association (IDA), both approved on February 8 FYR Macedonia is embarking on an EDI Training Programs in the FSU ambitious economic reform program. The assistance, marks the first Bank In late 1991 the World Bank's Ec - that can be used as aids by local operation in iY Macedonia since the "nomic Development Institute (EDI) participants in their future teach- coun yjoied theiiistitution onDecem- initiated an educational program in ing. Studies on economics, banking ber 30, 1993. TheIDAlandWorldBank countries oftheformer Soviet Union and finance, and enterprise restruc- fbd,smwillpayforbadlyneededimports. (FSU) to assist in the transition pro- turing are available in Russian, as Thefundingwill also help open the way cess. In addition to, the target audi- are training handbooks on finan- tointematiohal assistancebbygivingnew ence of trainers, enterprise manag- cial risk management, bank regula- weightto amulti-donoreffortassisting ers, government officials, bankers, tion, and supervision and bank FYR Macedonia in clearing its share3 of and agricultur, and energy special- analysis. A series ofpapers and case the formerYugoslavi's debts. TheIMF ists participate in the programs. studieswerepublished onenterprise is.providing.,a$17 dnhllionicre4itunder Topics. include "Banking ,and Fi- management for restructuring and the SystemicTrans.formation Facilit. nance,". "Market Economics," privatization based on local experi- *,"Privatization. and Restructuring", ence. The updated version of "Glos- Easing Chinia's Telephone Short- "Project Analysis", and ",Orienta- sary on Banking and Finance," in age tion. to the World Bank. "By the end both English and Russian, has just of thefirstyear, EDI had organized been published Sixteen instruction A $250-million World Bank loan, ap- twenty-five courses reaching over videos complement courses on bank- proviedinlateDecember 1993,willhelp 2,500 participants, with a budget of ing and finance. finance China's $623 millin telecom- $2.25 million. B the end of 1993, municationsprojectaimed atincreasing the total number afparticipants had [Videos can be made available for long distance and local telephone ca- reached almost 4,:000. Thisyear the Russian trainers. Contact Mary : pacity in several provinces of the coun- seminars will receive more partici- Elizabeth Ward, the World Bank, try. Telephone demand has climbed 20 pantsfifom the CentralAsian repub- Room M-5011, 1818 H Street, NW percent annually inthe 1 990s, arid about lics, and both the project analysis Washington, DC 20433, tel.(202) 1.-6million people are now waiting for and project,management programs 473-6372. Written materials are tel ep hones. A 2,084-ktilometer ()fi;. will be extended. ;The first EDI available from the World Bank, EDI bre optic >cable in ihe north' will link trained Russian , trainers have al- 7rainingMaterials Center, RoomM- Beijing,rinnerMongolia, Ningxia, and readyruntheirfirsttrainingcourses. P1-010,, 1818 H Street, NW_ ,Wash- Gansu. In the south a second cable of ~inigton, D.C. 20433, teL. (202),473- 4,461 km will link theprovinces of As part of the program, EDI has 6351.] 441kiang,Fujian,JiangAfUnan,Guiehou, .produced ,a variety of written and and Sichuan. The~ project -is ailso -de- . flvisual training materials in Russian Lisa Griffin, EDI, the World Bank 18 January 1994 Transition. Milestones of Transition Poland's parliament has sent the benefits, however. The rest were either vemberrateof8.8 percent. (Food prices government's proposed budgetfor 1994 ineligible for compensation ortheirpe- increased by 7.8 percent, and.the rake tocommissions. A final vote is expected riod of entitlement had expired. Some was only 2.4 percent for clothing and in February; in the meantime, the 130,000 peoplereceivedfinancial sup- footwear.) Ib 1993 the inflation-rate government's draft budget;has legal portfromlocaigovernmentauthorities. amounted to.34.7 percent. force. The government plans revenues - of6 10trillionzloty($28 billion), expen- Hungary's nuclear waste