Please see our announcement on page 40. v t l THE NEWSLETTER ABOUT REFORMING ECONOMIES TRANSITION Volume 8, Number 6 December 1997 Interview with Joseph Stiglitz Transition Economy Is Still A Well-Defined Category Joseph Stiglitz, senior vice president, Development Economics, and chief economist joined the Bank on February 1, 1997. Before that, he spent four years at the U. S. Council of Economic Advisers (1993-97) where he became chairman of the council in 1995. He is following the transition process closely, well proven by his pathbreaking book, Whither Socialism? How can the Bank contribute to accelerating and making this process as painless as possible? Is there an alternative to global capitalism? These were some of the questions Mr. Stiglitz reflected on during the following interview with Transition editor, Richard Hirschler. Q.The "stock market is not an unmiti- managers were able to sell controlling gated blessing," as you put it, in your blocks of shares of smallerfirms through W hat's Inside book Whither Socialism?, warning shady "bypass enterprises" to investors stock exchange fetishists. Don't you who were ready to pay-not over the Czech Market Failure 4 think that transition economies, es- counter but under the table-fat premi- Upbeat EBRD Report 6 pecially in light of the present upheav- ums above the shares' market price [ed.: als in Southeast Asia, are expecting see "Market Failure and Corruption in the StrictUzbekTradeRegime 9 too much from share trading? Czech Republic" on page 4]. This "tun- Economic Freedom Index'98 12 neling" of assets clearly undermines A. Let me put it in a broader context. trust and makes a mockery of fair busi- Customs Red Tape in CEE 14 On one hand, stock markets and secu- ness practices. It is also true that a lot FiscalAusterity-Overzealous? 15 rities markets are valuable mechanisms of stock market activity is based on ForTrue Federalism in Russia 17 for companies to use to raise capital and speculation, and price fluctuations are share the risks of business operations more the result of psychological factors Pension Reform in Hungary 19 with the stockholders. This is critical for and have less to do with economic fun- Adam Michnik's Central European development and for the transition to a damentals. Frog 22 market economy. On the other hand, it is extremely difficult to ensure that capi- Q. According to many experts, one Milestones of Transition 21 tal markets function well. There are nu- reason for the current realignment in World Bank\IMF Agenda 29 merous examples of fraud and abuse, Southeast Asia is that other emerg- especially in countries where strict regu- ing markets, including those in Cen- Conference Diary 32 lations are not in place and where the tral and Eastern Europe and the New Books and Working Papers 34 oversight of trading and the protection former Soviet Union, became more of minority shareholders are not assured. competitive and, to some extent, East Selected Articles 39 For example, in the Czech Republic it Asia is loosing the competitive To Readers:Transition's Future 40 has been revealed that investment fund edge... Macroeconomics and Growth Division Development Research Group The World Bank * "' v £ 7. t ; A * t ,14 A. may be o.\ejlem#t, but I more been particularly sanguine with respect petition creates vested interest groups important factor is that the financial to fulfilling that dream. There are three such as those that are now in play, that systems of Irnany Asian economies are hypotheses that explain this turn of try to stave off any competition and im- much weaker than had been thought. events: pede the development of a competitive Suddenly everybody is focusing on the - First, the move to a market economy market economy. It may have been a weaknesses of Asia's financial sector, and privatization in Russia and a num- mistake to put all the weight on private including mismatches between bank li- ber of other countries occurred rap- property and neglect competition. China abilities and assets. There is a matu- idly-to solidify transition and eliminate has given priority to competition and has rity mismatch, as many banks the possibility of a reversal and to avoid put less weight on private property (that borrowed for the short term but lent the asset stripping of state enterprises. is, settling property rights), and it seems imprudently for the long term; there is The consequence was the creation of to have been quite successful in the also a foreigln exchange mismatch, with a system in which managers garnered past decade and a half. assets denominated in local currency a disproportionate share of wealth. and liabilities in foreign currency. Once Voucher privatization in the Czech Re- Q. With respect to the transition pro- disillusioned foreign investors started public was more in accord with egali- cess, do you believe that there is such pulling out cf these countries, local cur- a category as "transition country?" rencies lost value, the huge and partly . hidden debt: of the banking and enter- D. efinitely. If you believe, as I do, that prise sector suddenly surfaced, and , history matters, then the legacy of the the economies-the Republic of Korea 1 experience that these countries have is the latest in a row-face a severe ~o~had over a half a century or more is ob- liquidity crunch. " viously going to affect them. The impact of common history diminishes over time, Q. The consolidation of financial sec- but we have not moved far enough down tors will certainly have huge social . that road. On the other hand, some tran- costs, in ternns of enterprise downsizing _HMM ' sition economies, such as the Central and shrinking real wages-just as hap- Asian countries, happened to be embed- pened in many transition economies. ded in the Soviet Union, but in some In your book Whither Socialism?- ways have more in common with the which is as much a critique of social- "planned economies" of other develop- ism as of the neoclassical model of ing countries. The legacy of the past is Hayek-you speculate on whether it very much influencing development in would be possible "to bring closer to- tarian distribution, but as I mentioned Russia, Belarus, and Ukraine, although gether insigjhts of modern economic before, the country failed to put in place they all have different characteristics. A theory and the utopian ideas of the laws to protect the securities market. number of Central European countries, nineteenth century." So the Czech Republic wound up with like Hungary and the Czech Republic, another set of problems. clearly are moving fairly rapidly into in- A. The book was written in the early * Second, in order for capitalism to work tegration with the more industrialized 1990s, at the onset of transition, when there needs to be a concentration of countries, and they will become less and many of us thought that these coun- wealth to solve the public good problem less differentiated as a category. tries were moving toward capitalism of management. The Czech Republic's from a more egalitarian base than had idea was based on the notion that you Q. How can the World Bank, as a been the case for economies that had could have good management without knowledge bank, help the transition evolved into capitalism out of feudal- concentrated wealth. It didn't happen. So process? ism, without the intervening stage of the question is whether inequality is an socialism. So the question in our minds inherent property of capitalism. A. The Bank has seen its role as capac- was whether this would wind up with a * Third, these countries simply did not ity building and learning center. For the form of people's capitalism-the reign havetheoptionofmovingslowly;"youcan't transition economies, it has a unique of market forces, but with a more egali- jump over a chasm in two steps." That is a potential; most of these countries have tarian distribution of income? Experi- debatable proposition. In fact, privatizing highly educated labor forces and highly ences over the past few years have not before introducing the conditions for com- educated populations, but they were not * TRANSITIONI, December 1997 (D 1997 The World Bank educated in the principles of a market scholar's economic rationalism? To These institutions are made up of yol- economy. They had the learning capac- put it differently, what serves people- untary groups of citizens who come to- ity, but did not have the knowledge about better, to confront imperfect markets getherto pursue a common good that goes market economies. We have learned in or imperfect governments? beyond the members of those groups. eight years of the transition process that making market economies work is ex- A. My sense is that the engine of the 0. And these nongovernmental or- tremely difficult. Therefore, it is extremely economy has to be the market, that ganizations can be the seed of a bet- important to draw on a knowledge base government is not generally a good ter society in the future? that is even broader than the Bank's vehicle for production. We are increas- knowledgebase.Wearedevelopingapar- ingly recognizing that government has A. Yes, maybe we are evolving into a ticular expertise in trying to translate and a very important but limited role to play society whose members will pursue col- transmit that information. in providing the conditions-the legal lective action without using government framework that enables the market sys- that has the power of taxation and the Q. So what should be the major thrust tem to function. At the same time, the power of compulsion. That says some- of the Bank's research and education government has assumed market-like thing about an element of human be- in the next two years? characteristics in many of its activities. havior that is not quite as selfish as We are also recognizing a very big role some of the economic maxims have A. Right now there is a certain focus on for institutions in our society that are led us to believe. Or, to put it more financial markets, and we will use this neither private nor government, I'm talk- broadly, people get personal satisfac- focus as an opportunity to transmit what ingaboutvoluntary, nonprofit institutions. tion and private utility out of doing pub- is an enormous amount of received wis- We do not know why and how they work lic good. So economists can always dom on that. The restructuring of enter- in the same sense that we understand reconcile something seemingly contra- prises is another important topic both for profit motives and the political process. dictory with their paradigm. research and education. We need to know more about the conditions, the vehicles, and the mechanisms that will lead to more 6 S-V effective restructuring. For example, we k,A know from empirical evidence that after (<\ ,1O A I M privatization foreign investors tend to RA r IONM 16 RA e ON carry out far more restructuring than do domestic entrepreneurs. We should look into this more deeply. -a Another area of research and education is how to make government more effi -& cient and how to provide the precondi- tions for effective private sector . - development. So we are seeing govern- ment and the private sector in much more l complementary roles. Government should 11 provide the legal structure and make sure . that markets are competitive and that -.4- antitrust and regulatory laws are in place. _ Our investigation also includes the fight c . --m - against corruption: what are the main causes, and what can we do about it? Q. How can you reconcile a sense of W hv c social responsibility-which is no- "We have come from the London Stock Exchange, seeking asylum and ticeable all along in your book a better way of life." Whither Socialism ?-with the From the World Press Peview © 1997 The World Bank TRANSmTON, December 1997 * Market Failure and Corruption in the Czech Republic by Andrew Schwartz T he circumstances behind the res- free market. The unregulated free mar- Illusions began to crumble almost two ignation of Czech Prime Minister ket came to the Czech Republic and the years ago. Then, the Czech public first Vaclav Klaus illustrate the perils other former communist countries under learned that several managers of the of unbridled! markets to attaining eco- the guise of rapid privatization, the main funds designed to invest the public nomic freedom and political democracy. market reform strategy of the early vouchers were instead systematically Klaus's troubles are a variant of the ills 1990s. The idea was to privatize before stealing from their own investors. The that are buffeting the East Asian econo- threatened former communist enterprise Czech Ministry of Finance recently enu- mies. What provoked Klaus's resignation managers, bureaucrats, and trade merated 15 techniques for stealing in a were the allegations that linked a $5 unions could set up defenses against widely distributed report. A common million Swiss bank account to officials the development of free markets. Rapid one: The investment fund managers sell in Klaus's party, and the discovery of privatization is behind Klaus's political company shares in the portfolio to suspicious payments to the same party vulnerability. dummy companies at absurdly cheap from a successful bidder in a prices. The dummy companies sell the privatization case. Led by Klaus, the Czech reformers re- shares on the market. The dummy com- ligiously pursued rapid privatization. panies deposit the ensuing profits into The deeper causes for Klaus's resigna- Prior to 1989, the Czech state owned overseas bank accounts. The fund in- tion lie in a free market system in which 97 percent of total economic assets. vestors (the trusting public) are left with nearly everyone in government is as- From 1992 to 1994 the Czech Republic nothing. sumed to be on the take, the stock mar- transferred more than 70 percent of ket is rigged, and bribery is considered national assets from state to nonstate But that's the least of it. The Czech pub- legitimate business. The communist-era owners. Today, the state share is less lic is now learning that dishonest opera- motto: "He who doesn't steal, steals than 20 percent; and by the turn of the tors have systematically squeezed the from his family," seems applicable un- century that share may well be less assets from many of the country's best der Czech capitalism. than 10 percent. companies, its municipalities, and its banks (private- and state-owned). The The Western press has attributed Rapid privatization, especially the Czech locals have coined a charming euphe- Klaus's troulbles to the inevitable mis- voucher program-which offered citi- mism for the criminals-tunnelers. The fortunes of an economic slump. At first zens chances to purchase shares in tunnelers have achieved their wealth glance, this sounds like a good expla- large companies at nominal prices-met primarily through the corrupt collusion or, nation for Klaus's political misfortunes. with popular enthusiasm. Within two at the very best, the benign neglect of The Czech Republic has seen its cur- years nearly every Czech was a share- the state. rency collapse by more than 20 percent holder; indeed, the Czechs were the larg- against the dollar, its trade deficit and est per capita shareholders of any These developments seemed to confirm government budget deficit balloon, and country in the world, including the United the belief that rapid privatization was not its economic growth slow to a crawl just States. the mass distribution of national wealth this year. Even the remarkably low but the private appropriation of national Czech unemployment rate is up by more Rapid privatization seemed to underpin wealth. Is it any wonder that decent than 25 percent, though to a still-mild the country's dramatic economic recov- Czechs felt betrayed, even humiliated? 4.9 percent. ery from communism. Entry into the Eu- They were reminded of the proverb "the ropean Union seemed a matter only of fish stinks from the head." Nonetheless, the economic slump is not when, not if. Klaus was overheard to say the fundamental reason behind the po- "the question is not, whether the Czech The political and economic turmoil in the litical uph/eaval in the Czech Republic. Republic is ready to join the European Czech Republic illustrates that private Rather, it is the excuse behind the up- Union, but whether the European Union property does not make a market any heaval. The real culprit is the unregulated is ready to join the Czech Republic." more than elections define a democracy. f TRANSITON, December 1997 © 1997 The World Bank A fair and efficient state is necessary to roads. A new generation of leaders is portant, the easy money already has regulate the market reform process. Un- talking seriously about capital market been stolen, and the first generation of bridled markets lead irresistibly to un- regulation, bank regulation, and mod- market reformers is fading from the imaginable thievery. Elsewhere, the lack ern accounting and auditing standards. scene. In their absence, I am hopeful of attention to building a functional state Behind the surface gloom of deficits, that the next generation of Czech lead- administration has distorted markets and currency crises, and capital flight, ers will develop a capitalist state, the democracies throughout the former com- long-term venture capital is seeping into sine qua non of the modern world. munist world, including Russia. the economy. One fine day the large banks will be fully privatized to honest The author is a researcher and is asso- Where will the Czech Republic go from and experienced foreigners, who will ciated with the Berkeley Roundtable on here? Certainly, the country is at a cross- pass on skills to the locals. Most im- the International Economy. Czech Capital Market Control-To Be Announced Later It is generally expected that caretaker Prime Minister Josef agers, and band advance payments on the purchase of Tosovsky will seek to maintain the momentum of the capital securities-practice that has been used by unscrupu- market reform effort and support a major legislative initia- lous managers to drain cash from funds. The bill would tive aimed at improved regulation and increased transpar- force closed-end funds, through which some of the murki- ency in the capital markets, stricter control of the investment est deals have taken place, to become open-ended funds funds, and acceleration of bank privatization. But these mea- if they traded at a discount of more than 40 percent to sures-already far behind the original schedule-are likely their net asset value. to be delayed by the political vacuum in the next six months, and only a new post-poll government-securing its man- * A banking law amendment, already passed in the lower date through the next parliamentary elections-will be able House, would limit banks' holdings to 50 percent of in- to go ahead with these reforms. The following is a summary dustrial companies and prohibit bank officials from sit- of recent legislative initiatives: ting on boards of industrial companies. It calls for a clearer separation of each bank's commercial and in- * The Senate demanded amendments to the legislation that vestment banking activities. Combined with the plan to would have established a capital markets securities com- privatize the country's four largest banks during the next mission as of January 1. The law was already passed by 18 months, the amended law could lead to substantial the Chamber of Deputies (br lower house of parliament). reforms in the banking sector. Bank privatization could The commissioners would have had the power to impose be crucial to industrial restructuring and greater capital fines of up to 100 million korunas ($3 million), revoke li- markets transparency. The Klaus government agreed in censes, block suspicious trades and capital transfers, and July to sell its 36 percent stake in the country's third- approve or reject share issues. That would have gone a largest financial institution, Investicni a Postovni Banka long way in stemming those scams that have stripped com- (IPB), to Nomura. However, only the post-poll govern- panies of their assets, leaving behind worthless shares ment will be able to make the final decisions on the sale and "tunneled" investment funds into offshore bank ac- of the three remaining banks-Ceska Sporitelna, counts. As a result, great volumes of securities were traded Komercni Banka, and Ceskoslovenska Obchodni Banka. at undisclosed prices outside of financial markets. On De- The total assets of the "big four" account for around 60 cember 22, Czech Finance Minister Ivan Pilip warned that percent of total banking assets. More than 30 percent of if the creation of a commission is delayed into 1998, he those assets are nonperforming, largely as a result of will not hesitate to introduce tougher regulations on the tougher central bank regulation, which is making it in- capital markets. creasingly difficult to write off bad debts. The banks des- perately need a capital injection to increase reserves Another postponed legislation on investment funds and improve provisioning levels. would limit fund holdings in any company to just 11 per- cent, prohibit transactions between the fund and its man- Based on AP, Dow Jones, and Oxford Analytica reports. t 1997 The World Bank TRANSITION, December 1997 * EBRE) Report Predicts Accelerated Growth in Most Transition Countries Old Nomenklatura Benefited Privatization T he European Bank for Recon- well. Incompetent or corrupt managers Corporate governance is lax in the Czech struction and Development's are becoming entrenched in what would Republic, where private investment (EBRD) 1997 Transition Report otherwise be good firms. The desire of funds played a vital role in the success (its fourth) "Enterprise Performance and these managers to retain control is caus- of voucher coupon privatization. The Growth," assesses the reform process ing many potentially profitable compa- system of cross-ownership among state- across Central and Eastern Europe, the nies to miss out on investment from owned banks and the investment funds Baltics, and the Commonwealth of In- external sources.That also hurts the hasinsulatedCzechfundmanagersfrom dependent States (CIS). overall macroeconomic performance of external control. A lack of transparency these countries. Privatization programs is depriving minority shareholders of Corporate