20508
http://www.worldbank.org/html/prddr/trans/WEB/trans.htm                       http://www.wdi.bus.umich.edu
http://www.hhs.se/site
r    'I THE NEWSLETTER ABOUT REFORMING ECONOMIES
Vol. 11, No. 2                    World Bank/William Davidson Institute/SITE/BOFIT                   April 2000
Prospects and Challenges for Russia: Davidson
Institute Surveys 100 Leading Transition Economists
by Jan Svejnar
Russia's economic performance since the fall of communism has been dismal. Since 1989 gross domestic product has fallen
almost 50 percent, foreign direct investment has remained miniscule, capital flight has reached dramatic proportions, cre-
ation and growth of new firms has been low, and income inequality has approached levels observed in Brazil and India. Yet the
Russian Federation is one of the richest countries in terms of natural and human resources. With appropriate economic
policies, it could become a rapidly growing economy that is attractive to foreign investors.
I n view of the importance of the recent * In five years Russia's economy is  ing. The experts are cautiously optimistic
Russian presidential election for the fu-  expected to perform better than (or at  about Russia's future economic perfor-
ture course of the Russian economy,  least as well as) itis currently perform-  mance. About 53 percent of them expect
the William Davidson Institute commis-                                           ,
sioned a survey of leading policy- and  _.......    L Ei .,
business-oriented academic economists   W    hat's Inside
working on transition economies. The sur-                                               .
vey obtained experts' views about the per-   Three Papers of the ABCDE Conference:  William Davidson Institute 25
formance of the Russian economy and   0 Janos Kornai: The Road to a Free  (see detailed contents on page 2)'
future prospects and challenges for Rus-   Economy 3                       Social Policy Lessons for Transition
sia. The 100 respondents, many of whom    0 Paul Collier: End of Conditionality? 6  Economies 29
are research fellows of the Davidson Insti-   0 Joel Helleman and others: Capturing
tute, are almost equally divided among   the State 8                       New Books and Working Papers 30
economists in North America, Western                                       New Needs  and Reforms  P r
Europe, and the former Soviet Union.   China Needs Further Reforms 11
* China at the Gates of the WTO 13  EU Standards and Russia 31
Their views, summarized below, thus con-
stitute a balanced cross-section of opin-   Growth is Good for the Poor 15  World Bank/IMFAgenda 32
ions and expertise.
* The dismal performance of the Rus-   Investments in the Baltics 17       Stockholm Institute of Transition Economies
* Business Climate in Estonia 17   0 The BICEPS Project 33
sian economy during the 1990s was
worse than expected. Almost two-thirds   * Action Plan in Latvia 18        * SITE RECEP Research 34
of the respondents state that economic re-                                 * A New Network 36
Latvian Puzzle: Currency Substitution 20
form has proceeded worse or much worse
t                               ~~~~~~~~~~~Conference Diary 36
than expected. For the vast majority of ana-
lysts surveyed, Russia's transition from plan   Pension Reform in Ukraine 21  Milestones of Transition 38
to market has not fulfilled its potential.  0 State Pension Fund is Bankrupt 24    Bibliography of Selected Articles 47
Development Research Group    The World Bank   M          The William Davidson Institute            SITE (



the Russian economy to be stronger in five  they tend to view Russia as a good invest-  Summing up, our survey indicates that
years, while about 40 percent expect per-  ment opportunity. Consumer goods pro-  Russia's transition has fallen short of ex-
formance to be the same as it currently is.  duction and sales are viewed as a neutral  pectations, but that the new president
investment opportunities, while financial  is expected to turn the country around.