problem is Russia exported much more oil in 1993 ditures of 693 trillion ($32 billion),.anda intensifyming. Russiaisno longeraccept- than in 1992, but slumping world mar- deficit of 83 trillion ($4 billion), or 4.1 ing radioactive - waste produced by kets tooktheirtoll on revenues. A study percent of GDP. The economy is ex- Hungary'sSoviet-designedatoriicplant by the Center for Economic Analysis pectedtogrow4.5 percentin 1994, with at Paks, and Ukraine objects to trans-, said that crude oil exports outside the investment rising 6 percent; exports, 6 portation of the waste through its terri- former SovietUnion rose 30 percentin percent; and imports, 2.5 percent. Infla- tory: Storage facilities at Paks, which the ten months January through Octo- tion is expected to drop to an average of produces S6yons ofnuclearwasteyearly beroverthesameperiod in 1992 butthat 27 percent. A monthly devaluation rate will be filled by early 1995. Hungarian the average contract price ($105.10 a for the zloty of 1.6 percent will continue. officials are talking with French and ton) was 8'. 9percent lower. Prices for Real wages are to rise 2 percent. Do- Britishfirmsaboutsolutionstotheprob- crude oil, Russia's main export earner, mestic debt servicing will cost 82 trillion lem. have fallen to their lowest levels in'five zloty ($3.9 billion), while servicing - years due to oversupply. Poland's foreign debt will consume a In the first nine months of 1993' further30trillionzloty($1.4billion). Estonia's industrial production Some 15 percent oftRussia's territory amnountedto 10.36'billionkroons ($762 is an "ecological disaster 'zone," and' The Czech koruna is the most stable million), representing a 32.4 percent onlyhalfthe'country's 122 millionhect- currencyinpostcommunistEurope, as- decline compared with the"same period ares"of arable land is suitable 'for farm- serts a report of the Dresdner Bank. in 1992, and a60 percent decline com-. ing accordingto ecology ministerum ktot Real inflation in the Czech Republic pared with 1989, accendingto the 1993- Danilov-Danilyan who explained that droppedfrom60percentin 1991 to 10 94 economiic survey of the Estonian around l00,O0OpeopleinRussialivein percent in 1993 and the koruna's ex- economics ministry. As of October 15 areas with"anunfavorablerradioactive change rate against all major Western of 1993 the Estonian ehterprise register situation" and that only about one-fifth currencies has remained stable for a listed 7,434 manufacturing companies ofthetoxic industrialwaste produced in relativly long time. and 72 miningenterprises ofwhich only the countryis purified. According to about4,000wereo0perating. Investments Danilov-Danilyan the "very serious" Bulgaria may seek to resolve its debt innew and existingenterpises amounted ecological situation is unlikely to im- problemsbypurchasingliabilities directly to 5.59billion kroons','ofwhich less than prove any earlierthan 1995: from the country's major creditors, Fi- 900 million kroons;carne from abroad. nance Minrister Stoyan Aleksandrov Russian President Boris Yeltsin pub- announced in mid-January afteratwo- In Lithuaniaindustrial outputfell by 25 lished,adetreeyesterday aiming to con- day meeting in Frankfurt with represen- percent in 1993, with only 49 percent of clude avoucher privatization program tatives of commercial creditors. Bul- industrial capacity utilized throughout by July. Yeltsin's decree provides new garia owes more than $9 billion to its the year. Agricaltutal production was benefits for the investment funds, .ex- commercial creditors and the debt is satisfactory, but severe'drops in pur- empting them from paying tax on divi- currently sold on the open market for chasing power decreased demaMid for dend income. slightly more than 35 cents per dollar meat and dairy products, and lowered . owed. procurement prices. The 1994 budget Russia?s. ministry of labor says that envisages a deficit of 163 million litai officialdatathatputthenumberofpeople In Hungary the number of registered ($40 