Governance Requires thus fall short of their primary goal-to rights that would be considered part of Changes bring about economic growth and stabil- the fair value of share ownership in the ity by strengthening the performance of West. A new phase of economic transition is former state firms. necessary in Eastern Europe and the Independent agencies are needed that former Soviet republics to counteract Competitive market pressures are con- monitor and control emerging capital a legacy of communist-era managers sidered as one strong influence on the markets. The ultimate goal should be who still retain control over many performance of insider-controlled com- a stock market system that allows both former state firms. This next stage of panies. This raises the need for laws the ownership and control rights of transition requires new forms of cor- and institutions that foster a competi- companies to change hands. Another porate governance that allow share- tive marketplace. But the continued way to break up insider control is to holders to sack managers who are government subsidies to firms with in- gradually increase outside ownership incompetent or corrupt. The EBRD, in competent managers is preventing the through outside financing. This pro- its 1997 Transition Report, urges gov- emergence of new private firms that cess appears to be taking hold slowly ernments across the formerly commu- could prove to be more efficient. Also, in Russia. A last-resort approach to nist world to create new laws and the benefits of competition are being corporate governance is the threat of market institutions that boost compe- squandered by arbitrary bureaucratic bankruptcy. The threat is important in tition and crack down on corruption. hurdles on the part of government-an- countries like Bulgaria, where insider Characterizing old state managers as other legacy of the communist era that privatization has drained most state "insiders," the EBRD report says that is making it difficult for new firms to firms and where banks and capital mar- outside investors-including small enter the marketplace. kets are weak. shareholders; and strategic investors- must have more control over the man- The rise of financial-industrial groups Corruption in the CIS agers of newly privatized firms in order in countries like Russia and Ukraine to improve corporate performance. could be a challenge to the insider Corruption is higher in the Common- domination of industry. Such groups wealth of Independent States (CIS) than Privatization in most of the CIS coun- could eventually evolve into effective in any other region in the world. The tries, as well as in Poland and the former agents of corporate governance and re- EBRD ranks Azerbaijan, Kazakhstan, Yugoslavia, have benefited primarily the structuring. But if not properly regu- Russia, Ukraine, and Uzbekistan high- old state managers and other insiders, lated, they could also recreate the kind est for corruption of public officials, who remain largely in control. Russia has of industrial or regional monopolies that based on estimates by the London- sold off the entire spectrum of compa- prevailed under communism. Effective based Economist Intelligence Unit and nies' operations to incumbent managers competition policies could keep the the DRI/McGraw Hill Global Risk Ser- and employees. The managers quite of- powers of the financial-industrial vice. Both organizations are consultants ten seek to control workers' shares as groups in check. who evaluate investment risks for po- a TRANSITION, December 1997 ( 1997 The World Bank tential foreign investors. The Economist ity of corruption nearly twice as high as International competitiveness in manu- Intelligence Unit asked country experts any other region, with the exception of facturing declined in several transition to assess the "degree to which public Eastern Europe." The entrepreneurs economies in 1996 and 1997, driven by officials are involved in corrupt prac- wereaskedtorespondtoasecondstate- a combination of real-wage increases tices" on a scale of 0 to 4 (0 being very ment: "If a firm pays the required addi- outstripping gains in productivity and low and 4 being very high). Among the tional payment, the service is usually continuing appreciation in real exchange 97 countries surveyed, 18 were former delivered as agreed." More than 80 per- rates. The average increase in unit la- communist states that are making the cent of the respondents in the CIS and bor costs in deutsche mark terms in the transition to market economics. The Eastern European nations tended to advanced countries of Central and East- average corruption score of these tran- agree that this was the case. ern Europe in 1996 came to 9 percent. sition economies was 3.35-"higher Wages, however, remain substantially than any other region in the world."AII The remarkably high levels of corrup- lowerthaninWesternEurope,andthere five CIS countries included in the sur- tion in transition economies reflects a is little evidence that the increase in vey (Azerbajian, Kazakhstan, Russia, high degree of uncertainty about gov- labor costs has damaged exports in Ukraine, and Uzbekistan) received the ernment policies toward the market. general. highest rating-a score of 4-for cor- Managers, especially in the CIS, ap- ruption among public officials. pear to rely on corruption-transactions Forecast 1998: Regional Growth they regard as relatively predictable and Returns DRI/McGraw Hill studied 21 transition credible-as a means of hedging economies in its analysis of 33 risk against the risks associated with the The collective gross domestic prod- factors across 106 countries. For the instability of government policy, much uct (GDP) of the Eastern European 12 CIS countries included in that sur- as they did under central planning. Gov- region is expected to grow in 1997 for vey, the average corruption score was ernments in transition countries need the first time since market reforms 64 percent, "a level only slightly ex- to improve the predictability of their were launched after the collapse of ceeded by the countries of Sub-Sa- policy decisions if they want to reduce communism, despite anticipated de- haran Africa." However, DRI/McGraw the underlying causes of widespread clines in Albania, Bulgaria, Moldova, Hill's corruption scores for the East corruption. Romania, Tajikistan, Turkmenistan, European and Baltic countries were and Ukraine. The general trend re- substantially lower. Capital Flow Picks Up mains one of robust growth in East- ern Europe and the Baltic states and A recent country-by-country survey Net private capital flows into the re- a gradual return to growth in the CIS, asked more than 3,600 entrepreneurs in gion have surged in the past two years most importantly in Russia. Most 69 countries to respond to the following and could exceed $55 billion in 1997, transition economies are now expand- statement: "it is common for firms in my reflecting growing confidence. The in- ing in contrast with the situation of a line of business to have to pay some flows could bring their own problems. few years ago, when many were ex- irregular 'additional payments' to get "There is a danger of overheating, of periencing extreme economic disloca- things done." Within the 10 CIS coun- excessive real exchange rate appre- tion and rapid falls in output. Average tries studied, 65 percent of respondents ciation and of volatility." A Czech cur- GDP in the former communist world said that this was, frequently, usually or rency crisis in 1997 indicated the risks. is expected to increase by 1.7 per- always true. Foreign direct investment has contin- cent in 1997. This follows seven years ued to flow into the region at a rapid of continuous decline in the overall In this study the regional average for the pace, with Poland the main recipient output of goods and services. CIS was 15 percentage points higher in 1996, replacing Hungary, which had than for the next highest region-Sub- led the field since 1989. The pace of In 1998 real growth has been forecast Saharan Africa-and 24 percentage investment has accelerated again in for all Eastern European countries, with points higher than for Latin America. The 1997, with Poland and Russia each set overall GDP expected to increase 4.3 entrepreneurs were also asked if they to attract a quarter of the estimated percent in Eastern Europe and the couldpredicthowmuchtheywouldhave total foreign direct investment of $18 Baltics and 4 percent in the CIS. Con- to pay in bribes if they wanted "to get billion for the region. In 1998 regional traction of the Russian economy-by things done."The respondents in the CIS foreign direct investment is forecast to far the region's largest-has finally countries reported "a level of predictabil- rise to more than $20 billion. come to an end. Expansion of the Rus- Oc 1997TheWorldBank TRANSITION, December 1997 E sian economy is expected to drive Growthinthemoreadvancedeconomies negativegrowth,reflectingtheslowpace growth in the other regional economies. is being driven by domestic demand, of reform and, in some cases, high rates especially by private consumption, of inflation.Their economic prospects are Growth in Central and Eastern Europe whereas exports were the driving force uncertain. and the Baltic states in 1997 will be be- when growth first resumed. But countries low the earlier expectations of many such as Belarus, Moldova, Tajikistan, Inflation has continued to fall in most forecasters, due largely to the sharp Turkmenistan, Ukraine, and Uzbekistan transition countries. Inflation is ex- contractions in output in Albania and are lagging. They have recorded low or pected to be less than 10 percent in Bulgaria and slower growth in the Czech Republic-a little more than 3 percent is projected (see table). In 1998 four per- Growth, Inflation, and Foreign Direct Investment in 25 Transition Economies cent growth is expected. (This com- Projected level pares favorably with the 2.7 percent of real GDP FDI per capita growth predicted for Western Europe GDP in 1997 In flaFtiocn in next year.) 1996a 1997° 1998b (1989=100) 1996a1997b 1998b1996 In the CIS economies growth is pro- Eastern Europe and the Baltics jected at 0.8 percent in 1997. That also Albania 8.2 -15.0 10.0 73 13 33 17.0 28 is lower than the earlier forecast, due to Bulgaria -10.9 -7.0 2.5 63 311 592 37.0 12 the slower-than-expected pace of enter- Croatia 4.2 5.0 5.0 74 9 9 4.0 73 prise restructuring in Russia, which ac- Czech Republic 4.1 1.0 2.5 90 9 9 8.5 123 countsfor75percentof GDP intheCIS. Estonia 4.0 7.0 5.0 76 15 12 10.0 71 Russia (as well as several other coun- FYR Macedonia 1.1 2.0 5.0 56 0 8 6.5 20 triesintheCISinwhichoutputhasfallen Hungary 1.0 3.0 4.0 89 20 17 14.0 195 since reforms began) might record posi- Latvia 2.8 3.4 5.0 54 113 8 7.0 92 tive growth in 1998. Lithuania 3.6 4.5 5.5 44 13 10 9.0 41 Poland 6.0 5.5 5.0 110 19 15 14.0 71 However, the growth performance is Romania 4.1 -1.5 1.5 87 57 116 40.0 9 highly uneven across the 25 transition Slovakia 6.9 4.5 3.0 94 5 7 6.5 33 countries. In some countries, such as Slovenia 3.1 4.0 4.5 99 9 9 8.0 90 Poland, growth has been sustained for Averagec 4.1 3.1 4.0 95 38 65 14.0 66 six years, whereas in others, such as CIS countries Azerbaijan, it is just beginning. In the Armenia 5.8 5.8 5.0 39 6 19 14.0 6 East European and Baltic states the Azerbaijan 1.3 5.2 8.5 41 7 7 6.5 87 starperformerisexpectedtobePoland, Belarus 2.6 3.0 2.5 66 40 99 105.0 7 with GDP growth projected at 5.5 per- Georgia 10.5 10.5 10.0 34 14 9 7.5 5 cent in 1997. At the other end of the Kazakhstan 1.1 2.0 3.5 58 29 12 11.0 67 scale, Albania's output is expected to Kyrgyzstan 5.6 6.0 5.0 60 35 24 25.0 7 contract by 15, percent, and Bulgaria's Moldova -8.0 -2.0 3.0 34 15 11 9.5 13 by 7 percent. Russia -5.0 1.0 3.0 57 22 14 13.0 14 Tajikistan -7.0 -3.0 0.0 36 41 105 36.0 14 In the CIS countries the top performer Turkmenistan -3.0 -15.0 8.0 51 446 44 58.0 2 was Georgia, with growth in 1997 pro- Ukraine -10.1 -3.0 2.0 37 40 15 18.0 10 jected at 10.5 percent. At the bottom Uzbekistan 1.6 1.0 2.5 86 64 40 32.0 2 of the list is Turkmenistan, whose GDP Averagec -4.6 0.8 3.1 56 63 33 28 17 is expected to shrink by 15 percent. Total Averagec -1.1 1.7 - 72 - - - 31 Armenia, Azerbaijan, Croatia, Estonia, a. estimate. Georgia, Kyrgyzstan, Lithuania, Po- b. projection. land, Slovaka ad Sc. Estimates for real GDP represent weighted averages. The weights used were land, Slovakia, and Slovenia are now EBRD estimates of nominal dollar-GDP for 1996. growing at annual rates of 4 percent or - Not availabe. more. Source:Transition Report 1997, EBRD. a TRANsnoNz, December 1997 t 1997 The World Bank eight countries in 1997. The EBRD says that prices will have climbed less than Why the Strict Trade Regime in 20 percent in 16 countries. But five b k1 t? economies have seen a marked accel- UZbekistaIi< eration in inflation-Bulgaria, Romania, David G. Tarr Belarus, Albania, and Tajikistan. As of the fall of 1997 Uzbekistan's trade valued exchange rate. Exporters have to Income disparities have increased regime remains excessively controlled surrender 30 percent of their foreign ex- across Central and Eastern Europe, the and is far from what is needed to inte- change earnings to the state. Uzbekistan's Baltic states, and the CIS countries in grate it into the world trading environment, strict foreign exchange regime has the fol- the 1990s. Social policies in Central even by the standards of the Common- lowing consequences: Europe have mitigated these dispari- wealth of IndependentStates(CIS). Ithas . It is an added tax on exporters. ties to some extent, but, in the CIS, lead to significant inefficiencies and rent- * Most exports have become uncom- inequality and poverty have risen seeking and has not prepared the coun- petitive in world markets, because export- sharply. Related social indicators, par- try for growth or poverty reduction. What ers demand higher prices to cover the tax ticularly life expectancy, have also are the reasons for this strategy? and the surrender of foreign exchange. Al- deteriorated in many countries. though other factors also play a role in the Import Controls. The primary means of steady decline in exports (especially of The life expectancy at birth of male regulating imports is through the ration- manufactured products) the exchange re- Russians in 1995 was 58, the lowest ing of foreign exchange at the official gime further aggravates this trend. in any transition economy. Dramatic in- exchange rate. This means that only a * Since the price of imports is deter- creases in deaths from heart disease, limited range of applicants receive for- mined at the unofficial exchange rate, higher suicide rates, and the spread eign exchange to buy foreign products importers who obtain foreign exchange of infectious diseases seem to be re- and services not on the prohibited list. at the official rate reap large profits (eco- lated to higher stress and a deteriora- Imports tariffs vary from 5 to 50 percent. nomic rents). This induces corruption in tion in public health services. The government claims that these tar- the allocation of foreign exchange. iffs help to increase budget revenues. *The majority of commodity markets are A new phase of the transition has be- But, unless they are uniform, inefficien- monopolized due to the limited access gun in the countries across the region. cies and rent seeking develop. to foreign exchange. Governments should strengthen the in- * Prices to consumers remain high due stitutions that support competition, in- Ban on Exports. Export taxes range to economic rents and monopoly profits. vestment, and innovation. The potential from 20 to 40 percent, and many items . Capital is fleeing the country either for growth is large, but so is the possi- cannot be sold abroad. The Ministry of through the underinvoicing of exports or bility of reform being trapped by vested Foreign Economic Relations imposes through the overinvoicing of imports, interests, monopolies, and bureaucracy. licensing and export quotas for the most banking the difference abroad. Thus less With a combined GDP of $1 trillion important export products, such as cot- foreign exchange is repatriated and less (about 3 percent of the world economy), ton, fuel, ferrous and nonferrous metals, is available to purchase critical imports. the region is rapidly establishing itself and ores, which together constitute about as a major emerging market. 80 percent of total exports. Cotton is the State control of the trade regime means major export item. Under a system of that there is limited control over what is Contribution of RFE/RFL correspon- state orders, the state buys cotton at a imported-through preferred foreign ex- dents Stuart Parrott and Ron Synovitz low price, strictly limits its exports, and change rationing and nonuniform tar- are appreciated. ToorderEBRDfTransi- restricts quantities that can be sold iffs-strong controls on exports and low tion Report: Publications Desk, One freely on the domestic market. prices to domestic producers of key com- Exchange Square, London EC2A 2EH, modities. The results are lower produc- U.K., tel.44171-338-7553, Email: Foreign Exchange. Probably the prin- tion of key products (especially cotton), pubsdesk@ebrd.com, website: http:// cipal problem with Uzbekistans trade re- reduced exports and imports, and www.ebrd.com. gime is the foreign exchange regime. It misallocated imports. remains highly controlled, and the result is a considerable excess demand for for- The country gives the impression that it eign currency. It is rationed at the over- is resisting the allocation of resources © 1997The World Bank TRANSITION,December1997 a through market forces and integration into services were underproduced during the extracting rents (bribes). Under the the world market economy. A market Soviet past and under market conditions planned economy, pervasive price con- economy allocates resources based on all economies will allocate more resources trols and shortages provided ample op- price signals in the market, and in a small to services. Attempts to preserve the in- portunity for the nomenklatura to collect economy without world market integration herited industrial structure are the same rents through the preferred allocation of those signals will be very distorted. There- as trying to preserve central planning on rationed goods. As the controls of the fore, for a small economy like Uzbekistan, a smaller scale than in the former Soviet state wither away under the transforma- it is crucial to have an open trade regime Union. This is a failed strategy. Sustained tion to the market economy, the oppor- if it is to convert to a market economy. growth will come only through the trans- tunities for collecting rents drastically Although it has not had a sharp decline formation to a market economy, and an diminish. In a number of countries in output thanks to its mineral wealth, open trade regime is a fundamental ele- policymakers realized that the trade re- the failure to make more progress to- ment of a market economy, especially in gime was one of the most effective re- ward a market economy and integrate a small economy. maining means of collecting rents. into the worlcl trading system means that Licenses that convey enormous eco- Uzbekistan has not yet established the * The desire to prevent frivolous im- nomic rents (profits) to the recipients pro- conditions for sustained growth. ports. Some authorities argue that free vide great incentive for payments to the markets allow frivolous imports like officials providing the licenses. When What Explains This Strategy? Coca-Cola and chewing gum, and that there is excess license to control the they must control imports in order to al- trade regime (for example, foreign ex- The fear of adjustment costs, the desire locate foreign exchange to essential change rationing plus quotas and li- to preserve the industrial base or pre- imports. Central planners, however, are censes on imports and exports) it is vent frivolous imports have been offered notoriously incompetent in making de- difficult not to conclude that numerous as explanations for the restrictive trade cisions that involve millions of people official actors are trying to get into the regime. But are these concerns a valid and thousands of firms, when compared act of collecting payments for granting basis for the! Uzbek trade regime? to a functioning market system that re- licenses. flects the demands of millions of people. The fear of adjustment costs. Most It is impossible for a central planner to Rent Seeking = Economic Dislocation transition countries that have adjusted know whether imports to one industry are the fastest heive arrested the output de- worth more to the whole economy than Rent seeking exists to some extent in all cline the fastest. Estonia, Armenia, and imports to another, or more than con- societies. If rent seeking were simply a Latvia-whose experience is the most sumer imports. And there is nothing transferofwealthamong individuals, with- relevant for IJzbekistan-led the other wrong with consumer goods. In a well- out growth consequences, it would be a countries in arresting their output de- functioning market economy, the de- less severe problem. But if rent seeking dline, and they also were the leading mands for consumer goods are balanced is extensive and pervasive in a small de- reformers in trade policy. On the other by firms' demand for intermediate and veloping economy, economic growth and hand, slow adjustment in other CIS coun- capital goods, so the value to society of poverty reduction are endangered. Cntre- tries, such as Ukraine, has led to a con- each class of goods is approximately preneurs who develop new or make bet- tinuing decline in output. In these equalized. The high demand for imported ter products, introduce new technologies countries much of the adjustment costs consumer goods in Uzbekistan reflects into the economy, or cut costs, are scarce still lie ahead and will have to be borne the underproduction of consumer goods talents that must be cultivated in devel- if they want to move forward. Thus fear in the domestic economy, which was typi- oping economies. But if it becomes more of adjustment costs does not appear to cal of the traditional industrial structure profitable to solicit a government official be a valid