http://www.worldbank.org/html/prddr/trans/WEB/trans.htm http://www.wdi.bus.umich.edu THE NEWSLETTER ABOUT REFORMING ECONOMIES TRANSITION Volume 10, Number 4 The World Bank in collaboration with The William Davidson Institute August 1999 A Changing Development Landscape: Globalization and Localization 19677 World Development Report 1999/2000 August1999 by Shahid Yusuf World Development Report 1999/2000: Entering the 21st Century explores the avenues for institutional change and catalogues the major issues confronting the world in the early 21st century. These issues include macroeconomic instability resulting from openness, decentralization, rapid urbanization, and climate change. Both globalization and localization will shape the development landscape in the early 21st century Both forces have a long, albeit somewhat fitful history The response of nation-states to these two forces will determine whether incomes in low-income countries converge with those of industrial countries and whether efforts to eliminate poverty from tomorrow's world are ultimately successful. G lobalization entered the develop- Organization (WTO). The adoption of com- ment discourse in the early mon rules to regulate banking and financial W hat's Inside 1 980s. Now it is common cur- reporting lent further momentum, as did the rency and denotes the integration of mar- creation of the World Wide Web and an What Went Wrong in Ukraine? 3 kets for goods and factors of production, international movement toward product Unsolved Governance in China's SOEs 5 along with the increasing commonality of standards like the ISO 9000. standards and consumer tastes. Starting Migration in Transition Economies 8 in the 1 980s many countries began dis- Greater receptivity toward FDI and the ease Developments in Russia mantling controls on the movement of capi- of transactions overlong distances induced * Money Laundering Scandal 11 tal and adopting a more favorable stance companies to reorganize their activities, * Conglomerates and their Future 14 to foreign direct investment (FDI). Declin- slice up the value-added chain, and distrib- * Survival Strategy of 12 Oligarchs 16 ing transport costs and advances in com- ute production facilities across markets. * Reader's Forum: Stealing the State 17 munications and information technology This spatial diffusion and the widening of tightened the integration of goods and markets are behind the proliferation of pro- UNDP Report-Transition's Dark Side 19 capital markets. duction networks, which allows firms to spe- * Human Development Ranking 21 cialize, focus their research efforts, and Overhaul of Statistics in Transition Getting Global ... leverage their scarce managerial and mar- Countries 22 keting skills. Cross-country production net- The Uruguay Round in 1994 significantly works have reinforced the impulse released WilliamDavidsonInstitute 25-31 lowered trade barriers and enlarged the bythe liberalization oftradeand the removal Women's Issues in Eastern Europe 32 gambit of trade liberalization to include ser- of barriers to capital mobility. World Bank/lMFAgenda 33 vices, intellectual property rights, agricultural Milestones of Transition 35 commodities, and textiles while anchoring Even with these changes, globalization New Books and Working Papers 37 the new rules of the game in the World Trade might have remained a weak force were it Bibliography of Selected Articles 43 Development Research Group The World Bank M TheWilliam Davidson Institute not for a seismic shift toward market- The pull of local identity is manifested Gains and Risks based economies and democratic forms through the following developments: of government symbolized by the tearing Globalization and localization promise in- down of the Berlin wall. This rise of politi- * Nation-states multiplied from 96 in 1980 creased availability and more efficient al- cal participation also feeds centrifugal to 192 in 1998. location of resources, freer circulation of pressures within nation-states. knowledge, more open competition, and 0 The process of political and functional improved governance. But there are down- Membership in the WTO increased from decentralization-pointing toward partici- sides and risks as well. Globalization en- 102 countries in 1990 to 134 in 1998. patory democracy-is continuing in large tails greater exposure to external shocks Trade in goods and services rose twice and small states. Half the countries that and capital volatility-recently highlighted by as fast as gross domestic product (GDP) decentralized also devolved major func- the East Asian crisis-along with numer- during the 1990s. By 1998 FDI in devel- tional responsibilities. In many countries ous environmental consequences. Mea- oping and transition economies reached sures to decentralize in order to satisfy local a net $155 billion-1 6 times larger than in demands can lead to macroeconomic in- 1990. International trade that flows through stability and lack of fiscal prudence. On the global production networks is now one- other hand fiscal rules can buttress politi- third of total trade. One dark side of glo- cal autonomy by assigning revenue bases, balization, however, is the rapid spread of 7 responsibilities, and prescribing revenue harmful substances and pollutants. sharing arrangements between the center and localities. Efforts to raise urban living . .. and Local at the Same Time standards could prove elusive if policies cannot prevail over the spread of poverty, Nation-states increasingly focus on supra- violence, and squalor. national issues such as globalization, which circumscribe their choices. Simulta- Recent strides in development thinking have neously, localization is forcing states to begun to define a pragmatic agenda of insti- take note of subnational dynamics and of Eastern Europe and Central Asia tution building and policies that exploit the accommodate demands coming from the subnational governments evolved follow- gains and contain the risks from these two local level. ing the collapse of the earlier autocratic forces. For example, rules for fiscal decen- regimes. tralization can establish the sharing of respon- Localization demands autonomy and a sibilities between central and subnational political voice for regional and community 0 Urbanization is continuing by leaps and governments. All change courts risk. The needs. It has many motives, including: bounds. At the turn of the 21st century half downside of globalization and localization is the world's population will be living in ar- starklyapparentfrom the EastAsia crisis and * Dissatisfaction with the state's ability to eas classified as urban. As recently as the state-induced fiscal crises in Brazil. These deliver on development promises. 1975 this share was just over one-third; by forces are generating much of the stimulus 2025 it may rise to almost two-thirds. While behind development. Minimize the risks and * Strength of local and ethnic identity, re- the rate of urbanization has passed its ensuring thatdevelopment is stable and sus- inforced by education, better communica- peak in the higher-income countries of tainablearetheobjectivestostrivefor.Asthis tions, and the rising concentration of Eastern Europe, the transition is just be- report shows, the road to such a desired fu- people in urban areas. ginning in Asia and Africa. An increase of ture is paved with good institutions. almost 1.5 billion people is expected in * Desire to deepen the sense of belong- urban populations over the next 20 years. Excerpted from an article to be published ing somewhere in a world in which global- While the public sector is likely to remain in the IMF's Finance and Development. ization levels cultural differences. the key player in planning urban develop- Shahid Yusuf is staff director of the World ment and providing basic services, part- Banks'DECWD team, in charge of prepar- * Sharpening competition among nerships between the public sector, ing the World Development Report 1999/ subnational units in an open environ- nongovernmental organizations (NGOs), 2000 to be published in mid-September. ment, along with the reluctance of richer and private entities have become an im- Web site: http.//vww worldbankorg1wdr/2000/ entities to share their resources with less portant source of capital, skills, manage- home. htm; Email: world_development_re- well-off neighbors. ment, and initiative throughout the world. port @worldbankorg. a TRANSITION, August 1999 ( 1999 The WVorld Bank/The William Davidson Institute What Went Wrong with Foreign Advice in Ukraine? by Vira Nanivska Reform in Ukraine has been greatly hampered by its government's lack of institutional capacity for policymaking. The reform process was conceived, designed, and guided by donors. So what went wrong? Somehow the political will to go the "Western way" did not manifest itself in concrete policy decisions. The government lacked the institutional capacity to make radical political choices. To fix what has already gone wvrong, Westem technical assistance must be reassessed and shifted to enable Ukrainians to initiate their own institutional capacity building. A fter Ukraine gained independence another, and the government has been During the Soviet period the Ukrainian gov- in December 1991, the general bogged down in putting out fires. ernment did not have any real governing /A view was that it had great eco- responsibilities; rather, itwasfullyengaged nomic potential. Already blessed with While reformists did not have the neces- in the distribution of resources and the di- well-educated people, abundant natural sary skills, experience, or resources to de- rect management of a huge, country-sized resources, relatively well-developed in- fend theircourse, well-organized opposition production line. No policy formulation was dustry and agriculture, Ukraine's geo- groups rapidly attracted financial resources necessary-all decisions were made by the graphical location in the heart of Europe and retained social support by successfully Central Committee of the Communist Party. was also advantageous forworld trade. using familiar Communist slogans. The Ukrainian government's role was to execute those orders. Lowering High Expectations Burden of the Soviet Legacy But after the collapse of the totalitarian Instead of reaching this great potential, The intemational community tends to believe regime-and in order to function properly however, Ukraine endured one of the that lack of political will by Ukraine's presi- in the new democratic arena-the Post- world'sworstdepressions in modern his- dentandgovernmentistheuniquecauseof Soviet Ukrainian government was ex- tory. Even among the struggling countries the inadequate reforms and economic strat- pected to justify its decisions, predict their of the former Soviet Union, Ukraine stands egy. This ignores the other reason: the gap consequences, and prove why they were out as having one of the longest and deep- between the design of foreign technical as- better than the alternatives. Analytical and est periods of economic decline-one last- sistance programs and the institutional real- political justifications should have been ing for nearly nine years and with a ityincountriesoftheformerSovietUnion. presented to win public support. But the contraction in GDP of more than 60 per- government machine was unable to cope cent. For a long time international donors be- with the challenges of transformation- lieved that the post-Soviet Ukrainian gov- neither substantively (what to do?) nor The effect of this economic downturn on ernment had both the mandate and the managerially (how to make it happen?). the people has been severe. Most Ukrai- capacity to make reform decisions. Donors Even during the present reform process, nians live on less than half the income of a believed that once the Ukrainian govern- no new capacities to fulfill such tasks have few years ago. At least 30 percent-and ment was advised it would take the lead in been developed. perhaps up to 75 percent-of families now reforming economic and social institutions. live below the poverty line. Sickness from They further believed that once state con- The government also lacks the ability to preventable causes is rising, death rates trol was removed and Ukraine had been effectively communicate reform to the are climbing, life expectancy is falling, and given the right recommendations, civil so- Ukrainian people. The basic principles of the population is shrinking. ciety would automatically become active a market economy and the rationale for re- and independent, and enterprises would forms have yet to be explained, nor has Poor policy decisions and the lack of a cooperate with foreign investors following any future prosperity been linked to the suc- sound economic strategy have exacer- generally accepted business rules. Given cess or failure of these reforms. Voucher bated the economic decline in Ukraine. these assumptions, donors saw their role privatization, for example, was promoted While the president and government have solely as advising the government on re- as a liberal-socialist equity measure aim- articulated a clear, medium-term economic forms and supporting the transition finan- ing at the "fair redistribution of state prop- policy, its implementation bears little re- cially. However, the government lacked the erty." However, those not involved in private semblance to its vision. As a result, skills needed to fulfill its new role in a mar- business-including public servants, Ukraine has stumbled from one crisis to ket economy. teachers, doctors, pensioners, and sol- (D 1999 The World Bank/The William Davidson Institute TRANSITION, August 1999 m diers-did not see the benefit from the been on European integration. In these sions in the presence of opposition and changing ownership of shops and facto- countries institutions were developed to freedom of speech. Market forces, embed- ries and thereby did not become allies of allow integration into the European Union ded in people's vested interests, thrive in reform. Thus there was no public pressure (EU). Together with their Western coun- Ukraine. Private initiative is far ahead of to introduce transparent bankruptcy pro- terparts, government officials in Central regulatory framework, and a "shadow cedures. Europe adjust their institutions to EU stan- economy" makes up 60 percent of GDP. dards, which is stipulated in technical The problem lies in the reform design. This Ideally, the institutional mechanism of the assistance projects. design did not account for the Soviet insti- Ukrainian government to carry out reforms tutional legacy and for the market behavior should include: In the former Soviet Union technical assis- of people who instinctively make money tance has aimed at consulting, advising, wherever possible and who are unwilling to * Employing qualified experts for profes- and sharing information, not institution wait for the proper and correct legislation sional policy analysis, especially research building. The first project of public admin- or propedures to be in place. on the possible short- and long-term con- istration reform in Ukraine started in late sequences of suggested decisions. 1997-compared to 1991 in Poland. Ukraine, therefore, needs to build on ex- isting societal forces instead of fighting * Evaluating the public costs of ignoring Considering the overall high level of edu- them. The international development com- those decisions and of reinforcing them, cation, the Ukrainian government has few munity needs to advise on the reform pro- and comparing these decisions with de- specialists with the knowledge and exper- cess as a special policy craft, both in fined goals. tise necessary for government work in a concept and implementation. Projects democratic, open, and transparent soci- should be designed to facilitate new gov- * Managing change by establishing a ety. Most public servants lack the skills ernmentfunctions. department of reform management that is needed to give strategic advice to the gov- able to formulate reform strategy, differen- ernment. Training programs must also be restruc- tiate process from substance, identify driv- tured so that Ukrainians can initiate their ing forces and opponents of reform, Technical assistance in Ukraine has fo- own development. Ukrainian partici- develop action plans, and build political cused on advice rather than on teaching pants need substantive training, includ- support throughout the country. Ukrainians to develop and formulate policy ing continuing study programs after advice. Frequently, foreign consultants do returning from abroad. For now these * Putting organizational procedures in not promote the transfer of knowledge overseas programs do little more than place to provide extensive supportfor gov- because they are expected to provide provide sightseeing tours. Technical aid ernment reform policies, including an offi- advisory service. Thus they are opposed also needs to be aimed at helping Ukrai- cially structured system of communication to guiding, consulting, and supervising nian institutions to ask the proper ques- with the Parliament, as well as procedures Ukrainians to do the same. As a result, all tions, find the answers, and thus be and documents that fulfill the principle of parties are frustrated-the foreign advi- self-supportive in the decisionmaking government transparency for the public. sors because Ukrainians do not follow process. their advice, the Ukrainians because they Donors' Miscalculations were not helped to deal with their problems. Vira Nanivskar is Director of the Inter- Ultimately, the government is unable to national Centre for Policy Studies Foreign technical assistance to date has evaluate foreign advice-let alone imple- (ICPS), Kyiv. ICPS is a nongovernment not helped to develop Ukraine's analytic ment it. Like the fictional character Baron research organization operationally fi- competence inside and outside the gov- Munchausen, the Ukrainian government is nanced by George Soros' Open Society ernment. Recommendations offered to the expected to drag itself by its own hair into Institute. ICPS conducts independent government by groups of foreign experts a new role. research and organizes dialogue be- who conduct their own research cannot tween the public, the government, NGOs, directly be used with any great or lasting More Training, Less Advising foreign experts, and the media. Its peri- effect on Ukrainian policymaking. odical Quarterly Predictions provides On the contrary, Ukraine has paid a high economic commentaries and forecasts. Why was the approach more successful price for early democratization, which has ICPS produces and disseminates the in the Central European countries than in not been matched by the government's Russian language version of our Tran- Ukraine? In Central Europe the focus has institutional capacity to take reform deci- sition Newsletter. * TRANSITION, August 1999 (C 1999 The 'World Bank/The William Davidson Institute How to Better Manage China's State Owned Enterprises? by Weian Li, Lidong Wu, and Yashuang Zhang Beiing, a city with an unprecedented construction boom, was the location of the "4th Annual International Conference on Transi- tion Economies" in late July, sponsored by The William Davidson Institute of Ann Arbor, Michigan, the London-based Centre for Economic Policy Research (CEPR), and the National Center for Economic Research at Tsinghua University, Beijing, in coop- eration with the World Bank and the Ford Foundation. The conference covered a broad range of transition issues, including the experiences of Central and Eastem European transition economies and the lessons gained that can be useful for China's scholars and policymakers. The following article analyzes the corporate governance dilemma of China's state-owned enter- prises. Incorporation and mixed ownership (through selling stocks to banks and other investors on the stock exchange) can create favorable conditions for introducing modern, market-driven corporate governance in China. Transition newsletter will come back to the conference debate in the future issues. T he corporate governance of were formally separated under formal against the power of the enterprise man- China's state-owned enterprises contracts (managers gained some au- ager. is gradually changing from admin- tonomy and became more motivated to istratively controlled to market driven. In the increase production), but the administra- These prerequisites are not met, for a va- highly centralized planned economy, gov- tive nature of governance did not change. riety of reasons: emnment and enterprise functions were not The government-the external gover- separated. Businesses were government nance in this system-controls personnel * During the process of broadening enter- affiliations, or state-owned enterprises, affairs, appoints and evaluates manage- prise autonomy, the government stays out and lacked the necessary rights and vital- ment, and scrutinizes overall business of an enterprises' affairs and real control ity of an independent entity. As a result, en- performance. The internal governance in shifts to the enterprise managers. Due to terprises were inefficient, with elusive this system is a structure of checks and an asymmetry of information, the govern- performance responsibilities. Reforms balances among three power centers: mentis unable to determine whetherexter- starting in the late 1 970s were not enough nal factors or a manager's successes or to cure the ailing state enterprises or to 0 Enterprise directors or managers take failures cause a certain outcome. Reward- allow an efficient governance mechanism charge of the daily production and man- ing or penalizing managers is biased and to develop. agement. inefficient at best. Supervision of enter- prises needs to be made more efficient, but While the means of government control * The secretary of the Communist Party bringing the enterprise back under full gov- changed-from physical indicators to fi- Committee is responsible for the person- ernment control is not a realistic alternative. nancial regulators-the authorities were nel and the party affairs, as well as super- still unwilling to give up supervision of the vision of the enterprise operation. * Enterprise directors and managers pur- enterprises' activities, including invest- sue personal interests-often this means ment policies, production mixes, and long- 0 The Workers Council represents staff in maximizing their own economic gains. term development plans. The government, the enterprise management. Without adequate supervision, adverse as owner, made the decisions, and the selection and moral hazards are the result. managers or factory directors executed This governance pattern is efficient only if: these decisions. Managers of the enter- * Since the party secretary and the fac- prises' day to day operations therefore * The government exercises effective su- tory directors or managers have common lacked incentives for preserving and in- pervision over the enterprise. interests, collusion among them is hard to creasing enterprise value. avoided-often, the factory manager and * The enterprise director or manager is a the party secretary are the same person. Who Controls Whom? person of high principles. Supervision by the Workers Council is even more ineffective since the staff de- With thecontracting-outsystem,theown- * The party secretary and the Workers pendsonmanagersfortheirsalaries,wel- ership and management of the enterprise Council provide checks and balances fare, and promotions. C) 1999 The World Bank/The William Davidson institute TRANSITION, August 1999 Clearly, a new governance pattern is by the authorities, and to protect the inter- 0 Worker participation in management needed in China, but it needs to be ap- ests of the minority shareholders. This should be encouraged. Participation en- plied under the right conditions. Selected more market-driven corporate governance sures the sustainable development of the enterprises are experimenting with the structure still suffers from several problems: enterprise, binding the future of the firm to shareholding system. However, two prob- the well-being of its employees. Likewise, lems are already apparent. First, due to 0 The shareholders' control in many en- the position of worker directors and their the special characteristics of listed com- terprises is rather limited. Their major role participation with the board of directors and panies in China, stocks are concentrated is to decide how much of the dividends board of supervisors should be regulated. in the hands of state authorities orof legal should be distributed each year. Share- Worker directors and worker supervisors entities approved by the state. Majority holders do not select members of the should beselected bytheWorkersCouncil. stock owners-with a huge concentration board of directors, which in many com- of shares-thus have unmatched power to panies is established before the share- 0 Supervision of enterprises should be dominate shareholders' meetings, boards holders' general meeting. Often directors strengthened by introducing outside super- of directors, and managers. Thus the for- are government officials who had previ- visors such as auditors and accountants. mal separation of power is illusory. Sec- ously managed the company from their At present, most supervisors are chosen ond, enterprise governance should provide relevant ministries. The government ap- from the ranks of corporate managers. for an efficient decisionmaking process. points the chair of the board of directors The newsystem does littletoimprovethe and the general manager. In some prov- * Theindependenceofnonexecutivedirec- process, although it appears to be tightly inces local authorities simply remove di- tors-experts, scholars, or experienced en- structured and well coordinated. The rectors and the chair if unsatisfied with trepreneurs-whose participation is invited shareholders' general meeting is pre- them. Thus even listed corporations are by the shareholders should be reinforced. vented from serving its proper function by controlled more by the government than the enormous power of the board of direc- by the shareholders. A standard mecha- Needed: Capital Market tors, while the second-tier board of super- nism has yet to be established. visors is too weak to have much influence. An effective corporate governance mecha- Despite this formal system, external gov- nism assumes the existence of a function- Limited Shareholders' Role ernance mechanism remains ineffective. ing, efficient capital market. China's capital The government is unable to properly su- market is rife with speculative activities due A recent firm-level survey found that in 85 pervise enterprises because asymmetric to ambiguities in regulations, loose super- percent of state enterprises