* Moderate economic growth is likely  services and producer goods production  While only a sizeable minority of our ex-
over the next 10 years. In contrast to  and sales are rated as areas that repre-  perts believe that the president will es-
the short run, respondents are relatively  sentsomewhat unfavorable opportunities.  tablish a rule of law, a large number
sanguine about Russia's economic                                         feels that he will improve the collection
growth over a 1 0-year horizon. Very few   0 Increasing incentives for FDI is the  of taxes and encourage the develop-
expect past declines to continue, two-  most productive form of external assis-  ment of new private firms. Russia's
thirds expect the average rate of growth  tance. Almost two-thirds of the respon-  economy is likely to improve over the
to be about 1-3 percent a year, and 21  dents identifyincreasing incentives forFDI  next 5 years and register moderate to
percent expect the annual rate of growth  as the most productive form of external as-  possibly respectable rates of growth
to reach 3-6 percent. The experts polled  sistance for Russian economic growth.  over a 1 0-year horizon. Presently, Rus-
thus predict that Russia is likely to resume  More than a third are in favor of technical  sia represents a good investment op-
moderate to respectable economic growth  (but not financial) assistance, and more  portunity only in natural resources and
in the next decade.                 than 20 percent believe that maintaining  telecommunications, the number of at-
financial assistance through the interna-  tractive investment opportunities will
* Putin may be good for Russia's eco-  tional financial institutions would be most  presumably increase over time. Provid-
nomic growth. Fully 60 percent of the re-  fruifful. Very few experts favor direct finan-  ing incentives for foreign investment is
spondents believe that Vladimir Putin will  cial assistance from the United States or  seen as the most productive form of ex-
be a positive change agent for Russian  significantly higher levels of financial as-  ternal assistance. In the short term, Rus-
economic growth. This is a strong but not  sistance from the international financial  sia will be important politically but not
unanimous endorsement by the experts:  institutions.                     economically on the global scene. The
30 percent of those polled hold the oppo-                                new U.S. president should place high
site view.                          0 Russia will be relevant for global po-  priority on economic growth and stabil-
litical stability but not for global eco-  ity in Russia.
* The new Russian president should  nomic stability or growth in the short
focus on establishing the rule of law,  and medium term. The experts believe  Jan Svejnar is the executive director of
elimin atingcorruption, collecting taxes,  that during the next five years Russia's po-  the William Davidson Institute and the
andencouragingprivatefirms. Mostre-  litical and economic stability will be rel-  Everett E Berg Professor of Business
spondents identify the establishment of the  evant, though not highly relevant, for global  Economics at the University of Michigan
rule of law as by far the most important pri-  political stability. However, they do not see  Business School.
ority. Yet 70 percent of them also indicate  Russia's stability as being relevant for ei-
that it is unlikely that meaningful reform will  ther global economic stability or global
be carried out in this area. The elimina-  economic growth. In the short term, Rus-
tion of corruption and the institution of an  sia is hence viewed as having the poten-  Con       of
effective system for collecting taxes are  tial to destabilize the world politically, but  tents
also deemed to be important policy initia-  its economy is considered too unimpor-
tives by a majority of those surveyed. In-  tant to affect the global economy.       W DI
terestingly, while almost all respondents
indicate that the elimination of corruption  0 Russian economic growth andstabil-   Conference on Accounting in Transition
is unlikely, half think that Russia will prob-  ity should be a high priority for the next  and Emerging Economies 25
ably institute an effective system for col-  U.S. president. Almost60 percent of the re-
lecting taxes.                      spondents believe that Russian economic   Markets, Human Capital, Inequality:
growth and stability should be a high or very   Evidence from Rural China 26
0 Russia represents a good investment  high priority for the next U.S. president. This
in the natural resources and telecommu-  presumably reflects their belief that Russia's   Recent Working Papers 27
nications sectors. Overall, the experts are  economic stability and well-being have glo-
byand large neutral on Russia as an invest-  bal political ramifications and thatthe Presi-   Upcoming Davidson Institute Research
ment opportunity. However, in the areas of  dent of the United States is a key player in   Conferences 28
natural resources and telecommunications,  interaction with Russian policymakers.   I
m TRANSITION, April 2000        The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies © 2000



Ten Years of Transition: Lessons Drawn, New
Issues Discussed During World Bank Conference in
Washington
Since 1988 leading academics, policymakers, and researchers have gotten together every spring at the Annual World Bank
Conference on Development Economics to discuss the latest issues in development. This year 's conference-organized by Boris
Pleskovic,.Administrator of the Research Advisory Staff-was dominated by the new development thinking, but the new generation
of transition issues received attention as well. In this issue we summarize the papers of Janos Komai, who 10 years ago published
the first comprehensive book on postsocialist transition; Paul Collier, who analyzes drawbacks and weaknesses of conditional aid
and urges true partnership between donors and borrowing govemments; and a paper of Joel S. Hellman, Geraint Jones, and Daniel
Kaufmann, who analyze the roots and outcome of corruption and kickbacks in the transition economies based on survey data.