million) withexpenditures of2,945 out of work in Russia at around one unemployed fell to 635,000inNovem- millionlitai exceedingrevenues of2,782 milHidnseriouslyunderestirnatethenumw ber 1993,70,000 less thanthe peak figN millionlitai-bothabout60percenthigher ber of unemployed. Vladimir Varov, ure in February 1993' November's'un- than in 1993. deputyninisteroflabor, saidonJanuary employment rate of 12.2 percent was '12thatQthe trueniumberisbetween4and 0.4 percentlowerthanin October. Only Inflation in Latvia slowed to 5.1 per- 5 million people, orS to 6 percentofthe 330,000peoplereceivedunemployment cent in-December 1993 from the No-' work force. . O.f these, one million are Volume 5, Number 1 19 The World Bank/PRDTE officially registered as unemployed, estimates of 300 million jobless peas- 1993 GDP contracted by 1.3 percent, while the rest are "working for bank- ants bytheyear2000. Hetoldanational with the Western part of the country ruptenterprises, living on statesubsidies conference on rural work that the aver- showing a decline of 1.9 percent, and disguised as wages, and producingnoth- age farmer's annual income in 1993 the east an increase of 6.3 percent. ing that anyone needs." was 880 yuan ($101), an increase of C only 2 percent over 1992 after inflation; Cambodia'snewbudgetandecononic In the first nine months of 1993 in contrast, urban incomes rose 10 per- legislationhavebroughtgovernment Romania's foreign debt grew 26 per- cent. Latest official estimates show accounting procedures into line within- temational standards for the first time cent to the equivalent of more than $3 that the average urban resident earned then1t960s. Fiance minst Sam billion, the Romanian news agency, about2,300yuan($264)in 1993. since the 1960s. Finance mbnister Sar Rompres, reported. In another develop- Rans reot htCmoi' ala Rompres, eorted 24 n Romanotter devlop- Explosive urbanization in China over menthasapproveda 1994budgetof890 ment, some 244 Romaniuan state com- *panies were shifted into private hands the past decade has left many experts billionriels. Gross domestic productfor panies were shifted into private had rr convinced that Chinese cities are at the 1994 has been forecast at 6 trillion riel lastyear, compared withatarget ofu550, saturation point, writes the ChinaDaily ($2.4 billion), 8 percent over 1993, (com- In twelve years' time the number of pared with 7.5 percent growth this year Unemployment is continuing to rise in cities in China has more than doubled over 1992). An estimated $3 00 million in tUhe traPnsilYtimon ecocnomies tmogfEanssteern from 223 to 517, with their populations investment is needed for energy devel- Europe and the CIS, although the in- increasing by asimilaramount, from 90 opment in Cambodia to ensure suffi- creases in 1993 werein general some- to 231 million people. China now has cient supply by 1997, according to the what smallerthan in 1g992 according to thirty-two cities with at least 1 rmillion country's minister for industry, mines wh late smllrt otha n 1,cordic to people-more that the France, Japan, and energy. the latest report Of the Economic Corn- Rusia and the United States combined. nussion for Europe. In mid- 1 993 there China expects apopulation of 1.22 bil- were abouti6 trnElluonpersons unem- lionby 2000 despite astrictbirti control The Europe Agreements associating mloredtha in DEcembern 1992. Uperet program, meaningthecountry'spopula- Poland and Hungary with the Euro- more than in December 1992. Unem- tionisincreasingbyl1 millionannually. pean Union enteredintoforceonFeb- ployment rates ranged from an excep- The country's large and medium-size ruary 1. (Europe Agreements has been tionally low 3 percent in the Czech Re- public to nearly 30 percent in FYR cities do notcurrentlyhavethefinancial signedalso withthe CzechRepublic, the Malcdoni. Intheay CS prcuntries regisR resources to cope with the growing in- SlovakRepublic, Romaniaand Bulgaria, Macedonia. In the C1S countries regis- frastructure demands imposed by ever- but