explanation for a trade regime of the former Soviet Union. The control for a license than it is to compete on the such as Uzbekistan's. There are three system (through the tax on exports in market by cost cutting or making a bet- other more legitimate reasons: various ways) makes fewer exports and, ter product, the economy will fail to grow therefore, less foreign exchange available because scarce entrepreneurial talent is *The desire to preserve the industrial for buyers of consumer goods and inter- diverted into rent seeking and others are base of the country. It is true that, if left mediate goods from abroad. prevented from competing. to the markel, the productive structure of many countries in the Baltics and the * The desire of government officials to David Tarr is lead economist of the World CIS will chang e markedly. For example, either wield power or get rich through Bank's Development Research Group. E TRANSITION, December 1997 © 1997 The World Bank Som Like It Appreciated..... By presidential decree, Uzbekistan abolished customs du- ratio-before the IMF would resume payments. Fischer em- ties and export licensing for manufactured goods as of No- phasized the need for the unification of the exchange rate at vember 1, 1997. President Karimov's decree also: a market-determined point between the official and unoffi- * Halved the corporation tax on firms exporting more than cial rates. However, there is little indication that President 30 percent of their output Karimov intends to endorse a sorn devaluation at this time. * Abolished advance payments by exporters (including cot- ton exporters), subject to bank guarantees of convertible In late October Minister of Macroeconomics and Statistics currency proceeds Bakhtiyor Hamidov predicted that industrial output would * Exempted from excise duty and value-added tax (VAT) increase by 6.5 percent and investment by 26 percent in enterprises selling their own products to firms within the 1997 over 1996. This would represent the first upturn from CIS, (effective January 1, 1998). This should revive direct post-communist recession: industrial output in 1996 was 7 Uzbek sales primarily to Russia. percent less than in 1995. Agricultural output is estimated to be up 7 percent year-on-year, and GDP growth for 1997 is But restrictions were not lifted for primary products that forecast officially at 5.2 percent. Monthly inflation in 1997 constitute (or will constitute) the bulk of its export earn- is likely to average 2.2-2.3 percent. (Annual inflation was ings-cotton, gold, other precious and nonferrous metals, brought down from 1,200 percent in 1994 to 64 percent in rolled steel, and oil and gas. In terms of world production, 1996). Uzbekistan ranks fourth in uranium, fifth in cotton, seventh in gold, and tenth in natural gas. It possesses other miner- In 1996 the cotton crop fell from a 1993-95 average of 4 als as well. million tons to 3.1 million tons, while the grain harvest dropped from 3.2 million tons in 1995 to 2.7 million tons in The government decided to keep the official exchange rate 1996. In 1997 the crop suitable for human consumption is of the som and the strict foreign exchange control intact. forecast at only 2.5 million tons, compared with a require- Imports rose in 1996 to $4.5 billion, from $2.7 billion in ment of 4.5 million. There will, therefore, be a substantial 1995. Despite the tight currency controls and import li- demand for foreign exchange for importing grain. No official censing, the trade balance deteriorated further in the first statistics are yet available on the full cotton crop. Early half of 1997. The trade surplus shrank from $136 million in indications are that the government's target of 4 million tons the first three months of 1996 to $75 million in the first might be reached. quarter of 1997. In November the som's black market rate dropped to 160-180 som to the dollar, while the official rate Uzbekistan received $342 million in foreign direct invest- is 76 som to the dollar. The market value of the currency is ment in 1989-96. There was a net outflow of investment in estimated at 90 som to the dollar, closest to the commer- 1995, and so little foreign investment arrived in 1996 that, in cial exchange rate used by banks. The central bank spent per capita terms, Uzbekistan ranked as the least attractive $3.3 billion dollars in 1996 intervening to protect the cur- transition economy. Uzbekistan has the least per capita for- rency. (The som was introduced in November 1993.) eign direct investment in all of Central Asia. In the longer term, the government wants to reverse this trend, although In 1997 the government was due to implement its commit- it did not promise an easing of the administrative proce- ment to the IMF's Article VIII provisions for full current ac- dures for the time being. However, in December 1997 the count convertibility and the nondiscriminatory availability country was successful in signing a $1 billion agreement of foreign currency to residents. However, Tashkent reneged. with a United States-Japanese consortium (ABB Lummus The import and foreign exchange restrictions caused the Global Nissho Iwai and Mitsui & Cothat) to build a $1 billion IMF to suspend its $185 million Systemic Transformation chemical complex in Shurtan, 350 kilometers southwest of Facility in December 1996, after $92 million had been dis- Tashkent, to be completed by the end of 2000. The facility bursed. Shortly afterwards, the World Bank deferred release will have an annual capacity of 125,000 tons of polyethyl- of a $250 million Enterprise Reform Loan. The IMF's First ene, 137,000 tons of liquid gas, and 37,000 tons of gas Deputy Managing Director Stanley Fischer warned the gov- condensate. ernment that it would have to prepare a new economic pro- gram by the end of 1997 and meet all its earlier Basedonreportsofnewsagenciesandtheintemationalre- commitments-including a 3 percent budget deficit to GDP search group, Oxford Analityca, Oxford, U.K. © 1997 The World Bank TRANSITION, December 1997 * 1998 Index of Economic Freedom Being loyal to Transition's tradition, we summarize the latest Economic Freedom Index, a joint venture of the Heritage Foundation and the Wall Street JoumaL The ranking is based on measues of 10 broad economic factors in 156 economies. (The higher the score on a factor, the greater the level of government interference in the economy and the less economic freedom.) Again, we have to express some reservations about the objectivity and comparability of these calculations. Quoting from the executive summary: '...Estonia and the Czech Republic, both of which score well in the 1998 Index.., are following the models of Hong Kong and Singapore...." The latest upheavals in the Czech Republic confirm the validity of this statement, but alas, from a completely differentperspective. And there are some strange results in the rankings: an example, Mongolia precedes Slovenia, and Cambodia leads Croatia. We can agree, however, with the final conclusion of the authors: countries with more economic freedom also have higher rates of economic growth and are more prosperous than those with less economic freedom. Index of Economic Freedom Rankings Score Tax- Government Monetary Foreign Bank- Wage! Property Regu- Black Rank Economjy 1998 1997 1996 1995 Trade ation intervention policy investment ing prices rights lation market 1 Hong Kong 1.25 1.25 1.25 1.25 1 1.5 1 2 1 1 2 1 1 1 2 Singapore 1.3 1.3 1.3 1.25 1 1 1 1 1 2 1 1 1 1 3 Bahrain 1.70- 1.6 1.7 1.6 2 1 3 1 2 2 2 1 2- 1 17 Estonia 2.15+ 2.35 2.35 2.25 1+ 3.5 2 4 1 2 2 2 2 2+ 20 Czech Rep. 2.20- 2.05 2 2.1 2- 4- 2 2 2 1 2 2 2- 3+ 62 Latvia 2.85+ 2.95 3.05 - 2+ 2.5 3 5 2 2 2 3- 3 4 66 Hungary 2.9 2.9 2.9 2.8 4 4 3 4 2 2 2 2 3 3 69 Poland 2.95+ 3.15 3.05 3.25 2+ 3.5 3 5 2 3 3 2 3 3 74 Lithuania 3.00+ 3.1 3.5 - 1+ 3 3 5 2 3 3 3 3 4 77 Slovakia 3.05 3.05 2.95 2.75 3- 4.5 3 2+ 3 3 3 3 3 3 80 Mongolia 3.01+ 3.3 3.5 3.33 1+ 4 3 5 3 3 3 3 3 3 80 Slovenia 3.1 3.1 3.35 - 4 4 3 5- 2+ 2 3 2+ 3 3 94 Romania 3.30+ 3.4 3.7 3.55 2 5 3 5 2 3 2 4 4 3+ 96 Cambodia 3.35+ 3.55 - - 3+ 2.5 3+ 5- 3 3 3 4 4 3 96 Moldova 3.35 3.35 3.45 4.1 3 3.5 3 5 3 3 3 3 3 4 104Armenia 3.45 3.45 3.75 - 2 3.5 3 5 4 3 3 3 4 4 104 Russia 3.45+ 3.65 3.5 3.5 4+ 3.5 3+ 5 3 2 3 3 4 4 114 Bulgaria 3.65- 3.6 3.5 3.5 4- 4.5+ 3 5 3 3 3 3 4 4 120 Albania 3.75- 3.65 3.45 3.55 3 3.5 5 5 2 4 3 4- 3 5 120 China 3.75+ 3.8 3.8 3.8 5 3.5+ 5 3 3 3 3 4 4 4 120 Croatia 3.75- 3.7 3.7 - 3 3.5- 5 5 3 3 4 4 4 3 125 Ukraine 3.80- 3.75 4 3.9 4 4+ 3 5 3 4 3 4- 4 4 132 Krygyzstan 4 - - - 4 4 3 5 3 4 4 4 4 5 135 Belarus 4.05- 3.85 3.55 3.65 4+ 4.5 3 5 4 3 4- 4- 4- 5 136 Kazakhstan 4.1 - - - 4 4 3 5 4 4 4 4 4 5 143 Azerbaijan 4.40+ 4.6 4.7 - 5 4 5 5 4+ 4 5 4 4 4+ 143 Tajikistan 4.4 - - - 5 5 4 5 4 4 4 4 4 5 145 Turkmenistan4.5 - - - 5 5 4 5 4 5 4 4 4 5 146 Uzbekistan 4.55 - - - 5 4.5 4 5 4 5 4 4 5 5 147 Vietnam 4.7 4.7 4.7 4.7 5 5 5 5 4 4 4 5 5 5 154 Cuba 5 5 5 5 5 5 5 5 5 5 5 5 5 5 154 Korea, D.R. 5 5 5 5 5 5 5 5 5 5 S 5 5 5 Source: Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick, "1998 Index of Economic Freedom." (New York: The Wall Street JournaL --Not available. M TRANSITION, December 1997 3 1997The World Bank Calculating the Scores Fifty independent economic variables were analyzed and grouped into the following 10 economic factors: trade policy, taxation, government intervention in the economy monetary policy, capital flows and foreign investment, banking, wage and price controls, property rights, regulation, and the black market. Each factor was scoredaccording to a grading scale unique for that factor: Trade policy Banking regulations * Average tariff rate * Government ownership of banks * Environmental, consumer safety, and * Nontariff barriers * Restrictions on the ability of foreign worker health regulations. * Corruption in the customs service. banks to open branches and subsid- * Regulations that impose a burden on iaries businesses. Taxation * Government influence over the allo- * Top income tax rate cation of credit The black market * Tax rate that applies to the average * Government regulations, such as de- * Smuggling income level posit insurance * Piracy of intellectual property * Top corporate tax rate * Freedom to offer all types of finan- * Agricultural production supplied * Other taxes. cial services, such as buying and sell- * Manufacturing supplied ing real estate, securities, and * Services supplied Government intervention in the insurance policies. * Transportation supplied economy * Labor supplied. * Government consumption as a per- Wage and price controls centage of the economy * Minimum wage laws Ratings of 1 are indicative of a mostly * Government ownership of busi- * Freedom to set prices privately with- free economy, and ratings of 5 are in- nesses and industries out government influence dicative of extensive economic inter- * Economic output produced by the * Government price controls ference by government. Each economy government. * The extent to which government price in the index has been given an overall controls are used economic freedom score, based on the Monetary policy * Government subsidies to businesses average of the 10 individual factor a Average inflation rate from 1985 to that affect prices. scores. A plus sign (+) indicates an im- 1995 provement and a minus sign (-) a wors- * Average inflation rate for 1996 (for Property rights ening of the score on a particular factor informational purposes only). * Commercial code defining contracts compared with the economy's score in Sanctioning of the foreign arbitration 1996. Capital flows and foreign investment of contract disputes * Foreign investment code * Government expropriation of property The four broad rankings of economic * Restrictions on foreign ownership of * Corruption within the judiciary freedom are: businesses * Delays in receiving judicial decisions. * Restrictions on the industries and * Legally granted and protected private * Free: 1.99 or lower companies open to foreign investors property. * Mostly free: 2.00 to 2.99 * Restrictions and performance require- * Mostly unfree: 3.00 to 3.99 ments on foreign companies Regulation * Repressed: 4.00 or higher. * Foreign ownership of land * Licensing requirements to operate a * Equal treatment under the law for business 1998 Index of Economic Freedom, by both foreign and domestic companies * Ease of obtaining a business license Bryan T Johnson, Kim R. Holmes, and * Restrictions on the repatriation of * Corruption within the bureaucracy Melanie Kirkpatrick, 1998, 408 p. To or- earnings * Labor regulations, such as estab- der, call The Wall Street Journal Fulfill- * Availability of local financing for for- lished work weeks, paid vacations, ment Center at 1-800-975-8625. eign companies. maternity leave, and selected labor © 1997 The World Bank TRANSITION, December 1997 * Eastern Europe behind a Red-Tape Curtain DHL Customs Report Rebukes Bureaucratic Regulations T he Iron Curtain dividing Europe Only 10 percent of Western multination- shipments (35 percent), and closer co- might have come down, but a als in the survey felt that customs au- operation with the EU (21 percent). "red tape" curtain still shields the thorities in Central and Eastern Europe Eastern half of Europe, according to operated as facilitators (6 percent) or The report concludes that customs au- Western European multinationals. DHL's partners (4 percent). Thirty-nine per- thorities, who often see themselves as recent custorms report for Central and cent felt that customs authorities oper- police rather than as facilitators of the Eastern Europe shows that shipments atedas barriers, 37percentfeltthatthey economy, should be educated about what have been turned back at border posts were duty collectors, and 25 percent felt businesses need. Peter Davies, DHL because forms were not filled out in the that customs authorities in the region regional director for Central and Eastern right color ink. Customs held back a Brit- operated like policemen. Over half of Europe, noted that in some countries ish shipment or cider because they didn't multinationals that took part in the DHL customs officers lack motivation, re- have a product code for it and wouldn't survey reported that the customs de- sources, and pay. label it as an apple drink. As the leading lays had resulted in lost revenue to their air express operator, DHL conducted the businesses. Estimates ranged from Stefan Korshak of Radio Free Europe's survey to find out to what extent cus- "hundreds of thousands of pounds" to Kyiv office, supplemented this with the toms difficulties prevent Western com- "several million." following report: panies from doing more business with countries in the region. According to respondents, the most In the DHL office in Kyiv, Ukraine, three straightforward customs procedures can resident customs officers are enforcing One hundred multinationals from 13 Eu- be found in the five countries that are Ukraine's import rules. A DHL customs ropean countries-Austria, Belgium, first in line for European Union (EU) broker, a former customs officer himself, Denmark, Finland, France, Germany, membership. Forty-one percent said estimates that his former colleagues de- Italy, Netherlands, Norway, Spain, Swe- that, out of all the countries in Central lay from a quarter to a third of the firm's den, Switzerland, and the United King- and Eastern Europe, they had encoun- incoming packages. In the recent DHL dom-took part in the survey, conducted tered the least difficulties with customs survey, Ukraine was put in the same in August 1997. Most respondents were in the Czech Republic. Thirty-four per- group as Romania, Bosnia, and Yugosla- export managers. Half of the compa- cent felt that Hungary offered the via, offering the "least straightforward" nies that participated have an annual smoothest customs clearances, fol- customs rules. No nation was deemed to group turnover of more than $2 billion, lowed by Poland (12 percent), Slovenia have improved them as little as Ukraine. and all have experience in trading with (12 percent), and Estonia (12 percent). Some examples of customs roadblocks at least two Central and Eastern Euro- Eleven percent said that they had en- in Ukraine: pean countries. countered the least number of difficul- * Videotapes, CD-ROMs, and floppy ties in Lithuania, while 7 percent cited disks entering the country require indi- Problems with customs rules and regu- Latvia and Slovakia. Less than half (49 vidual export licenses under legislation lations is by far the biggest challenge percent) of the companies that took part enacted in July to protect international that Western European multinationals in the DHL survey believed that customs copyrights. One DHL shipment ran into face when doing business with Central procedures in the region had improved trouble recently because it included a and Eastern European countries. Al- over the past two years. Countries in corporation's annual report stored on most 9 out of 10 multinationals (89 per- which improvements had been noted computer floppy disk. The same mate- cent) experienced customs clearance included Hungary (23 percent), the riai easily could be transmitted electroni- problems. By comparison, 30 percent Czech Republic (18 percent), Poland (15 cally via Internet. of respondents; said that currency fluc- percent), and Slovenia (12 percent). * A Customs Committee rule blocks cou- tuations had caused difficulties for their Those respondents who had noticed rier shipments of financial instruments company, 27 percent cited political in- better customs procedures also noted such as credit cards, travelers' checks stability, and 25 percent mentioned the an easing of documentation require- and even blank checkbooks. problem of corruption. ments (50 percent), faster processing of * Foodstuffs require certification from the M TRANSITION, December 1997 © 1997The World Bank State Quarantine Commission and quality Letter to the Editor approval from a State Food Committee. * Medicines need the blessing of the health ministry. How to Speed Up Growth and Keep Debts * Electronic equipment must be vetted at Bay? for radiation hazards by the Ukrainian Y Standardization Center for radiation and by Bruno S. Sergi electric hazards. Communications equipment like mobile phones, satellite Recently, Stanislav Menshikov and phenomenon, therefore restrictive fiscal antennae, and pagers, if deemed to pose David Gisselquist wrote about fiscal policies are unwise, I do not agree with no threat of radiation, fall under the pur- policy in Russia (Transition, Vol. 8, No. him when he advocates a new program view of the Communications Ministry. 2 pp. 13-16). Menshikov argued that to expand aggregate demand in - Christmas presents-sent through a Russian fiscal and monetary policies Keynesian terms. I am for "directed" courier company-often fall under regu- are restrictive, real money supply is in- public expenditures and "directed" tax lations that control wholesale manufac- adequate, and there is no need to fight incentives. turers, and therefore are subject to taxes against "the nonexisting demand-pull and licensing approvals. The same thing inflation." By restricting aggregate de- Table 1. Basic macroeconomic sent by mail invokes different rules al- mand: "the government helped prolong indicators lowing goods vaiued at up to $200 to pass depression in the real sector while fail- (percent) into Ukraine unimpeded. Recently, man- ing to restrain supply-side inflation." In- Cumulative agers of express delivery offices in Kyiv creasing government spending would GDP Real GDP met with customs arents in an attempt not riska new inflationary surge, he con- Growth Inflation growth torescue Christmas fruitcakes thaatmight cluded. David Gisselquist-while not 1997* 1997* 1990-97 to esueChistasfritake tatmihtsharing some recommendations of otherwise be held hostage until July. Mshaikov-supports thiew ta Bulgaria -4.8 769 -37.5 Menshikov-supports the view that CehRp45 8 -. "fiscal austerity has gone too far and is Czech Rep.4.5 8 -5.8 To order DHL report call Dirk Singer or not the wa to romote economic Hungary 2.0 18 -12.4 Richard Kanareck, DHL London, 44-171 - nthewy to prmteooi Poland 5.5 16 +11.6 nichadKanaeckJHLLonons4417l-growth. To turn the corner in Russia is 1 1. 465-7700, oremail: Dirk-Singer!classic. growth. rther ihn ru ," Romania -1.5 109 -13.0 to prioritize growth rather than reform," msn. com. he pointed out. But apart from the Russia 1.0 14 -49.6 quoted opinions, most authors of your Slovakia 6.0 6 -2.5 1~ 91tJM( I'JF OUS@D9F[ newsletter strongly believe that restric- *forecast. Off " ORouRci r tive monetary and fiscal policies are the Source: World Economic Outlook (1 997), precondition for successful economic the World Bank MultiQuery. Database reforms. (1997), and Russian Economic Trends (1997.1). / i Postsocialist economies have entered a new stage of transition. In terms of GDP Deficit in transition countries can be growth, many perform better now than a considered as a transition deficit, being few years ago (table 1). However, there the outcome of a transition recession: is a plausible risk that, in many of these the GDP falls and tax collection breaks economies, recovery may lose steam, down, as has been the case in Russia 4 / > X ~~~~~~~and their GDP will level off somewhere and other CIS countries. In Russia tax around the level that prevailed before tran- collection is not even 20 percent of GDP, sition (see the cumulative real GDP and only 10 percent of overall revenues growth in table 1). No question, invest- originated from personal income tax. ments are absolutely necessary to keep these economies growing. Since the current rate of inflation easily outperforms that of real GDP growth, While I do agree with Menshikov that governments can reduce their relative From the World Press Review Russian inflation is not a demand-pull amountofdebtbymeansofinflation.Thus (© 1997 The World Bank TRANSMON, December 1997 U the budget delicit is compatible with the Thus I contest the current wisdom that growth and, at the same time, cut down stability of government debt, and it is not only rigid fiscal policies assure stability their external and domestic debt. only the outcome of increased budget and the prospect of income growth. In this spending but also of a tax-cutting policy second stage of transition, policymakers, The author is professor at the University (see table 2). Nhat I call "active deficit," by boosting expenditures and applying of Messina, Italy, teL. 39-330-907841, fax encourages the rapid accumulation of sav- tax exemptions, can speed up economic 39-965-279-74. ings, along with human and physical capi- tal investments, and is compatible with Table 2. Basic fiscal indicators in 1996 an open policy toward foreign investment, (percent of 1996 GDP) technologies and telecommunications. Domestic Extemal Totalpublic debt Government Govemment public public to government Governments, however, should not Country deficit revenue debt debt revenue (%) merely expand aggregate demand in or- Bulgaria 13.3 32.0 24.1 96.9 378 der to boost economic growth "a la Czech Rep. 0.6 46.5 8.7a 16.5 54 Keynes." They can put their economies Hungary 1.1 51.2 33.0 40.5 143 to a rapid growth track if they are able to Poland 2.8 45.9 16.8 30.2 102 induce positive supply response, stimu- Romania 5.7 31.4 3.6b 18.2c 69 lating the economy through public sec- Russia 6.5a 12.4 16.0 30.2d 364 tor investment (infrastructure) and Slovakia 1.3 44.9 10.2b 9.5 44 introducing tax incentives (for example, a. International Financial Statistics 1997, IMF to promote foreign direct investment). b. Taken from "Aspects of Fiscal Performance, in Some Transition Economies Under That implies "directed" public expendi- Fund-SupportedPrograms,"IMFWorking Paper 97/31, W. H. Buiter 1994.. tures and "directed" loss of tax revenues. c. 1995, calculated as total external debt minus private nonguaranteed long-term exter- This"actve" igfiit i comatibe wih anal debt. This "active" deficit is compatible with a d. 1995, calculated as total external debt minus short-term private external debt. policy that is oriented toward stabilizing Sources:The World Bank MultiQuery Database, (1997). indebtedness. Western Advisors Rush In --1''= 1 i1ft--2 1,2 g ¢<< m 1.