These papers can be downloaded from http://www.worldbankorg/research/abcde/washington 12/agenda 12.html. As a follow-up to
the Washington conference, the Second Annual Bank Conference on Development Economics in Europe will take stock of "Devel-
opment Thinking at the Millennium." That conference will be held in Paris June 26-28, 2000.
The Road to a Free Economy-Ten Years After
By Jinos Kornai
Ten years have passed since the publi-  opment of the private sector. The main  pany (owned by nationals or foreigners).
cation of my book The Road to a Free  impetus behind the growth of the private  A particularly desirable type of owner is a
Economy: Shifting from a Socialist  sector is mass de novo entry. Creation of  strategic investor who is prepared to in-
System-The Example of Hungary. It  new firms has to be facilitated by break-  ject a significant amount of new capital into
was the first book in the international lit-  ing down barriers to entry, ensuring the  the company. If the company is held pub-
erature to put forward comprehensive pro-  security of private ownership, establishing  licly, there is no need to prevent the shares
posals for the postsocialist transition. In this  institutions to enforce private contracts,  from being dispersed across a large num-
article I examine two issues I addressed  and, cautiously, promoting the develop-  ber of shareholders. Where possible, how-
in my book-ownership reform and mac-  ment of the private sector (through tax and  ever, it is desirable to have a core owner.
roeconomic stability-in light of 10 years  credit policy, for instance).
of experience with transition.                                              Fourth, the budget constraint on compa-
Second, most state-owned companies  nies has to be hardened. This is key to
Ownership Reform                      must be privatized. The basic technique  ensuring the financial discipline essential
for doing so is sale. State assets must be  to operating in a market economy. Aset of
The Road to a Free Economy supported  sold mainly to outsiders, with preference  new laws must be passed, including bank-
creation of an economic system in which  given to those who offer a fair price and  ruptcy, accounting, and banking laws. Fol-
private ownership would dominate. In this  make a commitment to invest in the com-  lowing the legislative phase all these laws
respect, its views did not differ from many  pany. If the buyer is an insider, a genuine  should be consistently enforced.
proposals originating in the West. This  price must still be paid: insider privatization
broad agreement on the need for private  cannot be allowed to degenerate into a  Strategy B: Accelerated Privatization
ownership left open the question of which  disguised form of give-away. Give-away
is the best road to creating such a system,  distribution of state property must be  Strategy B focuses on the rapid liquidation
however.                              avoided.                              of the state sector. It stresses eliminating
state ownership as quickly as possible. The
Strategy A: Organic Privatization     Third, preference must be given to sales  main technique for privatization is some
schemes that produce an ownership struc-  form of give-away, such as a voucher
Strategy A is based on four main tenets.  ture with a majority owner. The majority  scheme, in which property rights in state-
First, the most important task is to create  shareholder may be a businessperson, a  owned companies are distributed free and
favorable conditions for bottom-up devel-  group of owners, ora privatelyowned com-  equally among the country's citizens. This
© 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000   *



approach may be linked with toleration or  for its adoption in the international arena.  Labor productivity in Russia in 1998 was
even encouragement of takeovers by  The program was applied energetically in  33 percent lowerthan in 1989. In the Czech
managers. In many cases this kind of  Czechoslovakia. In the first phase the as-  Republic productivity was just 6 percent
privatization turns out to be a pseudo man-  sets of state-owned enterprises were dis-  higher than in 1989, the last year of so-
agement buy-out, as the managers pay a  persed among millions of voucher owners,  cialism. In contrast, labor productivity in
very low price, almosttantamountto receiv-  but they were soon concentrated among  Hungary in 1998 was 36 percent higher
ing the property rights in the company free  investment funds. These funds lacked the  than in 1989, and Poland's productivity
of charge. Under Strategy B, dispersed  capital to develop the backward compa-  had risen 29 percent.