the general information provides ample room for in- vision, and lack of a modern enterprise sys- manager has assumed full responsibility sider control. tem. Strong measures must be taken to get under the direction of the board of direc- the stock market back on the right track. tors (75 percent) or the board of supervi- Internal governance is also weak. Most sors (10 percent), while 15 percent of shareholdingcorporationshavenointer- Managers are important human re- corporations are either run jointly by the nal supervision mechanisms. Workers sources in modern corporations. The board of directors and the party commit- lack efficient access to the management practice of having government depart- tee (12 percent)-the committee assum- of a corporation. Supervisors come from ments appoint managers should be ing responsibility for decisions-or by the the corporate auditing, accounting, and ad- stopped and a market for high-level man- general manager under the direction of the ministrative staffs. This arrangement agers should be established. Intermedi- party committee (3 percent). makes collusion with managers far more ary companies (head-hunterfirms) should likely and nearly eliminates anythe chance be established to find individuals with The survey also found that the board of for independent supervision. In most cor- management talent. Managers should be directors (selected from high-level execu- porations the general manager and the selected on the basis of fair competition tives) overwhelmingly dominates the chair of the board are the same person, and markettesting. decisionmaking process, initiating pro- significantly undercutting the supervisory posals and participating in discussions. role of the board. The current banking system in China does The worker directors, the board of super- little to improve the efficiency of corporate visors, and the ministries have more of a We base our recommended corporate governance. Loans are still allocated on an supplementary function. Efforts have been governance model on the principle of joint administrative basis, providing little corpo- made to give a greater role to worker di- governance and joint decisionmaking by rate discipline. Assuming that China intro- rectors and "outside" directors, appointed all the interested parties. duces the German or Japanese model of * TRANSITION, August 1999 © 1999 The World Bank/The WXilliam Davidson Institute the main-bank system-allowing banks to incorporation, of existing banks and the es- Business School of Naikai University, accumulate part of their assets in enterprise tablishment of new banks, encouraging Tianjin Province, through random sam- shares-reform of China's banking system competition in the financial sector. pling of 300 of the 745 listed companies. should create a new relationship between Weian Li is Dean, Lidong Wu and enterprises and banks and improve the ef- *The survey was carried out in 1997, sup- Yashuang Zhang are PhD students of fectiveness of corporate governance. This ported by the State Committee of Eco- economics at the International Business reform would require commercialization, or nomics and Trade and the International School, Nankai University. Corporate Governance in Eastern Europe-A Survey by Oxford Analytica In the early years of transition, observers spoke of choosing networks among firms-and among firms, banks, and parts of between different models of capitalism-particularly between the state-compensated for the structural shortcomings of the Anglo-Saxon stock market capitalism and the German model formal organization of the economy, keeping the economy run- of more concentrated ownership that permits commercial banks ning in times of political paralysis. These informal networks, how- to hold enterprise shares in their assets. The corporate struc- ever, have also exacerbated structural shortcomings by bypassing tures that have emerged in practice borrow elements from dif- regulatory controls and allowing anticompetitive links to flourish. ferent models of capitalism. A decade of privatization has had different effects on corporate governance. Several problems A prerequisite for improving corporate governance is the use of have emerged: market mechanisms to force underperforming firms to change management practices and failing firms to exit the market. Al- * Crony capitalism. Several countries are just beginning to though the rudiments of these mechanisms are in place across unravel the webs of crony capitalism that have been built up as Central Europe, they have not been widely used. The number of a result of partial privatization and political favoritism. In par- serious takeover bids is still small. Shareholder activism looks ticular, the Czech and Slovak governments are trying to undo like a distant prospect, given that supervisory boards are weak the work of their predecessors. By contrast, front-runners of tran- and market supervision is well below Western European stan- sition-like Hungary and Poland-have relatively good corpo- dards. Regulators have been slow to respond to these problems. rate governance, as evidenced by the level of industrial restructuring and competitiveness. However, market supervi- Central Europe's equity markets have not recovered to a level sion is still not entirely trusted by investors even in these pre- close to the highs achieved before the Asian and Russian cri- ferred investment destinations. ses. However, some efforts are being made to improve inves- tor confidence, such as: * Iron triangles. Across Central Europe there is still much to be done to dismantle the iron triangles that have been built up * Legal reforms are being introduced to allow hostile takeovers. among firms, banks, and the state. Soft credits have been pro- Hungary has recently introduced a takeover law, ending a situ- vided to many failing enterprises through these links, even after ation in which firms could write "poison-pill" clauses into their privatization. statutes to ward off hostile bidders. * Management abuses. Managers and boards are often re- 0 The Czech Republic is reforming its bankruptcy rules so that luctant to cede control, preferring to retain control of failing busi- they can be used to force market exit. nesses rather than allow foreigners a chance to improve enterprise performance. Also, a general lack of transparency * Abuse of minority shareholders is being addressed through deters investors, especially after revelations over the past two legislative change, as in the substantial protection provisions in- years of the extent of the "tunnelling" used to strip Czech firms cluded in this year's overhaul of Slovakia's financial regulation. of their assets after voucher privatization. Boards are still reluc- tant to give out information, while local accounting standards Based on a recent report of OxfordAnalytica, the Oxford-based are often well below international norms. Moreover, rules on international consulting firm. Information: OxfordAnalytica Ltd, shareholder liability are frequently unclear. At Pasley Tyler, 42 Berkeley Square, London, England, WIX 5DB; Tel: 44171-318-0800; Fax: 44171-409-369; United * Interfirm networks. Interenterprise links are a key concern States address: OxfordAnalytica Inc., 1750KStreet, NW, Suite in improving corporate governance, particularly among small 800, Washington, DC 20006; Tel: 202-872-24 1; Fax: 202-429- and medium-size enterprises. At the start of transition, informal 7030; Email: client.services@oxford-analytica.com. C) 1999 The World Bank/The William Davidson Institute TRANSITION, August 1999 C Ethnic Unmixing and Forced Migration in the Transition States by Tim Heleniak T he recent episode of ethnic cleans claims have come into the open as the The response of many has been to migrate ing and forced ethnic migration in result of the end of the cold war and the back to what they perceive to be their eth- Kosovo is, unfortunately, all too nic homelands. This massive, unplanned, common among the transition states of and chaotic ethnic unmixing has had a Europe and Asia. The emergence of new negative impact on development and has independent states-many resulting from led to increased poverty at a time when the breakups of the Soviet Union and Yu- the states are also transforming their goslavia and the liberalization of political economies away from the centrally planned regimes across the region-has spawned models they used for decades. a number of different migration streams, many of them forced. Each of the transi- With most of the armed hostilities in the tion states has become more ethnically ho- formerSoviet Union having died down, much mogeneous since the beginning of the of international community's attention has decade as a result of the ethnic unmixing , : focused on the repatriation of 780,000 refu- that has been the primary, but not sole, ., gees and 800,000 internally displaced cause of the migration . people and on the rebuilding of Kosovo. It should be kept in mind that the conse- Chaotic Unmixing quencesofarmed ethnicconflicts lingerlong liberalization that contributed to the after hostilities have ended and disap- During the Soviet period a tight lid was breakup of the Soviet Union, Yugoslavia, peared from the headlines.Anumberof po- kept on the nationalist and territorial aspi- and Czechoslovakia. As new states seek tentially explosive situations remain in the rations of various ethnic groups. Sup- to correct these grievances or assert formerSoviet Union-and elsewhere in the pressed ethnic grievances and territorial claims, other ethnic groups are excluded. region-to which durable political solutions Glossary Internally displacedperson (IDP):A person in similar circum- Refugee: A person who is outside his or her country of origin stances to a refugee with the exception of not crossing an inter- and is unable or unwilling to avail to the protection of that coun- national border. More difficult to deal with because such a person try or return there. Such inability or unwillingness is attributable is often outside the reach of the international community. to a well-grounded fear of prosecution, based on race, religion, Interational Organization for Migration (10M): An interna- nationality, membership in a particular social group, or political tional NGO that monitors the complex migration and refugee opinion. movements and works on governmental capacity building in United States Committee on Refugees: A U.S. NGO that areas of migration and refugee legislation. attempts to find solutions to refugee problems partially through Irredentism: The policy advocated by members of an ethnic publicizing the plight of uprooted peoples. Compiles the an- group of reattaching a region that was-or that they believe nual World Refugee Survey. should be-part of the ethnic homeland to the homeland. Usu- United Nations High Commissioner for Refugees ally only possible when the group is a majority in the region and (UNHCR): The main United Nations body mandated to deal the region is contiguous to the homeland. with refugees. The UNHCR and the IOM organized the Com- Nonrefoulement: The principle that no person with a well- monwealth of Independent States (CIS) Conference in 1996 founded fear of persecution should be forcibly returned to the to deal with consequences of the large and complex post- country where they fear persecution. This is the guideline under Soviet migration. The World Bank has played a limited role in which the international community and other bodies dealing with the work on the conference that has fallen short of expecta- refugees operate. tions in terms of fund-raising and other areas. T PANSITION, August 1999 C 1999 The World Bank/The WNilliam Davidson Inrstitute World Bank Focuses on Conflicts, Refugees, Migration To deal with the current proliferation of ethnic conflicts, the Post- More elusive are preventative measures that the Bank can Conflict Unit was created in 1997 within the World Bank's So- take in countries to manage conflict before it erupts into vio- cial Development Network. The Bank plays a role in post-conflict lence. A better understanding of the historical dimension of reconstruction based on its comparative advantages in aid co- the ethnic conflicts that give rise to violence and forced mi- ordination, macroeconomic stabilization, infrastructure finance, gration is a positive first step. However, no single set of cir- social assessments of displaced populations, and social sec- cumstances leads to ethnic or intrastate conflict and population tor restoration. The Bank, along with the European Commis- displacement. There is an ongoing debate about the role aid sion, is organizing the international community's response to plays in promoting civil society and good governance. the situation in Kosovo. As a development institution, the Bank cannot resolve con- Keep in mind that the Bank is not relief agency, although there is flicts, nor it is in the Bank's mandate. The Bank's role is not to often a humanitarian impulse to avert every incident of violent interfere in the internal affairs of a member country nor ques- conflict that causes population displacement. Many of the Bank's tion its political orientation and obviously has less leverage procurement and disbursement processes have proven to be a with non-members-keep in mind that Yugoslavia is a non- stumbling block in post-conflict recovery. The Bank's major role member. Promotion of growth, equity, and inclusion-all in- comes later in the post-conflict reconstruction phase and during cluded in the Bank's mandate-can also go a long way toward return to normal operations. To that end, the post-conflict fund conflict management. In addition to infrastructure reconstruc- was created to be a quick-disbursing instrument through which tion, which is at the core of the Bank's role, more attention analysis and piloting of reconstruction activities can be carried needs to be paid to sustainability issues. The Social Devel- outwhen normal Bank borrowing is not possible. Two grants each opment Strategy Paper for the Europe and Central Asia re- $1 million from the fund have been awarded to assist Albania gion that is being drafted lists migration and ethnic conflict as with the refugees who have fled there from Kosovo. one of the main social development issues-and challenges. have yet to be found.Anumber of "pseudo the Europe and Central Asia region has ranging from 50 percent in the three states" exist-regions within sovereign increased from eight at the beginning of Transcaucasus states and Tajikistan to statesthatoperateautonomouslybutare not the decade to the current 27. Only five barely 1 percentfrom Ukraine and Belarus. recognized as independent by any other states in the region remain within the same While the return migration of nearly 3 mil- country. These include theTransdniester re- borders as at the beginning of transition. lion Russians is considerable and has gion of Moldova, Nagorno-Kharabakwithin Most of the new, or newly independent placed great strains on the depressed Azerbaijan, the Chechen republicwithin Rus- states are the homelands of a titular eth- Russian economy to absorb them, most sia, the Ossestian and Abkhazian regions nic group who have the goal of making Russians outside Russia were reluctant to in Georgia, and the Kosovo region within Yu- state and nation consistent, often with migrate. Russia realized the potential bur- goslavia. In all of these areas the push for greatly exaggerated or conflicting claims den of absorbing 25 million Russians from autonomy or territorial claims has resulted of homeland. This has led to a number of non-Russian states, and discouraged mi- in ethnic violence and population displace- episodes of forced migration, as well as gration while helping the expatriots feel ment. The resolution of these conflicts may noncoerced ethnic unmixing. Little of the part of the Russian nation by persuading cause further displacement. bloody ethnic unmixing of the former So- the states to allow dual citizenship. Thus, viet Union has been directed at Russians; with a few exceptions, most of the non- As a development institution, the World Bank however, the largest number of Russians Russian successor states are embarking has an obvious, albeit uncertain, role to play have migrated back to Russia from areas on state building with significant minorities in the ethnic unmixing and forced migration where ethnic violence is the greatest. of Russians and other nationalities. taking place across Europe and Asia. In the new states of the former Soviet The mosaic of nationalities in the More States, More Migration Union, much of the increase in ethnic ho- Transcaucasus region has been the area mogeneity has been due to the return mi- of some of the most violent and severe Migrationhasalwaysplayedaroleinstate gration of more than 10 percent of the ethnic unmixing in the former Soviet building orunbuilding. Thus, it should come Russian diaspora population from the Union. The conflict between Armenia and as no surprise that there has been so non-Russian states. The rate of return AzerbaijanovercontroloftheArmenia-ma- much migrationasthenumberofstatesin among the states varies considerably, jority enclave of Nagorno-Kharabak has (© 1999 The World Bank/The William Davidson Institute TRANSITtON. August 1999 a caused an estimated 350,00OArmenians to of the Muslim-Croat Federation of Bosnia zenship or introducing discriminatory laws. leaveAzerbaijan, of which 260,000 went to and Herzegovina and the Serb Republic The majority of states, however, are trying Armenia, and 167,000 Azeris to leave Ar- Srpska continue the difficult rebuilding pro- to walk the fine line between creating a menia forAzerbaijan. An estimated 550,000 cess there. The recent end to hostilities in homeland for members of the titular nation- internally displaced people remain in Kosovo has allowed a tentative start to the ality while also accommodating minority Azerbaijan. The separatist movements in repatriation of Kosovars and to the recon- nationalities. Kazakhstan, with its large Georgia by the Abkhaz and Ossetian re- struction of infrastructure. Still, the Serbian Russian population, is a good example of gions has caused an estimated 275,000 government views Kosovo as part of the this balanced policy. displaced people. At its peak the civil war in Serbian homeland. Tajikistan, which lasted from 1992 to 1997, A number of factors dictate the level of caused thedisplacementof 900,000 people, The transition states of the Europe and migration and the degree to which it is 700,000 of them internally. By mid-1997 a Central Asia region contain about 7 per- forced. These have to do with the charac- peace agreement had been reached and a cent of the world's population but have teristics of the diaspora group, the home- majority of those displaced have returned. about 15 percent of the world's refugees land, and the host country. Even two of the relatively peaceful and pros- and internally displaced people. Other es- perous Baltic states-Latvia and Estonia- timates place the region's share of refu- 0 Size, history, rootedness, and geo- have been taken to task by the international gees and displaced people at closer to 30 graphic concentration characterize the community overtheir exclusion of large Rus- percent. In most cases the conditions that diaspora group. Russian populations in sian-speaking populations through restric- caused these population displacements non-Russian states tend to be large and tive citizenship and language laws. are unresolved and the affected people concentrated, usually in the capital cities. remain in a state of permanent migration. Most were born in these non-Russian The four-year war in Bosnia and current states. dispute in Kosovo are rather well known. Displacement and Consequences At the end of 1997 more than 800,000 * A homeland's attitude toward the Bosnians remained internally displaced. During the 1990s some titular members diaspora community affects migration at More than 600,000 Bosnian refugees re- of the newly independent states tried to both formal and informal levels, which trans- mained outside the country and 40,000 correct what they perceived as historical lates into how much of a pull factor it be- refugees from Croatia were in Bosnia. An wrongs by giving preference to their eth- comes. Some states such as Kazakhstan intentionally decentralized state consisting nic group, often by arbitrarily defining citi- and the Baltics automatically grant citizen- Russia's August Crisis Changes Migration Patterns The August 1998 financial crisis in Russia had an immediate This same downward net migration trend and overall migration effect on migration patterns in the country. The long-term im- turnover continued during the first eight months of 1998, with pact of the crisis may have an even deeper impact on the age the number of Russian citizens who left declining by 15 percent and occupational composition of the country because of the as compared to 1997. Following the August financial crisis, selective nature of migration. Since the breakup of the Soviet during the last four months of the year the number of people Union at the end of 1991, Russia and the other two Slavic leaving increased by 18 percent and there is evidence that pres- states, Ukraine and Belarus, have been the only former So- sures for further emigration from the country persist. Emigra- viet Union (FSU) states where more people have arrived than tion to Israel from Russia doubled in the first two months of 1999. left. Russia has received about 5.5 million legal migrants be- There is also evidence that many of the country's young, who tween 1992 and 1998 while 2.5 million have left over the same have been recently educated in new professions, are seeking period, resulting in a net population gain from migration of 3.0 to leave for better prospects abroad. million. The net migration was about 250,000 in 1992, Russia's first year of independence, building to a peak in 1994 at more The number of those migrating to Russia from the other FSU than 800,000. Net migration has declined considerably since states seems to have been also influenced by the financial cri- then to 300,000 in 1998. Since 1994 Russia has had positive sis. Many Russians and Russian-speakers in other FSU states net migration with all other FSU states. Migration from Russia have postponed migrating because of the political and eco- to outside the FSU (mainly Germany, Israel, and the United nomic turmoil in Russia. The number of people migrating from States) has been rather steady between 1990 and 1997 at Russia to Kazakhstan actually increased in 1998, the first such about 100,000 people a year. increase in the 1990s. E TRANsITION, August 1999 ( 1999 The World Bank/The William Davidson Institute ship to members of the titular ethnic group norities and the degree of social inclusion placed remain in limbo, wanting to return anywhere in theworld. Others, such as Hun- have been among the largestfactors influ- to their homelands or integrate into the gary, took a more neutral approach to its encing either coerced or noncoerced eth- resident societies, but are bared from do- diaspora members. Hungary, while recog- nic unmixing. ing so. At the same time, a country unable nizing that Hungarians living in neighboring to handle its large minorities, and which states are part of the Hungarian nation, is This recent and ongoing population dis- forces them into uncertain status, will not ready to offer nonresident citizenship- placement has negatively affected social sooner or later be destabilized itself. this is done to preserve good relations with development in the region by increased un- those bordering countries that were estab- certainty among those affected, fragmen- Tim Heleniak is in the World Bank's De- lished in the ruins oftheAustro-Hungarian tation of social relationships, loss of velopment Data Group (DECDG). He re- empire, inheriting millions of Hungarians. livelihood and savings, increased poverty, searches and writes on internal and Germany and Israel aretwo homelands that and necessary adjustments to new sur- international migration in the Europe and have greatly affected migration patterns in roundings and new social institutions. CentralAsia region. This article is based the region by inducing a mass migration of Many migrants have been forced to make on the author's own work and selected German and Jewish populations. difficult adjustments. Urban Russians from papers presented at the conference the non-Russian states, for example, have "Diasporas and Ethnic Migrants in 20th * As previously mentioned, the character- been directed to live in rural areas that they Century Europe" held May 20-23, 1999, istics of the host nation toward ethnic mi- are unaccustomed to. Many of the dis- Humbolt University, Berlin, Germany. Foreign Loans Diverted in Monster Money Laundering? The Mafia, Oligarchs, and Russia's Torment Federal and state authorities, examining possible money laundering through the Bank of New York, suspect that Russian organized crime may have been involved in skimming Intemational Monetary Fund (IMF) loans and other foreign economic aid to Russia, the Wall Street Journal reported on August 25. Altogether, as much as $10 billion was allegedly laundered through the bank, the 16th largest asset-holding bank in the United States. A top IMF team started consultations in Moscow to pour over Russia's finance books. T he probe into the route of IMF loans all, some $350 billion in capital has fled government. After Gaidar was replaced, toRussia is part of a wide-ranging the country since the fall of the Soviet Kagalovsky moved to Russia's Bank U.S. federal investigation into Rus- Union, with nearly a third of it landing in Menatep, headed by Russian oil and bank- sian money transfers that passed through the United States, intelligence sources told ing baron Mikhail Khodorkovsky. Menatep the Bank of New York (and its London of- the U.S. News and World Report. And snapped up a number of enterprises dur- fices) in the past year or so. investigators believe that the flow of funds ing Russia's controversial "loan to share" has accelerated since the crash of the ruble privatization, including a controlling stake Capital Flight Schemes in August 1998. As Russian companies in the country's second-largest oil com- face bankruptcy, their motivation to pre- pany, Yukos. Menatep failed last year Russia's national police agency, the MVD, serve assets tends to vanish. amid Russia's financial crisis (see box on conservatively estimates that $9 billion il- page 16). Kagalovsky is now deputy chair- legally flees the country each year. Astudy During an August 21 raid on the Bank of man of Yukos. by the Institute of Economics of the Rus- New York, U.S. federal investigators sian Academy of Sciences and the Cen- seized the files of