implementation in their cases takes tered unemployment rose 27 percent beterendeuemberl9ymentrose 193 perc larger populations. The article recom- more time; owing to the separation of buttheenDeemploybnentr1atend sne3 mends that urban growth be Czechoslovakia, and some unresolved buttheunemploymentrate was lesthan concentrated in key cities such as trade issues). Poland's and Hungary's exceptlArmenia(5 percent ). Althe cougs Shanghai, Beijing, Tianjin, Shenyang, legislation will be harmonised with that except Armenia (5 percent). Although Guangzhou, Chongqing, and Wuhan and of the European Union. This applies these low figures reflect in part techni- thatnewcitiesbebuiltalongtheYangtze especially to customs law, partnership cal deficiencies inthe statistics they also River law, banking law company accounting point to a general reluctance to accept andd taxation, intellectual services, com- openunemployment. China's economygrewat record speed petition regulations, the protection of in 1993. Official data show that indus- human,plantandanimallifeandhealth, China has established its first minimum trial output in 1993 was $403 billion, an humn,slatian an life a health, legislation on foodstuffs, consumer law, wage rules to protect workers' living increase of23.6 percentover 1992, 7he.n indirecttaxation, technical standards and standards, the official China Daily re- output rose 20.8 percent overthe previ- regulations, transportation and environ- ports. The minimum wage level, set by ous year. The growth rate in 1993 was mental protection. The Europe Agree- individual cities and provinces, must be the highest simce China began its open- ments were signed in December 1991. at least half the local average wage. doorandreforn policies in 1978. In the meantime, interim agreements Shanghai has set its minimum at $24 a implemented the accords' trade mea- month, whilethe special economic zone Germany's Economic Research Insti- sures. (The Community's interim ac- of Shenzhen has set a level of $32 a tutereportsthatGermanrecovery is not cord with Bulgariaentered into force on month. in sight, although a gradual upward February ) TheBJune,1993meetingtof movementrnightbeapparent inthewest thebCopenhagen European Council held LiuJiangChina'sfarmminister, warned by summer. The institute has forecast outtheprospectnofefullmemberslipfor of a widening gap between the urban that western German GDP will decline the six countries once they satifr rich and the rural poor and called for byO.5 percentin 1994, whilethatofthe nomicanddemocraticrequirements,but more investment in agnculture, amid east will grow by 6 percent. Germany's set no target date for that to happen. 20 January 1994 Transition New Books and Working Papers The PRDTE unit of the World Bank regrets that it is unable to supply the publications listed World Bank Publications fasterdisinflation and the level ofexter- J. Blommestein and Michael G. -Spen- nal competitiveness in anopeneconomy cer, The Role of Financial Institu- AndresSolimanoandDavidYuravlivker, suchasHungarythatuses the exchange tions in the Transition to a Market PriceFormation,NominalAnchors, rate as anominal anchor in disinflation. Economy, IMF WP no. 93/75, Wash- and Stabilization Policies in Hun- ington,D.C.,October 1993,45 p. gary: An Empirical Analysis, WP no. Alfredo Thome, Eastern Europe's 1234, December 1993,36 p. Experience with Banking Reform: Financial institutions intermediate be- To order: Ms. Susana Florez, PRDTE, Is There a Role for Banks in the tween savers and investors and contrib- Rm. N11-017, tel. (202) 473-9075. Transition?, WPno. 1235, December utetocorporategovemance. Equityand 1993,38p. bond markets in the former centrally Authors, using monthly data, provide To order: Noni Jose, Rm. 18-168, tel. planned economies are not yet in a po- econometric estimates of the determi- (202) 473-3688. sition adequately to provide these ser- nants ofinflationfor 1990-92. Empitical vices. It is not yet clear that investment estimates ofprice