ownership may actually be preferred to  nies. Moreover, the funds were closely
ownership by a dominant owner. All citi-  linked to the large commercial banks, which  Macroeconomic Stability
zens share in the property rights of the for-  were dominated or owned by the state.
merly state-owned companies, so that                                       My book recommended immediate mac-
"people's capitalism" develops.      Such an ownership structure was incapable  roeconomic adjustment in Hungary (that is,
of building up strong corporate govemance.  adjustment within the next year or two). I
What Lessons Can Be Learned from   Restructuring dragged on. Despite the stri-  still think that position was correct. In the
Experience?                          dent Chicago-style free enterprise rhetoric  event, adjustment was postponed several
directed at the outside world, budget con-  years. Most experts agree that if post-
Ten years after the onset of transition, I am   straints remained soft. Whereas privatization  poned, macroeconomic stabilization costs
convinced that strategyA, which promoted  by sale engenders natural selection, the  more. There is an ethical and political di-
organic growth of the private sector, was  transferof property rights bygive-awaydistri-  lemma posed here by the intertemporal
the correct position to take. Strategy B  bution conserves the existing structure.  distribution of pain and gain and the ac-
proved inferior at best and harmful atworst.  Performance has been disappointing. ceptance of the political price of unpopu-
Adoption of Strategy B seems to have been  lar measures.
The state socialist system left behind a  a significant factor behind the privatized
legacy of mass unemployment on the job.  companies' poor performance.      I did not predict the deep recession that
Strategy A is prepared to reverse this                                    followed the system change; I was too op-
legacy, even if it means taking painful and  Perhaps the saddest example of the fail-  timistic in my expectations of future
unpopular measures. Strategy B shrinks  ure of strategy B is provided by the Rus-  growth. The socialist system left a badly
from doing so.                       sian Federation. There every feature of the  distorted structure of input and output.
strategy appeared in extreme form: a  Correcting this structure called for cre-
Hungary and Poland followed strategyA.  voucher scheme was imposed on the  ative destruction. Because destruction is
In Hungary hundreds of thousands of small  country, coupled with mass manipulated  rapid, whereas creation proceeds much
and medium-sized firms were created.  transfers of property into the hands of man-  more slowly, the two processes led to a
Tightening of the budget constraint in the  agement and privileged bureaucrats. In the  deep recession.
first half of the 1990s allowed a process  unprecedented ownership reform that oc-
of natural selection to sweep over the cor-  curred, ownership of natural resources,  My book recommended implementing a
porate sphere. This coincided with a  especially oil and gas, was expropriated  radical action program byonestroke. In ret-
strengthening of financial discipline. The  by the "oligarchs."            rospect, I do not reject the notion of a radi-
chains of mutual debt among companies                                      cal adjustment package, in which several
were broken and the standing of private  All these failures are closely connected  measures are taken simultaneously. Such
contracts improved. A start was made to  with the survival of the syndrome of the soft  a policy is appropriate if it will restore equi-
consolidate the banking sector. All these  budget constraint, which has infiltrated and  librium in several important dimensions of
developments helped attract foreign capi-  done damage to every cell of the economy  the economy at once-or at least bring the
tal. The strong inflow of capital was one of  and body politic. Russia has become a  economyclosertoatolerabledegreeofdis-
the main factors responsible for the im-  nonpayment society. Companies do not  equilibrium (by reducing the deficit on the
provement in Hungary's productivity and  pay their suppliers, employers do not pay  current account or the budget deficit to a
export performance.                  their employees, borrowers do not repay  sustainable level, for example). But I paid too
their loans. All of this is tolerated by the  little attention to howto consolidate this quick
At the beginning of the 1990s Vaclav  executive and the judiciary. In fact, the state  fix and produce lasting improvement.