~~~~~~~~~~If-1- - - "Is that supposed to be the Western emergency aid?" From the Hungarian daily Nepszabadsag m TRANSITION, December 1997 ©0 1997 The World Bank Russian Grassroots Fight for True Federalism by Adam Korengold and Leonid Polishchuk The past few years in Russia have seen overall tug of war between the political "supremacy of human rights and rule of a massive transfer of economic and po- elites of the center (Moscow) and the law, democracy, and federalism."The CU litical power from the national government regions. Lack of constitutional consen- undertakes networking in all 89 constitu- to the regions. In theory such a major de- sus and stability undermines the author- ent regions of the Federation, provides centralization could vastly increase the ity of law; renders legal, fiscal, and expertise on a broad range of legal, fis- efficiency of public decisionmaking. regulatory arrangements unpredictable; cal, and regulatory issues; drafts key These gains, however, are contingent and stifles economic growth. constitutional legislation, including upon: model charters for regional governments; *Unhampered economic links between In 1995, with the support of the Council and functions as advocate and informa- regions within a national market of Federation (the upper house of the tion clearinghouse. *A constitutional structure that imposes Russian parliament), a group of Russian checks and balances between different legal scholars and experts, along with In the two years since its inception the branches of the government politicians and other practitioners of con- CU has established local chapters in 52 *A culture that respects and insists on stitutionalism, formed the Russian Con- constituent regions of the Federation. Its the rule of law and compliance legal experts are drafting and with constitutional norms and discussing key legislative provisions. IRIS + CU = U.S.-Russia acts and constitutional docu- ments which deal with the fol- Since none of these conditions Regional Programs lowing issues (among others): are being met in Russia, the the principles governing divi- country's political and economic Since the spring of 1995 the Constitutional Union and the sion of power between the fed- decentralization has, to this point, Center for Institutional Reform and the Informal Sector eral and regional governments been more a source of conten- (IRIS) affiliated with the University of Maryland's Depart- and between the regional leg- tion than a path of prosperity. ment of Economics, have collaborated on several legal islative and executive Violations of federal constitu- issues, including establishing constitutional charters for branches, the legal founda- tional norms by regional authori- Russian regions, working out bilateral treaties between tions of local self-government, ties norms abound. Local regions and the federal government, and dealing with the and the reform of public law bureaucrats frequently exploit legal and constitutional aspects of fiscal federalism. Since at the subnational level. their region's distrust of Moscow 1993 IRIS has worked in Russia on many programs funded to delay market reform and pre- by USAID and other donors. The prospective agenda of Constitutional reform at the re- serve their economic and politi- the two partners includes such topics as the legal foun- gional level heads the CU cal control. In turn, the federal dations of local self-government; development of an in- agenda. The recent regional government threatens to overstep dependent regional judiciary; regional legislative autonomy gubernatorial votes have its limits of authority and curtail and economic integration; and political, social, and eco- vested subnational govern- regional powers. nomic rights in federal and regional legislation. With fi- ments with greater authority, nancial support from the Mott Foundation, the CU and but at the same time have in- Inconsistent and inadequate le- IRIS will jointly undertake a series of seminars for creased their accountability. gal systems (both federal and Russia's regional policymakers. The two organizations The regional governments, regional) further aggravate the will also promote direct links between Russia's regions however, still depend heavily problem. Legal and constitu- and U.S. states, cities, and municipalities. on transfers from the federal tional reforms are implemented budget. This serious mismatch separately at the federal and between increased responsi- regional levels. Such separation is help- stitutional Union (CU), an independent bilities and inadequate fiscal resources ful, considering the diverse regional grassroots organization. As its charter is squeezing regional politicians who, needs and preferences, but it also jeop- points out, the CU strives for uniform rather than turning to the mistrusted cen- ardizes the unity of the Russian state. application and enforcement throughout ter, are asking independent experts of the Legal reform has become part of the the country of principles based on the CU for help working out a broad range of © 1997The World Bank TRANSITION, December 1997 Russiarn Asymmetric Federation-Regional Economics 101 Efforts to negotiate and regulate relations of economic Tatarstan have made claims to: policymaking and economic resource control between the center and the regions have been ongoing since the Soviet * Full responsibility over issues defined in the legal docu- collapse. The March 1992 Federation Treaty and the 1993 ments as joint federal-republic functions (such as federal Constitution enshrined a system of asymmetric federalism: taxes, customs duties, and defense) * Exclusive right of resource extraction (Tatarstan passed a The 21 ethnic republics were granted autonomous status law in May regulating oil and gas exploration and within the federation; but the 57 regular territories-oblasti production-sharing agreements) (regions), kraya (territories), and the cities of Moscow and * Revaluation of federal property and federal privatization. St. Petersburg-and 11 autonomous districts (okrugi) located within these republics became administrative units of a uni- In regular territories, legislation has differed: tary state. * Reform-oriented leadership (such as those in Nizhni Novgorod, St. Petersburg, and Samara) approved regional Under this legal framework, the republics enjoyed key rights legislation on land privatization, real estate markets, and to control local economic development including: bankruptcy in 1995-96 * Conservative leaders (Tula, Ulyanovsk, and Voronezh) * Control over natural resources, strategic enterprises, and created local trade barriers, price controls, and taxes that infrastructure-federal property was limited mainly to impede the free flow of capital and labor defence-related enterprises * In regions where local corporatism predominates and there * Independent privatization policies is a close entanglement of local political and economic power * Unilateral tax retention and locally applied federal tax rates (Sverdlovsk and Irkutsk), attempts were made to raise ad- subject to bargaining with the center ditional revenues from exports through local customs du- * Independent foreign economic relations. ties and rent seeking. In practice, the ability of the ethnic republics to pursue inde- Overall, the system of asymmetric federalism, combined pendent economic policies depended more on their economic with the nontransparent nature of much center-regional bar- assets, bargaining skills, and political influence than on their gaining, has greatly complicated foreign direct investment de jure rights. (The Constitution deliberately includes some (FDI) in Russia. The center has largely been unable to im- ambiguous formulations, which gives the federal authorities pose standard regulations for the drafting of regional legis- leverage to intervene.) The republics' legal economic rights lation. There is no central registry of subnational legislation. were further enhanced by a series of bilateral power-sharing However, differences between regional economic legisla- agreements signed with the center beginning in February tion seem to marginally influence FDI into the regions. Re- 1 994, when Tatarstan negotiated the first such deal. The gions benefiting from major urban agglomerations; relatively regular regions resented the preferential treatment given to well-developed transport, distribution, and financial infra- the ethnic republics and lobbied for the legal enhancement structure (Moscow Oblast and city, Yekaterinburg and of their economic rights. Novosibirsk) and a favorable gateway location (St. Peters- burg, Arkhangelsk) receive most of the FDI. The center has in many cases conceded and has signed power-sharing agreements with the regions. To complicate Market-friendly institutions and legislation have helped to matters, sorme resource-rich okrugi also want to separate create a generally favorable environment in Nizhni Novgorod from their regions. For example, Yamalo-Nenetsk and and Samara. But some western investors seem to prefer Khanty-Mansi in Tyumen oblast have claimed exclusive local leadership with authoritarian tendencies and less di- rights to resource extraction on their territory. versified economic and political interests, such as that in Tatarstan, since in some respects this makes foreign in- The republics and the regular regions tend to pass different vestment dealings easier and cheaper. types of regicinal economic legislation. In the republics, eco- nomic legislaition has aimed mainly to assert more economic Based on the report of Oxford Analytica, the Oxford (U.K.)- autonomy. For example, Bashkortostan, Sakha-Yakutia, and based international research group. * TRANSITION, December 1997 (D 1997 The World Bank legal, fiscal, and regulatory issues, and -j v T 1 Pension resolving conflicts that arise from con- -Hungary's In v o VO rension flicting interpretations of the constitu- tional law. Reform Experience tional ~ ~ ~~ b lawl.eusc Some 200 legal experts from across the by Antal Deutsch country convened at the CU's annual H ungary's population is 10 million not only the ongoing costs of pay-as- congress, held last summer in Moscow. and is slowly declining.The birth you-go (PAYGO) plans, but also the bur- The congress's message was clear: rate is low, and the death rate den of the investment required to "Treaties between the federal govern- of middle-aged men is spectacularly establish the new system. Another view ment and the regions are often based high. The causes of death are smoking, takes the promises of the present sys- on political expediency, rather than on.. o l l d y h amnis alcoholism, generally bad diet, and a tem as given sunk cost or unrecorded sound principles of fiscal and adminis- high level of stress. The retired popula- national debt. In other words, any gov- trative federalism. That erodes the Rus- tion is overwhelmingly female, aging, ernment "deficit" specifically arising from sian constitutional system and puts and in need of ever-increasing medical paying these claims is only turning im- bargaining ahead of constitutional norms. expenses. The labor force is 4.5 million, plicit debt into explicit debt. The Russian federal constitution itself of which about 16 percent are officially requires fundamental amendment. The unemployed. There are 2.9 million pen- The specific reform arrangements in notorious vagueness in the division of powe bewee th feera goernentsioners, Including those on early retire- Hungaryvare: power between the federal government men an diailt beeis The and the regions should be eliminated. retirement age was low: 55 for women, *The retirement age is to advance in 60 for men. The pension system itself stages, from 55 and 60 for women and from federal Incursions. Constitutional frovfedersight murstieore. vontig iou;an aimed for a replacement rate of about men, respectively, to 62 years for both, overh m40 percent of the average wage. by 2008. legal responsibility for violation of con- -The annual inflation indexation of on- stitutional provisions and norms should The ratio of old and young population to going pensions will follow the Swiss in- be strengthened." the working-age population is high and dexing formula, taking half the change will continue to rise in the foreseeable in the consumer price index and com- The CU recognizes that unless legal re- formis acompnie by ffors toin-future; current estimates predict that the bining it with half the change in the av- form IS accompanied by efforts to im- prove the legal culture of Russian dependency ratio will be 79 percent in erage industrial wage. society-that is, public acceptance of 2001 and will increase to 87 percent by * The payroll tax used to finance pen- constitutional authority as well as appre- 2020. According to the traditional view, sions will extend its base to capture all ciation and respect for the rule of law- change to a funded system means that wage-like incomes. it will have limited results. Thus the the present generation will have to bear * In the reform's initial year of 1998, 6 organization initiates debate over public law and public policy, with the goal Foreign Direct Investment of educating government officials, poli- ticians, and the public. Fostering a greater public acceptance of improving the Russian legal system and the rule of law, is the mission of the Constitu- tional Union. _ Adam Korengold and Leonid Polishchuk are, respectively, Project Coordinatorand Research Associate at IRIS. Inquiries may be directed to IRIS, 2105 Morrill Hall, l College Park, MD 20742, tel. 301- 405-3110, fax 301-405-3020, Email: "Originally they wanted to exploit cheap labor from some Asian Ipol@iris.econ.umd.edu, IRIS website: country, but then, thank God, they chose us." http://www.inform. umd.edu/IRIS. From the Hungarian magazine H6cipo. © 1997The World Bank TRANsmTION, December 1997 * Russia Is Getting Ready for Private Pension Funds Russia's government in mid-December gave the go-ahead early retirees. The workforce numbers about 80 million. There to an ambitious reform program for the country's pension are too few workers supporting the population. This has pro- system, which has been a heavy burden on the duced great strain on the system. Although life expectancy government's already-strapped finances. The plan calls for for men is just 57, once they reach that threshold, they can shifting the current system of broad but low state ben- expect much longer life. efits-inherited from the Soviet era-to a combination of About ten million pensioners live under the poverty line. The state pension and private pension-savings accounts, minimum pension received in the country is about 70 (new) funded from worker and employer contributions. The plan rubles per month, the equivalent of $12. End-December, the doesn't involve raising the retirement age, (women are able a p ' ~~~~average pension was 370 rubles a month, up from 322,5 to retire at 55 and men at 60) but will create incentives for rubles at the beginning of 1997. The level of taxation that people to work longer by tying pensions more closely to should be collected for pensions is around 28 percent of time~~~~~~~~~~~~sol seve onlete the pesosob.ond2 ereto time served on the job. wages. The number of pensioners being supported are be- The plan will go to the president for final approval in January. ing supported from the formal economy. The government "The program won't affect current pensioners except to en- struggled in 1997 to pay off huge pension debts built up be- sure better financing of benefits and automatic indexing in cause the State Pension Fund failed to collect necessary line with wage levels", Deputy Prime Minister Boris Nemtsov payroll taxes. The size of the informal economy is such that said. New hires would presumably fall under a new, pri- there are many people generating GDP that is not being ac- vately funded system. counted for. One can work as little as five years in the formal There are 37 million pensioners out of a total population of system and still receive a pension. 150 million. About 12 million of the 37 million pensioners are Based on news agency reports. percent of wagess will be diverted to in- of the PAYGO program and hence the tion of private pension funds. A period dividual retirement accounts for those government's deficit in the long run. of rapid growth in terms of both mem- participating in the new system. In 1999 * Reforms will substantially increase the bership and assets followed. By the end the diversion will be 7 percent; and in stock of domestically owned savings. of 1997 membership was expected to 2000, and thereafter, it will rise to 8 per- * The level of pension benefits will be be 847,000, and assets at 51 billion cent of wages. These contributions will more closely related to the level of earn- forints ($275 million). In the summer of be deductible from the income and so- ings on which they are based. 1997 Hungary was also the first transi- cial security tax bases. [Employers' con- * The private defined contribution pen- tional economy to have legislated thor- tributions-curriently 24 percent of gross sion will more than offset the cut in the ough-going reform of its social-security salary, but due to fall to 22 percent by government-defined benefit pension, system. It remains to be proved that in- 2000-will continue to fund the state thus leaving future pensioners better off. dividual pension accounts produce a suit- pensions, together with the contributions able real rate of return, or that the (now 6 percent, to be increased to 8 per- The major unknown now is the propor- book-keeping costs of the reform are not cent by 2000) of those employees who tion of persons who will actually opt to underestimated. Decisionmakers of other do not join the new system.] transfer to the new system. That num- transforming economies will watch and * Participants in the new plan will include ber can only be guessed at. The govern- evaluate the early Hungarian experience all those entering the labor force after ment hopes that the proportion will be closely. So the story is about much more January 1998 and anyone wishing to low enough to accommodate the result- than local significance. switch to the new system. ing annual shortfall in the cash flow of * There will be al floor-guarantee for indi- the PAYGO system. (Experts reckon that Excerpted from fall 1997 issue of World viduals who have spent at least 15 years the shortfall-to be funded from the cen- Economic Affairs, vol. 2, no. 1. in the new system. At the same time, tral budget-can be kept within 1 per- there is no ceiling on the new publicly cent of GDP, or about 70 billion forint at The author is Professor of Economics, provided annuily. today's prices). McGill University, Montreal, Canada, and an advisor to the Hungarian Minis- As a result: In 1993 Hungary was the first transi- try of Finance. E-mail address is * These reforms will reduce the scope tional economy to legislate the opera- indu@musicb.mcgill.ca. * TRANSITION, December 1997 t 1997 The World Bank The World of Pensions Milestones Pensions are replacement income for those too old to work. of Transitioin "Funded" pension plans have a pool of assets large enough to meet their future liabilities. Pay-as-you-go (PAYGO) plans have little or no assets and rely on future payments into the plan to Stress, often related to poverty or the fear of unem- finance benefit payouts. There are two kinds of pension ben- ployment, is playing a significant part in shortened life efits. expectancy in transition economies. On December 9 the World Health Organization (WHO) reported that the aver- * Defined-Benefit (DB) plans promise a monthly income cal- age life expectancy at birth is now 67.3 years for men and culated on the basis of previous earnings and years of ser- 75.3 for women in the CEE countries, and 60.6 years and vice. In orderto runaDB schemetheplan need notbefunded, 71.9 years in the countries of the former Soviet Union (to but there must be a solvent guarantor. compare: 73.8 years and 80.6 years in the European Union). The extremely high smoking rates, particularly in Russia, * By contrast, Defined-Contribution (DC) plans simply accu- the Baltic states, Albania, Bulgaria, and Croatia suggest mulate a savings account that will buy whatever annuity is that 21st century health services will face an enormous available on the market at the time of retirement. DC plans burden from this disease. The report's message is stop require assets