equations--bothcon- Leila M. Webster and Dan Swanson, funds will providethenecessaryfinanc- sumer price index and producer price The Emergence of Private Sector ing and corporate management. The index--showthequantitativeimportance ManufacturingintheFormerCzech first priority forfmancial sector reforms and statistical significance of the ex- and Slovak Federal Republic: A must be to establish ahealthycommer- change rate in Hungary's price forma- Survey of Firms, World Bank Techni- cial banking sector. Banks are the most tion during the period of intensified re- cal Paper no. 230, November 1993, promising source offinancing, provide form, as the economy became more 93 p. payment services which are crucial to opento intemationaltrade. Money sup- both the real and financial sectors and, plyaffectsconsumerandproducerprices Leila M. Webster, The Emergence of by monitoring the use of loaned funds, with several lags; its impact on prices is Private Sector Manufacturing in will be the primary source of corporate small in the short run. Nominal wages Hungary: A Survey of Firms, World governance during the transformation have a more significant effect on the Bank TechnicalPaperno. 229,Novem- to a market economy. consumerpriceindex than onproducer ber 1993, 99 p. price index. Financial sector reform has, at times, Leila M. Webster, The Emergence of been portrayed as a question of adopt- The studypresents policysimulations of Private Sector Manufacturing in ing eitherabank-based or a(securities) alternative rules for the exchange rate Poland: A Survey of Firms, World market-basedmodel.Inthebank-based and the money supply, and their effect BankTechnical Paperno. 237,Novem- model, commercial banks, oftenlicensed on the rate of inflation and the level of ber 1993,94 p. as "universal" banks, take the lead in the real exchange rate. They find that a financing enterprise restructuring and rule offixing the exchange rate entails 5 To receive publications of the World investment. Proponents of the market- percentless inflation ayear--measured Bank, order from World Bank Publi- based model argue that the structural bytheconsumerpriceindex--thanifthe cations, PO. Box 7247-8619, Phila- problems inthe banking sector cannot rule is based onlyonreducingthe rate of delphia, PA 19170-8619, tel. (202) be overcome easily;.so firms will have money growth (to 1 percent a month). 473-1155, fax (202) 676-0581; or to look to equity and bond markets for visit the World Bank bookstores, in sources ofnew capital. Equity and bond A fixed exchange rate policy, neverthe- the US., 701-18th St. NW Washing- marketsinthepost-socialisteconomies less, is associated with greater appre- ton, D.C., or in France, 66, avenue are not sufficiently well developed to ciation ofthe real exchange rate than is d 'Iena, 75116, Paris. support significant issues of new secu- thepolicyofmoney-baseddisinflation- rities or to provide a mechanisms for -nearly 4 percentage points more real IMF Publications corporate control. They lack adequate appreciation ayear. A Purchasing power liquidity, regulatory oversight, informa- parity- based exchange rate rule stabi- To order: IMF Publication Services tion disclosure, and clearing and pay- lizes the real exchange rate at the cost tel. (202) 623-7430 orfax (202) 623- ment systems. The important role of ofasubstantial acceleration in inflation. 7201. banks in maintaining the payment sys- These exercises illustrate the nature and tem and in providing credit to market magnitude of the trade-offs between participants to supporttrading and settle- Volume 5, Number 1 21 The World BankIPRDTE mentmeansthatuntil banks are restruc- To order CEPR Discussion Papers: Andras Inotai and Jan Stankovsky, tured andrecapitalized, securities mar- 25-28 Old Burlington Street, London Transformation in Progress: The ket development will be constrained. WIX JLB, tel. (44 71) 734-9190, fax External Economic Factor, no. 200, (44 71) 734-8760. 