Klaus, economist-prime minister of what  sets a bad example by often falling behind
became the Czech Republic, championed  with wages and insurance contributions  Sustainable growth requires not just one
the voucher scheme (strategy B), arguing  owed to state employees and pensioners.  macroeconomic intervention but a deep,
*  TRANSITION, April 2000        The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies © 2000



comprehensive program of institutional re-  Ironically, the expression "mass pri-  is a curious amalgam of revolution and
forms. It is easy to improve the budget bal-  vatization," used as a synonym forgive-away  evolution, a trial-and-error process in which
ance at a single stroke by raising the rates  and voucher schemes, is the inverse of the  old institutions are either retained or liqui-
of existing taxes. But lasting improvement  mass collectivization imposed by Stalin.  dated, new ones tested and accepted or
requires radical tax reforms: broadening  Stalin did notwanttowaste timewith volun-  rejected. Differentelements in the process
the tax base, introducing new taxes, and  tary collectivization. Using brutal, merciless  may be very rapid, fairly rapid, or slow.
improving the tax collection system. And  violence, he imposed collective ownership  Each has its own appropriate speed.
that is just one element, perhaps the easi-  on the peasantry in a matter of two or three  Some changes call for a one-stroke inter-
est, of the fiscal reform. More difficult is  years. I do notwant to exaggerate the com-  vention; many others advance by incremen-
reducing state expenditure, which could  parison;luckily,nogulagswererequiredand  tal changes. The emphasis has to be
involve reorganizing the state apparatus  no brutality occurred in the 1 990s. Change  placed on consolidation, stability, and
and reforming the education, health care,  was forced by milder means. Nonetheless,  sustainability of growth.
and other welfare systems. It is relatively  there were similarities: the subordination of
easy to declare that the currency is con-  the ownership reform to political and power  Excerpted from Janos Kornai's paper:
vertible. It is much harder to organize an  purposes, the horror of gradual change, the  "Ten Years After the Road to a Free
effective system of international payments,  impatience, and the obsession with speed.  Economy-the Author's Self Evaluation."
develop well-functioning connections be-                                   The author is professor of economics at
tween the domestic and international  Transitionfromsocialismtocapitalismhas  Harvard University and Collegium
banking systems, and guarantee that in-  to be an organic development. Transition  Budapest.
ternational payment agreements will be
observed.                              Toward Europe
Macroeconomic stabilization is not a battle
but an endless war. Stabilization cannot be             n                                              1_.
achieved by a blitzkrieg. Institutional re-UU
forms can be obtained only step by step,
by a series of larger and smaller blocks of    l        l_
reforms. I see that now and regret that I
did not feature this idea in The Road to a              U 1
Free Economy.
Gradualism? Shock Therapy?-                                 6
Wrong Question
The polemics of the early 1990s con-
cerned the choice between "gradualism"
and"shocktherapy."Inthosedaysthatwas
one of the favorite topics of classroom dis-
cussion in courses on comparative eco-
nomics. That was what many students had
to write about in their exam papers.
In my view, the question was badly put, and
so I am not going to try to answer it. The
question itself implies a yardstick: speed. I                                                   7  
am convinced that speed, while important,
is not the primary measure of success. The
transformation of society is not a horse                          .            *..-
race. The main indicator of success is not
who passes the winning post first. Exces-  "Prices are already EU compatible, only the wages remain Hungarian."
sive emphasis on speed leads to impa-
tience, aggressiveness, and arrogance.    From the Hungarian daily N6pszabdsag.
O 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000



For a New Relationship between Donors and
Recipients: The End of Conditionality?
by Paul Collier
T      hirty years ago donors tried to re-  price governments would have to pay for  credibility of governments, not just with do-
duce poverty by delivering projects  aid-or equivalently, policy change would  nors but with private investors as well.
with high rates of return. This ap-  be what donors bought with their aid.
proach encountered three fundamental                                    Costs of adjustment are largely mythical.