and safeguards but no guarantor of a promised smoking, cut down on alcohol, and eat more fruit and veg- level of benefits, because there is no such promise. etables and less animal fat. Government-sponsored plans in most major industrial coun- Trade among the former East Bloc countries is roaring tries are based on PAYGO arrangements. This means that back to life, according to a recent article in the Wall Street everyone's pension is paid by some other people down the Journal. U.S. companies are fueling much of the cross- road. Successful PAYGO plans presume that the working border activity. Under communism, 70 percent of East Bloc population as a proportion of the total, will grow (or at least countries' trade was among themselves, particularly with not decline!) and labor productivity in the economy will also the Soviet Union. In the early 1990s the backlash caused grow. Such public pensions include elements of income re- a shift west: companies were hungry for hard currencies, distribution: from rich to poor, also from later generations of and consumers were hungry for products with Western la- contributors to the initial generations of recipients, and from bels. The drift back to the East is a strong sign of the men with short life expectancies at retirement to women region's long-term fitness and stability, economists claim. with long ones. Governments often earmark a payroll tax to Western Europe will always be the region's main market cover the ongoing expenditures of the PAYGO system. and supplier, but the return of neighborly trade is giving a strong boost to several companies. Pension reform consists of designing a new system while maintaining the liabilities of the old system. The twin goals OECD ministers signed a new international convention of reform are usually to reduce budgetary cost to the gov- outlawing bribery by companies to win foreign con- ernment, along with the burden of taxes to citizens, as tracts. Bulgaria and Slovakia also signed the convention. well as to increase benefits to future retirees. Pension The agreement will also end the practice whereby compa- reform in the late 1990s involves: nies have been allowed a tax deduction against foreign bribes. The convention includes a sweeping definition of * The redesign of the public pillar (PAYGO) by reducing those covered by the offense by defining a "foreign public benefits agent" as anyone who holds a legislative, administrative, or judicial post in a foreign country as well as anyone with * The redirection of funds from the PAYGO system to pri- a job in a public sector company or an international organi- vately owned and managed contribution accounts that are zation. The convention will go to member countries' parlia- fully funded. These are attractive because they confer a ments for approval before being ratified a year from now. sense of ownership on the pension saver and, if compe- tently managed, promise much better returns to the typical participant than can be obtained by putting the same funds into the PAYGO arrangement. Continued on page 24 ( 19 9 7 The World Bank TRANSITION, December 1997 "There is need for socialist care for the poorest, conservative defense of tradition, and liberal reflection on efficiency and growth." Adam Michinik Explains the Central European Syndrome P eople from Central Europe like garian writer Gyorgy Konrad: "It is we, to reason. Only strong institutions can to tell jokes. For years jokes of- who live in Central Europe, who began achieve this. The socialist, on the other fered them asylum. In the world the two greatWorld Wars." Put differently, hand, saw in man a good being, forced by of jokes they not only felt free and sov- this multinational mosaic, conquered by inhuman social conditions into animal be- ereign, within captivity and Soviet domi- German, Austro-Hungarian, Russian, havior. Both conservative and socialist nation, but they also laughed. Two and Ottoman empires, was, and still is, rejected the order of a freedom based on people, with the experience that comes a source of conflict and destabilization. the free play of political and economic with age, were playing tennis. The ten- Today, seven years after the collapse of forces and on the specific domination of nis ball ended up in the bushes. While the Berlin Wall, the nations of Central propertyandmoney.Theconservativeheld looking for the ball, one of the players Europe are facing new opportunities and that this order liberates an animal rapa- saw a frog. The frog spoke to him in a new challenges. ciousness in man, while the socialist was human voice, "I'm a beautiful princess, of the opinion that this order virtually re- turned into a frog by a mischievous wiz- Decades and centuries of existence in quires an animal aggression. ard. If you kiss me, I will become a prin- an environment of oppression and re- cess once again. I will marry you, you pression produced a specific culture, Why did we rebel against communism? will be a prince, and we will live happily characterized by honor and self-irony, the Why did we prefer to become a small, ever aiter." The player put the frog into stubbornness to stand by values, and repressed minority, rather than to join the his pocket, found the ball, and contin- the courage to believe in romantic ide- majority who lived and made careers in ued the game. After a while, the frog als. Here, national and civic conscious- the world of totalitarian dictatorship? again spoke to him, this time from his ness developed as a result of human Well, we rejected communism for sev- pocket, "Sir, did you forget about me? I bonds-and not by the order of state eral reasons: it was a lie, and we were am this beautiful princess, turned into a institutions; here it was easier to devise searching for truth. Communism meant frog. If you kiss me, I will become a prin- the idea of civil society, precisely be- conformity, and we desired authenticity; cess again. We will get married and live cause the sovereign national state re- communism was enslavement, fear, and happily ever after!" And then she heard mained largely in the realm of dreams. censorship, and we desired freedom; it his answer: "Dear lady frog, I will be com- was an ongoing attack on tradition and pletely honest with you. I have reached The system of parliamentary democracy national identity, which we held to be the age at which I would rather have a and the market economy have had fierce ours; it was social inequality and injus- talking frog than a new wife..." adversaries since their inception. Let's tice, and we believed in equality and jus- give them the symbolic names of "con- tice; communism meant a grotesquely This frog is Central Europe, knocking at servative" and "socialist." For the con- deficient economy, and we sought ratio- the gates of NATO and the European servative, the democratic order was a nality, efficiency, and affluence; commu- Union. NATO and the European Union negation of tradition-the defeat of the nism meant the suppression of religion, have not yet made up their minds to Christian spirit by a rapacious nihilism; and we held freedom of conscience to kiss. They don't yet know whether they the total victory of relativism over the be a fundamental human right. So, we prefer to have a talking frog or a new world of tested and absolute values. For rejected communism for reasons equally wife. [Since the publication of this es- the socialist, it was a system that gen- dear to a conservative, socialist, and lib- say, both NATO and the EU decided to erated, disguised, and perpetuated in- eral. In this way, a peculiar coalition of "kiss the frogl Let us skip the contro- equality and injustice. ideas emerged, which Leszek versies over defining the borders of Cen- Kolakowski noted in his well-known es- tral Europe. Let's remind ourselves, The conservative saw in man a wild be- say, "How to be a Conservative-Liberal however, of thie statement by the Hun- ing, that cannot be domesticated by calls Socialist?"This coalition collapsed along M TRANsiTION, December 1997 D 1997The World Bank with communism. Egalitarianism found countriesthathad justregainedindepen- subject of democracy is people, not itself in conflict with the principles of a dence after a long enslavement. Con- ideas. liberal economy; conservatism chal- servative partisans of the national lenged the spirit of liberal tolerance. principle emphasized the need to recon- Today, the classic ideological positions- struct the ethnic fabric destroyed like liberalism, conservatism, or social- Dilemmas arose and were resolved in through years of official denationaliza- ism-donotdominatepublicdebateabout different ways by the socialist, the con- tion; partisans of the civil principle de- taxes, health reform, or insurance. Yet, servative, and the liberal. For the social- fended the fundamental tenets of in each of those debates, there is a need ist the central issue was to give a human democracy against an "invasion of in- for the presence of a socialist care for face to a rapacious market economy, to tolerant chauvinism." the poorest, a conservative defense of defend the poorest sectors in society, tradition, and a liberal reflection on effi- to pressure the secular character of the Democracy is gray, established only with ciency and growth. Each of those values state, and to show tolerance toward difficulty; its quality and flavor are best is needed in democratic politics. It is people of different faiths and nationali- recognized when lost under the pressure these that give color and diversity to our ties. The conservative, for his part, of advancing "red" or"black" radical ideas. life; it is these that equip us with the ca- wanted to bring back the continuity of Democracy is not infallible, because in pacity to choose; it is thanks to their con- national symbols and would fight for a its debates all are equal. This is why it tradictions that we can afford Christian reshaping of the constitution lends itself to manipulation and may be inconsistency, experimentation, changes and institutions; he would warn against helpless against corruption. This is why, of opinion, and changes of government. the dangers of liberalism and relativism; it frequently chooses banality over ex- Fundamentalists of different stripes con- and he would demand harsh treatment cellence, shrewdness over nobility, and demn the moral relativism of democracy for members of the old regime. The lib- empty promise over true competence. De- as though it were the state that should eral would say, "the economy first," eco- mocracy is a continuous articulation of be the guardian of moral virtue. We, how- nomic growth, clear market rules, a particular interests; a diligent search for ever, the defenders of gray democracy, stable system of taxation, privatization, compromise among them; a marketplace do not grant the state this right. We want and exchangeable currency. He would of passions, emotions, hatreds, and human virtues to be guarded by the hu- be a careful defender of the idea of a hopes; eternal imperfection; and a mix- man conscience. That is why we say, "gray tolerant state with regard to the Church, ture of sinfulness, saintliness, and mon- is beautiful." And all of this has been told to national minorities, and to neighbor- key business. Yet only democracy-with to you by a frog from Central Europe. ing countries-and with regard to the its capacity to question itself-also has past. the capacity to correct its own mistakes. Adam Michnikis Editor-In-Chief of the Pol- Only gray democracy, with its human ish Gazeta Wyborcza. This is excerpted At the same time, a nostalgia appeared, rights and its institutions of civil society, from his essay "Gray is Beautiful; A Let- surprising-the socialist, the liberal, and can replace weapons with arguments.The ter to Ira Katznelson." the conservative. It was nostalgia for the security of the "good old communist days:' when, it was said, "the state pre- l I tended to pay the people, and the people L pretended to work." The dispute over the shape of the mar- ket economy took on the form of a so- cial conflict in which the arguments of the socialist and the conservative came together in a criticism of the policies of liberal transformation. Unemployment, social contrasts, the frustration of em- I \ t L l ployees-all contributed to a siowdown ' a In t in the reform process. The dispute over revie ntire portfolio, Mr. Hartwelder, andfind that your lottery the shape of the state turned out to be ticket for Saturday's draw is your best shot at financial independence." fundamental, especially in multinational From the World Press Review © 1997 The World Bank TRANsITiON, December1997 * Continued from page 21 experts attending a regional forum of the start in the spring of 1998, followed by World Energy Council in Warsaw said. strategic sectors in the summer, and Poland, for example, needs to spend $3 banks in 1999. In the Serb Republic billion annually to upgrade its power sec- some 400 firms will be sold, 55 percent tor. Some 112 million people living in the of shares are to go to state-run Tighergrowth latestiED osurvy Cexets Iregion's 11 countriesarefacingagradual privatization funds, 30 percent will be highEasterngw Euroeat n mostuCentras but substantial growth of energy prices offered to citizens through a voucher in the next 20 years that will match scheme, and 15 percent to strategic GDP prices in the West. Participants agreed investors for cash. 1996 1997 1998 that privatization of the energy sector is Bulgaria -9.0 -6.0 2.0 vital for the region. Bulgaria Czech Republic 4.4 0.9 1.7 Estonia 4.0 9.0 -- Albania Bulgaria will accelerate privati-zation Hungary 1.0 3.0 3.9 and the liquidation of money-losing Latvia 2.8 4.0 Major macroeconomic targets for stateenterprisesinordertoattractfor- Lithuania 3.6 4.0 -- 1998: 10 percent GDP growth, 20 per- eign investment, according to Prime Poland 6.1 5.6 5.4 cent inflation, and a $170 million bud- Minster Ivan Kostov. Prime Minister Romania 4.1 -4.0 1.0 get deficit (down from $333 million Kostov also announced that the govern- Russia -4.9 0.5 3.0 in 1997). The government wants to raise ment plans to eliminate 30 percent of loss- Slovakia 7.0 5.0 4.5 public sector wages by 20 percent, but suffering enterprises by the end of 1998 Slovenia 3.5 3.5 4.0 also cut 15,000 jobs in that sector in and will have closed 90 percent of such Ukraine -10.0 -4.0 -- 1998, Prime Minister Fatos Nano an- companies by the year 2001. The intro- -- Not available. nounced in mid-December. Of the duction of an IMF-backed currency board Source: OECID. 267,000 people currently employed by on July 1 marked the beginning of an in- the government, some 150,000 work in creasingly confident economic and finan- The European Union (EU) is to begin government administration. The govern- cial recovery after a 9.7 percent fall in enlargement negotiations on March ment hopes to help create 73,000 new GDP over the first half of 1997, accord- 31, 1998, under the United Kingdom's jobs in the private sector. Albania has ing to the Financial Times. The currency presidency. Full membership talks with 162,000 registered unemployed, while board has played an important role by Cyprus, Czech Republic, Estonia, Hun- another 155,000 families receive welfare stabilizing the currency and permitting the gary, Poland, and Slovenia will be ac- payments. The average monthly salary remone-tization of an economy that had companied by preliminary talks with in the state sector is $55. largely reverted to barter and black mar- ket trading. December-December infla- Bulgaria, Latvia, Lithuania, Romania, tio in 199 isatcptda 61 and Slovakia. All 11 nations will be part BosniaIn 1998 Is anticipated at 16-17 and Slovakia. Al 11 nations wil be part VV"'percent and GDP growth at 4 percent. of the newly formed European Confer- ence. All will be eligible for $83 billion in According to the Muslim-Croat EU economic aid grants and soft loans Federation's Privatization Law, Czech Republic EU2000 econoi aidp ghaprants andsotlains ad opted last October, small-scale in 2000-06 to help the aspirants attain privatization should involve firms Czech GDP for the first nine months EU standards. Expanding the club will with up to 50 employees and up to of 1997 slowed to just 1.1 percent oblige EU mernberstomakemajorstruc- 280,000 dollars in assets, to be fol- above the same period in 1996. The tural changes;, including a change in lowed by the sale of strategic enter- Czech economy is now expanding at its costly farm subsidies, reallocation of aid prises, (electricity, water supply, slowest rate since it returned to growth for poor regions, and simplification of transportation, mining, forestry, tele- in 1994 and isslowerthan any other Cen- convoluted decisionmaking rules. Ad- communications and public service, and tral European economy. Consumer dressing these issues could take years. media). The government will settle its spending and corporate investment have obligations to citizens groups by issu- declined, and government spending CEE countries are facing a major re- ing vouchers that can be used to buy dropped. The 11-month trade deficit to- structuring of their power industry, assetsofferedforsalethroughauctions taled 123.9 billion koruny ($3.6 billion), which has become obsolete and re- and public tenders. The World Bank compared with 140.1 billion koruny 1996, quires costly modernization, energy suggested that small-scale sell-offs the Statistical Office reported. Imports * TRANSITION, December 1997 © 1997 The World Bank increased 12.8 percent year-on-year, rate targets, warned National Bank of Romania while exports were up 19.1 percent. How- Hungary Governor Gyorgy Suranyi. He ever, export growth was boosted by the called for self-restraint in Hungary's The government's failure to acceler- weakened koruna and will be sustained wage increases. The main monetary ate the privatization of enterprises in the longer term only if greater progress policy target for 1998 was to ensure that and banks, implement the foreign in- is made in industrial restructuring. Lon- the decline in inflation was sustained vestment law, start the land reform, don-based IBCA lowered the country's in the next few years as Hungary pre- and go ahead with the closing of sovereign rating to BBB+ from A-, cit- pares for EU and Monetary Union mem- loss-suffering industries provided ing a slowdown in the restructuring of bership. criticism from a majority of domestic the Czech economy. Josef Tosovsky, the and foreign observers, who neverthe- new caretaker prime minister, was head Hungary has leaped from fifth to first less agree that Victor Corbea's year-old of the national bank before his appoint- place on the list of Central European government is much more ment. He is expected to call for new elec- countries ranked by their investment reform-oriented than its predecessors. tions in mid-1998. He promised to adhere worthiness, published annually in the By the end of 1997 the government is- to tight fiscal and monetary policies, simi- Central European Economic Review. sued an emergency decree on the sale lar to his deputy and close associate Poland ranks second, followed by of state-owned companies in a bid to Pavel Kysilka, who has taken over tem- Slovenia, the Czech Republic, and Es- accelerate reforms and simplify the pro- porarily at the central bank. tonia. Hungary received high grades for cess. The new rules will become et- international integration, legal system, fective January 1, Privatization Minister Hungary accessibility to investment, productiv- Valentin lonescu announced. The gov- ity, political stability, and fighting corrup- ernment still wants to maintain control The Hungarian economic boom is ex- tion, and lower grades in economic of strategic enterprises, such as those pected to accelerate until the turn of growth, price stability, and current ac- in the aviation, energy, and telecommu- the century, but the country may have count balance. The list is based on as- nications sectors. Out of the nation's difficulty in achieving its inflation targets, sessments by economic analysts from 6,500 state-owned enterprises, those to according to the latest OECD study of PlanEcon, Deutsche Morgan Grenfell, be sold will most likely be the smaller Hungary.OECD analysts putGDP growth CSFB, HSBC, the Daiwa Research In- ones-4,000 have assets of less than at 3 percent in 1997, 3.9 percent in 1998, stitute, an.d WIIW. $100,000. Romania's inflation rate fore- and 4.2 percent in 1999. (The nine-month cast for 1997 is 120 percent. In recent 1997 GDP was up 3.9 percent Poland months industrial output dropped, the year-on-year, reflecting growth in invest- trade deficit increased, and the leu's ment and consumer spending.) The ex- The revised 1998 budget draft sets exchange rate declined 10 percent port increase is predicted to compensate the deficit target at 1.5 percent of GDP, against the dollar. for the expected boom in imports. Also, down from the 1.6 percent set by the the country will continue to attract large previous government. The revised draft Slovakia amounts of foreign capital, because the also foresees subsidy cuts for state return on investment ratio and market companies and indirect tax increases. Slovakia's state budget for 1998 an- competition are improving. In 1997 the The deficit is in line with the prefer- ticipatesrealGDPgrowthof5percent OECD expected the central budget defi- ences of Finance Minister Leszek and 12-month inflation of 6 percent. cit to account for 5 percent of GDP, and Balcerowicz and National Bank Presi- Expenditures are set at 184.8 billion for 5.4 percent of GDP in 1998. The gov- dent Hanna Gronkiewicz-Waltz, who crowns ($5.4 billion) against revenues ernment may not be able to hit its infla- has said that a 1.5 percent deficit will of 179.8 billion crowns. Parliament ap- tion targets as they largely depend on allow a reduction in the zloty's devalu- proved the budget on December 12. The wage oufflows. The OECD forecasts in- ation rate to maintain anti-inflationary resulting deficit is equivalent to just 0.4 flation of 14.4 percent in 1998, in light of pressure while seeking to curb trade percent of GDP, but excludes repayment an agreement with employer organiza- deficit growth. Poland's 1997 January- of state debt principal, totaling 46 billion tions on a 13.5-16 percent wage increase. October trade deficit reached $12.4 