Natasha Gurfinkel Investigators say Menatep and Kagalovsky tre for the Study of International Economic Kagalovsky, a senior vice president who increasingly are becoming a focus of the Relations at the University of Western supervised the bank's East European investigation. Federal and international law Ontario, published this May, suggested that division. She and the bank's vice presi- enforcement officials say they are looking up to $70 billion disappeared in 1992 and dent in London, Lucy Edwards, were sus- into whether Kagalovsky helped construct 1993 alone. Other specialists argue that pended. Ms. Kagalovsky is the wife of a byzantine network of offshore corpora- total capital flight in 1994-98 amounted to Konstantin Kagalovsky, Russia's repre- tions that politically connected or mob- more than $140 billion and currently is run- sentative to the IMF in the early 1990s linked Russians may have used to siphon ning at more than $15 billion a year. Over- under Prime Minister Yegor Gaidar's hundreds of millions of dollars out of the (D 1999 The World Bank/The William Davidson Institute TRANSITION, August 1999 F country. Investigators say that sum may man Peter Berlin and his wife, Lucy holders. Net sales quadrupled from 1994 include part of foreign aid and funds Edwards. Berlin, British corporate to March 1998, net income jumped nine- pumped into Russia by the IMF to shore records show, is listed as a director of fold, earnings rose by a factor of five, and up the reeling Russian economy. Benex Worldwide Ltd., the company that the future looked just as promising. Benex kept several of the suspicious accounts became a distributor of YBM Magnex's Yukos denies that it has been involved in at the New York Bank. Benex maintained magnets. By March 1998 YBM was boast- transfer pricing schemes, but oil industry close ties to Semion Mogilevich the al- ing of plans to become "the world's lead- analysts calculate that its subsidiaries ef- leged head of Solnetsevo, Russia's larg- ing producer of high-energy permanent fectively lost hundreds of millions in rev- est organized crime group. Mogilevich magnets." enue last year by selling its oil to the holding has built a $100 million empire from company at bargain rates. Yukos, like all arms dealing, extortion, prostitution, and But six months later, in June of last year, petroleum companies battered by last other rackets. Before submerging in re- YBM Magnex pleaded guilty to conspiracy year's low world oil prices, itself reported cent years, he lived in Budapest, Hun- to commit securities fraud and has since a $79 million loss for 1998. A deal earlier gary, but is thought to have moved to filed for bankruptcy-law protection. In De- this year scattered the ownership of Moscow in recent weeks. Mogilevich al- cember 1998 the company's new board, Yukos's two oil production companies legedly is the principal target of a strike composed of outside investors, admitted among six separate offshore firms, from force assembled in early 1998 by the to U.S. authorities that there was evidence the British Virgin Islands to the windswept U.S. government. The force is com- of YBM's criminal wrongdoings, possibly Pacific atoll of Niue in the South Pacific. prised of the FBI, the Treasury Depart- involving links to organized crime. YBM had ment, the State Department, the Central faked customer lists showing money laun- Elaborate shell games have become a Intelligence Agency, and the Hungarian dering activity in accounts and business dominant feature of Russia's post-Soviet Interior Ministry. dealings in Eastern Europe and the Car- economy. Menatep's own purchase of ibbean. (Money laundering means moving Yukos back in 1996 began with a flour- Asenior U.S.governmentofficialsaidthere ill-gotten gains through a series of bank ish of thinly disguised deception by were "substantial links" between Benex accountstomakethemlooklikelegitimate Kagalovsky. He said "an unknown com- and YBM Magnex International Inc., a business proceeds). pany called Monblan" had won 85 per- Newtown, Pennsylvania, maker of indus- cent of Russia's second-biggest oil trial magnets. Mogilevich was a founding Earlier this year, the FBI and other fed- company. Menatep later admitted that shareholder of the company. Founded in eral agents raided YBM's world head- Monblan was a subsidiary. 1994 by a Russian emigre scientist, YBM quarters in Newtown. The confiscated Magnex, a magnet and bicycle manufac- documents suggest that Russian mob- Secrets of New York Bank Accounts turer, rose from an obscure penny stock to sters may have used the company's East- a multinational worth nearly $1 billion in ern European operations to launder Also underthe scrutiny of U.S. federal and less than four years. Its numbers aston- millions in dirty money through a web of local investigators is Russian business- ished competitors and delighted stock- related enterprises. Transfer Pricing-Techniques to Syphon Money Abroad Under the transfer pricing scheme, or "tolling," Russian compa- While transfer pricing understates the true value of exported nies have been selling products at below-market prices to their goods to minimize the amount of foreign currency that is le- offshore intermediaries. The intermediarythen sells the products gally required to be re-exchanged into rubles, an alternative at the international price and the foreign currency proceeds never approach is to overstate expenses. enter Russia. This practice has drained billions in profits from Russia's core metals and oil companies into offshore accounts. These so-called bogus service agreements involve an off- shore company-often set up by an intermediary that takes Some groups also carry out domestic "transfer pricing"-sell- a commission for its efforts-that offers fake consulting ser- ing their goods at below cost to a Russian intermediary com- vices to its Russian "client." This practice allows money to pany that is controlled by a few executives, thus depriving be exported, while the bills "paid" by the Russian company shareholders of the original company of their profits. These reduce the domestic profits on which it is required to pay tax goods can then be exported at a fair market price. to the authorities. TRANSITION, August 1999 (C 1999 The World Bank/The William Davidson Institute The Budapest-based production facility pean and U.S. banks before landing in IMF approved a new loan of $4.5 billion of Magnex was established eight years an offshore account in the Channel Is- for Russia. ago as the property of the Mogilevich- lands that was controlled by a Russian controlledArigo Ltd. Shortly thereafter its commercial bank. All this makes the ongoing IMF-Russia capital increased and it started to produce discussions even more complicated. high-tech magnets. (As the Budapest- Some of the accounts Berlin established Moscow's IMF envoy, Mikhail Zadornov, based World Economy Weekly re- at the Bank of New York weren't regular told NTV television that negotiations, ported, the shabby, run-down building that deposit accounts but "micro/CA$H- scheduled to last here until September employed 200 people, one third of them REGISTER" accounts. These accounts 1, will concentrate on the 2000 budget Russian, did not reveal much about the hi- are typically used by businesses for cash parameters and Russia's compliance tech production, and hardly reflected the management purposes and are de- with a tight fiscal policy agreed on with $80 million investments in the mid-1 990s). signed to make international fund trans- the IMF over the summer. The IMF wants "The products were sent back to the off- fers simpler. Account holders access Russia to aim for a primary budget sur- shore company at Caiman Island and then their accounts and can conduct numer- plus of 4 percent of GDP next year-a reshippedtotheCIScountries."...Atleast ous transactions, including wire trans- figure that excludes Russia's foreign that is what the owners claimed. fers and payment orders in foreign debt payments. Moscow ministers want currencies, via a personal computer. the IMF to lower its sights, stressing that A year ago the Hungarian company, now chronically poor revenue collection renamed Crumax Inc., decided to start a Were IMF Funds Hijacked? should improve only enough next year to new investment with $20 million in order meet a three-percent surplus. to increase production and build a new The IMF said on August 23 that it was research and training basis. The Canadian looking into reports of diverted funds but Meanwhile, some members of Congress investors vetoed the plan. that it had made payments only to the are launching their own probes into the Central Bank of Russia. IMF spokesper- matter. James Leach, a Republican from With the Money, Mogilevich Disap- son Graham Newman pointed out that Iowa and chairman of the House Bank- peared Too underthecurrentstandbycreditlMF money ing Committee, is planning a hearing, ten- is paid into the Russian government's ac- tatively set for mid-September, on the role Mogilevich disappeared from Budapest count at the New York Federal Reserve Western banks may have played in help- following a Hungarian-American coordi- Bank and that these funds can only be ing Russian money laundering, including nated raid. Officials confiscated docu- used for repayments to the IMF. Earlier an investigation of whether IMF funds ments and computers in his Budapest credits were paid into either the central have been siphoned. "Russian banks ap- offices that well-informed sources link to bank of Russia's account at the New pear to be more platforms for insiders the FBI's NewYork investigation. The Hun- York Federal Reserve, or its account at seeking to spirit money out of the country garian authorities declined to discuss the (Germany's) Bundesbank, and were than intermediaries for domestic eco- results of these raids. The Hungarian tax used by the authorities to build up re- nomic growth," Leach said in a press police have extended an ongoing inquiry serves, help finance the budget, or pay statement. At issue is whether foreign into companies controlled by Mogilevich. international obligations. theft has been facilitated by self-serving banking practices in the Western world, Investigators in NewYork estimate $6 bil- The possible siphoning of funds from including the United States. lion zipped through the Benex accounts IMF credits to Russia comes at a time in the short time since authorities began when an audit released this summer by This article was based on reports of re- monitoring the transactions last fall. They Pricewaterhouse Coopers shows that porters Michael Allen, Paul Beckett, told the New York Times that the Berlins Russia's central bank funneled $1.2 billion Michael Binyon, James Bone, David S. may be involved in one of the largest in IMF money in 1996 to a firm it controlled Cloud, Alan S. Cullison, Andrew Higgins, money-laundering operations ever con- called Financial Management Co., or and David Listerof the Wall Street Jour- ducted in the United States. Some $4.2 Fimaco, in the Channel Island of New Jer- nal, Lacy McCrary of the Philadelphia In- billion passed through a single account sey. The central bank hid that transaction quirer, Gyorgyi Kocsis of the World in more than 10,000 transactions be- from the IMF and later explained it was Economy Weekly, Budapest, and David tween October and March, the New York trying to keep the money beyond the reach E. Kaplan of the U.S. News and World Times reported. The cash in question of creditors. The MF has lent about $20 Report. appears to have passed through Euro- billion to Russia since 1992. In July the © 1999 The World Bank/The William Davidson Institute TRANSITION, August 1999 Curse or Blessing?-Financial-Industrial Groups in Russia by Tatiana Popova Starting in the early 1990s, Russian industrial companies and banks set up financial-industrial groups through equity ownership, sometimes through cross-ownership arrangements. Their goal was to combine financial and industrial capital and managerial know-how, gaining advantage on the market and through the authorities. Both government-induced and market-driven financial- industrial groups became important factors shaping the development of the Russian economy. Their role in the Russian economy has been mixed: it remains to be seen whether they can help overcome the investment and structural crisis or worsen the crisis through inefficient investment policies, monopolistic behavior, and abuse of power and influence. T he drive for financial-industrial in- Voucher privatization, the preferred ap- ation of at least three financial-industrial tegration has been rooted in So- proach, produced a spectacular rate of groups with similar profiles in the same viet history in a number of ways: privatization-at least on paper. Large in- regional market. The 1995 law limits the * Russia's large industrial enterprises dustrial enterprises were transformed into participation of any bank or enterprise to originate from the Soviet era, and bureau- open joint-stock companies. Due to the a single financial-industrial group. crats tend to preserve bureaucratic struc- large number of new owners, including tures. voucher holders and labor collectives, A financial-industrial group can be * Managers of industrial enterprises have ownership and control were scattered and formed around an industrial enterprise, been unable to adjust to market conditions unmanageable. This prevented the emer- research organization, -bank, or trade in their approaches to distribution and gence of clearly identifiable owners. While firm. However, to qualify as a financial- sales on domestic and external markets. workers acquired most small firms in trade industrial group, participation of a manu- * Russia's financial capital and institutions and services, the state retained controlling facturer of goods or provider of services have operated in imperfect and fragmented blocks of shares in many formally "priva- and a credit organization is necessary. markets. To combine financial and indus- tized" industrial firms. Efforts to privatize Financial-industrial groups that include trial capital for investments and to restruc- by selling enterprises through offerings legal entities in other CIS countries are ture enterprises became a necessity. have yielded meager results. registered as transnational group. If the fi- nancial-industrial group is based on an in- In 1990-92 Russian merchant capital- The Russian government thereafter de- tergovernmental agreement, the group is ism-a mix of commodity exchange, trad- cided to promote the financial-industrial given the status of an international group. ing, smuggling, and corruption-created integration of enterprises and financial or- the first large-scale conglomerates. Their ganizations, hoping that it would help solve Participants in a financial-industrial group assets increased as financial markets structural problems while avoiding further pursued different interests: enterprises fre- evolved, and the phoenix of financial capi- monopolization of the economy. quently sought the umbrella of a financial- talism was reborn on the ruins of the so- industrial group to milk the government or cialist industry. Opinion was split on Russia's legislation currently covers two banks in order to stay alive or to acquire whether the financial resources of these corporate forms of financial-industrial in- funds for covering their operational costs, conglomerates were channeled into long- tegration: official financial-industrial such as wages. Banks wanted to diversify term productive investments based on real groups and holding companies. A holding their property, including having a direct role needs or aimed more at gaining conces- company is defined as an enterprise, in in owning and managing industrial enter- sionsfromtheauthorities. any organizational and legal form, that prises. possesses controlling blocks of shares of By mid-1 997 about 130,000 state-owned other enterprises. A financial-industrial The government had its own stake in the enterprises-over half-had been priva- group is defined as a group of enterprises success of financial-industrial groups: it tized. Although formal privatization in Rus- and other organizations that pool their capi- hoped efficient groups could take over the sia proceeded quickly, it did not create tal, or a group of companies that consoli- roles of investors, managers, and liqui- responsible proprietors willing to retool date all or part of their assets, carrying out dators of bankrupt enterprises. It offered technologies, modernize production, joint investments aiming at technological support to officially recognized financial- manufacture competitive products, and and economic integration. industrial groups. Groups of industrial and manage their enterprises more efficiently. financial companies willing to register as Decisions to privatize were essentially Regulators tried to prevent the formation financial-industrial groups in principle re- guided by social and political goals. of monopolies through envisaging the cre- ceived state support and were classified W TRANSION-, August 1999 () 1999 The World BanklThe William Davidson Institute as "official" financial-industrial groups- mation of officially registered financial- groups-still control Russia's oil, gas, and once the authorities registered them. industrial groups and led to the fast spread metal industries, employ millions of people, of ad hoc, "unofficial," financial-industrial bring in the bulk of the country's hard cur- The state support can take several forms: groups. Hundreds of unofficial financial- rency earnings, and excessively influence * Afinancial-industrial group may receive industrial groups have been set up by in- Russia's politics. Financial-industrial blocks of state shares. The state can off- dustrial, trading, investment, and insurance groups gained special privileges, includ- set the debt of a member enterprise and companies, which also established their ing tax concessions and exemptions from grant state guarantees for loans, basically own "pocket banks" to provide financing customs duties. for investments. The state also can pro- for the groups, work out investment vide investment credits and other financial projects, and take part in the management. The future of Russia's large conglomerates support for the group projects. depends on the willingness and power of * An international financial-industrial The huge financial-industrial alliances- the stateto enforce effective antimonopoly group can receive favorable treatment on comprising financial, investment, insur- policies in regulating official and unofficial customs tariffs. ance, trading and leasing firms, pension financial-industrial groups, especially clip- * Afinancial-industrial group can be rec- funds, as well as large banks under the ping the wings of the oligarchs. ognized as a consolidated group of tax- control of oligarchs-have grown out of the payers with consolidated accounting. unofficial groupings. Even after the shock The author is Economist at the Interna- * Afinancial-industrial group can receive of August 1998, these oligarchs-heads tional Fund for Social and Economic the right to define the period of amortiza- of several unofficial financial-industrial Reform, Moscow. tion of equipment and accumulate the funds for its activity. e The central bank can provide banks that participate and invest in financial-industrial Secret to Happiness groups lower reserve requirements and change other rules in order to increase in- vestments. * The government can financially support _P financial-industrial groups that participate in federal programs. In 1998 the 75 officially registered finan- cial-industrial groups produced about 10 percent of the Russian GDP and em- ployed 5 million people-almost 30 per-__l cent of the industrial workforce. Official financial-industrial groups-a group of '/ \ about 1,150 non-financial enterprises and 160 financial organizations-are concen- trated in a few regions. In 1997 almost 40 percent of them were located in Moscow and most of the rest in Siberia and the Urals region. The government initially expected a larger * % volume of integration in industry, but it couldn't afford to offer more generous in- centives. Many manufacturers were afraid "I don't have a summer cottage which can be of the dominance of the banks. Banks on burgierized, a car to be stolen, and their part found the rule of restricting their I don't care about stock prices." participation to one financial-industrial group frustrating. This has slowed the for- From the Hungarian magazine H6cipo ( 1999 The World Bank/The William Davidson Institute TRANSITION, August 1999 i The Twelve Oligarchs-What Are They Doing? Since most banks owned by the oligarchs had invested an average of 35 percent of their assets in the GKOs (short-term treasury bills), the GKO moratorium-introduced after the collapse of the ruble in August 1998-effectively made their banks insolvent. As Marshall 1. Goldman, professor of Wellesley College and Director of the Davis Center for Russian Studies at Harvard University, recently pointed out, "in a high-stakes shell game the oligarchs, though considerably poorer, are defying the current economic malaise and remain ahead of the rest. " (The following list is based on his article in the International Economy). So, who are the twelve oligarchs and what are they doing now? 0 Vital Malkin (president, Russian Credit Bank). He has prom- ised foreign creditors to restructure the $650 million debt owed * Vagit Alekperov (president, Lukoil Oil). Lukoil remains by his bank, but also has shifted assets to the newly estab- Russia's leading oil company. Its 1998 output totaled 53.7 lished IMPEX bank. million tons. Lukoil's credit ratings improved since August 1998. 0 Vladimir Potanin (president, Interros Trading Co./ Oneximbank). The former first deputy prime minister and * Petr Aven and Mikhail Fridman (co-chairmen, Alfa group). putative architect of the 1995-96 loans-for-shares scheme, TheAlfa group suffered less from the August devaluation and faces severe problems. License of Oneximbank has been default than most of its rivals. In October, however, it admitted withdrawn in July, but assets had been shifted to Rosbank, to being unable to repay a $77 million syndicated loan arranged leaving behind debts-$525 million owed to foreign deposi- by Bank of America. Alfa holds on to Tjumen Oil, the group's tors and investors and $1.5 billion to domestic. Interros as- major corporate investment, besides real estate, securities sets shifted to Interros Prom. The oil company Sidanko faces trading, and cement and chemical industries. bankruptcy proceedings together with a number of its sub- sidiaries, including Rosneft. Potanin has lost control over * Boris Berezovsky (founder, LogoVAZ). He has assets over- the telecommunications holding Svyazinvest, having used it seas and close connections with President Boris Yeltsin's fam- as collateral for a credit he was unable to repay. The group ily and staff. He maintains operating control of ORT, the still owns 38 percent of Norilsk Nickel, 26 percent of jet- country's leading television network, Sibneft, a major oil com- engine maker Perm Motors, 26 percent of car manufacturer pany, Logovaz, the Avtovaz auto dealership, Aeroflot airline, Zil, and has holdings in oil, metallurgy, and real estate busi- and the Nezavisimaia Gazeta. nesses. * Vladimir Bogdanov (president, Surgutneftgas). His posi- * Aleksandr Smolensky (chairman, SBS-Agro Bank). SBS tion did not change. Surgutneftgas, the second largest oil com- Agro was closed and temporarily placed under the adminis- pany, produced 35.2 million tons of oil last year. trative control of the Russian Central Bank, later saved by a government stabilization fund. Smolensky's new "front" banks * Anatoly Chubais (president, United Energy System). His include Soyuz Bank and First Mutual Society. Smolensky still position is unchanged. heads the SBS-Agro group, the parent holding company. * Vladimir Gusinsky (founder, Mostbank, Mediamost). His me- 0 Rem Vyakhirev (president, Gazprom). The August crisis dia interests (including the second largest television network NTV, strengthened Gazprom and its chief, as the government has be- and the daily newspaper Today/Segodnia) put him in a strong come more reliant on the company for revenue. Gazprom's main position as the parliamentary, presidential, and regional elec- problems remain unchanged: collecting domestic payments and tion campaigns get underway. There is talk of him taking a major negotiating its tax bills with the government. In 1998 it regis- stake in the telecommunications holding Svyazinvest. tered a $2 billion loss. The February appointment of former Gazprom boss and ex-prime minister Viktor Chernomyrdin as * Mikhail Khodorkovsky (founder, Rosprom/Menatep). His the government's representative in Gazprom was seen by many more viable assets have been transferred from Menatep Bank as a prelude to Vyakhirev's removal. to the new Menatep, St. Petersburg. The group owns majority stake at the Yukos oil company; controlling shares in plastics, * VladimirVinogradov (president, Inkombank). Russia's third metallurgy, textiles, chemicals, and food processing companies. largest bank was temporarily closed, its license withdrawn. * TRANSITION, August 1999 (3 1999 The World Bank/The William Davidson Institute Readers' Forum Russia's Oligarchs Stole the State Machinery by Stefan Hedlund In 1989 Francis Fukuyama gained issued underthe Washington consensus. between nations that are embedded in worldwide fame with his book The Now, however, the time is ripe to set such social norm systems could safely be as- End of History and the Last Man. explanations aside and to question in- sumed out of existence. The fundamental point of the book was that stead if there is any valid ground at all for the ongoing collapse of the communist or- the notion of universally applicable policy The long string of discouraging events that der also meant a final triumph for the West- advice. have played out in Russia following the ern way of life. Basic liberal values start of "reforms" in January 1992 have concerning democracy, market economy, While the relative success stories in Cen- brought home the truth that cultural speci- and the rule of law had emerged victori- tral Europe have had little if anything to do ficity can be ignored only at a price. The ous. with Western advice and Western finan- factors underlying the plunder and destruc- cial support, in Russia the Western aid tion of the Russian economy that have Given the realities of the time, with the effort has been overwhelming. And Rus- taken place in the name of "radical reforms" peaceful "revolutions" in Central Europe sia, as we all know, is now de facto bank- may be sought in two different dimen- and the