1993,77 p. Investment funds emerging from mass privatization schemes may create con- WEFA Working Papers ZdenekLukas, Die Landwirtschaftin centrations of equity ownership that - ; den Oststaaten 1992, no. 148, 1993, would allow them to play an important Michael Alexeev, Jim Leitzel and Wil- 96 p. role in corporate control and perhaps, liam Pyle, Essays on Second To order: Vienna Institute for Com- too, in finding sources of investment Economy Markets, Berkeley-Duke parative Economic Studies, PO. Box capital. They are a relatively recent in- Occasional Papers on the Second 87, A-1103 Vienna, tel. (431) 782- novation, however, and itremains to be EconomyintheUSSR, no. 37, Decem- 567, fax (431) 787-120. seenhowactivetheywillbeinfinancing ber 1993,53 p. and managing privatized enterprises.' Other Working Papers Kimberly C. Neuhauser, Two Chan- Tlhe authorities should first establish a nels of Consumer Credit in the Laszl6 Csaba, Economic Transforma- healthy banking sector, because it is the USSR., Berkeley-Duke Occasional tion in the Visegrad Countries: A banksthatarethemostpromisingsource Papers on the Second Economy in the Comparison, University of Helsinki, of working capital and corporate con- USSR,xno. 38, December 1993, 67 p. WP no. 353,1993,18 p. trol. This'doesnot meanthatsecurities marketdevelopmentshouldbeignored, Vladimir G. Treml and Michael V. DanutaGotz-KozierkiewiczandWitold onlythatitshouldnotbea'priorityuseof Alexeev,TheSecondEconoy,andthe Malecki, Exchange Rate and For- scarce government resources at the Destabilizing Effect of Its Growth eign Debt in the Monetary Stabili- present time. Many obseervers recom- on the State Economy in the Soviet zation, Institute of Finance (Warsaw), mend that banks be given the power to Union: 1965-1989, Berkeley-Duke not, 37, 1993,43p. actasuniversalbanks,combininglend- Occasional Papers on the Second ing with securities market operations Economyinthe USSR, no.36, Decem- ElzbietaSkrzeszewska-Paczek, Stabi- and equity investment. However, com- ber 1993, 76 p. lization in Mexico: Lessons for Po- mercial banking and investment bank- land, Institute of Finance (Warsaw), ing activities should be separated, at To order: The WEFA Group, Special WP no. 36,1993,39 p. least until banks have demonstrated Projects/Ginny, Jones, 401 City Av- To7 order: Institute of Finance, infor- competenceintheir commnercial lending enue, Suite.300, BalanCywyd, Phila- mation andPublication Section, War- operations. ' dephia, 19004, tel. (215) 660-6387 saw, Swietokrzyska 12, Poland. or:(919) 660-1841. PaulfHilbers,,Monetary Instruments Eugenio F. Lari, HasTheWorldBank and Their Use During the Transi- WIIN Papers: a Role to Play in Central and East- tion from a Centrally Planned to a em Europe?, [Original title Quale MarketEconomy,IMPWP no. 93/87, Die'IndustrienTschechiens und der Ruolo Puo Ricoprire La Banca Washington, D.C., November 1993, Slowakei: Profile, Trends und Bezug Mondiale Nell' Europa Centrale ed 29p. zu Osterreichs Industrie, no. 201, Orientale?], Quarterly Review of 1993,69p. BancaToscana, 2/1992, 30 p. CEPR Working Papers Raimund Dietz, Eigentum und New Books L. Karp and S. Stefanou, Domestic Privatisieungaus systemtheoreticher and Trade Policy for Central and Sicht.EinBeitragzurTheoiiederTrAs- Mike Dennis, Social and Economic East European Agriculture, CEPR fomiation,no. 150,1993,182p. ModernizationinEasternGermany: no. 814, November 1993. From Honecker to Kohl, Pinter Pub- .Peler Havlik, lsepa zwschen Plan ishers, London, 1993,252 p. E. Virhegyi, Key Elements of the- undMkt:DieWis snc Reform of the Hungarian Banking - inderRegionvon1989bisAnfang1993, Launching,Financing, and Protect- System: Privatization and Portfolio -,Ano. 149,1993,77p. ing Business Ventures in Russia: A Cleaning, CEPR no. 826, September t Regional Strategy, Geonomics Insti- 1993.- tute,Vermont, September 23-26,1993, 79p. 22 January 1994 Transition To order: Geonomics Institute, 14 there oughtto beaunified conmand.