bil- crowns. (The finance ministry has aban- lion from $9.7 billion in the same period doned the accounting deficit method of Wage increases slowed the decline in 1996, with imports surging by 12.6 calculating the deficit, which it used for in inflation in 1997 and may jeopar- percent against exports growth of 5.3 the 1997 budget.) The January-Novem- dize the 1998 inflation and exchange percent. ber trade deficit increased to 43.9 billion i) 1997 The World Bank TRANsitioN, December 1997 * crowns (about $1 billion), the Statistical For 1997 Estonia's growth was ex- Experts estimate that private consortia Office reported on December 21. pected to reach almost 10 percent. In will account for 75 percent of oil produc- Eleven-month exports were up 9.9 per- the second quarter of 1997 Latvia's GDP tion by 2010. cent year-on-year, while import growth increased by 6.5 percent and Lithuania's was just 4.5 percent. growth was a mere 2 percent, compared Kazakhstan to the same period in 1996. Estonia's The country's third-largest bank, 1998 budget (passed by the parliament Annual inflation in 1997 will not ex- lnvesticna a Rozvojova Banka (IRB), on December 17), targets a surplus of up ceed 12 percent, according to the gov- is being placed under forced govern- to 54 million kroons ($3.8 million). The ernment. The National Statistics Agency ment adminiistration because of se- budget surplus is intended to slow eco- reported that consumer prices increased vere liquidity problems. The bank nomic growth. The rapid GDP growth has by 9.8 percent from January to Novem- suffered a 1.2-1.3 billion crown ($35-38 been underpinned by a strong influx of ber 1997, compared with 24.8 percent million) loss in 1996. IRB argues that it foreign capital, mostly "hot money" as in the same period in 1996. did not receive compensation for losses foreign direct investments fell as a pro- that it incurred because the government portion of the total from 80.3 percent in About 73 percent of Kazaks live be- forced it to provide a low-interest loan 1996 to 17.3 percent in 1997. Foreign low the government-defined poverty program to housing cooperatives and to capital inflow fueled a credit boom (credit line of $50 per person a month, rep- provide housing for young couples. IRB's volumes doubled in 1997), while the cur- resentatives of the International Fed- ownership structure is another factor rent account deficit reached 9.8 percent eration of the Red Cross reported behind the bank's difficulties: the steel of GDP. during a recent press conference in producer VSZ is both a major share- Almaty. The Red Cross's vulnerability holder and a significant debtor. The na- Azerbaijan study was conducted last February and tional bank will guarantee all deposits March among households of seven and draft a rehabilitation program. In Azerbaijan about 70 percent of en- representative regions. More than half terprises are to be privatized by the end of the respondents said that they were Baltics and the Commonwealth of of 1998. Under a three-year privatization malnourished, while 11 percent of chil- Independent States program, 15,000 small enterprises have dren in the republic were not attending been sold by auction. Under a mass school because they lacked adequate Estonia, Latvia, and Lithuania agreed privatization program, launched last shoes and winter clothes. to abolish nontariff customs barriers March, 7.1 million voucher books-each and establislh a joint economic area containing fourvouchers-were distributed Russia that would allow free movement of labor among the citizens. In larger enterprises and services among the three countries that have been converted into joint-stock President Boris Yeltsin launched a and the creation of a joint border regime. companies 15 percent of shares are sold veiled attack against the radical reform During their end of November meeting in to the employees for vouchers, another wing of his government on December Riga the three prime ministers also signed 55 percent at open voucher auctions, and 26. 'Today it is obvious to the majority of a resolution that stresses the need to the remaining 30 percent in cash auctions people that there are few noticeable suc- continue to cooperate in combating ille- in which foreigners may also participate. cesses in the economy," Mr. Yeltsin ad- gal immigration and to tighten control over By the end of 1997 shares in 400 larger mitted. He said that the country's the countries' eastern frontiers. enterprises are expected to be sold (out economic failures stemmed in part from of a total of some 2,000). Railroads, water the reformers' Marxist style of governance. Baltictradeddeficitsdeterioratedin 1997. facilities, historical and cultural monu- "We haven't lost the habit of thinking in Estonia's tradle deficit for the first nine ments, pension funds, and the national accordance with [communist] cliches and months increaised to $960 million, up from bank are excluded from privatization. The rules," Yeltsin noted. "Only party slogans $660 million in the first three quarters of President or the Council of Ministers can have been replaced with economic ones. 1996. Latvia showed an eight-month trade authorize the sale of fuel and energy pro- Instead of exhortations to build the Dnieper gap of $600 million, up from $480 million duction, petrochemicals, telecommunica- Power Dam or the Magnitka plant we for the same period in 1996. In Lithuania tions, and bread- and wine-making (a called for 'privatization at any price."' the trade deficit grew to $1.1 billion for the nonvoting "golden share" is reserved for first eight months, up from $640 million in the state).The stock exchange and invest- The revised 1998 budget, which is the same period of 1996. ment funds have yet to be established. headed for a third reading in the Duma M TRANSITIoN., December 1997 © 1997The World Bank in January, outlines revenues of 367.5 percent since early October. The gov- 55 million rubles ($10,000). The status billion rubles ($57 billion) and expen- ernment was forced to raise interest of the 110 million middle-income Rus- ditures of 499.9 billion rubles ($78 rates on treasury bills to 28 percent in sians is also precarious. Kalashnikov billion). These amounts are in order to attract and keep investors. The suggests that 20 million of them could redenominated rubles-as of 1998 one bills are key because they help to cover fall below the poverty line if the new ruble equals one thousand current growing budget deficits. But rising inter- government's planned increases in rent rubles. The projected budget deficit still est rates have put even more debt-ser- and utility charges are implemented. remains at about 4.8 percent of GDP, vice pressure on a government that has and inflation for 1998 is estimated at 5.7 already borrowed heavily and collects Russia's population shrunk by nearly percent. The government has proposed only about half the taxes it is owed. 300,000 in eight months. There were that the new tax code be approved in 147.2 million as of September 1, 1997, stages so that changes in personal in- Russian workers are experiencing the compared with 147.5 million at the be- come tax policy could be implemented worst conditions since the 1920s, Bill ginning of the year, the State Statistics at the turn of the year, followed by the Jordan, the secretary-general of the In- Committee reported. Since the beginning new value-added tax (VAT) and profit tax ternational Confederation of Free Trade of the year the natural decrease in the in July 1998. (In the first nine months of Unions, told a news conference in Mos- population (the difference between the 1997 Russia's tax service collected cow at the end of November. He noted number of deaths and births) reached 172.1 trillion rubles ($29 billion) in taxes, that 40 percent of workers (32 million) half a million, while the population in- which meant that revenues were running did not receive their October wages and creased by 200,000 through migration. at only 52 percent of budget. Around 30 that only 25 percent of workers (20 mil- percent of enterprises are in arrears to lion) are paid on time and in full. Twenty Early in November George Soros, the the federal budget. million Russian workers are owed 54,000 Hungarian-born investor-philanthro- billion rubles ($9.1 billion) in back wages. pist, pledged to donate $500 million The credit ratings agency Standard & Jordan said that people have not been to needy Russian health and educa- Poor's downgraded its outlook for paid for a year in parts of Russia, and tion programs over the next three Russian sovereign debt from "stable" about 10 million workers are now paid years. Soros, who has already poured to "negative" on December 19. Gross with items ranging from canned pine- $260 million into Russia since 1994, will government debt as of November was apples, to manure, to meat grinders, to now be sending more foreign aid to the 56 percent of GDP. Based on official coffins. The bulk of back wages is owed country than the U.S. government. Soros Russian data, this comprised a gross by private companies, many of which has amassed a $5 billion personal for- external debt of $143.8 billion; domestic are loss-suffering and mired in tune trading currencies, and he has sig- debt of just over $60 billion, mostly in interenterprise debt. nificant business investments in Russia. treasury bills; and payments due to state He has given $1.5 billion to humanitar- employees and suppliers totaling around The number of Russians with in- ian projects worldwide, and wants to put $44 billion (converted according to the comes lower than the subsistence more Western publications in Russian li- market exchange rate, not purchasing level rose during September from braries and hook up more schools and power parity). GDP in 1997 is likely to 31.9 million to 33 million, and their hospitals to the Internet. He plans to set be around $445 billion at the prevailing share in the population rose from 21.6 up training programs for business manag- exchange rate. percent to 22.4 percent, according to ers, lawyers, and local government offi- data from the Russian State Statistics cials. In addition, Soros has begun In November foreign investors Committee. The average monthly sub- consulting with U.S. health officials on moved to repatriate some $4 billion sistence level in Russia dropped to 407 funding tuberculosis treatment and the de- in ruble-denominated debt, forcing thousand rubles in September 1997, as crepit prison system in Russia's provinces. the central bank to spend more than $1 against 413 thousand rubles ($71). billion of reserves to offset the heavy Sergei Kalashnikov, a former sociologist demand for dollars, according to cen- who heads the Duma's Labor Commit- Russia is expected to increase net tral bank estimates. Foreigners own tee, argues that the real income of those grain output to 76-82 million metric around $20 billion of government secu- living below the poverty line continued tons, around 15 percent more than in rities, compared with reserves of $21 to shrink from January to August 1997. 1996. While still below the 1991-95 av- billion at the bank's disposal, and the There are six million ric-defined as erage, it is a welcome sign considering stock market has declined about 40 those with annual incomes in excess of that grain production has contracted 40 © 1997TheWorldBank TRANsrnoN, December 1997 m percent in this decade. Earlier, the Duma 1.4 million tons of cotton. In the 1998 35 percent to avoid currency devalua- criticized the government's agricultural state budget revenues are set at 6.4 tion and prevent a run on the treasury policies, claimingthattheriseinthecosts trillion manat ($1.5 billion) and expen- bills. Foreign companies hold half of of industrial inputs needed in agriculture ditures at 6.6 billion manat ($1.58 bil- Ukraine's 6 billion T-bills. Vlodymir had outstripped the rise in agricultural lion). The budget deficit is not expected Lanovyi, the acting head of the Ukrai- producer prices many times. Because of to exceed 1.4 percent of GDP. nian State Property Fund, said that Kyiv this about 70 percent of farms were forced will sell major state-owned industrial into bankruptcy, about 18 million hectares Ukraine firms for cash rather than use vouchers. of farmland were fallow, crop yields were At the end of November the IMF re- 50 percent cf their previous level, and The government has received only 60 leased an additional $103 million to help around half of the country's food needs percent of annual budget revenues support Ukraine's currency. were now being met by imports. through October, while GDP declined by more than 4 percent. At the same China President Yeltsin proposes compro- time, the State Property Fund has col- mise for privatizing rural land. Yeltsin, lected only 198 million hryvnya of the China is willing to slice the average in a meetinc with parliamentary lead- 500 million it was required to channel to tariff imposed on imported goods by ers on December 26, proposed a free the state budget by the end of 1997. On more than half by 2005. Chinese offi- market for land in urban areas and a December 17 the government confirmed cials said that the tariff reductions, from tightly controlled system for selling land that it will sell treasury debt worth 750 a current average rate of between 23 per- in rural areas, including a ban on sell- million hryvnya ($395 million) to help fi- cent and 26 percent to 10 percent, would ing agricultural land to foreigners and a nance the 1997 budget deficit (targeted be done in the context of negotiations provision mandating the buyer to use at 5.5 percent of the GNP). The debt will over China's terms of entry to the World the land for farming for an unspecified be issued in two tranches, with foreign Trade Organization. During his 1997 trip period. Lawimakers agreed to form a sales handled by Merrill Lynch Interna- to the United States, Chinese President working committee to revise the re- tional and domestic sales handled JiangZeminnotedthattotalforeigncapi- cently adopted land code that aims at through the First Investment Bank. The tal invested in the country so far ex- preventing investors from buying up Central Bank raised its discount rate to ceeds $200 billion. large chunks of land, but also thwarts the owner to sell or mortgage land. Many farmers are also wary of privatiz- Social Support ing rural lancls. Turkmenistan at are we doing? Reducing pover The gas-rich Central Asian country, Turkmenistain, has become the sec- ond state in the region after oil-rich Kazakhstan to win sovereign rating (B-2) by Moody's Investors Service. Turkmenistan's reserves of natural gas are estimated at21 trillion cubic meters. In March Turkmenistan expects to an- nounce the results of tenders issued in September for eight of its 30 oil and gas fields in the Caspian Sea. Results in Turkmenistan's economically impor- tant agricultLiral sector have been dis- appointing: grain harvests amounted to 639,000 tons and cotton harvests, 620,000 tons, compared with projected figures of 1.2 million tons of grain and From the Kazakh weekly Asia: Economy and Life * TRANSITIONJ, December 1997 C) 1997 The World Bank China's financial regulators are con- sidering broad liberalization of the World Bank/IMF Agenda domestic foreign exchange market in 1998. The package would increase World Bank Support to Russia: $800 Transition wrote in February 1997, "the the number of financial products traded Million Structural Adjustment Loan... Bank's verification missions, sent to and give domestic companies greater three major coal basins-Kuzbass, responsibility for risk management. Un- On December 18 the World Bank ap- Rostov, and Tula-reported that not all der a proposal now before the central proved two loans totaling $1.6 billion the funds trickled down through the bank, forward contracts on the yuan for reforms in Russia. Since Russia bureaucracy to reach the intended re- would be introduced and regulations joined the World Bank in June 1992, cipients, housing and public utilities of eased governing the amount of foreign Bank commitments have amounted to the coal communities.") Deputy Minis- currency that state-owned commercial almost $10 billion for 39 projects. The ter for Fuel and Energy Igor banks and foreign trade companies are $800 million structural adjustment loan Kozhukhovskii acknowledged that allowed to hold. will focus on restructuring electricity, some 30 percent of government funds Vietnam gas, and railway services (the natural earmarked for the coal industry have monopolies); developing urban land been misappropriated. He also said in and real estate markets; improving tax mid-December that wage arrears to Vietnam's government is expected to collection; enabling banks to efficiently coal miners totaled 3.5 trillion rubles introduce new incentives for foreign mediate savings into investments; im- ($590 million) as of December 1 and investors in the new year. The follow- proving bank regulation and supervi- overall debts to coal mines reached 9 ing measures are expected: tax breaks sion as well as reforming money trillion rubles. Energy producers owe for investment in machinery or equip- markets and payment systems; and the most debt as 90 percent of the coal ment manufacturing and in the trans- further liberalizing Russia's foreign is consumed by power plants. Line port sector; lower import taxes; land trade and investment trade regime. Minister Sergei Kiriyenko promised to rents to be slashed by 25 percent; and introduce a system of tough controls, foreign companies will be able to sell ...and Another Coal Loan Worth $800 including the use of payment certifi- shares and issue bonds, thus raising Million cates to miners, to prevent the diver- capital domestically. sion of funds. But he also hinted that TheWorldBank's$800millioncoalsec- the distribution of state funds to the However, in oil and gas exploration and tor adjustment loan will help the gov- coal sector will continue to be carried in the telecoms sector, western busi- ernment to liquidate Rosugol, the out by Rosugol. nesses will still be required to sign coop- national coal company, privatize viable eration contracts, and foreign coal companies (accounting for 45 per- IMF Traffic Light Turns Green manufacturers of consumer electronics, cent of coal production), continue to detergents, garments, footwear, and reduce coal subsidies, close mines, and Underan agreementwith Russia, reached some building materials will still be re- provide a social safety net for affected on December 12, the International Mon- quired to export at least 80 percent of workers and their families. Economics etary Fund will proceed with the next $700 their production in order to protect Viet- Minister Yakov Urinson announced that million installment of a three-year $10.1 namese producers. According to the lat- 86 out of some 200 coal mines in Rus- billion loan in January, a month ahead of est official statistics, the planning and sia will be shut down in 1998 and he schedule.TheFundsuspendedfurtherdis- investment ministry licensed 288 new promised social support to employees bursementslastOctoberafterRussiahad projects in the January-November period, of those mines, drawn down about $5 billion of the loan. with total investment capital of $5 billion, The Fund said that Russia had failed to compared with $8.8 billion worth of for- Officials in Moscow vowed that the meet key conditions, chiefly the collec- eign investment approved in 1996. money will reach its intended recipi- tion of taxes. But now Russia is making ents this time around, according to the new efforts to improve its tax collection, We appreciation the contributions from Moscow Times. The Times reminded cut government payroll, and establish a the RFEIRFL Service, in particular from readers that some funds transferred new Treasury system that will give the Viktor Luhovyk, Stuart Parrott, Stefan from the World Bank's first $500 mil- finance ministry authority over the bud- Korshak, Stephanie Baker, Michael lion coal loan, approved in 1996, never gets of powerful ministries, such as the Wyzan, and Floriana Fossato. reached the intended beneficiaries. (As interior and defense. (C 1997 The World Bank TRANSITION, December 1997 * Donor Pledges to Georgia, Armenia, structural reform program. The Govern- Credit for Tajikistan. The government will Moldova ment has embarked on an ambitious use the loan to reduce the arrears for the extension of the reform program, an- social safety net and to finance the re- In mid-December 1997, the World Bank chored by the privatization of the agri- settlement of refugees, internally displaced hosted a series of Consultative Group culture and energy sectors, and reform persons, and demobilized soldiers. (In Meetings in Paris with officials from of the social sector, notably the pension June the government signed a peace deal Georgia, Armenia, and Moldova. Repre- system. The Government expected the with the United Islamist Opposition to end sentatives of donor countries and inter- decline in GDP to stop in 1997 and ex- more than four years of civil war.) national organizations met separately perienced a modest growth of 3 percent Tajikistan received $56 million in pledges with high ranking government officials in 1998, increasingtoabout5percentover at the Vienna, Austria international do- of the three countries. Assistance com- the medium term. The World Bank indi- nor conference, which was attended by mitments were made at the meetings to cated plans to commit up to $300 mil- representatives from 40 countries. This meet the external financing requirements lion over the next three years, of which money will also be used for post-con- of the three countries in 1998. over half would be IDA credits. flict rehabilitation of the economy. * In Armenia 1997 was the fourth con- $2.4 Billion Aid to Vietnam IMF Supplemental Reserve Facility secutive year of GDP growth. Real GDP growth is expected to reach 5.2 percent Vietnam's international donors, during On December 22 the IMF approved the in 1998. Inflation is targeted at 9 per- their December 11-12, 1997 meeting in Supplemental Reserve Facility (SRF) as cent for 1998 as well. The current ac- Tokyo, chaired by World Bank Vietnam a new mechanism to disburse assis- count deficit is estimated to slightly Country Director Andrew Steer, pledged tance to countries undergoing