growing signs of a pending implo- rupt and a pariah on the financial markets. sions-both linked to the institutional triad sion of the Soviet Union, Fukuyama's point The artificial life support that is being of- laid out above. was compelling. Itwould also come to un- fered by the IMF can do little more than derlie much of the Western democracies' postpone this realization. How then could Beginning with the informal norm systems, attitudes toward the growing number of all this effort fail so miserably? it must be emphasized that a functioning former socialist states in Eastern Europe. market economy presupposes a set of In an environment marked by the "Wash- No one has come closerto an answerthan supporting social norms thatserve to block ington consensus," it had become difficult Jeffrey Sachs when he proclaimed that in the formation of collectively irrational indi- indeed to question whether a slavish imi- the case of Russia he felt like a surgeon vidual strategies of the prisoner's dilemma tation of the Western way really was the who had sliced open a patient only to dis- kind. (See box next page.) right way for everyone. cover that everything that was supposed to be there was not. So what exactly was The "Wrong" Path Dependency in Is There Just One Right Way? missing? Some simple tools out of institu- Russia tional theory may help us clarify that im- Ten years later we have accumulated suf- portant question. In the Russian case, however, social norm ficient experience to return to that ques- systems were veryfarfrom market conform- tion. In the part of Europe that then was The Institutional Change Triad ing.Thiswasduenotsimplytotheantimarket cast in a "Soviet" mold and that on the practices of the Soviet system but also to surface looked the same from Potsdam Putting it briefly, institutional change is historical patterns of behavior that are to Vladivostok, widely divergent degrees determined by the interplay among formal strongly marked by path dependency. Along of progress have been recorded. During rules, which may be changed overnight, listof examples could be advanced but per- transition to democracies, Central Europe informal norms, which change only gradu- haps the most important is a deeply rooted raced ahead of the former Soviet repub- ally if at all, and enforcement mechanisms, rule aversion-drawing actors into elaborate lics, and on the territory of the former So- which provide legitimacy for the formal schemes of rule evasion. viet Union the three Baltic states have rules and may thus help transform the in- outperformed their Russian neighbor. formal norms. Path dependence in such behavior may be established in two mutually supportive In the field of policy advice there has been The main thrust of "shock therapy" was to ways. On the one hand, we have organi- a strong drive to explain such divergences change the formal rules, and to do it as zational responses to a widespread prac- in performance by pointing to varying de- quickly as possible. Tacitly, if not openly, it tice of rule evasion that are marked by grees of adherence to the prescriptions was assumed that any cultural differences increasing returns and may, thus, not be © 1999 The World Bank/The William Davidson Institute TPANSITION, August 1999 A easily dislodged. On the other hand, we functioning market economy cannot exist this respectdid little morethan reinforce old have the formation of mental models that in a vacuum. To mention one example, patterns of viewing the law as a mere in- serve to rationalize behavior that might there can be no property without govern- strument in the hands of the rulers. otherwise have been clearly seen as so- ment, and without property rights there can cially irrational. These mental models con- be no market economy. It also bears re- Returning to what was said above about stitute a perhaps even greater obstacle to calling that it was not deregulation but the sweeping deregulation in a nonmarket the imposition of universal and transpar- ability and willingness of the state to guar- environment, it must be added that the ent rules of the game. antee contracts and to act as a third party neoliberal crusade against the state has enforcer that gave birth to the market greatly compounded the damage. Given To recommend and undertake sweeping economy in the Northern Italian city states that the purpose of deregulation was to deregulation in an environment that was in the 12th and 13th centuries, allow a wide scope for private revenue marked by a whole set of such nonmarket maximization in an environment where attitudes and modes of behavior was tanta- In the Russian case we may find another there were few if any norms against steal- mount to courting disaster, for the simple powerful path dependence in the view of ing from public coffers, the forced abdica- reasonthattherewouldbenoonelefttocare the state as an alien and often hostile tionofthestatefrom its role as enforcerof for the collective rationality. Those who- force-in a society that never really has common rules was a sure way of complet- somewhat belatedly-have been scolding evolved any sense of mutual relations be- ing the disaster. the widespread Russian practice of rent tween the rulers and the ruled. For example, seeking serve only to underline what really the strong notions of mutual rights and obli- The grand program of privatization, once should have been obviousfrom the start. gations that marked medieval Western hailed as "the fastest in human history," Europe, and which gave rise to the "West- provides but one illustration of this impor- The other dimension in which we may find ern way" of democracy, market economy, tant point. By now there has been plenty Russian specificity concerns the role of the and the rule of law, have no correspondence said about the predatory behavior of the state. Again it bears emphasizing that a in Russian tradition. The Soviet system in Russian oligarchs, but none has put it bet- The Prisoner's Dilemma: Cooperate or Defect? Two people have been arrested separately, and are held in of 40), and confessing is also better if the other person does separate cells. They are not allowed to communicate. Each is not confess (that way, you get to go free instead of having to told the following: serve 30 days). Thus the equilibrium-the behavior we expect * We have arrested you and another person for committing to see-is that each player confesses. The optimum, however, this crime together. is clearly for each player not to confess, since each player then * If you confess, and the other person confesses, we will re- gets only 30 days. ward your assistance to us and your sparing us the expense of a trial by sentencing you both fairly lightly: to 2 years of prison. With 40 years at stake, confession has nothing to do with * If you don't confess, and the other person also doesn't con- whether one is guilty. It has only to do with what is at risk. The fess, we will not be able to convict you, but we will be able to hold prisoner's dilemma would be a completely depressing game if you here and make you as uncomfortable as we can for30 days. not for the possibility that cooperation can evolve in the long * If you confess and the other person does not, we will show run, even though in the short run it seems always better to strike our appreciation to you by letting you go free. We will then take and run-to defect. your testimony, in which you will implicate the other person as your accomplice, and put that person in prison for 40 years. RobertAxelrod in The Evolution of Cooperation (1984) con- * If you don't confess, and the other person does, that person's ducted a series of experiments in which the game was played testimony will be used to put you in prison for 40 years; your repeatedly. Participants were invited to submit strategies for accomplice will go free in exchange for the testimony. playing this game over and over. He found that cooperation * Each of you is being given the same deal. Think about it. could arise if the game were played over and over again and if the players involved have a large enough chance of meeting What should each player do? again. A risk-averse person will always confess. Confessing is better Based on material from Alannah Orrison, Social Sciences, if the other person confesses (that way, you get 2 years instead Saddleback College, Mission Viejo, Califomia. e TRANSITION, August 1999 (C 1999 The World Bank/The William Davidson Institute ter than George Soros who said that first Russian society by "reforms." If we are to ues may come under renewed threat- "the assets of the state were stolen, and avoid deterministic statements about the but not from an embittered Russia. While then when the state itself became valuable Russian inability to change, we must ac- Russia's efforts at imitating the West have as a source of legitimacy, it too was sto- cept that 1991 did provide a window of brought about a halving its GDP, China's len." The real hallmark of the Russian opportunity" when many options were own way has led to a doubling of its GDP! kleptocracy is that the machinery of the open. Against this background, the trag- These are not auspicious grounds on state itself has been hijacked by the edy of Russia's failure becomes even which to argue for the spread of Western kleptocrats and used for personal enrich- greater, for the simple reason that we must values. ment. And this, in turn, was facilitated by now realistically expect that there will be a the reformers' crusade against the state substantial backlash, both against the Ste fan Hedlund is professor of East Eu- as an alleged obstacle to free markets. West in general and against the very no- tions of democracy, market economy, and ropean Studies at Uppsala University, The main conclusion to be reached from the rule of law. Sweden. Address: Gem/a Torget 3, Box what has been said above concerns not 514, 751 20 Uppsala, Sweden; Tel: 4618- only the massive damage that has been Paradoxically, it may thus turn out that 471 0000; Fax: 4618-106-397; Email: inflicted on the Russian economy and on Fukuyama was quite wrong. Liberal val- east@east.uu.se UNDP Report Exposes Transition's Dark Side- The Rise in Poverty, Crime, Disease and Mortality Countries of the former Soviet Union and Eastern Europe are paying the price for their transitions to a market economy So claims the United Nations Development Programme (UNDP) in a newly released report, Human Development Report for Central and Eastern Europe and the CIS, 1999. The UNDP finds that "a human crisis of monumental proportions is emerging in the former Soviet Union." The report had several major findings. uring the transition process, tries of the region-most notably in the Rising Poverty D gains in freedom have been ac- Russian Federation and most strikingly companied by losses of basic among young and middle-aged men. The The World Development Indicators economic and social rights. Millions of transition countries of Central Europe 1999, published by the World Bank, pro- people in the region are now unemployed have fared much better than those of vides the most recent illustration of the or underemployed. Workers have been Eastern Europe. Most regrettably, this rapid rise in poverty: "Even before the cri- driven into the low-paying and insecure reversal of the trend in life expectancy sis, poverty was undermining transition in employment of the informal sector. Aver- means that several million people who did Eastern Europe and the CIS. In 1989 age cash incomes have plummeted. The not survive the 1 990s would have done about 14 million people in the former Com- comprehensive system of social protec- so if life expectancy levels from before the munist bloc lived on less than $4 a day. By tion has crumbled. Many basic social ser- 1990s had been maintained. As a con- the mid-1990s that number had risen to vices now require fee payments or have sequence, an estimated 9.7 million men about 147 million (from 4 percent of the been partially privatized. Public education are "missing" from the region. population in 1988 to 32 percent in 1994)." and health facilities have deteriorated or InArmenia a household survey conducted have been replaced by private facilities Morbidity levels have also risen. High by the Ministry of Statistics in 1996 found available only for those rich enough to pay. morbidity is characterized by higher in- that about 55 percent of households were Transition in the region has had other hu- cidences of common illnesses and by poor, based on a minimum consumption man development costs. the spread of such diseases as tuber- basket. In the Kyrgyz Republic, according culosis-diseases that had been re- to the National Statistics Committee, 71 Loss of Life: The Missing 10 Million duced to marginal health threats in the percent of the population had an income past. Particularly serious has been the belowthe poverty line in 1996-which was Loss of life has been the largest single spread of sexually transmitted diseases based on a scale of poverty in which 60 cost of transition, represented by the de- and the rising threat of the HIV/AIDS percent of total income is spent on the cline in life expectancy in several coun- epidemic. minimumfoodneededforsurvival.lnGeor- ©D 1999 The World Bank/The William Davidson Institute TRANSITION, August 1999 C gia in 1996 about two-thirds of the popu- wage-and this probably overstated the ment and attendance rates have fallen. lation had an income belowthe official pov- real figure because delays in pension Expenditures on nursery and other pre- erty line. In Ukraine this total was about 50 payments were even greater than wage school facilities have been slashed. In the percent. arrears. Statistics show a sharp increase countries of the former Soviet Union, of inequality in Armenia, the Czech Re- more than 30,000 pre-schools have A recent study in Poland shows that 60 public, Hungary, Macedonia, Moldova, closed between 1991 and 1995. This has percentofchildren sufferfrom someform Russia, and Slovakia. In many coun- increased the burden of household work of malnutrition. Income-poor families in the tries-including Armenia, Georgia, Rus- on women and diminished their opportu- transition countries have greatly reduced sia, and Ukraine-the share of average nities for employment. their consumption of milk, meat, and veg- income spent on food rose dramatically. etables and are now relying on cheaper, Despite the rising share of food, daily In most countries the direct and indirect lower-quality foods. Iron deficiency is com- calorie intake fell as average incomes costs of school attendance have risen for mon in the region. The number of Russian and expenditures declined. children and their families because facili- women suffering from anemia at the end ties, transport assistance, stipends and of their pregnancies nearly tripled between Shrinking Spending and Rising Costs subsidies for books, and school meals 1989 to 1994. An area study in Uzbekistan in Education have all been cut. Increasingly, the quality showed that about 65 percent of women of schooling has declined due to over- ages 15-50were anemic in 1994.A 1996 Azerbaijan, Bulgaria, and Georgia are crowding, dilapidated facilities, lack of survey in Moldova revealed that 20-50 among the countries where educational heating in winter, underpaid teachers and percent of children had rickets because of spending has shrunk most. In Bulgaria edu- support staff, and lack of health checks inadequate intake of vitamin D. Infant mor- cation spending has been cut by more than among children. tality rates have been held down in most 50 percent in real terms. Value amounts of countries,butthenumberoflowbirthweight scholarships and the number of students Rising Uemployment and Informal babies is on the rise, signaling future prob- receiving them have declined. In Moldova, Sector Activities lems in child mortality and malnutrition. for instance, stipends forstudents have fallen toaboutaquarteroftheaveragewageand Mass unemployment has been a major Some people have experienced much are now provided only to students achieving source of social hardship in the 1990s for greater impoverishment than others. In good academic grades. Students and their transition countries, with Macedonia and Russia in 1997 the average old-age pen- families have been expected to bear the Moldova having extremely high levels (more sion was 34 percent of the average growing burden of schooling costs. Enroll- than 30 percent), others with more than 20 Human Development Indexes: A Mixed Picture Human development is defined as the process of enlarging Tajikistan, Vietnam, Mongolia, and Laos. But even they perform people's choices to lead a long and healthy life, acquire knowl- well when it comes to subtracting HDI ranking from real GDP per edge, and have access to resources needed fora decent stan- capita ranking-showing thattheirHDI position is been betterthan dard of living. The UNDP's Human Development Index (HDI) their GDP per head ranking. The higher a country's HDI ranking, measures the level of human development through three com- the more favorable is its human development situation relative to ponents: longevity, measured by life expectancy at birth; edu- its wealth. The UNDP claims that a good HDI, in part, reflects the cational attainment, measured by a combination of adult literacy legacy of pre-transition developments-for instance, longevity and (two-thirds weight) and the combined primary, secondary, and education fared well in the communist systems. And while its tertiary enrolment ratios (one-third weight); and standard of "people lacked social and political freedom," they also "enjoyed living, measured by real GDP per head (in dollars, on purchas- full employment and an extensive system of social protection." ing power parity). The UN DP predicts "The worsening life expectancy for the early The table on the next page ranks the countries in transition ac- 1990s and the deteriorating quality of education in many FSU cording to their HDI, as calculated in the Human Development countries could cause further decline in their human develop- Report 1998, released by the UNDP. Slovenia took the high- ment indexes, and could affect the potential for economic est marks, followed by the Czech Republic, Slovakia, Poland, growth." As indicated in Human Development Report 1998, and Hungary. Russia ranks 71st in the survey. Five countries the picture is more complex: out of 27 transition countries, 12 closing the ranks of transition economies are Moldova, did worse than in 1994, but 15 did better. * TRANSITION, August 1999 ( 1999 The World Bank/The William Davidson Institute percent (such as Armenia), and most not been paid for many months-as in half the GDP in 1997, while in Hungary they having more than 1 0 percent of their la- Belarus, the Kyrgyz Republic, Russia, were about 30 percent of the total national bor force officially out of paid work. and Ukraine. income. A high proportion of the economi- Added to the openly unemployed are the cally active population is thus not covered millions of discouraged workers in the With the increase in unemployment and by entitlement to insurance-based social region who have dropped out of the la- underemployment, informal economic ac- protection and is being subjected to in- bor force and the millions of others who tivities-including the black market or other secure working conditions with low pay are classified as on "administrative illegal activities- have expanded. In Rus- and negligible or nonexistent benefits. leave" or who continue to work but have sia informal activities accounted for about This has become an important problem Ranking of transition countries according to their Human Development Index Combined first-,second- Human Real GDP and third- development per caDita Life Adult level gross index (PPP$J expectancy literacy enrollment Real GDP Life (HDIJ rank at birth rate ratio per capita expectancy Education GDP value minus (years) (%l) (%/.) (PPP$) index index index index HDI rank # HDI Rank 1994 1997 1997 1997 1997 1997 1997 1997 1997 1994 1997 1994 1 Canada 79 99 99 22480 0.9 0.99 0.9 0.932 12 2 Norway 78.1 99 95 24450 0.89 0.98 0.92 0.927 5 3 United States 76.7 99 94 29010 0.86 0.97 0.95 0.927 0 33 Slovenia 35 74.4 99 76 11800 0.82 0.91 0.8 0.845 0.886 5 3 36 Czech R. -39 73.9 99 74 10510 0.81 0.91 0.78 0.833 -0.882 3 3 42 Slovakia -42 73 99 75 7910 0.8 0.91 0.73 0.813 0.873 9 12 44 Poland -58 72.5 99 77 6520 0.79 0.92 0.7 0.802 -0.834 18 14 47 Hungary -48 70.9 99 74 7200 0.76 0.91 0.71 0.795 -0.857 8 6 54 Estonia -71 68.7 99 81 5240 0.73 0.93 0.66 0.773 -0.776 15 -8 55 Croatia -77 72.6 97.7 67 4895 0.79 0.88 0.65 0.773 -0.76 18 -10 58 Cuba n.a. 75.7 95.9 72 3100 0.84 0.88 0.57 0.765 47 60 Belarus -62 68 99 80 4850 0.72 0.93 0.65 0.763 -0.806 15 -13 62 Lithuania -76 69.9 99 75 4220 0.75 0.91 0.62 0.761 -0.762 22 -8 63 Bulgaria -69 71.1 98.2 70 4010 0.77 0.89 0.62 0.758 -0.78 23 -9 68 Ronmania -79 69.9 97.8 68 4310 0.75 0.88 0.63 0.752 -0.748 13 -3 71 Russian Fed. -67 66.6 99 77 4370 0.69 0.92 0.63 0.747 -0.792 8 -7 73 Macedonia, TFYR -80 73 94 70 3210 0.8 0.86 0.58 0.746 -0.748 28 -5 74 Latvia -92 68.4 99 71 3940 0.72 0.9 0.61 0.744 -0.711 15 -6 76 Kazakhstan -93 67.6 99 76 3560 0.71 0.91 0.9 0.74 0.709 15 -6 85 Georgia -105 72.7 99 71 1960 0.8 0.9 0.5 0.729 0.637 37 -31 87 Arn-rnia -103 70.5 98.8 72 2360 0.76 0.9 0.53 0.728 -0.651 26 -24 91 Ukraine -95 68.8 99 77 2190 0.73 0.92 0.52 0.721 -0.689 27 -14 92 Uzbekistan -100 67.5 99 76 2529 0.71 0.91 0.54 0.72 -0.662 19 -14 96 Turkrrenistan -85 65.4 98 90 2109 0.67 0.95 0.51 0.712 0.723 24 -12 97 Kyrgyzstan -107 67.6 97 69 2250 0.71 0.88 0.52 0.702 -0.631 19 -18 98 China -108 69.8 82.9 69 3130 0.75 0.78 0.57 0.701 -0.626 6 -3 100 Albania -102 72.8 85 68 2120 0.8 0.79 0.51 0.699 -0.655 19 -4 103 Azerbaijan -106 69.9 96.3 71 1550 0.75 0.88 0.46 0.695 -0.636 34 -25 104 Moldova -110 67.5 98.3 70 1500 0.71 0.89 0.45 0.683 -0.612 35 -28 108 Tajikistan -115 67.2 98.9 69 1126 0.7 0.89 0.4 0.665 0.58 46 -35 110 Vietnam -121 67.4 91.9 62 1630 0.71 0.82 0.47 0.664 -0.557 23 -26 119 Mongolia n.a. 65.8 84 55 1310 0.68 0.74 0.43 0.618 26 140 Lao People's Dem. R. n.a. 53.2 58.6 55 1300 0.47 0.57 0.43 0.491 6 Eastern Europe and the CIS 68.6 98.7 76 4243 0.73 0.91 0.63 0.754 Industralized countries 77.7 98.7 92 23741 0.88 0.96 0.91 0.919 World 66.7 78 63 6332 0.69 0.73 0.69 0.706 Source: UNDP Report 1998. (C 1999 The AVorld Bank/The William Davidson Institute TRANSITION, August 1999 X for a growing number of women, who have been pushed out of the formal labor sector. ys How Can New Development Strate- in Transition Economies gies and Policies Help? by Misha Belkindas, Mustafa Dinc, and Olga Ivanova Because of the protracted and complex na- ince the countries of Central and informal economy-already well developed ture of transition, the responsibilities of the Eastern Europe and the former in the pre-reform period-expanded. Infor- state should increase ratherthan decrease. Soviet Union began the transition mal activities were not measured by sta- The state should be active and intervene in Thersticalateas sho e macketvn inerven cannt to market-based economies, their statis- tistical reporting and the macro criticaluareas wherfiien mllocarkt ofo rces c tical systems have struggled to operate in aggregates were not properly adjusted to ensure an efficient allocation of resources the new environment. The quality of socio- capture them. portuwhtiereaccs tor basliod assneqitsanoP economic indicators has deteriorated sig- * Adjusting to international statistical stan- portunities for livelihood is inequitable nificantly overthis time, due primarilyto the dards-notably, switching from the Mate- Market forces alon cannever bereliedon following reasons: rial Product System to the UN System of to create a fair or equitable society. * With loosened controls, enterprises have National Accounts-was delayed. been less inclined to provide complete The key to economic recovers is to stimu- data to statistical authorities. In pursuit of In 1998 the Technical Assistance in Sta- late higher levels of investment including tax evasion, there are strong incentives for tistics team of the World Bank Develop- investment in human capabilities. Revitaliz- underreporting. ment Economics Data Group conducted ing economic growth should be a priority . Many newly established private enter- a survey to assess the quality of statistics Tidoverxad s notimply,ofever, social wssel prises, especially if family-owned, have in a number of transition countries. The This does not imply, however, that essential escaped the statistical network because findings suggest that in many countries the expedi es hu an elopme shoud business registers are both incomplete basic data are well below satisfactory level be postponed. Such expenditures are a and outdated. (assumed to be equal to 3; see figure), with stimulusetodgrowth and desnaf the trajection. 0 With the loosening of state control the a strong correlation between average data speed, and destination of the transition. Data Quality in Transition Countries Shifting from universal coverage of ben- (The higher the per capita GNP the better the data quality.) efits and services to selectivity and tar- -__________ _____ _____ _ _ __ _ __ geting based on means testing has created substantial problems. Such schemes rarely are effective in reaching the intended beneficiaries and invariably involve high administrative costs. In ad- dition, governments have been wrongly 3.5 ' ft6d advised to privatize many of their social Skorgu. Ba 4 services and social protection programs. 3 R, & k LSPp. Cech p4 The state must intervene because the substantial positive externalities from M 2.5 such expenditures, or additional benefits, are enjoyed bysocietyasawhole. 