-In Perhaps the greatestac,complistmient Hillcrest Ave., Middlebury, Vermont this respect, NATO offers a better cul- oftheMarshallPlanwasthatitfostered 05753, tel. (802) 388-9619, fax (802) ture than the European Cornmission European cooperation. The need for 388-9627. which has been put in charge ofcoordi- cooperation among the formerly com- nating economic assistance. The G-7 munist countries is even greater than it Malcolm R. Hill and Caroline M. Hay, ought to have developed a command was in post-war Europe.anditis in this Trade, Industrial Cooperation and structure for dealing with economic aid field.that the, Partnership For Peace TechnologyTransferContinuityand to theformer SovietUnion, but didnot. could makeits greatest contribution to Change in a New Era of East-West security Butthereformnandreconstruc- Relations, Avebury, Vermont, 1993, There ismuchto begainedfrom giving tion of economic ties among the for- 123 p. the task to the NATO's Partnership For merlycomnunist countries should not Peace. For one thing, it would put the be pursued-at the expense oftheir inte- WalterLaFeber,America,Russia,and emphasis on conflict prevention rather gration into the European economy. the Cold War, 1945-1992,7th edition, than intervention; for another, it would Countries like .Hungary have -almost McGraw Hill, New York; 1993,394 p. put the economic costin the context of completelybrokentheirdependenceon the.gainin security. Incidentally, itwould the Soviet market; they need better ac- Jeffrey Miller, The Bulgarian Bank- focus attention on the constituency in cess to European markets more than ing System, Bulgarian National Bank, the former Soviet Union which is the anyother form ofeconomic assistance. 1993,63p. mostimportantfromasecuritypointof By allowing differentiated treatment, view, namely the military. In current includingmembershipintheEuropean Maciej Nowicki, Environment in Po- economic conditions, even very small Union and NATO, the Partnership For land: Issues and Solutions, Kluwer expenditures benefitting the military Peace should. help fulfill their aspira- Academic, Boston, 1993,191 p. would have a major effect in their atti- tions. tude andbehavior- ,, To order., -The Soros Foundations, 888 Perry Patterson, Capitalist Goals, SeventhAvenue, New York, NY 10106, Socialist Past: The Rise of the Pri- tel. (21.2) 757-2323, fax (212) 974- vate Sector in Command Econo- 0367.: mies, Westview Press, Boulder, 1993, 225p. George Soros, Toward a New World Order: The Future ofNato, The Soros Foundations, New York, November 1993,1l8p. Providing economic assistance to the former Soviet Union has been an un- nitigated failure. The history of West- em assistance [could be divided] into threephases: first, whenWestemassis- tance should have been promised but was not; second, when it was promised butitwasnotdelivered; andthird, when it is delivered but it does not work. We are now entering the third phase. One ofthe reasons for the failure is that each donor country is acting on its own and is guided by its own interests and not that ofthe recipients. In my foundation, we describe Western assistance to the formerly communist countries as the "lastbastionofthecommand economy." MOW____ That may be unavoidable, but at least From the Hungarian Economy Volume 5, Number 1 23 The World Bank/PRDTE Bibliography of Selected Articles Central and Eastern Europe Ottolenghi, D., and A. Steinherr. Yugosla- Cuba via: Was It a Winner's Curse? Economics Bodgenor, J. Eastern Europe: Black Sea of Transition/European Bank for Recon- Zimbalist,A. Dateline Cuba: Hangingonin Ambitions. Banker(U.K.) 143 :28-30, Sep- struction and Development (International) Havana.ForeignPolicy(U.S.)92:151-67,fall tember 1993. 1 :209-43,June 1993. 