acute fi- increase to about $420 million, despite a total of $2.4 billion in aid for 1998. The nancial crises. The facility would provide projected export growth of more than 10 expected 1998 reform of trade, state en- financial assistance to members expe- percent. The 'Norld Bank on December terprises, and the financial sector jus- riencing exceptional balance of pay- 11 approved a $20 million social invest- tify high levels of assistance, the ments difficulties due to massive ment fund to Georgia that will help mobi- participants pointed out. In order to short-term financing as a result of a lize resources; for microprojects related achieve an annual growth rate of 9-10 major loss of market confidence. Financ- to water supply, irrigation, roads, and percent, Vietnam needs to effectively ing under the SRF will be available im- schools in approximately 400 communi- utilize its labor force, private sector, and mediately, but repayment will also be ties. (Since it joined the World Bank in stable macroeconomic environment, and faster-within one to one and a half years 1992 and IDA in 1993, commitments to adhere to an outward-oriented, competi- of the date of each disbursement and Georgia reached $366 million for 14 tive, and labor-absorbing growth strat- costlier-3 percent above the average projects). egy, the donors suggested. IMF rate on loans of 4.7 percent. The IMF has the authority to extend the re- The current account deficit of Armenia Supporting Romania's Land Market payment period by up to one year. (excluding official transfers) is expected to decrease from 27 percent of GDP in On December 9, 1997 the World Bank ap- IMF Releases Tranche for Bulgaria 1997 to 22 percent of GDP in 1998. Ex- proved a $25.5 million loan to Romania to ternal financing requirements for 1998 finance the General Cadastre and Land On December 16,1997the IMF released are likely to be around $400 million, down Registration. The project seeks to provide the fourth $80 million installment of a from about $500 million in 1997. In mid- secure land ownership rights, facilitating stand-by loan to Bulgaria, approved in December the Bank approved a $15 mil- land transactions, and helping to consoli- April. Some $160 million remains to be lion credit thal will improve the financing date economically inefficient farms. Since released. The loan agreement is valid un- and managernent of Armenia's school Romania joined the World Bank in 1972, til June 1998. On December 17 IMF system. (Since Armenia joined the Bank Bank commitments have totaled more Resident Representative Peter Stella in 1992 and IIDA in 1993, commitments than $4.8 billion for 52 projects. praised the Bulgarian government for the totaled $355 million for 15 projects.) successful implementation of its cur- Post-Conflict Aid to Taiikistan rency board, saying that it was now im- * The Consultative Group for Moldova portant to sustain the momentum of confirmed their continued support for On December 16 the World Bank approved stabilization and persevere with struc- that country's financial stabilization and a $10 million Post-Conflict Rehabilitation tural reform. He told a news conference M TRANSITION, December 1997 © 1997 The World Bank that the IMF would like to see the Donors' Enlarged Aid Package to World Bank Credit to Bosnia and country's privatization program move Mongolia Herzegovina forward, and he believed it was natural to link it to a timetable. On October 30 Donor countries and international orga- On December 23, 1997, the World Bank the World Bank approved a $100 million nizations pledged $250 million in a new approved two credits for Bosnia and loan to help cover Sofia's balance of aid package for Mongolia in a strong Herzegovina. The first credit of $10 mil- payments shortfall. message of support for its market lionwillsupportthereconstructionofthe economy reforms. The World Bank and Natural Gas System of Sarajevo; the International Finance Corporation Japan cochaired the meeting of the second credit of $17 million will support Invests in Sofia Hilton Mongolia Assistance Group. The aid basic reconstruction investments in package for 1997 was $212 million. Republika Srpska in the agriculture, The World Bank's International Finance housing, water and sanitation, and elec- Corporation (lFC), together with a group World Bank Continues Loansto China tric power sectors. In other news, the of international investors, will finance a Moslem-Croat federation government is new hotel in Bulgaria's capital, Sofia.The To ensure healthy, long-term growth of to liquidate the biggest prewar state financing consists of up to $12.8 million the economy, China should improve its bank after legislation on banking reform in IFC loans and a syndicated loan of fiscal and pension systems, reform its has been adopted by parliament. up to $9.5 million. state-owned enterprises, and commer- Privredna Banka Sarajevo is burdened cialize its state-owned banks, World with a prewar debt amounting to $1.6 Joint Efforts to Help Albania Recover Bank Country Director Yukon Huang million and is considered insolvent by pointed out. He confirmed that the Bank international standards. On December 9 the World Bank ap- will continue to lend China between $2.5 proved two IDA credits, one for $25 and $3 billion each year to support eco- IMF 1998 Growth Forecast Has Shrunk million and the other for $5 million, to nomic reforms. a Bit help Albania dismantle the pyramid schemes, reform banks, and increase Croatia Does Not Need IMF Money Asia's financial crisis threatens to put and improve unemployment benefits a damper on global growth, the IMF and other social services. Since Alba- As of 1998 Croatia will undergo IMF said in its interim World Economic Out- nia joined IDA in 1993, IDA commit- monitoring, take technical assistance, look, published last December. Over- ments to that country totaled $273 but refrain from drawing further loans all world output however would still million for 20 projects. Earlier, the IMF from the Fund, National Bank Governor grow by 3.5 percent in 1998, 0.8 per- approved emergency post-conflict aid Marko Skreb announced. The Croat gov- cent below the IMF's previous forecast of around $12 million. ernmentdidn'tdrawthesecondandthird last October. tranches (totaling $78 million) of its $486 The government's 1998 economic pro- million, three-year IMF Extended Fund Transition countries (Central and East- gramaimsat 12percentrealgrowthand Facility (EFF). ern Europe (CEE), Russia, the 15-20 percent inflation. Privatization will Transcaucasus, and Central Asia) will be the main focus of a three-year agree- The EFF, designed to support structural grow by an average 3.3 percent in ment with the IMF that is to be signed reform (especially in the financial sec- 1998, 0.8 percent less than projected inthespring, PrimeMinisterFatosNano tor), was awarded in March 1997, sus- last October. (The CEE, without said during his visit to London. In the pended for months, and made available Ukraine and Belarus, can achieve an first half of 1998 the legal framework again after 10 Bosnian Croats volun- average 4.3 percent growth rate, 0.4 for large-scale privatization would be tarily surrendered to the Hague war percent more than projected in Octo- completed, while some state enter- crimes tribunal. Croatia claims that it ber. That was the only country group prises would be restructured in prepa- will not need the IMF loans because it that merited a "growth-upgrade" from ration for sale. In another development, has ample foreign reserves ($4.4 bil- the IMF, despite the South Asian cri- Albania signed a $250 million deal with lion). According to an IMF delegation sis.) China's growth in 1998 will reach the IFC and a consortium of western recently returned from Croatia, the 8.8 percent, 0.7 percent less than pro- firms to boost production at the Patos country's real GDP can grow as much jected last October, according to the Merinze oilfield. as 5.5 percent in 1997. IMF forecast. © 1997The World Bank TRANSITION, December 1997 * Conference Diary For the Record ton, D.C. 20052, teL 202-994-7099, fax Akademie Travemunde, Europaweg 3, 202-994-5436, D-23570 Lubeck, Germany, tel. 49-4502- Meeting ol the ECPD Permanent 803206, fax 49-4502-803200, Email: Study Group on Privatization Forthcoming ostseeakademie @ tonline.de October 24-25, 1997, Sveti Stefan, Fed- eral Republic of Yugoslavia Russia-China-Central Asia: From Geo- City Marketing as a Way to Invest- politics to Geo-Economics in Eurasia ments and Common Projects Organized and sponsored by the Euro- January 23, 1998, Reading, February 26-28, 1998, St. Petersburg, pean Center for Peace and Development United Kingdom Russia (ECPD) of the University for Peace, es- tablished by the United Nations. The Organizers: Centre for Euro-Asian Stud- Organizer: Institute Eurograd. meeting, atteanded by some 20 partici- ies, University of Reading. Information: Boris Grintchel, Institute pants, aimed to take stock of what Language: English. Eurograd, Izmailovsky, 14, St. Peters- privatization achieved in the Eastern Eu- Topics: Geopolitical trends; international burg, Russia, tel. 7-812-112-6478, fax 7- ropean countries, including the Federal security and regional conflicts; economic 812-112-6506, Email: root@eimi.spb.ru Republic of Yugoslavia. Minimizing the trends, trade patterns, and business in- social costs; of privatization is a pri- terests; dynamics of relations between Active Towns: Strategy and Marketing mary concern in assessing the advan- Russia, China, Central Asia, and the to Increase Competitiveness tages and disadvantages of different West. April 20-22, 1998, St. Petersburg, methods ol privatization. More re- Information:NicholasTucker,Administra- Russia search is needed in order to arrive at tor, The Centre for Euro-Asian Studies, reliable comparative indicators of the GSEIS, The University of Reading, Organizer: Institute Eurograd. relative efficiency of privatized firms. Whiteknights, PO. Box 218, Reading, Information: Boris Grintchel, Institute RG6 6AA United Kingdom, teL 44-118- Eurograd, lzmailovsky, 14, St. Peters- The short-term results of privatization 9316637-20, fax 44-118-9755442, Email: burg, Russia, tel. 7-812-112-6478, fax 7- could differ significantly from longer-term cpss@reading.ac.uk 812-112-6506, Email: root@eimi.spb.ru results, partly depending on the rate of progress of institution building. Thefunc- The Widening of the EU toward Cen- International Conference on tioning of both the capital market and of tral, Southeastern, and Eastern Europe Privatization, Corporate Governnance, monitoring and regulatory institutions is February 20-22, 1998, and the Emergence of Markets in Cen- decisive. Participants agreed that Lubeck-Travemunde, Germany tral and Eastern Europe strengthening corporate governance was May 22-23, 1998, Berlin, Germany an indispensable adjunct to and prereq- Organizer: Ostsee Akademie. uisite of successful privatization. Language: German. Information: Eckehard F Rosenbaum, Information.: Ms. Gordana Hofmann, Information: Dr. Jorg Hackman, Ostsee- Frankfurt Institute for Transformation ECPD, Teraz,]e 4 1, 1 1000 Belgrade, tel. 38-11-324-6-04 1, fax 3811-324-0673, _ J E A Email: ecpol@afrodita,rcub.bg.ac.yu A . __'__-__ ! ir\ v Serbs and Albanians-The Struggle over Kosovo November 19, 1997, Washington, D.C., _ _ j. United States Information: Marvin Center, Room 405, 800 21st Street, NW, Washington, D.C. d t . 20052, or Efliott School of Intemational '-. Affairs, George Washington University, "I want plastic surgery. I look too honest for anyone to bribe me." 2013 G Street NW, Suite 402F, Washing- From the Hungarian daily Nepszabadsag M TRANsITION, December 1997 X 1997 The World Bank Studies, European University Viadrina, Organizers: International Graduate welcome. PO. Box 776, D-15207 Frankfurt (Oder), School, Faculty of Economics, Associa- Deadline: December 20, 1997. Germany, fax 0335-5534-807, Email: tion for International and Interdisciplinary Information: RogerBivand, JointDepartment erosen@euv-frankfurt-o.de Management, Saxonian Ministry of the of Geography University of Bergen and Nor- Environment and Spatial Development. wegian School of Economics and Business Investment Climate of Towns and Topic: Development and perspectives of Administration, Breiviken 2, N-5035 Bergen- Regions current and future laws and jurisdiction. Sandviken, Norway, tel. 47-55-959355, fax May 28-30, 1998, St. Petersburg, Call for papers: Applications for lectures 47-55-959393, Email: ersa-vienna @ wu- Russia or presentations are welcome. wien.ac.at or Roger.Bivand@geog.uib.no, Information: Dipl.-Kfm. Christian Internet: http://wwwwu-wien.ad.at/ersa/ Organizer: Institute Eurograd. Brauweiler, IHI Zittau, Markt 23, C- ersa98.htrnl Information: Boris Grintchel, Institute 02763 Zittau, Germany, tel. 49-3583- Eurograd, Izmailovsky 14, St Peters- 771531, fax 49-3583-771535, Email: 5th Conference of the European As- burg, Russia, tel. 7-812-112-6478, fax 7- cbrauweiler@ihi.htw-zittau.de sociation for Comparative Economic 812-112-6506, Email: root@eimi.spb.ru Studies: Economies in Transition and Fourth Annual Conference: Conver- the Varieties of Capitalism: Features, International Conference: Finance of gence or Divergence-Aspirations Changes, Convergence Ukraine and Reality in Central and Eastern September 10-12, 1998, Varna, Bulgaria May 1998, Dnipropetrovsk, Ukraine Europe and Russia June 23-24, 1998, Buckinghamshire, Organizers: ROSES-University of Paris, Organizer: International Program Com- United Kingdom Institute of Economics, Sofia, Bulgaria. mittee. Topics: Distinctive general features of Topics: Banks and banking, investment Organizer: Buckinghamshire Business the varieties of capitalism-"From Capi- activity, public finance. School-Centre for Research into East talism to Capitalism"-the change of dif- lnformation: DnipropetrovskState Univer- European Business (CREEB). ferent models/types of capitalism; "From sity DSU, Nauchmuy per. 13, Call for papers: Deadline February 23, Transitional Economies to Capitalism"- Dnipropetrovsk, 320625, Ukraine, tel. 380- 1998. the change of economic systems; and 562-766098. Information: Margaret Levell, CREEB, cooperation and integration of capitalism Buckinghamshire Business School, and economies. Petrochemical and Chemicals Indus- Buckinghamshire University College, Call for papers: Deadline March 1, 1998. try of the Former USSR NewlandPark, Gorelands Lane, Chalfont Information: Professor WladimirAndreff, June 4, 1998, Houston, Texas, United St. Giles, Bucks, HP84AD, United King- ROSES, University Paris I, 106-112, States dom, tel. 44-1494-603159, fax 44-1494- Boulevard de l'Hopital, F-75013 Paris, 874230, Email: creeb @buckscol.ac.uk; France, fax 33-1-45847889; or Professor Organizers: Integrated Strategies, Cali- Internet: http://wwwbuckscol.ac.uk Mitko Dimitrov, Institute of Economics, fornia, in conjunction with the CE Expo BAS, 3, Aksakov Street, BG-1040 Sofia, and hosted by McGraw Hill, publishers Regional Economies in Transition: In- Bulgaria, fax 359-2882108. of Chemical Engineering Magazine and stitutional Development and Socio- Engineering New and Record Magazine. Economic Change (session at the Financing Strategies for Investment Information: Gordon Feller, Integrated 38th European Congress of the Re- Projects in the CIS in Environmental Strategies, California, USA Office, tel. gional Science Association) Protection and Regenerative Energy 415-491-4233, Email: june4-conference August 28-September 1, 1998, Vienna, September 25-27, 1998, @mailexcite.com orgordonf@pacbellnet Austria Lubeck-Travemunde, Germany International Environmental Law-A Organizer: Norwegian School of Eco- Organizer: Ostsee Akademie. Comparison between Poland,the Czech nomics and Administration, University Language: German. Republic, and Germany in the Field of of Bergen. Information: Dr. Jorg Hackman, Ostsee- Waste and Soil Preservation Law Call for papers: Work in progress on con- Akademie Travemunde, Europaweg 3, D- June 15-17, 1998, St. Marienthal, D- ceptual issues (for example, the inter- 23570 Lubeck, Germany, tel. 49-4502- 02889 Ostritz, Germany (Train Station: face between new economic geography 803200, Email: ostseeakademie@ Krzewina Zgorzelecka, Poland) and transition processes) is especially tonline.de © 1997 The World Bank TRANSITION, December 1997 New Books and Working Papers The Macroeconomics and Growth Division regrets that it is unable to provide the publications listed. World Bank Publications West Europe, 1850, November 1997. on Vulnerability to Income Risk in To order: Jennifer Ngaine, room H3-029, Rural China, 1863, December 1997. To receive ordering andprice information tel. 202-473-7947. To order: Patricia Sader, tel. 202-473- for World Bank publications, write: World 3902. Bank, PO. Box 7247-8619, Philadelphia, Graciela Kaminsky, Saul Lizondo, and PA 19170, United States, teL 202-473- Carmen M. Reinhart, Leading Indica- Deon Filmer and Lant Pritchett, Child 1155, fax 202- 676-0581; or visit the tors of Currency Crises, 1852, Novem- Mortality and Public Spending on World Bank bookstores, in the United ber 1997. Health: How Much Does Money Mat- States, 701 18th Street, NW, Washing- To order: Saul Lizondo, room 18-169, tel. ter? 1864, December 1997. ton, D. C., orin France, 66 avenue d'lena, 202-458-5431. To order: Sheila M. Fallon, tel. 202-473- 75116 Paris, Email: books@world 8009, fax 202-522-1153. bank.org, Internet: http://www.world Cevdet Denizer, Stabilization, Adjust- bank.org ment, and Growth Prospects inTransi- Other Publications tion Economies, 1855, November Discussion Papers 1997. Helping Countries Combat Corrup- Toorder:EmilyKhine, tel.202-473-7471. tion: The Role of the World Bank, Pov- Csaba Csaki and Zvi Lerman, Land erty Reduction and Economic Reform in lJkraine: The First Five Susmita Dasgupta, Hua Wang, and Management, World Bank, September Years, Discussion Paper 371, August David Wheeler, Surviving Success: 1997, 69 p. 1997, 100 p. Policy Reform and the Future of In- dustrial Pollution in China, 1856, No- IMF Publications Working Papers vember 1997. To order: Susmita Dasgupta, tel. 202- To order: IMF Publication Services, 700 Cevdet Denizer, The Effects of Finan- 473-2679. 19th Street, NW, Washington, D.C. cial Liberalization and New Bank En- 20431, United States, tel. 202-623-7430, try on Market Structure and Joselito Gallardo, Leasing to Support fax 202-623-7201, Email:publications Competition in Turkey, 1839, Novem- Small Businesses and Microenter- @imf.org, /nternet:http://www.imf.org ber 1997. prises, 1857, December 1997. To order: Emily Khine, tei. 202-473-7471, To order: R. Gamer, room F6P-212, tel. Working Papers fax 202-522-3518. 202-473-7664. Atish R. Ghosh, Inflation in Transition Martin Rama, Efficient Public Sector Mansoor Dailami and Danny Leipziger, Economies: How Much? And Why? Downsizing, 1840, November 1997. Infrastructure Project Finance and Working Paper 97/80, July 1997, 28 p. To order: Sheila M. Fallon, tel. 202-473- Capital Flows: A New Perspective, 8009, fax 202-522-1153. 1861, December 1997. Zuzana Brixiova, On the Speed of To order: MansoorDailami, room G2-071, Transition in Central and Eastern David E. Wildasin, Externalities and tel. 202-473-2130. Europe: Does On-the-Job Search Bailouts: Hard and Soft Budget Con- Matter? Working Paper 97/102, August straints in Intergovernmental Fiscal Jyotsna Jalan and Martin Ravallion, 1997, 22 p. Relations, 1843, November 1997. Spatial Poverty Traps? 