2.0 T *j:ita hIdT e Based on Transition 1999-Human *s Development Report for Central and 1.0 Eastern Europe and the CIS, a United Nations publication. Website: http:// www.un. org/publications. Email: publica tions@un.org. Furtherinformation: UNDP 0.0 Publications, New York, Ms. Kowkab 0.0 500 ics 2000 3COO 4000 ono0 Simaan, tel. 212-906-6734. Source: compiled by authors. NPPerapitk * TRANSITION, Alugust 1999 (D 1999 The World Bank/The William Davidson Institute World Bank Loan Strengthens Russia's Statistical System A $30 million World Bank loan to Russia supporting the "Devel- of the statistics. Further, certain economic activities carried out opment of the State Statistical System" project was approved in by those in the shadow economy either are not captured or May 1999 and covers all aspects of the statistical system. The covered partially by official statistical reports. This places ad- Russian government will contribute an additional $8.55 million to ditional challenges on statisticians to make adjustments to pri- the project. Goskomstat, the state statistical office, together with mary information. The World Bank-supported project will help other data collecting agencies, faced many challenges that to restructure the statistical system and strengthen the data col- emerged with the systemic changes in the Russian Federation. In lection agencies. It will introduce up-to-date information tech- macroeconomic statistics, the Goskomstat started to shift to new nology based on modern equipment and software to the system. macroeconomic indicators in compliance with the 1993 System of National Accounts (SNA), and began collecting and dissemi- Goskomstat will implement the main part of the project at the nating data on prices. It introduced the Consumer Price Index federal and regional levels. Several subprojects will be imple- (CPI) and other price indexes as well as new indicators reflecting mented in other agencies-for example, the Ministries of Fi- the social development. These efforts, helped by international or- nance and Economy, the State Customs Committee, and ganizations and bilateral donors, have led to substantial improve- several regional administrations. Consultation, collaboration, ments in macroeconomic and social statistics in Russia. information sharing, and support among stakeholders (the World Bank, Goskomstat, other data producing government Despite these achievements, further efforts are needed to agencies, and data users) are considered to be key factors for achieve timeliness, quality, relevance, and comprehensiveness success. quality and per capita dollar GDP in these the content of the forms-along with the also provide a benchmark for the design countries. number of respondents-defines the and conduct of modern sample surveys "width" and the "depth" of the raw data based on probability sampling methods. The statistical systems for collecting, pro- made available for further processing. Sample surveys, while technically more cessing, and disseminating information demanding in design and conduct, are have to be restructured to meet the de- Thenumberofrespondentsdependsonthe less expensive and can produce more mands for dependable data-from the survey technique. Statistical data collection timely statistics than censuses. government, to underpin its policy deci- can be conducted either on a full-coverage sions; from the business community, to basis (census) or a part-coverage basis (a Data Processing. Still highly decentral- make proper investment decisions; and sample survey). ized in most transition countries, data pro- from the general public, to satisfy their re- cessing in the form of data capture, quirements for information about firms. The full-coverage census-a predominant editing, and tabulation is done in local of- And this restructuring must be undertaken method under central planning-does not fices. Thus primary data never get to the with scarce resources and without disrup- work in a market economy because it im- central headquarters; only summary in- tions. While the major requirements to poses an impossible workload on statisti- formation is passed upwards. This decen- streamline statistical systems in the tran- cal offices due to the explosive growth in tralized system was designed to help sition economies are clear, it is also clear the number of entities to be surveyed. administer the command economy and that the process will take time. track fulfillment of the plan. Its legacy is still For a sample survey to be representative, alive: statistical data processing is carried Collecting, Processing, and those developing the survey need to know out on microcomputers, using individual Disseminating Data the total number of enterprises and their software programs. Thus central statisti- relevant features. As the private sector cal offices are unable to use the more Data Collection. In the transition econo- grows and enterprise activity extends handyandefficientstandarddataprocess- mies most statistical observations are over regions and diversifies in nature, the ing and data analyzing packages avail- based on questionnaires filled out by re- reliability of statistical registers becomes able. spondents and returned to regional statis- increasingly important. Comprehensive tical offices. The amount of information and regularly recurring censuses of ma- The data processing system needs to be reported varies and may include from 10 jor economic areas are still needed to changed. Data processing is more effective to 100 indicators. Because respondents provide detailed statistics at the national, if done centrally-allowing for economies of include both enterprises and authorities, regional, and local levels. These censuses scale in personnel and equipment. Sophis- © 1999 The World BanklThe William Davidson Institute TRANSITION, August 1999 U ticated data capture-high speed keying, * Conducting a broad-based review of World Bank's support takes several forms, coding, scanning, and electronic collection what kinds of statistics are economically depending on the scale and scope of the techniques-machine editing and imputa- justified at the state, regional, and district project. It can come in the form of a grant, tion, complex tabulation, data storage, and levels; deciding how frequently these are part of a larger World Bank loan, a sepa- backup are also easier to handle from a needed and what accuracy criteria should rate loan, or a partnership arrangement single location. Centralized processing im- be applied to key statistics; and working cofinanced with bilateral donors and other proves uniformity and access to data, but it out a timetable to apply internationally ac- international agencies. requires statisticianswith bettertraining and cepted, standard practices. more powerful computers. * Establishing a solid statistical infrastruc- Governments in transition countries should ture and well-designed legal framework workoutdetailedplansandcostestimates Data Dissemination. Statistical offices that includes business and household reg- for developing their statistical systems. and other government agencies in transi- isters, questionnaires, censuses, and sur- These plans would enable them to assess tion economies have just started to pro- vey procedures. their financial needs, decide whether to vide data to users in electronic formats. 0 Reorganizingandmodemizingthedesign, applyforaWorld Bank loan, and allow pos- Most of these products are simply elec- strategy, and implementation of the data dis- sible donors to coordinate support. To ac- tronic versions of printed reports. Elec- semination system, thus improving economic complish this more effectively and efficiently, tronic products should contain more management and decisionmaking in the Development Economics-the research detailed information than printed products, government as well as in the private sector. arm of the World Bank headed by Vice given the lower cost of providing data in 0 Creating standardized electronic data President and Chief Economist Joseph such electronic formats as CD-ROM. Even sharing facilities, with user-friendly soft- Stiglitz-has recently established a special entire data sets can be provided to users, ware, supported by effective communica- trust fund that will extend the ability of tran- allowing them to aggregate the data ac- tions, to serve government users in a sition economies to get technical assis- cording to their needs. timely manner. tance and financing for development of their statistical systems. The lnternetisrapidlybecomingtheworld- How to Find Funds? wide medium for information dissemina- Misha Belkindas is Team Leader, tion. Statistical offices should use the In many transition countries, restructuring Mustafa Dinc, Consultant, and Olga Internet to deliver products to users. But the statistical system requires substantial Ivanovais, Economist at the TAS team this assumes the availability of the neces- resources-technical and financial. The at DECDG, the World Bank. sary electronic hardware. The Internet of- fers new possibilities to central statistical Parental Advice offices to recover some of the costs of their 6> \_________ operations. They can make available cer- tain statistical information on a subscrip- tion or fee basis. Government agencies, 1 l \ 1 however, should have access to all this in- formation free of charge. Checklist of Unfinished Business Transition economies have made consider- able improvements in their statistical sys- tems, but there remains much to accomplish: * Designing and conducting sample sur- veys that meet international standards, gradually replacing regular economic and business censuses with sample surveys, t( using an optimum mix of censuses and sample surveys for economic and busi- "I can make you member of a board of directors, but you have to finish ness statistics, and providing the neces- elementary school on your own." sary training for staff. From the Hungarian magazine H6cipo T RANSITION, August 1999 ( 1999 The WVorld Bank/The William Davidson Institute THE WILLIAM DAVIDSON INSTITUTE AT THE UNIVERSITY OF MICHIGAN BUSINESS SCHOOL Why Do Finns Hide? Bribes and Unofficial Activity after Conununism by Simon Johnson, Daniel Kaufmann, John McMillan, and Christopher Woodruff A substantial amount of output in many view the remedy to unofficial activity is land, Romania, and Slovakia on the other. developing and post-communist transi- better policing and enforcement of the Byall measures the countries of theformer tion economies goes unreported. This criminal code. Soviet Union are more hostiletoward busi- "unofficial economy"-made up of under- 0 The unofficial economy may result from ness than the East European countries. A ground and often illegal activities-im- the inadequacy of the institutional environ- striking 90 percent of Russian and Ukrai- pedes the country's economic growth in a ment. If it is hard to enforce contracts be- nian managers say it is normal for bribes number of ways. First, firms operating un- cause the courts do not work, a firm gains to be paid to government officials. Around derground in this shadow economy cannot little from registering its business. In this 90 percent of the managers also said that make use of market-supporting institu- view the state needs to invest in a commer- firms in their industry pay for "protection" tions-such as the courts-and so may in- cial court system to deter unofficial activity. of their activities. The firms suffer extortion vest too little. Second, doing business in not only from bureaucrats but also from secret generates distortions because of the Most of the empirical research on the un- criminal gangs. effort needed to hide activities and avoid official economy uses macro data, such detection and punishment. Resourcesthat astheamountofcash in circulation orelec- Corruption is less pervasive, though not are hidden may not find their highest-value tricity consumption. These estimates con- uncommon, in Eastern Europe. In the Slo- uses. Third, underreporting costs the gov- sistently show that countries with inefficient vak Republic 40 percent of managers say ernment tax revenue that might be put to regulatory environments and widespread bribes are paid, and in Poland and Roma- worthwhile use. corruption have an unofficial economy nia that number is 20 percent. The mafia is leading more than in excess of 40 percent less of a problem in Eastern Europe as well. Some Reasons for Hiding of the official GNP. Only 15 percent of Slovakian managers, and still fewer Polish (8 percent) and Ro- What causes firms to operate in these un- Does Experience Match Theory? manian (1 percent) managers, said protec- official economies? Economic literature tion payments are normally made. The offers four explanations, each with distinct Post-communist countries offer an oppor- firms' tax payments are lower in these three policy implications: tunity to examine the determinants of un- countries than in Russia and Ukraine. One * Entrepreneurs may go underground official activity because, starting from cost to a firm operating outside the formal when statutory tax rates are high and other similar levels of unofficial activity, their economy might be less reliance on the pro- official regulations are onerous. Cutting regulatory environments have diverged. tection of the courts, making it hard to main- taxes and red tape are, according to this Recent studies estimate that in 1995 the tain contracts with its trading partners. When view, the main ways to keep firms in the unofficial economy in Poland was less than asked whether they could use courts to en- official economy. 15 percent of GDP but in Russia and force contracts with trading partners, just * The predatory behavior of government Ukraine it was around 50 percent. over a half in Russia and Ukraine said they officials-who seek bribes from anyone could, whereas two-thirds or more in Po- with officially registered economic activ- So why do firms hide? Using firm-level land, Romania, and the Slovak Republic ity-will drive some businesses into unof- data from a survey of similar private manu- said they could. ficial activities. In this view eliminating facturing firms in Poland, Romania, Rus- bureaucratic corruption will prevent some sia, the Slovak Republic, and Ukraine, we All the firms in our survey are registered of the flight into the shadow economy. tried to find the reasons. The data show and operate in the formal economy, but * Firms might hide some of their output to that the five countries fall into two groups: many of them hide at least some output. escape extortion by criminal gangs. In this Russia and Ukraine on the one hand, Po- Underreported sales are highest in (C 1999 The World Bank/The William Davidson InStitUte TRANSITION, August 1999 d Ukraine (averaging 41 percent of total Wefind onlyweakevidencethattheabil- Thereisasignificantassociation between sales) and Russia (29 percent), and much ity of the legal system to enforce contracts corruption-in the form of bribes paid to lower in Poland, Romania,andtheSlovak affects entrepreneurs' decisions on government officials-and the hiding of Republic (between 5 and 7 percent). Man- whether to hide their activities. Ability to output. This is far worse in Russia and agers in Russia and Ukraine, then, face access bank loans and to involve outside Ukraine than in Eastern Europe. But even worse bureaucratic corruption, more mafia owners also do not appear to be signifi- within Eastern Europe, firms that say bu- extortion, higher taxes, and a less effec- cant issues. This is probably because the reaucrats are corrupt are more likely to tive court system. They also hide more of firms in our sample maintain at least some hide their activities. However, we cannot their output. Comparing averages across official activity and have access to govern- distinguish whether firms hide more to the countries, therefore, gives support to ment provided public services. avoid corruption orwhether firms that hide all four explanations for hiding. more have to make illegal payments. We We find no evidence that payments to private leave this for further research. Firm-level data from Poland, Romania, criminal groups affect the decision to hide and the Slovak Republic find no signifi- activities. This may be because we surveyed This article is based on a paper by Simon cant association between tax rates and manufacturingfirmsthatarerelativelyimmune Johnson, The Sloan School, MIT and the extent of unofficial activity in those from mafia-run protection rackets. Mostlikely, WDl Research Fellow, Daniel(Kaufmann, countries. If there is a tax rate effect, it however, it indicates that organized crime is World Bank, John McMillan, Stanford and probably lies more with the way the tax not as large a problem in Eastern Europe as WDI Research Fellow and Christopher system is operated. it is in Russia and Ukraine. Woodruff, UCSD. Foreign Investment and Emerging Markets: Highlights of a Conference Organized by the William Davidson Institute by Bernard Yeung n June 18-19, 1999, 25 distin- searchers, managers, and public policy to weaknesses in data and measurement. guished experts on FDI attended decisionmakers. FDI data are not very reliable. Also, FDI is a conference in Ann Arbor, not merely bricks and mortars, it includes Michigan, on the impact of FDI on Richard Caves of Harvard University set the extent to which the investing firm in- emerging markets. Following introduc- up the conference's theme in his introduc- volves itself in the local economy. To mea- tory comments, the five sessions fo- tory presentation. He surveyed crucial sure FDI properly, one has to master how cussed on capital markets, labor findings on the spillover effect of FDI, ar- it manifests itself in terms of "ownership, markets, institutional and economic guing that the capability to develop com- control, and contribution to capital forma- performance, social transformation, plex business organizations might be tion." Measurement is further complicated and public policies. important for economic development and by the fact that the influence of FDI on eco- for the interaction between FDI and indig- nomic growth is both multifaceted and The sessions were linked by the theme enous firms. Spillovers thus depend on highlyvariable. that the institutional environment mat- exactly what constrains the indigenous ters-where the institutional environment development of complex enterprises. He Capital Markets is defined to include the level of entrepre- proposed four constraints: the local neurial and monitoring capability and the environment's traditional forms of inter- Randall Morck of the University of Alberta legal and sociological structure. The im- personal relationships and its shortage of presented a summary of his work with vari- pact of foreign entry on emerging econo- skills, knowledge, and managerial capa- ous coauthors including Bernard Yeung, mies depends on the initial institutional bilities. University of Michigan and Davidson Insti- environment and how it evolves. In turn, tute, David Stangeland, University of foreign entry changes the institutional en- Following Richard Caves, Monty Graham Manitoba, Wayne Yu, Queen's University, vironment, as does the behavior of the of the Institute of International Economics Ontario and Artyom Durnev, University of indigenous firms. Understanding these noted that most of the recent empirical lit- Michigan. He presented evidence that relationships and their underlying dynam- erature on FDI and economic growth fails economic growth is slower in countries in ics will lead to fundamental insights for re- to reveal a robust relationship, partly due which the control of wealth is concentrated E TRANSITION, August 1999 C 1999 The World Bank/The William Davidson Institute in a few hands. Many emerging economies many Eastern European economies, de- Social Transformation have such "controlling hands"-entrenched spite their high levels of human capital. His managers who often do not have a signifi- statistics suggested that the explanation Srilata Zaheer of the University of Minne- cant share of ownership. To preserve their is that these economies lack infrastructure sota drew the audience's attention to how status, these managers discourage the and entrepreneurial capabilities and that interactions with foreign business led to development of a healthy capital market, they carry a high political risk. social changes. Interactions with foreign resist reforms and liberalization, and typi- business include direct investment, licens- cally do not introduce innovations in their The work byAnn Bartel and Ann Harrison ing, joint ventures, and more. Social own firms. Morck showed some evidence of the Columbia Business School further change as a result of these interactions that firms with these controlling hands have developed the conference's emerging was felt in labor rights and environmental access to less expensive capital but also theme. The authors disentangled the standards, just to name a few. Public dis- have subpar performance. Moreover, sources of public sector inefficiency using cussions in developed economies often economies where control of wealth is con- 1981-95 panel data on manufacturing tend to be ethnocentric, condescending, centrated tend to be less open and spend firms in Indonesia, focusing on protection and dominated by special interest groups, less on innovation. from competition and access to soft loans. many with hidden self-interests. Special According to their results, the existing con- interest groups often use multinationals as After controlling for openness, regulations, trolling hands of corporate assets clearly a means for pushing their social agenda and spending on innovation, economic are not running their firms competitively on poorer economies. Most often lacking growth remains negatively associated with and yet try to preserve the status quo. As in the discussions is an understanding that concentration in the control of wealth. Morck's a consequence, the local economy does people in the poorer economies are ca- results suggest that concentration in asset not readily develop indigenous agile firms pable of making conscious and voluntary control negatively affects the rest of an that can benefit from interaction with for- choices on their own, though in some economy. He further showed evidence that eign business. cases they may not be very well informed. foreign entrants tend to break up the strangle- Zaheer pointed out that although system- hold of controlling hands by reducing their Institutional and Economic atic research has begun to appear, the lit- control of corporate assets. Performance erature in this area is still thin. Simeon Djankov of the World Bank and Bruce Kogut of the University of Pennsyl- Public Policy Caroline Freund of the Federal Reserve vania and Andy Spicer of the University Boardfollowedwithadiscussiononforeign of California-Riverside focused on the Marina Whitman of the University of acquisition activities in Korea. Theyshowed importance of institutions. They showed Michigan Business School discussed that foreign acquisition targets are more that in the absence of an institutional the change in U.S. policy discussions re- likely to be affiliated with business groups. mechanism of state regulation and trust, garding FDI. In the past, FDI was seen privatization policies in the Czech Repub- as a vehicle for the economic develop- Labor Markets lic and Russia are not successful. Indeed, ment of poor nations and as a partial without strong institutions markets be- substitute for foreign aid. Also, a clear Juan Alcacer of the University of Michigan come arenas for political contests and positive relationship was thought to ex- presented evidence that FDI is attracted economic manipulation. ist between economic development and not only by low wages but also by inexpen- political stability-pointing the way to- sive human capital. In order to attract FDI, Tarun Khanna of the Harvard Business ward democracy. In the 1 990s the focus a country needs to attain a minimum level School presented his work with Krishna shifted to economics. Policy discussions of human capital development and then Palepu, also of Harvard Business School. now focus on the relationship between offer that capital at a competitive wage. Using Chilean data they demonstrated that FDI and employment, wages, income Cross-country data fit better with his model firms enjoyed net benefit from their affilia- distribution, trade and payments bal- than argumentsfocusing on wages. Implicit tion with Chilean business groups in the ances, home capital investment, and in this argument is that in order to attract 1988-96 period if group diversification spending on innovations. FDI, an emerging economy's workforce exceeded a threshold level. Theyalsofound needs to attain a fair level of "business so- evidence of nondiversification-related group More recently new and important issues phistication," a point that echoes Richard benefits. Their results suggest that firm- have been added to the discussion: Do Caves' opening presentation. Alcacer then groups may be useful substitutes for poor multinationals lead to "racing for the bot- raised the issue that there was little FDI in market institutions. tom" as regards environmental rights and C) 1999 The World Bank/The William Davidson Institute TRANSITION, August 1999 F labor rights? Do domestic policies like David Li, of the University of Science and local autonomy within many developing export controls (for security reasons) and Technology, Hong Kong, and the Davidson nations, leading to political instability and does the Foreign Corrupt Practices Act Institute, described the peculiar pattern of whether there is too much globalization. affect a multinational's ability to compete FDI in China, most of which has taken place The fear is whether too much globalization globally? Finally, Whitman drew the intheformofjointventuresbetweenforeign leads to economic instability. Additional audience's attention to a question Danny entrants and indigenous firms since 1992. concerns about globalization include urban Rodrick first raised: has globalization gone A large majority of the investment was round population growth, environmental issues, too far? In a number of industrialized coun- trip in nature; in other words, indigenous and the needed improvement in banking tries there is tension between the greater firms invested in Hong Kong and then re- and other capital markets. economic uncertainty and the perceived invested in China asforeign investment. He need for social insurance created by in- argued that local governments, competing Don Lessard of MIT concluded the con- creased openness. Tension also stems forforeign investment, created intemal taxes ference by pointing out that we need to from the growing limitations on the ability and regulations that favored FDI. As a con- know more about institutional environment to tax mobile factors of production-par- sequence, a local enterprise forming a joint and how it affects a country's economic ticularly capital. venture with a foreign enterprise could use interaction with other economies. the joint venture to compete more success- Jan Svejnar, Executive Director of the Wil- fully with other local firms. Bernard Yeung isArea Director for Foreign liam Davidson Institute, described the un- Direct Investment at the William Davidson even distribution of FDI in Eastern Simon Evenett of the World Bank high- Institute and Professor of International European countries. All these countries lighted the concerns of the supranational Business and Business Economics at the have gotten over an initial fear of being organizations-the growing pressures for University of Michigan Business School. taken over by foreigners, and the race has begun for FDI. The attempt to have a level Recent working papers of the William Davidson Institute: playing field has been replaced by an at- http://Iib.bus.umich.edu tempt to maximize FDI flows. Guariglia,Alessandra, and Byung-Yeon neurial Attitudes in Poland. WP 237, Kim. Unemployment Risk, Precau- March 1997. FDI Motivations tionary Savings, and Moonlighting in Russia. WP 232, June 1999. Jackson, John, Jacek Klich, and Krystyna Linda Lim, of the University of Michigan Poznanska. Firm Creation and Eco- Business School, pointed out that Asian Mitchell, Janet. Theories of Soft Bud- nomic Transitions. WP 238, July 1998. economies were more receptive to FDI. get Constraints and the Analysis of Cases in point would be Singapore and Banking Crises. WP 233, March 1999. Jackson, John, Jacek Klich, and Krystyna Malaysia, which have by farthe highest per capita, or per dollar of GDP, FDI in the Bonin, John. Banking Reform in China: Poznanska Democrac Institutions world. She offered several important ex- Gradually Strengthening Pillar or and Economic Reform: the Polish planations. The first is the geography and Fragile Reed? WP 234, June 1999. Case. WP 240, April 1998. pro-trade history of these countries. The Lizal, Lubomir. Does a Soft Macroeco- Carare, Octavian, Constantijn Claessens, second is that these countries have diver- nomic Environment Induce Restruc- and Enrico C. Perotti. Can Governments sified local cultures that are receptive to turing on the Microeconomic Level Maintain Hard Budget Constraints? the economic participation of foreigners. during the Transition Period? Evi- Bank Lending and Financial Isolation Finally, foreign entrants are competing with dence from Investment Behavior of in Romania. WP 241, January 1999. local capitalists who are mostly a very Czech Enterprises. WP235, June 1999. small and politically vulnerable ethnic mi- Perotti, Enrico, and Stanislav Gelfer. nority. These countries use familiar public Bratkowski, Andrzej, Irena Grosfeld Investment Financing in Russian policies like tax holidays to attract FDI. and Jacek Rostowski. Investmenti Financi nguin Rus.ian Oftenattachedtotheseattractionsarepre- and Finance in De Novo Private Financial-Industrial Groups WP designated regional location and require- Firms: Empirical Results from the 242, October 1998. dentsignateda rgona, locaiong trandfeqre- Czech Republic, Hungary, and Po- ments in local content, technologytransfer, land. WP 236, April 1999. Perott, Enrico, and Pieter van Oijen. and employment. Many of these countries Privatization, Political Risk, and Stock are opponents of the WTO policy intended Jackson, John, and Aleksander S. Market Development in Emerging to remove some of these practices. Marcinkowski. Analysis of Entrepre- Economies. WP 243, March 1999. * TPANSITION, August 1999 (C 1999 The World Bank/The William Davidson Institute How Will We Know Transition is Over? by Annette N. Brown This introductory chapter of the author's study "When Is Transition Over?" brings together the thoughts of leading scholars on the process of transition, with a focus on the institutional, economic, and political standards that indicate the end of the transition period. The countries that are changing from com- she also assessed the outcomes using Anders Aslund focused on one issue: rent- munist to post-communist societies are the Human Development Index, which so seeking. Aslund drew a clear line between undergoing a process that has been and far shows improvements in only a few rent-seeking (which he defines as the ex- continues to be difficult, tumultuous, and countries. Lavigne listed several barriers traction of monetary benefits from the gov- often painful for their citizens. In a few short to achieving standard market economies ernment) and inflation and between inflation years, people in these countries have lived and then discussed more specifically the and GDP performance. He then identified through more social, political, and eco- obstacles that the candidate countries the various types of rent-seeking and iden- nomic change than those in more devel- face in achieving EU membership. In tified who has benefited the most from each. oped, Western economies will see in a terms of barriers, she again stressed the In explaining why rent-seeking was so much lifetime. Both for those living through this problem of attitudes and emphasized the more a problem in the former Soviet Union processandforthosewhostudyandana- need to build strong civil societies. For than in East-Central Europe, Aslund ex- lyze it, there is a recurring question: When EU membership, the obstacles arise from plored the political-philosophical legacies is this transition over? poorly defined membership conditions of the communist system, including the that are in some cases stricterthan those strength of the old communist elite During the 1997/98 academic year, six for current members. (nomenklatura); the weaknesses of the distinguished economics scholars-Marie post-communist state, democracy, and civil Lavigne, Alan Gelb, Anders Aslund, Nicho- Alan Gelb started by elaborating a point society; the quality and independence of the las Lardy, Jan Svejnar, and Janos Kornai- that general economic analysis often for- media; and the people's understanding of visited Western Michigan University and gets or ignores, but is brought to the fore- and attitudes toward the market. Economic offered their answers to this question.Their front by transition: "Like automobiles, legacies also influence rent-seeking, such answers are in some ways very different market economies come in many different as kleptocracy, perverse relative prices, and in others very similar, but always in- models." To be successful, Gelb argued, deep financial crises, and natural resource teresting and insightful. In this introduction, reform policies need to be broad-based endowments. Aslund then argued that rent- I will present the speakers, their lectures, (because they are highly interdependent) seeking has been significantly reduced in and their answers. and sustained (because the cumulative most of the countries of the former Soviet exposure to reforms is more important Union and emphasized that privatization The Speakers than the immediate reaction in determin- served to diminish rather than to increase ing outcomes). Different forces drive re- rent-seeking. Marie Lavigne began her lecture by out- forms, which naturally lead to differences lining the many legacies of communism in the pace and phasing in of change Nicholas Lardy's lecture was distinct in and explaining how they negatively affect across countries. There are also many, if that it focused on one country-China- the transition process. She argued that one not too many, explanations for transition that has followed the very different reform significantlegacyiswhatshecalls,credit- outcomes. Gelb asked the question, path of gradualism. Lardy compared ing Janos Kornai, "paternalism." This "Could an alternative policy have worked China's reforms, starting in the 1970s, to legacy means that changes in basic atti- in Central and Eastern Europe and the those of Eastern Europe and the former tudes are needed before people behave former Soviet Union?" In his conclusion, he Soviet Union and argued that in spite of as proper economic "agents." She then raised an even more important question: China's superior economic performance, described the basic elements of the tran- "What kinds of economies and societies its reforms are unsustainable. Three is- sition package, discussed generally how will the transition countries turn out to be?" sues raise particular concern: enterprise these elements have been implemented, He identified, in particular, the increasingly performance and debt, nonperforming and compared the outcomes. In short, she unequal distribution of property and in- bank loans, and declining tax revenues. In found that in the transition countries lib- come as a major challenge for the future. the second part of his lecture, Lardy ex- eralization has been fast (in most cases), amined the necessary reform of China's stabilization fragile, and structural trans- Where Gelb offered explanations for the banking sector in more detail. It would be formation slow. Unlike the other authors, differences in outcomes among countries, extremely difficult for China to default on © 1999 The World Bank/The William Davidson Institute TRA\SMO\- August 1999 * household liabilities, as Russia did, be- the ethical principles underlying his analy- is important to consider because it is ob- cause the volume of household savings is sis: respect for individual sovereignty, vious to many people in Europe, but tremendous. It would also be infeasible for moral obligation to solidarity, and commit- Lavigne deems it unworkable because the China to gradually recapitalize banks ment to democracy and the transparency EU conditions are vague and unequally through reinvestment of profits, as Hungary of public decisionmaking processes. The applied. Although she did not offer her own did, because the necessary recapitaliza- initial conditions in any transforming criteria for the end of transition, Lavigne tion is too great. Instead, Lardy recom- economy determine which of these prin- concluded that transition is not over yet. mended that China recapitalize by injecting ciples might be problematic. Kornai ar- government bonds into these banks. gued that there is a clear need for health Gelb answered the question straightaway: care reform in Hungary. Hungarians are "Transition is overwhen the problems and Jan Svejnar, in the first half of his lecture, currently demanding improvements in the the policy issues confronted by today's described the "Central European model" quality of their health care system without 'transition countries' resemble those faced of transition and compared and contrasted understanding who pays for this service. by other countries at similar levels of de- it with two other models, the "Asian model" He offered several concrete suggestions velopment." He further stated that no mat- and the "Russian and NIS model." Svejnar as to how the provision of health care can ter how this definition is operationalized, identified several key areas where the tran- be changed in line with his underlying ethi- the "transition countries are not there yet." sition outcomes have been systematic cal principles. across the Central European countries, Aslund measured the end of transition ac- chief among them being that all of these These lectures shared several threads. All cording to the reduction of rent-seeking, countries now have functioning market speakers accounted for the initial condi- which reflects a variety of institutional re- economies. More interesting, perhaps, are tions, or legacies, in their analysis. In par- forms. According to his standard, Aslund the distinctive results that he identified ticular, they all mention the need to change concluded that transition is over in all but among these countries, which so often are people's attitudes toward and understand- a few countries. considered a group. Privatization has pro- ing of capitalism and market economies. ceeded unevenly, labor force adjustment Related to these changes at the individual Lardy argued that transition in China would has differed significantly, and various ex- level, most also mentioned the necessity not be complete until three sectors were change rate policies have resulted in di- to develop strong civil societies, in which aggressively reformed: state-owned en- verse foreign trade performances. The institutions support both capitalism and terprises, the financial sector, and govern- second half of his lecture focused on the democracy. The speakers generally con- ment service provision. challenges ahead for Central Europe. Al- sidered transition to occur in two stages: though other speakers visited this theme, the first primarily involves liberalization and Svejnar presented two conditions for tran- Svejnar provided the most detail, giving stabilization, the second encompasses a sition to be over: when central planning is what Lavigne might call a "full prescription myriad of structural reforms. They roughly abolished, and when an efficiently function- for finishing transition in Central Europe." agreed that the first stage is complete in ing market system has taken its place. The foremost challenge, Svejnar argued, many of the countries, but that progress According to these conditions, he con- is to generate and sustain high rates of and success in the second stage have cluded that transition is not over in any of growth. The building blocks for this growth been quite mixed. Finally, most empha- the considered economies. include such strategies as high rates of ef- sized the concept of transparency as an ficiently placed investment, human capital important goal in a variety of contexts. The Kornai answered this question with the development, and establishing effective lectures also differed in many ways, and most precision. Transition is over when corporate governance. perhaps the most interesting divergence three-and only three-criteria are met: lies in the answers that are presented. when the communist party no longer has Janos Kornai set out to discuss transfor- monopoly power, when the dominant part mationratherthantransition,wheretrans- The Answers: When Is Transition of the means of production is privately formation can be called the processes Over? owned, and when the market is the domi- following transition that improve the func- nant coordinator of economic activities. tioning of a capitalist system. An impor- Lavigne responded directly: "I think the Using these criteria, he concluded that tant part of transformation-not just in question is unanswerable." Indirectly, how- transition is over in Hungary and probably formerly communist countries but also in ever, she offered another reply: transition in several other countries as well. We can some Western countries-is the reform of is over for the CEE countries when they group these answers into three categories: the welfare state. Kornai stated explicitly become members of the EU. This answer systemic, outcomes, and institutional. * TRANSITION, August 1999 (C 1999 The World Bank/The William Davidson Institute Systemic. Kornai's answer is systemic in tional," fall somewhere in the middle. Al- ever, Gelb's is again more obscure. Where that he looks at changes in the features of though the rent-seeking that Aslund exam- for Aslund rent-seeking identifies a fairly theeconomicsystemstojudgewhentransi- ined arises from the systemic changes, specificsetofnecessary institutions, Gelb tion is over. He makes clear that the new clearly the new market system is consid- allows that the combinations will vary ac- system, the endpoint of transition, is a mar- ered to be part of his endpoint. For ex- cording to different levels of development. ket economy as defined by his specific cri- ample, the liberalizations of domestic prices teria. Gelb's answer also contain a strong and trade represent two measures toward In sum, the answers the speakers provided systemic component but is more obscure eliminating rent-seeking that are also part were very different, and the old maxim that than Kornai's. Gelb defended this obscurity of the systemic change. However, Aslund's economists never agree seems to hold true. by arguing that models of marketeconomies endpoint encompasses more. Policies to The question is academic, however, and vary greatly. Each transition economy will abolish rent-seeking include the liberaliza- more important than the proclamation about have its own terminus of transition, which tion of foreign trade, the unification of the whetherornottransition is overisthe analy- may or may not resemble a Western mar- exchange rate, and the elimination of inter- sis of the problems these countries still face ket economy. Therefore, the indicator seems est subsidies. He also indicated that a and the recommendations for what can and to be when the economy resembles a mar- strong central bank is important. With these should be done to address them. Along ketsystem ratherthana communistone. In latterconditions,Aslund included elements these lines, the speakers tended to agree. spite of a similarity in their criteria, Kornai of institutional, or structural, change in his and Gelb reached very different conclusions. criteria for the end of transition. Postscript Komai believed that transition is over, at least in some countries, while Gelb said none of Like Aslund, Lardy identified specific insti- Clearly the productive structure of any mar- the countries has reached this stage. tutional reforms, beyond the systemic ket economy is constantly evolving, and changes, that are required for the comple- these changes on the margin are vital for the Outcomes. In the second category, the tion of transition in China. State-owned en- continued success of the system. I do not answers are based on outcomes. Lavigne terprises need to be restructured so that they mean to say that transition is over when the considered, and then discarded, the cri- are forced to be profitable and desist from organization of production stops changing, terion that countries have gained EU mem- accumulating large bank debts. The finan- but rather it is overwhen the productive struc- bership. While such a result is certainly cial sector, the emphasis of the lecture, ture has been transformed from its inherited dependent on systemic changes, the sug- needs to be recapitalized and reformed so organization to one that continues to change gested criterion itself examines just the that banks operate as effective financial in- only slowlywith the evolution of the economy. outcomes. Svejnar also proposed a re- termediaries. The government needs to For example, when the processes of entry, sults based answer: the end of transition change its operation as well. It needs to col- exit, expansion, and contraction act to com- is the state of an advanced market lect more tax revenues and increase its role pletely reshape industries, the economy is economy. Again, a systemic component is as a provider of social services so that the still in transition. When these processes involved, especially in the first condition of enterprises can focus on their primary pro- settle such that they only change overall in- eliminating central planning, but the ulti- duction. Thesecriteria are clearlyinstitutional, dustry structure during a long period of time, mate condition is based on outcomes. especiallysince Lardyavoided calling forthe then transition is over. Like Gelb's endpoints, Svejnar defined efficient functioning to in- privatization of state-owned enterprises, mine are obscure-because we do not clude achieving rapid and sustainable whichwouldbeamoresystemicchange. knowwhatthe long-run equilibriumwill re- rates of growth and becoming compatible semble. We do not even know whether for with advanced market economies. In short, Gelb also highlighted institutional determi- any given country there is one, or more than these answers suggest that transition will nants. For example, he suggested that, one, possible equilibrium. Thus, this answer, be over not just when economies operate even with private ownership (a systemic like many answers to academic questions, differently, but also when they operate suc- feature), the Czech voucher funds (an insti- leads to more questions. cessfully. As a result, although Svejnar and tutional element) will make the Czech Kornai clearly agree that the countries of economy distinctive, and thus in transition Excerptedfrom "When Is Transition Over?" Central Europe are market economies, forsometimetocome. Heconcludedthat, Annette N. Brown, editor, pp. 1-11. Svejnar said they have at least 10 years in practice, the core systemic changes and Kalamazoo, Michigan: WE. Upjohn In- to go, while Kornai said transition is over. the combination of institutional changes go stitute for Employment Research. Used hand-in-hand in moving an economy toward with permission. Annette Brown is a pro- Institutional. Aslund's and Lardy's an- its transition endpoint. Compared with fessor at Westem Michigan University swers, which I have categorized as "institu- Aslund's and Lardy's approaches, how- and a WDI Research Fellow. (O 1999 The World Bank/The William Davidson Institute TSANSITION, August 1999 How to Make Transition Work for Women- Gender Equality: A Wake Up Call by Sarah Nedolast Transition from a socialist to a market economy in Central and Eastem Europe has sparked wide debate about shock therapy, gradualism, and sequencing. But what effects have these changes brought on by transition had on those who live in these changing societies? In particular, what effects have these changes had on women? W A /hile there is always a price to forthcoming report by UNICEF reveals that These outcomes may be explained by a va- pay and sacrifices to be made of the 10 million unemployed, 6 million are riety of events. Many large, state-owned en- during economic develop- women-this despite having achieved a terprises-which once employed many ment, the groups that pay most dearly are higher average level of education. women-have closed during transition. Be- often overlooked. In Central and Eastern * Political representation. Most citizens cause women are considered higher risk Europe, women bear the brunt of change- and more expensive labor, finding employ- as shown by labor market, political, and ment for men is the priority. Women might, poverty indicators. Women's position in for instance, take maternity leave and stay these societies has declined rapidly dur- at home during the first years after a child ing transition-a transition that largely is is born, a period during which it is against being managed by men. the law to fire them in several countries. Women are also often under pressure to Under the communist system gender equal- return to traditional roles: staying home and ity was a nonissue-the state proclaimed taking care of the family. Under these cir- that equality had already been achieved. Of- cumstances a woman's chances of being ficially, women and men were guaranteed considered a serious contender for a job- equal pay for equal work, equal access to or for that matter political office-are rather education, equal property and parental slim. Further, men are more likely to benefit rights, and equal representation in the politi- from retraining or education opportunities. cal realm. In addition, women were granted liberal maternity leave and inequality be- of post-communist societies are still Thesetrendsandtheprospectsforelimi- tween spouses was abolished by the state. unwilling to acknowledge women's nating gender discrimination were the top- But much of the equality proclaimed by the rights as an issue, and women often are ics of the recent seminar "Making the socialist system was equality under an op- not aware of their rights-nor how to de- Transition Work for Women in Europe and pressive regime. fend them. As a result of free elections Central Asia," hosted by the World Bank in transition economies, women on av- in Washington, D.C. The seminar brought After 10 years of transition, women in this erage hold few parliamentary seats. Al- together gender experts, scholars from region are facing many difficulties. Statis- though under the communist electoral Central and Eastern European, NGO lead- tically, economic reforms have most ad- system women were assigned one- ers, and practitioners to offer suggestions verselyaffected women as a social group. third of these seats, these fixed elec- to ensure that transition would work for Women's participation in the labor force tions were misleading because real women in the region. Their suggestions has declined sharply, they have lost their decisions were made in the Central included the following: voice in government, and they make up an Committees and Politburos of the Com- 0 Women entrepreneurs should receive increasingly large percentage of the poor. mu n ist Parties-where women were more support and easier access to credit. * Labor force participation. Women's highly underrepresented. 