1993. Bunce, V, and M. Csanadi. Uncertainty in Turbulent Outskirts. Economist (U.K.) CIS and the Baltics theTransition: Post-Communism inHun- 328:17,September 1 1, 1993. gary. East European Politics and Societ- Albania: OntheWayUp.Euromoney(U.K.) ies: EEPS (U. S.) 7:240-75, Spring 1993. Tymowski,A. W Poland's Unwanted Social p. 141-48, September 1993. Revolution. East European Politics and Clegg,N. Hungary'sPrivatizationFalters Societies: EEPS (U.S.) 7:169-202, Spring Bacon, K. H. IMF's Medicine for Russian afterFlying Start.FinancialTimes (U.K.)p. 1993. Economy Draws Criticism for Being Too 4, October 19, 1993. Strong. Wall Street Journal (U.S.) p. A16, Ulkraine over the Brink. Economist (U.K.) October25, 1993. Dempsey, J. Painstaking Restoration. Fi- 328:45-46, September4,1993. nancial Times (UJ.K.) p. 23-25, October 14, Brummer,A. IMFDirectorUrgesG7Aidfor 1993. Vmtrova, R. General Recession and the Yeltsin. Guardian (U.K.) p.4, September24, Structural Adaptation Crisis. Eastern Eu- 1993. Dobbs, M. Scars ofCommunism: Disaster ropean Economics: A Journal of Transla- in Yugoslavia. Washington Post (U.S.) p. tions(U.S.)31:78-94, Spring 1993. Bush, J. IMF May Delay Loans to Russia. Al ,A40-41, September5, 1993. Times (U.K.)p. 26, September24, 1993. Young, S. D. Going to Market: Economic Dobbs, M. Scars ofCommunism: Promise Organization and Transformation in a Galuszka, P., P. Kranz, and J. Rossant. What in Poland. Washington Post (U.S.) p. Al, HungarianFinn. WorldDevelopment(U.K.) Yeltsin Must Do. Business Week (U.S.) A26, September6,1993. 21883-99,June1993. 3341:22-26, October18,1993. Flemnming, J. S. Price and Trade Reform: Yunker,J, A. NewProspects for East-West Greenhouse, S. IMFMeetingBacks Yeltsin, The Economic Consequences of Shock Ideological Convergence: AMarketSocial- withaCaveat.NewYorkTimes(UJ.S.)p.AI 1, TherapyandPossibleMitigatingMeasures ist Viewpoint. Coexistence: A Review of September27, 1993. orWhyLiberalizationIsNotEnough. Quar- East-WestandDevelopmentIssues (Nether- terly Review/National Westminster Bank lands) 30:237-67, September 1993. Hiatt, F. Russia's Economic Reformers See (U.K.)p. 4-12,May 1993. OpportunitytoMove. WashingtonPost(U.S.) Zukowski, R. Stabilization and Recession p. A29, A32, September 28,1993. Glikinan;P. RecessionStagnation,andWays in a Transitional Economy: The Case of Out.EasternEuropean Economics:A Jour- Poland. WorldDevelopment(U.K.)2 1:1163- Hiatt, F. Yeltsin,World Bank Move to Spur nal of Translations (U.S.) 31:4-77, Spring 78,July 1993. PrivateLand Ownership. WashingtonPost 1993.~ (U.S.)p. A27, October27, 1993. Viet Nam McDonald, J. Transition to Utopia: A EIMFPlanstoKeepPushingRussiatoEnact ReinterpretationofEconomics,Ideas,and Awanohara, S. Open the Floodgates: IMF- Reforms. Journal of Commerce (U.S.) p. Politics in Hungary, 1984-1990. East Eu- World BankAid to Start FlowingtoViet- 2A, September24, 1993. ropean Politics and Societies: EEPS (U.S.) nam. Far Eastern Economic Review (Hong 7:203-39,Springl993. Kong) 156:92,October7,1993. Kaminski, M., and A. Robinson. Belarus Finds Breaking Up Is Hard To Do. Finan- Newbery, D. M. Tax and ExpenditurePoli- Riedel, J. Vietnam: On the Trail of the Ti- cial Times (U.K.) p. 3, October 12, 1993. cies in Hungary. Economics of Transition/ gers. WorldEconomy(U.K.) 16:401 -22,July European Bank for Reconstruction and 1993. Neumann,l.B.Russiaas CentralEurope's Development(International) 1:245-72, June Constituting Other. East European Poli- 1993. Vietnam:ANewEra.Asiamoney(`U.K.)4:l- tics and Societies: EEPS (U.S.) 7:349-69, 79, July-August 1993. Spring 1993. I TRANSITION is a regular publication of the World Bank's Transition Economnies Division, Policy Research Department. The findings, 1 views, and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations. Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent. Richard Hirschler is the editor and production manager, tel: (202) 473-6982. Jennifer Walker is the research assistant and desktop publisher. If you wish to receive Transition, send name and address to Jennifer Walker, room N- 11 023X,theWorldBank, 1818HStreetNW, Washington,D.C. 20433, orcall (202) 473-7466, orfax (202)676-0439. Inforlnationonupcorning conferences on transforming economies, indication of subjects of special interest to our readers, lefters to the editor, and any other reader contributions are appreciated. 24 January 1994