1862, Decem- To order: Cynthia Bernardo, tel. 202-473- ber 1997. Mark De Broeck, Kornelia Krajnyak, 7699. To order: Patricia Sader, tel. 202-473- and Henri Lorie, Explaining and 3902. Forecasting the Velocity of Money Chonira Aturupane, Simeon Djankov, in Transition Economies, with Spe- and Bernard Hoekman, Determinants of Jyotsna Jalan and Martin Ravallion, Are cial Reference to the Baltics, Rus- Intra-IndustryTrade Between Eastand thePoorLessWell-lnsured? Evidence sia, and Other Countries of the M TRANSIMON, December 1997 © 1997 The World Bank Former Soviet Union, Working Paper To order: Cambridge University Press, mania, Slovakia, and Slovenia], Work- 98/108, September 1997, 46 p. 110 Midland Avenue, Port Chester, New ing Paper 64, 1997, 52 p. York, 10573-4930, tel. 914-937-9600, fax Vito Tanzi, The Changing Role of the 914-937-4712. Stefan Janssens, The Effects of Prod- State in the Economy: A Historical uct Market Competition, Globalization Perspective, Working Paper 97/114, Benjamin J. Cohen (ed.), International and Unions on Productivity, Working September 1997, 28 p. Trade and Finance: New Frontiers for Paper 65, 1997, 22 p. Research-Essays in Honor of Peter Alicia Garcia-Herrero, Monetary Impact B. Kenen, 1997, 402 p. Jozef Konings and Alexander Repkin, of a Banking Crisis and the Conduct How Efficient are Firms in Transition of Monetary Policy, Working Paper 97/ David E. Wildasin (ed.), Fiscal Aspects Countries? Firm Level Evidence from 124, September 1997, 83 p. of Evolving Federations, 1997, 228 p. Bulgaria and Romania, Working Paper 66, 1997, 35 p. Paul R. Masson, Miguel A. Savastano, Palms & Company Inc., Publications and Sunil Sharma, The Scope for In- Edward Elgar Publishing Inc., flation Targeting in Developing Coun- To order: Palms & Company, Inc., Invest- Publications tries, Working Paper 97/130, October ment Bankers, 515 Lake Street South, 1997, 53 p. #103, Kirkland, Washington 98033, Edward Elgar Publishing Inc., 6 Market United States, tel. 425-828-6774, fax Street, Northampton, Massachusetts Stefano Manzocchi, External Finance 425-827-5528, Email: hi@aa.net or 01060, United States, tel. 413-584-5551, and Foreign Debt in Central and East- Michael Mandeviile, Email: mwm@ fax 413-584-9933. ern European Countries, Working Pa- aa.net per 97/134, October 1997, 28 p. James Angresano, The Political Anke van de Waal, Personal Develop- Economy of Gunnar Myrdal: An In- S. Erik Oppers, Macroeconomic ment and Transformation for Russian stitutional Basis for the Transforma- Cycles in China, Working Paper 97/135, Business Managers, November 1997, tion Problem, November 1997, 224 p. October 1997, 35 p. 100 p. Peter Kaderjak and John Powell (eds.), Pietro Garibaldi and Zuzana Brixiova, Pyotr Joannevich van de Waal-Palms, Economics for Environmental Policy Labor Market Institutions and Unem- Understanding Russian Banking, in Transition Economies: An Analy- ployment Dynamics in Transition Mossbusinessbank, Promstroibank, sis of the Hungarian Experience, No- Economies, Working Paper 137, Octo- Bank Saint Petersburg, and Petrovsky vember 1997, 200 p. ber 1997, 46 p. Bank, November 1997, 300 p. SIGMA Publications Asian Development Bank Leuven Institute for Central and East European Studies Publications To order: SIGMA-OECD, 2, rue Andre- To order: Asian Development Bank, PO. Pascal, 75775 Paris Cedex 16, France, tel. Box 789, 0980 Manila, Philippines. To order: Katholieke UniversiteitLeuven, 331-4524-7900, fax 331-4524-1300, Email: Ch. Deberiotstraat 34, 3000 Leuven, tel. sigma.contact@oecd.org, Intemet: http:/ Armin Bauer, Nina Boschmann, and 32-16-326-598, fax 32-16-326-599. /www.oecd.org/puma/sigmaweb David Green, Women and Gender Re- lations in Kazakhstan: The Social Marvin Jackson, Restructuring or Assessing the Impacts of Proposed Cost, March 1997, 138 p. Structural Change in Industry of Tran- Laws and Regulations, 13, 1997, 94 p. sition Countries: A Review of Issues, Armin Bauer, David Green, and Kathleen Working Paper 63, 1997, 24 p. Civil Service Legislation: Checklist on Kuehnast, Women and Gender Rela- Secondary Legislation (And Other tions: The Kyrgyz Republic in Transi- Marvin Jackson and Alexander Repkin, Regulatory Instruments), 1997, 12 p. tion, March 1997, 134 p. A Comparison of Structural Changes Among the Branches of Industry in Checklist on Law Drafting and Regu- Cambridge University Press Seven Transition Countries [Bulgaria, latory Management in Central and Publications Czech Republic, Hungary, Poland, Ro- Eastern Europe 15, 1997, 29 p. © 1997 The World Bank TRANSITION, December 1997 X Public Service Training Systems in Stephen Pudney, Derek Deadman, and both countries are in a precarious state. OECD Countries 16, 1997, 21 p. DavidPyle,TheEffectofUnder-Report- An almost decade-long economic de- ing in Statistical Models of Criminal cline is finally coming to an end in both Administrative Procedures and the Activity: Estimation of an Error Cor- countries. Supervision of Administration in Hun- rection Model with Measurement Er- gary, Poland. Bulgaria, Estonia, and ror, 97/3, September 1997, 28 p. The main challenge to faster economic Albania 17, 1997, 134 p. growth in the region lies in the heavily Wojciech W. Charemza, Kalvinder constrained external positions. The de- Law Drafting and Regulatory Manage- Shields, and Anna Zalewska-Mitura, teriorating cost competitiveness, ment in Central and Eastern Europe Predictability of Stock Markets with coupled with the generally sluggish de- [Albania, Bulgaria, Estonia, Lithuania, Disequilibrium Trading, 97/5, October mand in Western Europe, clouds the Slovakia, ancl Slovenia] 18, 1997, 207 p. 1997, 19 p. prospects for export-led growth. In con- trast to the first years of recovery after Effects of European Union Accession, WIIW Publications 1993, it is now predominantly domestic Part 1: Budgeting and Financial Con- absorption that affects the economic trol 19, 1997, 175 p. To order: WIIW, Vienna Institute for performance of the transition countries. Comparative Economic Studies, With the possible exception of Hungary, Effects of Ewropean Union Accession, Oppolzergasse 6, A-1010 Vienna, tel. private consumption and investment Part 2: External Audit, 20, 1997, 151 p. 431-533-6610, fax 431-533-661050. have been the main determinants of re- cent economic performance: in the con- Anatomy of the Expenditure Budget, Alena Zemplinerova, The Role of For- tracting economies of Bulgaria and Policy Brief 1, 1997, 7 p. eign Enterprises in the Privatization Romania demand plunged in early 1997, and Restructuring of the Czech while it boomed in Poland and Slovakia. Civil Service! Pension Schemes, Policy Economy, WIIW 238, June 1997, 38 p. The more advanced CEE countries have Brief 2, 1997, 7 p. a good chance of becoming normally Peter Havlik and others, Transition functioning European market economies University of Leicester Publications Countries Outlook Falters in 1997: in the medium term, while the outlook Some Stumble and Recover, Some for southeast Europe, the Balkans, and To order: Faculty of Social Sciences, Have Problems Ahead, WIIW 239, July the CIS countries (including Russia) is Managemeni' Centre, University of Le- 1997, 65 p. more bleak. icester LE1 ;7RH, United Kingdom, tel. 0116-252-39.52, fax 0116-252-3949, or Almost a decade since the start of re- Kazimierz Laski, Macroeconomic the Centre forEuropean Economic Stud- forms, the transition economies are still Problems of Trade Liberalization and ies (CEES) tel. 0533-522-892, fax 0533- fragile. Trouble hit the Czech Republic EU Eastern Enlargement, WIIW 241, 522-908. early in 1997 and devaluation of the Slo- September 1997, 33 p. vak currency appears inevitable. Poland Chin Bun Tse, Relational Database could confront similar dilemmas in 1998. The abrupt liberalization of foreign trade System for Small/Medium Size Ac- Only Hungary and Slovenia display ac- exposed the transition economies' weak counting Firms, 97/2, May 1997, 14 p. celerating economic growth. On average, competitiveness and was responsible for the economies of the five Central and a large part of the sharp economic de- Janusz N\aciaszek, Katarzyna Eastern European (CEE) countries are cline at the beginning of the transforma- Mikolajczyk, and Barbara M. Roberts, expected to grow well below 5 percent a tion. It was also the main cause of an Some Conseaquences of Eliminating year, and the process of catching up with unsustainable import surplus in many UnprofitableOutput:EvidencefromPol- Western Europe will be slower. With transforming countries. To ease difficul- ish Enterprises, 97/1, July 1997, 22 p. Bulgaria and Romania dramatically fall- ties in foreign trade, government can ing back, average GDP growth for the intervene either by supporting the expan- Robert Ackrill and Dean Garratt, Rules, CEE-7 was projected to drop by some 2 sion of export capacity or by encourag- Discretion and National Policy Au- percentage points in 1997, to recover ing domestic savings. The role of capital tonomy Under Economic and Mon- only in 1998. Economic recovery was inflows in financing the balance of trade etary Union, 97/2, September 1997, once more delayed in Russia and and the current account deficit is obvi- 21 p. Ukraine, and government finances in ous. However, capital inflows, especially M TRANSIrOI, December 1997 (D 1997 The World Bank the speculative kind, may also be a fac- 0221-57470, fax 0221-5747110, Intemet: Transition: The Social Safety Net in tor in destabilizing the economy. CEE http://www. uni-koeln.de/extern/biost Postcommunist Europe, Council on countries can avoid problems related to Foreign Relations, New York, 1997, real appreciation and the potential loss Ognian Hishow, Makrookonomische 198 p. of competitiveness at the time of their Politik und Reformfortschritte im To order: Council on Foreign Relations, accession to the EU by maintaining the Ostlichen Europa: Differenzierung 58 East 6897 Street, New York, New York autonomous exchange rate policy. Durch Unterschiedliche Transforma- 10021, UnitedStates, tel. 800-275-1447, tions-konzepte, 25, 1997, 40 p. Josef Faliinger, Growth, Distribution Danijela Kulis and Zarko Miljenovic, and Employment, WIIW 242, October Olga Alexandrova and Heinz Estimate of Revenues from the 1997, 17 p. Timmermann, Rusland-Belarus-GUS: Value-Added Tax in the Republic of Integrationsbestrebungen und Croatia, Occasional Paper 2, October If inequality is not mitigated by public Desintegrationstendenzen, 30, 1997, 1997, 20 p. redistributive measures, it can lead to 27 p. political instability, which has a negative Croatia is to introduce the value-added tax impact on investments and growth. If Rolant Gotz, Wirtschaftswachstum in (VAT) on January 1, 1998. This research inherited wealth does not correspond to Russland: Faktoren und Pers- project estimated VAT revenues. Based inherited skills, and if the funding oppor- pektiven, 32, 1997, 41 p. on comparisons with countries with a tunities open to the wealthy are better single rate similar to that of Croatia (Den- than those open to the skilled, the mar- Eleonora Schneider, Quo Vadis, mark, 22 percent and Norway, 20 percent) ket will not allocate efficiently. Slowakel? Von der Eingeleiteten and a similar base to that of Croatia (all Demokratie Zum Autoritarismus? 36, goods and services), the study estimated Political economics and market imper- 1997, 40 p. VAT revenues at about 10 percent of fections explain the negative relationship Croatia's GDP. Revenues from indirect between inequality and growth. Another Hans-Hermann Hohmann, Christian taxation are expected to decline after the explanation is based on the change in Meier, and Heinz Timmermann, Russia introduction of the VAT. In recent years the demand, investment, and innovation, and Germany in Europe: Recent sales tax has been yielding about 13 per- determined by the structure of antici- Trends of Political and Economic cent of GDP. pated demand. The development of de- Relations, 38, 1997, 36 p. To order: Institute of Public Finance, mand, however, usually depends on Katanciceva 5, 10000 Zagreb, Croatia, income distribution. Distribution thus in- Other Publications tel. 385-1-433-006, fax 385-1-277-089, fluences, through demand, the process Email: ured@ijf.hr of investment and innovation. Establish- Economies in Transition: Eastern ing new businesses will entail major in- Europe and the Former Soviet Marek Lubinski (ed.), Poland: Interna- vestment costs, and a large group of Union-Regional Overview, Country tional Economic Report 1996/1997, consumers (a less elitist distribution) Forecast, The Economist Intelligence World Economy Research Institute, Po- would simplify the amortization of the Unit, 1997, 53 p. land, 1997, 240 p. investment. Redistribution that levies To order: The Economist Intelligence To order: World Economy Research Insti- taxes on wealthier employees in order Unit, Client Relations, 15 Regent Street, tute, Rakowiecka 24, 02-554 Warsaw, Po- to subsidize the training of poorer em- London SW1Y4LR, UnitedKingdom, tel. land, tel.4822-49-12-51, fax4822-48-91-32. ployees leads to more training and higher 44-171-830-1007, fax 44-1708-371-850, employment; both the rate of growth and Email: london@eiu.com Bradley J. Rorem and Renee Giovarelli, the level of employment will then rise. Agrarian Reform in the Russian Far Vaclav Hoffmann, Jaroslav Jirasek, East, RDI Reports on Foreign Aid and Berichte des Bundesinstituts fur Milan Kubr, and Zbynek Pitra, Czech Development 95, Rural Development Ostwissenschaftliche und Internationale Manager: In the Process of Transfor- Institute, United States, October 1997, Studien Publications mation, National Training Fund, Prague 44 p. 1996, 28 p. To order: Bundesinstitut fur Ostwissen- Agrarian reform in the Russian Far East schaftliche und Intemationale Studien, Ethan B. Kapstein and Michael hasbroughtaboutthe successful introduc- Lindenbomstr, 22, D-50823 Koln, tel. Mandelbaum (eds.), Sustaining the tion of a market for a land shares leasing © 1997 The World Bank TRANsimloN, December 1997 X scheme. Some land share owners re- Social Security Administration, United the region's new policy institutes. ceive supplementary income from the States, August 1997, 394 p. To order: Freedom House, 511 C Street, lease, but the majority have not yet NE, Washington, D.C. 20002, United States, tested the market. Landowners operate This is the 601 anniversary of the United tel 202-543-3515, fax202-547-4101. under the threat that their land will be States Social Security Administration confiscated by local officials for nonuse (SSA). The SSA has been documenting P. Watson, Health in Societies in Tran- or irrational use. Agricultural producers details about social security systems sition l: Evidence from the Nowa Huta should be allowed to leave land fallow around the world through this publica- Study, Sociological Research Group not only to regenerate soil but also for tion. This edition contains summaries Working Paper 23, University of Cam- the simple reason that production in any of 172 systems in effect on January 1, bridge, July 1997. given year rmay not be profitable. 1997. To order: Sociological Research Group, To order: Superintendent of Documents, Faculty of Social and Political Sciences, Further recornmendations: The majority U.S. Government Printing Office, Wash- University of Cambridge, Free School of land that is currently part of level land- ington, D. C. 20402-9325, Email: Lane, Cambridge, England, CB2 3RQ, redistribution funds should be privatized. barbara.e.kritzer(ssa.gov; Internet:http./ tel. 01223-334-521, fax 1223-334-550. Ownership of land, in the land funds, that /wwwssa.gov/statistics/ores_home.html is currently being leased to peasant farms The Oil and Gas Industry of Sakhalin should be transferred to the lessee for a Peter Stanovnik and Marjan Sveticic, Island, Russian Far East Update, United payment equal to five times the land tax. Slovenia and the European Union, States, September 1997, 52 p. In anticipation of a fully effective land Center for International Relations, Fac- To order: Elina Erlendsson, Russian Far market, the government should make it ulty of Social Sciences, University of East Update, PO. Box 22126, Seattle, clear-through a public information cam- Ljubljana, Slovenia, June 1997, 24 p. Washington 98126, United States, tel. paign-that peasant farm owners are en- To order: University of Ljubljana, Faculty 206-447-2668, fax2o6-628-0979, Internet: titled to lease out agricultural land plots. of Social Sciences, 1001 Ljubljana, PO. http://www.russianfareast.com! In order to make long-term credit avail- Box2547, Slovenia, teL 38661-1681-461, able to peasant farmers, the right to mort- fax 38661-1685-330, Email: marjan. Newsletters/Special Publications gage land should be made fully operational. svetlicic uni-lj.si Large agricultural enterprises that are East European Constitutional Review, clearly insolvent should be broken up. Dr. Marjan Svetlicic, Outward Foreign published quarterly by the Central Euro- Policymakers should strive to develop Direct Investment by Central Euro- pean University. This double issue, Vol. land share rights. pean Economies and Restructuring, 6, no. 1-2, 1997, contains the following To order: Rural Development Institute, University of Ljubljana, Faculty of So- topics: Constitution Watch country by 4746 1I Avenue N.E., #505, Seattle, cial Sciences, Slovenia, 1997. country updates on constitutional poli- Washington 98105, United States, fax206- To order: University of Ljubljana, Faculty tics in Eastern Europe and the former 528-5881, Email: rdi@u.washington.edu of Social Sciences, 1001 Ljubljana, PO. USSR, Ken Jowitt explores the real Box2547, Slovenia, tel. 38661-1681-461, causes of the Soviet Union's collapse, Dieter Schumacher, Harald Trabold, and fax 38661-1685-330, Email: marjan. Andrei Plesu asks if the European Union Christian Weise (eds.), Transformation svetlicic@uni-l].si is more than a community of consum- des Wirtschaitssystems in Den Mittel- ers and producers, Bohdan Futey ana- und Osteuropaischen Landern: ThinkTanks in Central and Eastern Eu- lyzes the new Ukrainian "Law on the Aussenwirtschaftliche Bedingungen rope: A Comprehensive Directory, Free- Constitutional Court:' and the 1997 Pol- und Auswirkungen, DIW Sonderheft dom House, United States, 1997, 236 p. ish Constitution. 161, 1997, 434 p. To order: East European Constitutional To order: Dunck(er& Humblot, Berlin, Carl- Freedom House (recently merged with Review, Nador u. 11, 1051, Budapest, Heinrich-Becker-Weg 9, D-12165 Berlin, the National Forum Foundation) launched Hungary or CSCEE, the University of Germany teL 4930-790-0060, fax 4930- the Regional ThinkTank Initiative in Cen- Chicago Law School, 1111 East 60th 7900-0631, Email: duh-werbung@t- tral and Eastern Europe in 1997 to Street, Chicago, Illinois, 60637. online.de strengthen indigenous public policy in- stitutes, or think tanks, that advocate The Economics of Transition, pub- Social Security ProgramsThroughout democratic and free-market reforms in lished by Oxford University Press for the the World-1997, Research Report 65, the former East Bloc. The directory lists European Bank for Reconstruction and M TRANSmON, December 1997 ( 1997 The World Bank Development, Vol. 5, no. 1, May 1997 to a Cross-Sectoral and Cross-National 451-3497, fax44-131-451-3498, Intemet: contains the following topics: Enterprise Investment Strategy, by W. H. Buiter and http://www.oup.co.uklectranl Restructuring and Social Benefits, by S. others; and Round Table on Russia by Commander and M. Schankerman; M. D. Intriligator, A. Shleifer, and J. Lloyd. Georgian EconomicTrends: Quarterly Bank-led Restructuring in Poland (II), by To order: Mrs. Pat Chrystal, Secretary, Review, TACIS, Georgia, 1997, 74 p. C. W. Gray and A. Holle; Industrial Re- Economics of Transition, CERT, Heriot- To order: TACIS, Georgian Economic structuring in Russia, by E. Fuglo and Watt University, Riccarton, Edinburgh Trends, 16 Zandukeli St, Tbilisi, teL 995- C. Senik-Leygonie;A Portfolio Approach EH144AS, United Kingdom, teL 44-131- 32-93-9161, fax 995-32-93-9160. Bibliography of Selected Articles Postsocialist Economies Baldwin, R.E., J. F. Francois, and R. (Germany) 21(4): 348-53, December Portes. The Costs and Benefits of East- 1997. Feltenstein, A. Fiscal Policy During the ern Enlargement: The Impact on the Transition to a Market Economy. Eco- EU and Central Europe. Economic Zhao, G. From Border Trade to Eco- nomic Systems (Germany) 21 (4):309-26, Policy (United Kingdom), pp. 125-76, April nomic Regionalism: Yunnan Province December 1997. 1997. and the Upper Mekong Corridor in the 1990s. Journal of Chinese Political Sci- Holzmann, R. Pension Reform, Finan- Decision to Introduce Compulsory ence (United States) 3(1):27-64, 1997. cial Market Development, and Eco- Certification of Imported Goods. Slo- nomic Growth: Preliminary Evidence vakMonthlyReport1997(SlovakRepub- CIS and the Baltics from Chile. lntemationalMonetary Fund lic) 9:5, September 1997. Staff Papers (United States) 44(2):149- Andreff, M., and W. Andreff. Foreign 78, June 1997. EU Accession and Public Administra- Direct Investment in Russia and CIS tion Capacities. SIGMA Public Manage- Countries: Employment and Attrac- Piazolo, Daniel. Trade Integration be- ment Forum (France) 3(4):1, 15, 1997. tiveness. Economic Systems (Germany) tween Eastern and Western Europe: 21(4): 354-59, December 1997. Policies Follow the Market. Joumal of Roberts, B. M. Output Decline in East- Economic Integration (Republic of Korea) ern Europe: A Comparison of Expla- Egorova, E., and Y. Petrov. A Compara- 12(3): 259-97, 1997. nations for Poland. Economic Systems tive Study of Taxation in Foreign (Germany) 21 (4):327-46, December 1997. Countries and the Reform of the Rus- Siegmund, U. Are There Nationaliza- sian Tax System. Economic Systems tion-Privatization Cycles? Economic Sinn, H. W,. and A. J. Weichenrieder. (Germany) 21(4): 360-64, December Systems (Germany) 21(4): 370-74, De- Foreign Direct Investment, Political 1997. cember 1997. Resentment and the Privatization Pro- cess in Eastern Europe. Economic Rizopoulos, Y. Socio-Economic Net- Swaan, W. Tacit Knowledge and Post- Policy (United Kingdom), pp. 177-201, works and EconomicTransformation: Socialist Transformation: Results of April 1997. The Russian Case. Economic Systems a Comparative Study. Economic Sys- (Germany) 21(4): 365-69, December tems (Germany) 21(4): 375-79, Decem- Zloch-Christy, l. Industrial Policy: Does 1997. ber 1997. Eastern Europe Need One? Economic Systems (Germany) 21(4): 380-82, De- Thornhill, J., and R. Corzine. The Be- Central and Eastern Europe cember 1997. ginning of Russia's Oil Rush. Finan- cial Times (United Kingdom), p. 14, Anderson, R., and K. Done. The Czech Asia November 19, 1997. Republic: A Year of Growing Uncer- tainty-FinancialTimes Survey. Finan- Ahrens, J. The Political Institutions Wilson, A. An Update Checklist: How cial Times (United Kingdom), December of Economic Development: Suc- To Avoid Custom Delays. Russian Far 1, 1997. cess, Failure, and Prospects in East East Update (United States) 7(10):8-9, and South Asia. Economic Systems November 1997. ( 1997 The World Bank TRANSITION,December1997 M To (Dur Readers! TRANSITION Editor: Richard Hirschler Telephone: 202-473-6982 Tranlsition IS over? Certainly not Fax: 202-522-1152 Email: rhirschler@worldbank.org the process but possibly the Research Assistant: Jennifer Prochnow Telephone: 202-473-7+66 newsletter. You might be wonder- Fax: 202-522-1152 Email: jprochnowwalker@worldbank.org ing why we have no subscription " form in this issue. The fact is that TWorldBank 1818 H Street, N.W the World Bank's financing of Washington D.C. 20433 Telephone: 202-477-1234 F-ax: 202-477-6391 Transition is not guaranteed be- World Wide Web: S ^ ^ | ~~~~~~~~~~~~~~~~http:H/www.worldbank.org/ yond June 1 998. W ith the sup- Email: books@worldbankorg TRANsmoN is a publication of the World Bank and port iof our friends and outside is produced by the Macroeconomics and Growth Division of the Policy Research Department. we a re t n n 1e z A I n ryn t I i n gs to vvos A I r ks The World Bank works to reduce poverty and the I Bni - ank, we IareX V V Ei Cl I trIyin to work I *V V V V Iimprove living standards by promoting sustain- able growth and investments in people. The opinions expressed are those of the authors and should not be attributed in any manner to to con1tinue to publish Transition, the World Bank, to its Board of Executive Direc- tors, or to the countries they represent. whichi has" gained many support- TRANSITION is published six times per calendar year, in February, April, June, August, October, ers all over the world. If we do and December. To help finance this newsletter, tt is necessary to charge subscribers in OECD member countries. The annual subscription rate not sticceed, our current paying ~ ~~~~~~~~~~~~is $30. TRANsiTION will be sent free of charge to subscribers in transition and developing coun- subscribers will be reimbursed tries. on a [pro rata basis. W e will keep 01997 The International Bank for Reconstruction and Development/The World you posted on new develop- Bank All rights reserved m e nts Manufactured in the United States of America Volume 8, Number 6 December 1997 ISBN 0-8213-4189-8 ISSN 1020-5470 @ Printed on recycled paper