0 Women should be encouraged to par- participation in the labor force has de- * Poverty. As the number of single par- ticipate more actively in politics, especially creased in Central and Eastern Europe, ent families rise, state benefits decrease, by increasing their presence in national making women a disproportionately large and employment opportunities fall, women legislation. percentage of the unemployed. Although are becoming the most populous group of 0 Women should be encouraged to take women make up just a little more than 50 people living in poverty in Central and part in retraining and take advantage of percent of the population in the region, a Eastern Europe. educational opportunities. M TANSI-n!,' August 1999 (C 1999 The WXorld Bank/The William Davidson Institute * Women-oriented civil organizations of management.Womencanpursuemean- women must participate in the formula- should be granted adequate support. ingful participation in the political system. At tion and implementation of reforms. The the least they can participate and voice their best way to ensure an equal and open Democratization and economic progress pro- concems in civic organizations, which are be- society is to provide for equal participa- vide women with the tools to overcome the coming an important force in society. tion in the society's development. "invisible barriers" impeding their advance- ment. Opportunities existto capitalize on their Transition strategies should take into ac- Sarah Nedolast is Junior Associate for entrepreneurial skills and assume positions count the policy effects on women, and PREM Vice Presidency, the World Bank. World Bank/IMF Agenda World Bank Lends Record $29 Billion loans from the IDA. The total compares The World Bank also will restart two other in Fiscal 1999 with $5.22 billion in fiscal 1998, and lending programs: one for reform of $5.05 billion in fiscal 1997. At the same Russia's coal industry (the Coal 2 was The World Bank's loan commitmenttotaled time, IBRD disbursements in fiscal 1999 approved in 1997) and one for strength- $29 billion inthefiscalyearthatended June dropped to about half of fiscal 1998- ening the social safety nets (Social Pro- 30,withArgentina,Indonesia,China,andthe from $4.41 billion to $2.43 billion. The tection Adjustment Loan, SPAL). So far Republic of Korea receiving the largest por- crisis in Russia and Ukraine and the $950 million of a $1.6 billion total of these tions. The total surpassed the previous Kosovo-related developments played a programs was released. The remainder of record of $28.6 billion setin 1998. The World large role in the negative trend. IDA dis- the coal program has been revised intofour Bank said that atthe same time that its lend- bursements increased a bit: amounting 50 million-dollar tranches (the first was re- ing amounts increased, the quality of its to $501 million, compared to $439 mil- mitted on July 30) and two 100 million- loans also improved with fewer projects at lion in fiscal 1998. Since 1990 the Bank dollar tranches. The program is scheduled risk of not reaching their goals. "While we has committed $38 billion to the borrow- to end next June. The remaining $250 mil- see for a second fiscal year that the finan- ing countries in the ECA region. lion in the social safety net program will cial crisis has resulted in record lending, I be released this fall. am cheered to see an increase in the qual- World Bank Resumes Loan Disburse- ity of loans we have provided," World Bank ments to Russia The Fund's Russia Analysis President James Wolfensohn explained. During the 1999 fiscal year the lntemational In earlyAugust the World Bank resumed the According to the latest Fund report on Bank for Reconstruction and Development third Structural Adjustment Loan (SAL-3) Russia, a turnaround has occurred in (IBRD) and the International Development program for Russia, along with a revised 1999. Industrial output in the second quar- Association (IDA) combined gross disburse- repayment schedule. This was the Bank's ter was up 5 percent over the same pe- ments (transfer of money) totaled $24 billion, first cash injection for Russia since August riod a year ago, the ruble has stabilized compared to nearly $25.5 billion in fiscal 1998.Ayear ago, just before crisis struck, (in recent days it has shaken again), and 1998. IDA accountsfor about 25 percent of $1.5 billion in lending was agreed on and a inflation was held to 2 percent in June in the loans made by the Bank. The remaining tranche of $300 million was released. Un- response to budget cuts and tighter mon- 75 percent of World Bank loans are market- der the revised agreement, the remaining etary policy. But the report also noted that rate loans through the IBRD. $1.2 billion in the program will be paid out "policy implementation under past pro- infourtranches($100million,$100million, grams had been disappointing and that ECA: More Loans Less IBRD Dis- $400 million, and $600 million) by the end important elements of the new program bursement in Fiscal 1999 of next year. The first $100 million tranche had been proposed before but had not has been released-the rest depends on been carried out." According to the report, New lending commitments from the World Russia's success in implementing agreed the government's ability to strengthen tax Bank to countries of the Europe and Cen- structural reforms such as reforming mo- collection will be critical to the new initia- tral Asia (ECA) region totaled $5.29 bil- nopolies in the energy sector, promoting tive. "Russia's fiscal problems reflected, lion for 74 projects in 21 countries in fiscal development of the private enterprises, to an important degree, the fact that many 1999. This figure includes market-rate improving budget management, and further large enterprises were using their politi- loans made by the IBRD and concessional reform of the bank sector. cal influence to avoid seizure of assets in (© 1999 The World Bank/The William Davidson Institute TRANSITION, August 1999 X cases of tax delinquency," executive direc- Bank loan will also support the operation academics. He replaces Mark Malloch tors concluded in the report. The board and creation of small enterprises, retrain- Brown, who recently left the Bank after found that Russia had made little progress ing, and relocation for miners who are los- being appointed to the position ofAdmin- toward reforming its principal economic in- ing their jobs. The Bank loan will be at the istrator of the United Nations Development stitutions in the pastyear, particularly in bank Bank's standard interest rate for LIBOR- Programme (UNDP). Actively involved in restructuring. It urged authorities to continue based single-currency loans, repayable in defining and executing Sweden's interna- liquidating insolvent banks or to refer them 20 years, including a 5-year grace period. tional development policy for the past 16 to the bank restructuring agency. Romania joined the Bank in 1972, and years, Mats Karlsson also took charge of since 1990 its total commitments have Sweden's cooperation programs with Russia's Envoy to the IMF and World reached about $3.5 billion for 26 projects. Central and Eastern Europe. To our relish, Bank Resigns in recent years he also co-authored sev- IMF Credit to Romania-But Not to For- eral articles in Transition. Mikhail Zadornov, Russia's special envoy eign Creditors to the international financial institutions, Credit to Vietnam Uses Innovative Ap- resigned from his post on September 2, InAugust the IMF approved a $547 million proach saying he will run for parliament in the elec- credit for Romania. The Fund has suggested tions slated for December. Zadornov said Romania raise $350 million on intemational On August 3 Vietnam and the World Bank he will seek a parliamentary seat as a can- capital markets to pay back private credi- signed two credit agreements: one for Viet- didate of the liberal Yabloko party. tors. Romania has so far managed to bor- nam to use $80.5 million (Sanitation Project) row only $108 million on the private capital to improve public health and promote devel- Zadornov said he believes the IMF will dis- market, reports the Financial Times. "This opment in three urban areas (Danang, Hai burse the next $640 million loan installment accord is a passport allowing Romania to Phong, and Quang Ninh ) and another of to Russia as scheduled. Russia and the return to the international capital markets," $101.8 million to increase agricultural pro- IMF agreed on a $4.5 billion package of remarked Romanian Prime Minister Radu ductivity in the Mekong Delta. "The Mekong loans to be used to pay back Moscow's Vasile. IMF Deputy Managing Director project will benefit 610,000 people, create previous borrowings from the IMF. The first Stanley Fischer encouraged Romania "to 80,000 new jobs, add 500,000 tons to rice tranche of more than $600 million has continue to work vigorously toward obtain- production, and bring clean water to 280,000 been disbursed and conditions for further ing additional private foreign financing in people," World Bank DirectorAndrew Steer payments are being negotiated at present. support of its reform program." The country pointed out. The Mekong Delta accounts for The outgoing envoy said the money laun- hasthusbecomeatestcaseforthenewlMF nearly 30 percent of national GDP, 40 per- dering scandal that has prompted U.S. bail in (as opposed to bail out) policy of forc- cent of the country's overall agricultural pro- politicians to demand further checks on the ing private creditors to provide liquidity to fi- duction, and more than 80 percent of the use of any IMF money before more lend- nancially troubled countries, rather than country's rice export. The sanitation project ing is not likely to prevent the disburse- relying on the IMF to do so, the Financial uses an innovative approach: a revolving ment of the new tranche. Zadornov denied Times notes. Ukraine is anothertest case. fund, to be administered by the City that Russia had misused IMF funds or that Women's Union, will be established in each his planned resignation has anything to do World Bank Has New Communication city to assist low income families. with the ongoing probe about IMF money Head being illegally channelled abroad. World Bank Introduces New Loan Mats Karlsson, the World Bank's new Vice Products World Bank Helps Romania Restruc- President for External Affairs and UN Af- ture Mining Industry fairs, took up his post in early September. On September 1 the World Bank launched Karlsson moved to Washington from its new loan and hedging products, offering On August 31 the World Bank approved a Stockholm, where he was State Secretary developing countries more flexibility in man- $44.5 million loan to Romania for a Mine of International Development and Coop- aging theirfinancial risksinthefollowingways: Closure and Social Mitigation project. This eration at the Swedish Ministry of Foreign 0 A fixed-spread LIBOR-based loan will loan will help the government to perma- Affairs. He will be responsible for manag- provide increased flexibility for borrowers nently close 29 unproductive coal mines, ing the Bank's global communications pro- to tailor loan maturities and to manage with the smallest possible social and en- grams and for reaching out to the Bank's currency and interest rate risks over the vironmental cost, and to streamline the key constituencies-government officials, life of the loan. Borrowers will be able to management of the mining sector. The parliamentarians, NGOs, business, and change the currency and fix, cap, or collar * TRANSITION, August 1999 (© 1999 The World Bank/The William Davidson Institute the interest rate of their loan at any time M of Transition prior to the loan's final maturity. MiV Ilest ne ofTr nsiio * Hedging products, linked to borrowers' existing Bank loans, will assist borrowers in EU expansion will be staggered. Gunter rebalance the budget. The current budget managing their currency, interest rate, and Verheugen, the nominee forthe post of Eu- foresees expenditures of 7.2 billion lits. commodity price risks through currency and ropean Commissioner for EU enlargement, interest rate swaps with the Bank. Borrow- said he envisions an expansion of the EU in Growth slows. The growth figures for the ers transacting risk-limiting hedges with the at least four stages, with the EU ready to early part of this year have been clearly Bank would need to do so under a master accept new members by 2002. He noted that weaker than anticipated, although growth derivatives agreement to be signed with the each aspirant will be judged on individual is still expected to accelerate in the sec- Bank. Countries including Argentina, China, merits, Which will inevitably mean various ond half of the year. Estonia's finance min- Colombia, Hungary, Latvia, Lithuania, and dates for joining the EU." Analysts say that istry lowered its earlier GDP growth Mexico have asked for the service, said Hungary's position in the accession race has forecast of 2.2 percent for this year to 0.4 remained stable, but both Poland and the percent. The ministry also forecasts 4.1 Doris Herrera-Pol, the World Bank's man- . ager for marketing and client outreach in Czech Republic have fallen behind. The percent GDP growth for next year. In June financial products. Since 1996 Bank bor- Czech Republic is behind because of de- the Latvian government gave its GDP fore- rowers have selected single currency loan layed structural reforms, poorgrowth expec- cast for this year as 2 percent. Now the termsfor more than 95 percent of their Bank tations, and slow privatization of the banking Latvian central bank expects GDP growth loan commitments. Borrowers also con- sector, while Poland has grappled with agri- of between 1-2 percent. Lithuania's fi- verted $67 billion equivalent (58 percent) of cultural and environmental issues. nance ministry has adjusted its GDP fore- cast to 1-1.5 percent, and the economy their currency pool loans to single currency cattX-. ecnt n h cnm their cunderrhencypooloans tofsingler cuency Central and Eastern Europe ministry now says 1.3-1.6 percent is likely. terms under the conversion offer that con- Previous GDP growth forecasts for this cluded July 1,1998. The World Bank's New Baltics Products Website is located at http:// year were around 4 percent. www.worldbank.orgffps. Rising public sector deficits. A de- crease in economic activity in the first half Unempoymente isastll high.iSties based on International Labour Organization Successful Donor Conference for of the year contributed to higher public (ILO) calculation methods show thatunem- Kosovo sector deficits in all three Baltic nations. ployment averaged 9.6 percent of the la- g In Estonia the state's fiscal shortfall bor force in Estonia in the second quarter Officials from 100 donor countries and in- reached 1.2 billion kroons (about $80 mil- of 1999. Also using ILO methods, figures ternational organizations pledged suffi- lion) for the first six months of this year, the for Latvia from November 1998 indicated cient financial support to meet about $560 equivalent of 1.6 percent of Estonia's GDP an unemployment rate of 13.8 percent. million of urgent human needs and imme- in 1998. The recently approved supple- Similarly, Lithuanian unemployment in May diate reconstruction expenses in Kosovo mentary budget reduces government was 13.1 percent. until the end of this year. The European spending this year by 1 billion kroons. Commission and the World Bank, which * In Latvia the state deficit in the first half Czech Republic jointly chaired the first donors' conference of this year was reported at 45.6 million for the war-torn province on July 28, said lats ($77 million), or 1.2 percent of 1998 Government is preparing to sell its pledges made yesterday added up to GDP. The overall public sector deficit for stake in Komercni Banka, the country's $2.08 billion, including funding already dis- the first half was 67.3 million lats. The gov- largest bank. Although Komercni Banka, bursed during 1999. The next donors' con- ernment decided to cut state expenditures with total assets of 402 billion crowns ($12 ference in October will consider Kosovo's by 30 million lats this year. The finance billion), dominates corporate lending in the overall reconstruction needs. The donors ministry now forecasts a fiscal deficit this Czech Republic, its loan portfolio is said they would give $200 million for im- year of approximately 3.5 percent of GDP. plagued by nonperforming assets. The mediate humanitarian aid and $45 million * In Lithuania the state deficit in the first bank lost 4.475 billion crowns in the first to meet the costs of the UN in setting up a half of this year was 394 million lits ($ 87 half of this year. If not for the government's civil administration and paying thewages million), or 0.9 percent of 1998 GDP. recenttransferof 23 billion crowns of non- of public servants like customs officers and Lithuania planned a balanced budget for performing loans from Komercni to teachers. The EU said it would pick up the this year, but finance minister Jonas Konsolidacni Banka-a state-owned $300 million needed until the end of the Lionginas now says that cuts of at least bank set up to deal with bad debt- year to help rebuild damaged housing. 800 million lits are called for in order to Komercni's capital adequacy ratio would © 1999 The World Bank/The William Davidson Institute TRANSITION, August 1999 have fallen to about 4 percent, far short of count deficit, as compared with 75 percent AIDS cases exploding. Vadim Pokrovskii, central bank requirements. The govern- in 1998. head of the Russian Research Centerforthe ment intends to subscribe to at least half Prevention ofAIDS, said in July that a lack of the 9.5 billion crowns capital increase, CIS of prevention and public education in Rus- doubling Komercni's share capital and sia has led to a surge in the number of boosting the state's stake in the bank to Higher industrial production in most people infected with the HIV virus. more than 50 percent. This would make CIS countries. The Commonwealth of In- Pokrovskii said there has been a 12-fold the bank more attractive to potential inves- dependent States (CIS) Interstate Statis- increase in the number of HIV-infected tors as they would gain full control of tics Committee reports that eight CIS peopleintheMoscowareaduringthefirst Komercni. A group of local minority share- states increased industrial output in the six months of this year, compared with the holders in the bank have challenged these first half of 1999. Compared to the first half same period in 1998. He also said that plans. Many analysts in Prague believe that of 1998, industrial output rose in Tajikistan Russia lacks the money to keep the dis- Komercni's loan portfolio will need further by 7.9 percent, in Belarus by 7.0 percent, ease from spreading and that the disease restructuring next year. By some estimates, in Uzbekistan by 5.6 percent, in Russia 3.1 most commonly passes into the hetero- the bank's problem loans will fall between by percent, in Armenia by 2.8 percent, in sexual population via drug-using prosti- 45 billion to 50 billion crowns, of which Azerbaijan by 2.0 percent, in Georgia by tutes. The Health Ministry reported that some 70 percent are irrecoverable. 0.6 percent, and in Ukraine by 0.2 percent. almost 16,000 HIV-positive cases were Industrial output was down in Moldova by registered in the country as of last month. Poland 15.2 percent, in the Kyrgyz Republic by 10.0 percent, and in Kazakhstan by 4.1 Asia's Reforming Economies Poland's current account deficit wid- percent. China ens. Poland, Eastern Europe's smooth- est-sailing economy, is hitting rough seas, Russia China's parliament approves two according to the Wall Street Journal. growth-boosting economic measures. Poland's current account balance showed New investment law. In mid-Julya newfor- Incometaxexemption for bankdeposit in- a deficit of $1 billion for July, indicating eign investment law came into force in Rus- terest had been repelled in China. The new that slow economic growth in Germany sia, intended to protect investors' rights and tax on savings interest is aimed at boost- and Italy and economic collapse in Rus- guarantee that tax obligations will not sud- ing domestic consumption and ending a sia have dealt a heavy blow to Polish ex- denly change. It defines foreign investment as 22-month slide in retail prices that is bruis- ports. If this trend continues, the current a projectwith at least 1 billion rubles ($41 mil- ing China's producers. The tax measure account deficit could amount to between lion) of foreign investment orwhen a foreign is intended to discourage savings and pro- 6-7 percent of GDP for 1999, which would investor has at least 100 million rubles in the pel some of the 5,900 billion yuan (about be the nation's highest ever. Economic charter capital ofa company The lawdoes $72 billion) of private savings into the growth is slowing, FDI is lagging, and the not apply to foreign investors with stakes in economy. The tax will also amass revenue central government's budget deficit Russian banks or portfolio investors. The law for increased unemployment subsidies. A threatens to overshoot its 1999 target. also defines the rights of foreign investors, special 60 billion yuan bond issue will fi- Overhaul of the coal mining sector and its freezes tax rates for investment projects for nance a wide-ranging spending program health care and pension systems are sevenyears,andprohibitschangestotaxor in infrastructure, technology, and environ- proving costly. Those expenses have customslawsthathurtinvestors'profitsbyre- mental protection projects aimed at re- pushed the central government's 1999 gionsorthefederalgovernment. versing the sharp drop in domestic budget deficit to 97 percent of its planned investment. Fixed-asset investment rose targetforthe year-2.15 percent of GDP- The decline in Russia's population just 3.8 percent on the year in July, down atthe end of July. Domesticgrowth has also shows no sign of ending. With a further from 22.7 percent growth in the first quar- slowed. While Poland's finance ministry fall of up to 8 million people expected by the ter of the year. Dampened by dwindling predicts that GDP will show 3 percent year2016, the Washington Times reports inflows of foreign investment, weak ex- growth in the second quarter, that still lags that Russia's population, now at around 146 ports, and falling prices, China's economy behind the 5.3 percent increase the coun- million people, has been in steady decline grew just 7.1 percent in the second quar- try enjoyed during the earlier period. FDI for the past decade-a trend that will likely ter of this year, down from 8.3 percent in was down 48 percent in July, compared with continue. Experts blame factors such as a the first quarter. In the past three months July of 1998. If that trend continues, FDI in drop in medical standards, poor nutrition, Beijing has cut interest rates for the fourth Poland will cover only half of its current-ac- and fewer women giving birth. time since March 1998. i TRANSITION, August 1999 ©1 1999 The World Bank/The William Davidson Institute New Books and Working Papers The Macroeconomics and Growth Group regrets that it is unable to provide the publications listed. World Bank Publications ance tend to be more market-based, even klabrie@woridbank.org. The authors may after controlling for income. be contacted at tbeck@worldbank.org, To receive ordering and price information * Countries with a French civil law tradi- ademirguckunt@worldbankorg, orrlevine for World Bank publications, contact the tion, poor accounting standards, heavily @csom.umn.edu. World Bank, P.O. Box 7247-8619, Phila- restricted banking systems, and high infla- delphia, PA 191 70, United States, tel: 202- tion generally tend to have underdeveloped Constantine Michalopoulos, Developing 473-1155, fax: 202-676-058, email: financial systems, even aftercontrollingfor Country Goals and Strategies for the books@worldbank.org, Internet: http:// income. Millennium Round, WPS 2147, July www. world bank.org or http.//www. world To order Kan Labnie, Room MC3-456, tel: 1999, 41 pp. bank. org/html/dec/Publications/Work 202-473-1001, fax: 202-522-1155, email: papers/tranecon.htm, or visit the World klabrie@worldbank.org. The authors maybe Many developing countries have been re- Bank bookstore in the United States, at contactedatademirguckunt@worldbankorg luctant to participate in multilateral trade 701 18th Street, NW, Washington, DC, or or ulevine@csom.umn. edu. negotiations although they can gain sig- France, at 66 avenue d'lena, 75116 Paris. nificant benefits from a broader WTO Mil- Jean-PaulAzam, Shantayanan Devarajan, lennium Round of negotiations once they Working Papers and Stephen A. O'Connell, Aid Depen- develop proper strategies. They should dence Reconsidered, WPS 2144, July embrace industrial tariffs and trade-related Asl Demirgu,c-Kunt and Ross Levine, 1999, 14 pp. aspects of intellectual property rights, Bank-Based and Market-Based Finan- trade-related environmental issues, and cial Systems: Cross-Country Com- When foreign aid undermines institutions, government procurement. Liberalization parisons, WPS 2143, July 1999, 68 pp. countries can become aid-dependent, of their own trade with realistic transition even if donors and recipients have the best periods and technical assistance to ad- In bank-based financial systems banks play intentions. When foreign aid undermines dress constraints on their institutional ca- a leading role in mobilizing savings, allo- institutional development, aid recipients pacity in exchange for improved access cating capital, overseeing the investment can exhibit the symptoms of aid "depen- to the markets of their trading partners is decisions of corporate managers, and pro- dence-benefiting from aid in the short the only way to maximize benefits from viding risk management vehicles, as in term but damaged by it in the long term. multilateral trade negotiations. Germany and Japan. In market-based fi- To order: HedySladovich, Room MC2-609, To order: Lili Tabada, Room MC3-333, nancial systems securities markets share tel:202-473-7698, fax: 202-522-1154, email: tel: 202-473-6896, fax: 202-522-1159, center stage with banks in getting society's hsladovich@worldbank org. The authors email: Itabada@worldbankorg. The au- savings to firms, exerting corporate control, maybe contacted atjean-paul.azam@univ- thor may be contacted at cmichalopoulos and easing risk management, as in En- tlsel.fr, sdevarajan@worldbank.org, or @worldbank.org. gland and the United States. What are the soconnel@swarthmore.edu. relative advantages and disadvantages of Martin Ravallion and Michael Lokshin, each of these systems? Thorsten Beck, Ross Levine, and Asli Who Wants to Redistribute? Russia's Demirgu,-Kunt, A New Database on Fi- Tunnel Effect in the 1990s, WPS 2150, Analyzing newly collected data on a cross- nancial Development and Structure, July 1999, 26 pp. section of roughly 150 countries, some WPS 2146, July 1999, 63 pp. clear patterns emerges: Few Russians expected rising living stan- * In higher income countries, stock mar- A new database of indicators that mea- dards in the 1990s; most expected a de- kets become more active and efficient sure the size, activity, and efficiency of fi- cline, so there was strong demand for than banks. Thus financial systems tend nancial intermediaries (nonbank financial redistribution, even among those currently to be more market-based. institutions) and capital markets can show well off but fearful of the future. Some 72 * Countries with a common law tradition, the financial development and structure percent of the 7,000 adults surveyed in strong protection for shareholder rights, across countries and over time. October 1996 favor government action to good accounting standards, low levels of To order: Kari Labrie, Room MC3-456, tel: reduce incomes of the rich. But the other corruption, and no explicit deposit insur- 202-473-1001, fax: 202-522-1155, email: 28percentwerenotonlythecurrently"rich." (D 1999 The World Bank/The William Davidson Institute TRANSITION, August 1999 Women tend to favor redistribution more Maurice Schiff, Will the Real "Natural governors. They will be looking for evi- than men do. Trading Partner" Please Stand Up? dence of accountability in the form of the To order: Patricia Sader, tel. 202-473- WPS 2161, August 1999,25 pp. rule of law and transparency in the form of 3902, fax: 202-522-1153, email: psader To order: Maria Kasilag, Room MC3-321, reliable public information. @worldbank.org.Martin Ravallion maybe tel: 202-473-9081, fax: 202-522-1159, email: To order: Hedy Sladovich, Room MC2- contacted at mravallion@worldbank.org. mkasilag@woddbankorg. Theauthormay 609, tel: 202-473-7698, fax 202-522- be contacted at mschiff@worldbankorg. 1154, Internet address: hsladovich Francisco Ferreira, Giovanna Prennushi, @worldbank.org. The authors may be and Martin Ravallion, Protecting the Estelle James, Coverage under Old- contacted at rhanrott@erols.com or Poor from Macroeconomic Shocks, Age Security Programs and Protection gur.ofer@yale.edu. WPS 2160, August 1999, 24 pp. for the Uninsured-What Are the Is- sues? WPS 2163, August 1999, 21 pp. Simon Johnson, Daniel Kaufmann, and To minimize the harmful impact of mac- Pablo Zoido-Lobat6n, Corruption, Public roeconomic shocks on the poor, govern- The shift toward social security systems Finances, and the Unofficial Economy, ments and civil society need to be with a tighter link between benefits and WPS2169,August1999,51 pp. prepared for a flexible response well contributions will make such systems more ahead of the crisis, primarily setting up fiscally sustainable. But to protect the un- Analyzing a sample of 49 developing (Latin an effective permanent safety net, com- insured and underinsured, such programs American), transition, and industrial econo- bining a workfare program with targeted should be complemented by better social mies, the authors conclude that ineffective transfers and credit. Once a crisis has assistance programs for low-income and discretionary administration of tax and happened, the following should occur: groups, primarily workers who spend regulatory regimes, as well as corruption, * Macroeconomic policies should aim to much of their lives in agriculture or the in- are responsible for increases in the size of achieve stabilization goals at the least cost formal sector (often self-employed or in the unofficial economy-notjust higher tax to the poor. Temporary reduction in aggre- small firms) and women who, having rates. And countries with a larger unofficial gate demand is inevitable but as soon as worked mostly in the household, expect to economy tend to grow more slowly. a sustainable external balance has been be supported by a family system that may reached and inflationary pressures have fail them in old age. Wealthy OECD economies and some East- been contained, macroeconomic policy To order: Marianne Leenaerts, Room G2- em European economies find themselves in should be eased (interest rates reduced 030, tel: 202-458-4264, fax: 202-676- the "good equilibrium" of relatively low regu- and efficient public spending restored, to 0961, email: mleenaerts@worldbank.org. latoryandtaxburden(notnecessarilylowtax help offset the worst effects of the reces- The authormaybe contacted at ejames3 rates), sizable revenue mobilization, good sion on the poor). A fiscal stimulus directed @worldbankorg. rule of law and control of corruption, and a at labor-intensive activities (such as build- small unofficial economy. Several countries ing rural roads) can combine the benefits Martha de Melo and Gur Ofer, The Rus- in LatinAmerica and the former Soviet Union of growth with those of income supportfor sian City in Transition: The First Six exhibitcharacteristicsconsistentwitha"bad poor groups. Years in 10 Volga Capitals, WPS 2165, equilibrium:" the discretionary application of * Key areas of public spending-espe- August 1999, 58 pp. heavyregulatoryandtaxburdens,theweak cially investments in health care, educa- rule of law, heavy bribery, and an active unof- tion, rural infrastructure, urban sanitation, While authors welcome the relative suc- ficial economy. and microfinance-should be protected. cess of reform in majority of 10 regional To order: Diane Bouvet, Room G2-136, tel: * Efforts should be made to preserve the capitals along the Volga River, they point 202-473-5818, fax: 202-334-8350, email: social fabric and build social capital. out that a major difficulty facing Russian dbouvet@worldbank.org. The authors may * Sound information should be generated cities is the cost of subsidies to housing be contacted atdkaufmann@worSdbankorg on the welfare impacts of the crisis. and utilities. Real estate constitutes a orpzoidolobaton@worldbankorg. To order: PREM Advisory Services, major expenditure category for local gov- Room MC3-825, tel: 202-458-7736, fax: ernment rather than, as in most western Gudrun Kochendorfer-Lucius and Boris 202-522-1135, email: premadvisory@ cities, a majorsource of revenue. With the Pleskovic, (eds), Development Issues worldbank.org. The authors maybe con- credibility of Russia's federal government in the 21st Century , Villa Borsig Work- tacted at fferreira@econ.puc-rio.br, at an all-time low, foreign investors have shop Series 1998, in cooperation with the gprennushi@worldbank.org, or mraval to rely on the competence and reliability German Foundation for International De- lion@worldbank.org. of local leaders, especially mayors and velopment (DSE), 1998, 210 pp. * TRANSITION, August 1999 C 1999 The World Bank/The William Davidson Institute IMF Publications To order, contact CEUIOSI Publications of resources based on prices of unre- Office, H-1051 Budapest, Nadoru. 9, strained free markets increase the effi- To order, contact IMF Publication Services, Hungary, tel: 361-327-3222, fax: 361- ciency of the system and leads to general 700 19th Street, NW, Washington, DC, 327-3820, email: publicat@ceu.hu, equilibrium of competitive markets. It as- 20431, UnitedStates, tel: 202-623-7430, fax: Intemet: http://www.ceu.hu./ sumes that markets are mere aggregation 202-623-7201, email: publications@imforg, and interaction of maximizing individuals lntemet:http:/Avwwdmf org. Andras Bozoki, (ed.), Intellectuals and with stable and given preference functions, Politics in Central Europe, 1998. thus ignoring asymmetric anrd incomplete Michael Mussa and Miguel A. Savastano, information and regard institutional frame- The IMF Approach to Economic Stabi- TiborVarady, John J. Barcelo IlIl, and Arthur work as given. lization, WP/991104, 1999. von Mehren, International Commercial 0 Institutional economics. In this sys- Arbitration-A Transnational Perspec- tem economic actors are conceived of as Torbjom Becker, Public Debt Manage- tive, 1999. individuals with bounded rationality and in- ment and Bailouts, WP/99/103, 1999. complete information who do not take all alternatives and consequences into ac- Chris Jarvis, The Rise and Fall of the count. This results in loss of economic Pyramid Schemes in Albania, WP/991 Edward Elgar Publications value. Institutions can serve as "surrogates 98, 1999. of rationality." Compatibility between lay- To order, contact Edward Elgar Publishing, ers of the institutional system-including Joannes Mongardini and Johannes Muller, 136 West Street, Suite 202, Northhamptom, basic cultural norms and traditions in a Rachet Effects in Currency Substitu- MA 01060, United States, tel: 800-390- society-is a constraint that has to be tion-An Application to the Kyrgyz 3149, Intemet: http.//Aww.ve-elgar.co. uk. or taken account in a transforming environ- Republic, WP/991102, 1999. Glensanda House, Montpellier Parade, ment through coordination and motivation. Cheltenham, Glos, GL50 1UA, United * Evolutionary economics. This theory Joshua Charap and Christian Harm, In- Kingdom, tel: 44-1242-226934, fax: 44- rejects the principles of the neoclassical stitutionalized Corruption and the 1242-262111, email: info@e-elgarco.uk model and believes in heterogeneity of Kleptocratic State, WPI99/91, 1999. behavior-different economic agents may Attila Agh, Emerging Democracies in behave differently under the same circum- Matthieu Bussiere and Christian Mulder, East Central Europe and the Balkans, stances. Economic agents follow certain External Vulnerability in Emerging 1998, 368 pp. decision routines-established routines Market Economies-How High Liquid- leading to path dependency, or a continu- ity Can Offset Weak Fundamentals Horst Brezinski, Egon Franck, and Michael ity of firm behavior in a changing economic and the Effects of Contagion, WP/99/ Fritsch, (eds.), The Microeconomics of environment. This suggests that a firm in 88, 1999. Transformation and Growth, 1998, 288 transition can hardly follow any single op- pp. timal strategy to overcome its problems. Liang Hong, Do Hong Kong SAR and The imprinted routines of the socialist past China Constitute an Optimal Currency Transformation often is treated in a cook- can constitute a considerable bottleneck Area? An Empirical Test of the Gener- book manner rather than as a game of in an open economy. Microeconomic alized Purchasing Power Parity, WP/ chess-that is step-by-step procedure with analysis can play a major role in identify- 99179, 1999. action, evaluation, and feedback. Conse- ing routines that can cope with enterprises' quently, during transition the institutional and required change. Andrew Berg, Eduardo R. Borensztein, economic conditions of the target model are Ratna Sahay, and Jeromin Zettelmeyer, not clear. Economic institutions with formal Terry Cox and Bob Mason, Social and Eco- The Evolution of Output in Transition and informal rules and norms were devised nomic Transformation in East Central Economies-Explaining the Differ- to shape human interaction and help solve Europe-institutions: Property Relations ences, WP/99/73 economic problems.The essays in this and Social Interests, Studies of Commu- book show a variety of approaches to un- nism in Transition series, 1999, 230 pp. derpin economic analysis of transformation from a microeconomic point of view. Governments of the Czech Republic, Hun- Central European University * Neoclassical theory. This theory is gary, and Poland have experienced prob- Publications based on the assumption that reallocation lems in implementing economic reforms, © 1999 The World Bank/The William Davidson Institute TRA-\smoN, August 1999 m which have had to be weighed against in- to be a mixed blessing, with its adverse ef- process. The strongest financial standing creasing inequalities, growing unemploy- fects on inflation, the exchange rate and the and the fastest growth has been recorded ment, poverty, and the discontent of the current account, and difficulties to contain by foreign-owned companies, although in public. Electorates in Hungary and Poland disturbances resulting from reversals of the most cases those were the flagship, state- turned their backs to the liberal democrats flows. This book investigates recent expe- owned companies before privatization. and national conservatives in the mid- riences in Central and Eastern Europe and Government officials were less efficient 1 990s and brought to power the socialists, contrasts those with experiences from Latin "agents" at selling companies than man- initially reform communists. Four years America and East Asia. It concludes that agers of the firms were. Privatization with later, right-of-the-center parties formed the several features are similar. However, cer- the ESOP-type privatization is mixed. In government in both countries. In the Czech tain unique characteristics such as data most larger companies workers could not Republic the liberal-conservative coalition limitations and the fragility of the banking function as owners so the companies went gradually split up and the social democrats and financial systems compound the prob- bankrupt or were sold to the managers. were able to form a minority government. lems faced by policymakers in Central and These countries cannot afford to pay the Eastern Europe. Tony Verheijen (ed.), Civil Service Sys- high cost of social support structures and tems in Central and Eastern Europe, are attempting to reform pension, health, Christian Helmenstein (ed.), Capital mar- Civil Service Systems in Comparative and other social support reforms. This is kets in Central and Eastern Europe, Perspective series, 360 pp. the most important "unfinished business" 1999, 256 pp. of the transformation process. A comprehensive comparative analysis of The first part of the book presents case the emerging civil service systems in nine David A. Dyker (ed.), Foreign Direct In- studies on the transition process as expe- Central and East European states pro- vestment and Technology Transfer in rienced in eleven countries. It outlines the vides insight into the emerging patterns of the Former Soviet Union, 1999, 208 pp. role of monetary policy in macroeconomic administrative development in the region. stabilization, the characteristics of banking Saul Estrin, Marko Simoneti, and systems, the transfer of corporate owner- Daniel Vaughan-Whitehead, Albania in Andreja Bohm (eds.), The Gover- shipthroughprivatization,thedynamicsof Crisis-The Predictable Fall of the nance of Privatization Funds: Expe- exchange-related trading, and the impor- Shining Star, 1999, 384 pp. riences of the Czech Republic, tanceofintemationalfunding. In thesecond Poland, and Slovenia, 1999, 208 pp. parttheauthorspresentanin-depthanaly- At the beginning of the 1990s the first sis focusing on specific issues including encouraging results on GDP growth com- Privatization investment funds are the key market efficiency, financial risk, a compara- bined with the fulfillment of international re- feature of mass privatization programs in tive assessment of central bank indepen- quirements led many to believe thatAlbania transition economies. This book surveys dence, foreign debt settlement, and the wasashiningstarofeconomicdevelopment mass privatization programs in the Czech privatization process. in Central and Eastern Europe. But in 1997 Republic, Poland, and Slovenia, comple- this progress was reversed by unprecedented mented with extensive empirical analysis. Gernot Hutschenreiter, Mark Knell, and institutional, political, and social turmoil lead- Slavo Radosevic, Restructuring Innova- ing to a spiral of violence and chaos. The au- Janos Gacs, Robert Holzmann, and tion Systems in Eastern Europe,1999, thor provides a comprehensive economic Michael L. Wyzan (eds), The Mixed Bless- 300 pp. analysis on Albania and identifies the major ing of Financial Inflows-Transition reasons for the 1997 explosion. The collapse Countries in Comparative Perspective, lvan Major (ed.), Privatization and Eco- of the pyramid scheme was just the last Joint publication with International Institute nomic Performance in Central and East- drop-the breakdown of the industrial produc- for Applied System Analysis, I IASA, ern Europe-Lessons to Be Learnt from tion, failure of mass privatization, paralysis of Vienna, 1999, 253 pp. Western Europe, European Association thebanking system, and rampantpovertyfu- for Comparative Economic Studies series, eled discontent to breaking point. Successful macroeconomic stabilization in 1999, 390 pp. Central and Eastern European countries has encouraged inflows of foreign capital Comprehensive analysis of the impact of badly needed to promote economic devel- privatization in Bulgaria, Estonia, Hungary, Publications of Federal Institute for Rus- opment. Strikingly, these countries have and Poland, the book sheds new light on sian, East European and International found capital inflows in their various forms the achievements and shortcomings of that Studies Cologne, Germany, Berichte * TRANSITION, August 1999 C) 1999 The World Bank/The William Davidson Institute des Bundesinstituts fur Ostwissen- 10 St. James's Square, London SWIY Wojciech W. Charemza and Geomina schaftliche und Internationale Studien 4LE, United Kingdom, tel: 0171-957- Popescu-Turlea, Internal Foreign Ex- (BIOSt) (in German, with English summa- 5700, fax: 0171-957-5710, Intemet: http:/ change Markets and Hyperinflation ries) hwww. ria. org. during Transition: The Case of Roma- nia, No. 99/5, March 1999, 22 pp. To order, contact BlOst, Lindenbornstr. 22, Neil MacFarlane, Western Engagement D-50823 Koln, Germany, fax: 049-221- in the Caucasus and Central Asia, Cen- 5747-110, email: administration@biostde, tral Asian and Caucasian Prospects, Intemet: http://wwwbiost.de/biopubl.htm. 1999, 72 pp. Other Publications Aleksej Surubovic and Natalija Usakova, Richard Pomfret, Central Asia Turns Edgar L. Feige and Katarina Ott (eds.), The Presence of the Russian Economy South? Central Asian and Caucasian Underground Economies in Transi- in the CIS. Part I: Material Production; Prospects, 1999, 46 pp. tion: Unrecorded Activity, Tax Evasion, Part II: Financial Relations, No.9 and 10, Corruption, and Organized Crime, February 1999, 24 pp. and 30 pp. Ashgate, United States, 1999, 336 pp. To order: Ashgate, Old Post Road, Heiko Pleines, The Post-Soviet Crisis University of Leicester Publications Brookfield, Vermont 05036, United of the Russian Coal Industry, No 19, States, tel: 800-535-9544, fax: 802-276- May 1999, 34 pp. To order, contact Faculty of Social Sci- 3837, email: info@ashgate.com. ences, Department of Economics, Uni- Ognian Hishow, The Russian Economy versity of Leicester LEI 7RH, United Richard J. Hunter, Jr., and LeoV. Ryan, From after the Farewells to the Reformers. Kingdom, tel: 0116-252-2892, fax: 0116- Autarchy to Market: Polish Economics Economic Policy Stagnation and the 252-2908. and Politics, 1945-1995, Praeger Publish- Debt Trap, No 22, June 1999. ers, United States, 1998, 304 pp. Zbigniew Kominek, Stable Distribu- To order: De Paul University, Department tions and Returns on the Warsaw of Management, 1 East Jackson Boule- Stock Exchange: The Minimum Chi- vard, Chicago, Illinois 60604-2287, fax: SIGMA Publications Square Estimation, No. 99/11, April 312-362-6973. 1999, 37 pp. To order, contact Head of Publications Inflation Targeting: Lessons from the Service, OECD, 2 rue Andre-Pascal, Cornelia Scutaru and Adrian Ghita, Chaos International Experience, Princeton 75775 Paris Cedex 16, France, tel: 331- and Order in Transition: Social Costs University Press, January 1999. 4524-7900, fax: 331-4524-1300, email: (Inflation, Unemployment) and Ex- To order., Princeton University Press, 41 sigma.contact@oecd.org, /ntemet: http./ change Rate Policy. Case of Romania, William Street, Princeton, New Jersey /www.oecd.org/pumalsigmaweb. No. 99/9, April 1999, 18 pp. 08540, United States, tel: 609-258-5714, fax: 609-258-1335. Sustainable Institutions for European Robert Lensink and Elmer Sterken, Capi- Union Membership, SIGMA Paper no. tal Market Imperfections, Uncertainty, PiotrJasinski and Helen Lawton Smith, (eds.), 26, 1998, 26 pp. and Corporate Investment in the Czech Environmental Regulation in Transform- Republic, No. 99/8, March 1999, 21 pp. ing Economies: The Case of Poland, Public Opinion Surveys as Input to Ashgate, United States, 1999, 384 pp. Administrative Reform, SIGMA Paper Tomasz Kopczewski, Productivity To order: Ashgate, Old Post Road, no. 25, 1998, 106 pp. Growth in the Polish Banking Sector: Brookfield, Vermont 05036, United Bootstrapping Dea-Based Malmquist States, tel: 800-535-9544, fax: 802-276- Productivity Index Approach, No. 99/ 3837, email: info@ashgate.com. 7, April 1999, 37 pp. The Royal Institute of International Af- Russell R. Miller, Selling to Newly Emerg- fairs Publications Constantin Ciupagea, Rigidities of the ing Markets, Greenwood Publishing Labor Market in a Transition Economy: Group Inc., United States, 1998, 288 pp. To order, contact The Royal Institute of The Case of Romania, No. 99/6, April To order: Greenwood Publishing Group, International Affairs, Chatham House, 1999, 44 pp. Inc., 88 Post Road West, PO. Box 5007, © 1999 The WNAorld Bank/The William Davidson Institute TRANSITION, August 1999 * Westport, CT06881-5007, United States, prises into holding companies. Reviewed by tion for any capitalist market economy-the tel: 203-226-3571, fax: 203-222-1502, Maria Aggestam, School of Economics and financial sector. Part IV is dedicated to ag- lntemet:http://www.greenwood.com. Management, Lund University Sweden, riculture, and Part V covers reform of the email: maria.aggestam @fek.lu.se energy sector, sometimes perceived as the Peter S. Rashish (ed.), A New Approach Achilles' heel of the Ukrainian economy. for the Transatlantic Economic Partner- Axel Siedenberg and Lutz Hoffman, (eds.), ship: Report of the European Institute Ukraine at the Crossroads: Economic Whatever the macroeconomic figures, the 8th Annual Transatlantic Seminar on Reforms in International Perspective, major transformation still confronting Trade and Investment, November 4-5, Physica-Verlag Heidelberg, New York, Ukraine is a change in the mindset of 1998, The European Institute, 1999, 82 pp. 1999, 437 pp. people-the perception that while the To order: The European Institute, 5225 move from socialism to a market economy Wisconsin Avenue, NW, Suite 200, Part l, a macroeconomic review of the trans- can indeed be accomplished, short-term Washington, DC 20015-2014, tel: 202- formation process, provides a comprehen- approach in politics leads to proliferation 895-1670, fax. 202-362-1088, email: sive overview of economic development in of inefficient structures and policies rather info@europeaninstitute.org. the East European and CIS transformation than to their eradication. [See also lead countries. John Odling-Smee and Oleh article in this issue. The Editor]. Maria Romanowska, Michal Trocki, and Havrylyshyn identify three country catego- Bogdan Wawrzyniaket (eds), Financial ries: sustained growth, artificial growth, and World Disasters Report 1999, International Groups in Poland, (Grupy kapitalowe zero growth, with Ukraine belonging to the Federation of Red Cross and Red Crescent w Poisce), Difin Publishing, Warsaw, Po- latter. Part II covers issues that have been Societies, Switzerland, 1999,198 pp. land, 1998. 491 pp. neglected for too long in the transformation To order: Edigroup, Case postale 393, debate: institutional change as a precon- 1225 Chene-Bourg Switzerland, tel: Financial groups increasingly shape dition for any reform. Part IlIl addresses 4122-348-4428, fax: 4122-348-4422, rules, institutions, beliefs, and norms at structural change in what is the key institu- email: abonne@edigroup.int.ch. home and globally. The book provides a comprehensive overview of the formation and governance of financial groups in Demographic Survey Poland. State monopolies were the old monsters; since their weakening and de- mise in the early 1990s, financial groups are replacing them. They are neither com- Oldest Ma in the World pletely private nor public. As to their scale, What's your concentration, historical heritage, con- secret? nections with the government, and con- trol of their own activities, they markedly differ from their western counterparts. I had my stuffed on my 25th Maria Romanowska's paper, "Financial Group Strategies in Poland," explores the C dangers of recreating the old monopolistic monsters into new formations. Poland should set up lobby groups representing various branches of Poland's industry in order to in- | fluence decision-making bodies in the Euro- pean Union, argues Krzysztof Popowicz in his essay, "Polish Financial Groups in Negotia- tions with the European Union." Wieslaw Grudzewski and Helena Hejduk in their study "The Holding Company as Instrument for Re- * structuring Key Industry in Poland" challenge the idea of restructuring major Polish enter- From the World Press Review. * TRANSITION, August 1999 D 1999 The W0orld Bank/The William Davidson Institute Bibliography of Selected Articles Central and Eastern Europe Romania and Bulgaria: The Tortoise velopment Economics (Netherlands) and the Hare. Economist (United King- 59:337-64, August 1999. Buch, C., R. P. Heinrich, and D. Piazolo. Fi- dom) 352: 40, August 7-13, 1999. Elec- nancial Flows to Transitional Economies tronic access: Full text: ProQuest Direct Stahl, T. New Operators: Deregulation in an Integrated Europe. MOST (Nether- database; http:/jolis. worldbankimflib. orgl Comes to China's Domestic Telecom- lands), vol. 9:89-122,1999. uhtbin2/UMlperiod.pl?28390. munications Industry. China Trade Re- port (Hong Kong) 37:12-13, July 1999. Croatia: Financial Times Survey. Fi- Veghelyi, M. Hungary: Special Tax In- nancial Times (United Kingdom) pp.23- vestigation Unit. European Taxation Wo, L. China Unveils Unified Contract 26, July 9, 1999. (Netherlands) 39:279-81, August 1999. Law. Intemational Financial Law Review (United Kingdom) 18:17-22, June 1999. Goodnow, J. D. International Business Asia Transformation Patterns of Czech En- Xiaolu, W. Ups and Downs: Fluctua- terprises Since the Velvet Revolution Asia's Economies: On Their Feet tionsinEconomicGrowthDamagethe and the Velvet Divorce. Prague Eco- Again? Economist (United Kingdom) Economy. China Trade Report (Hong nomic Papers (Czech Republic) 8:178- 352:16-18, August 21-27, 1999. Elec- Kong)37:7,July 1999. 88, June 1999. tronic access: Full text: ProQuest Direct database; http.//]olis. worldbankimflib.org/ Yao, Y. Rural Industry and Labor Market Hall, T. W. Poland and Russia One De- uhtbin2/UMlperiod.pl?28390. Integration in Eastern China. Journal of cade after Shock Therapy. Joumal of Development Economics (Netherlands) Economic Issues (United States) 33:305- Bickers, C. Asia's Race To Go Digital. 59:463-96, August 1999. 14, June 1999. Far Eastern Economic Review (Hong Kong) 162:8-12 July 1, 1999. Electronic CIS Mannix, R. Local Hires the Key to Suc- access: Full text: ProQuest Direct data- cess in Hungary. Intemational Financial base; http://jolis.worldbankimflib.org/ Clemens, W. C., Jr. The Baltic Repub- Law Review (United Kingdom) 18:45-53, uhtbin2/UMlperiod.pI?23566. lics, Russia, and Energy: From Depen- June 1999. dency to Interdependence? SAIS Review Blayney, S. Reforming China's Asset (United States) 19:190-208, Winter- Myant, M. Czech Enterprises: The Appraisal Regime. Intemational Finan- Spring 1999. Barriers to Restructuring. Prague cial Law Review (United Kingdom), Economic Papers (Czech Republic) 18(7):27-29, July 1999. Conway, P. Privatization and Price Con- 8:163-77, June 1999. vergence: Evidence from Four Markets Das Gupta, M. Gender Bias in China, in Kyiv. Journal of Comparative Eco- Ostaszewska, A. Albania: Reform of In- South Korea and India 1920-1990: Ef- nomics (United States) 27:231-57, June come Taxation. European Taxation fectsofWar,FamineandFertilityDecline. 1999. (Netherlands) 39:276-79, August 1999. Development and Change (Netherlands) 30:619-52, July 1999. Kandiyoti, D. Poverty in Transition: An Petrovic, P. The Yugoslav Hyperinfla- Ethnographic Critique of Household tion of 1924-1994: Causes, Dynamics, Foster, T. Vietnam Shows New Face Surveys in Post-Soviet Central Asia. and Money Supply Process. Journal of to Foreign Investors. International Fi- Development and Change (Netherlands) Comparative Economics (United States) nancial Law Review (United Kingdom) 30:499-524, July 1999. 27:335-53, June 1999. 18:55-56, June 1999. Electronic ac- cess: Full text: ProQuest Direct data- Kazakhstan: Financial Times Survey. Pleskovic, B., Challenges for the New base; http://jolis.worldbankimflib.org/ Financial Times (United Kingdom), Economic Geography in the 21st Cen- uhtbin2/UMlperiod.pl?14903. Suppl.: I-IV, July 1, 1999. tury, International Regional Science Re- view (United Kingdom) 22(2): 139-41, Houben, H. China Economic Reforms Komashenko, A. Personal Taxation in 1999. and Integration into the World Trading the Ukraine. Tax Planning International System. Journal of World Trade (Switzer- Review (United Kingdom) 26:15-16, Au- Testa, D. Confidence Is Returning. land)33(3):1-18,June 1999. gust 1999. Central European (United Kingdom) 9:44-45, July/August 1999. Electronic Sarno, L. Hot Money, Accounting La- Russia to Press for Broad Revamp access: Full text. ProQuest Direct data- bels, and the Permanence of Capitals of Soviet-Era Debt. Wall Street Jour- base; http://jolis.worldbankimflib.org/ Flows to Developing Countries: An nal (United States), p. A17, July 28, uhtbin2/UMlperiod.pl?11291. 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