problems:                           The implications of using aid as in induce-  Most reforms, if they are sensible, lead to
mentfor reform were uncomfortable: if do-  rapid improvement in the economy. The
* Some projects were good but not widely  nors "bought" the reforms, it was clear who  emphasis on costs of adjustment encour-
replicable (they could not be "scaled up").  "owned" them. Indeed, when one African  aged governments to exaggerate the dif-
Such projects were irrelevant in the larger  head of state became annoyed with do-  ficulties of policy reform. The negotiating
context of economic growth.         nors who had complained about the lack  framework was such that the rational gov-
of political rights in his country, he threat-  ernment would exaggerate the costs of
* Projects were fungible-that is, donor  ened to reverse the reforms unless they  policy change in order to maximize its
support for a project the government would  desisted. The notion that the reversal of a  price. Furthermore, since donor negotiat-
otherwise have financed itself freed up re-  reform program could be a threat is intelli-  ing teams saw their role as extracting the
sources for the government to do some-  gible only if itwas understood by both par-  maximum reform for a given amount of aid,
thing else. Donors thus financed not the  ties that the reforms belonged to the  at the margin the government was always
project they appeared to pay for but the  donors and not to the government.  a reluctant reformer, refusing to implement
marginal project the government chose to                                reforms urged on it by donors.
undertake. Donor care in selecting among  Indeed, the implications of using aid as
intramarginal projects thus made no dif-  an incentive were so uncomfortable that  Studies find that aid has not, on average,
ference to the overall portfolio of imple-  a fig leaf alternative theoretical underpin-  sped policy change. David Dollar and
mented projects.                    ning emerged: the notion of costs of ad-  Jacob Svensson of the World Bank stud-
justment. Under this theory, policy  ied 220 reform programs. Theyshowthat
* Success of a project depended less on  change was initially costly and so was  the success of reform is systematically
the design of the project than on the envi-  like an investment. Aid could finance  related to domestic political economy fac-
ronment in which the project took place.  these upfront costs.          tors, such as how long the government has
Like other investments, donor-funded                                    been in power, but unrelated to donor be-
projects failed in hostile environments.    Neither of these theories was completely  havior. They find no overall relationship
wrong. Sometimes the incentive of aid was  between aid flows and policy change.
Weaknesses of Aid for Reform        sufficient to induce a government to imple-
ment policies it otherwise would not have  This result is not as surprising as it might
Good project design being insufficient to  undertaken. Sometimes such policy  seem. The incentives argument is indeed
achieve donor objectives of reducing pov-  changes had upfront costs. However, as  elementary economics: the offer of aid for
erty, a new approach was developed in the  general propositions these theories were  reform should induce a supply response.
1980s, namely, conditionality. Aid was pro-  dysfunctional.             However, it misses four offsetting effects.
vided in return for explicit negotiated com-
mitments to policy reform.          The lure of aid led governments to promise  0 The provision of aid alleviates fiscal and
more than they intended to deliver and to  payments crisis and so reduces the ur-
The theory underlying this new approach  implement more than they could sustain.  gency for a government to change policy.
was that aid could be an incentive to policy  The govemment of Kenya, forexample, sold  Economists would say that the income ef-
change. However, an implication of this  the same agricultural reform to the Bankfive  fect of aid offsets the substitution effect. In
theory was that governments would be un-  times in 15 years. The same conditionality  poor policy environments, aid for reform
dertaking policy change againstwhatthey  has appeared in seven of the past eight  paradoxically tends to delay reform: the
considered to be their interests, except for  Policy Framework Papers for Malawi. Cu-  income effect dominates the substitution
the receipt of aid. Policy change was the  mulatively, such behavior destroyed the  effect. As the reform process proceeds,
* TRANSITION, April 2000       The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies © 2000



the reforms become more complex and  given level of policy and institutions, the  goats: governments could blame the inter-
need a wider constituency of support to be  greater the poverty, the larger should be  national financial institutions for unpopu-
implemented effectively. By this stage con-  the aid program. The better is the policy  lar but necessary policy changes.
ditionality serves no purpose, because the  and institutional environment, the more ef-
substitution effect cannot be translated into  fective aid is in raising growth and reduc-  A final possible effect of the attempt to
effective incentives for such a large group  ing poverty. But even in environments with  coerce reform is that it might have given
of actors.                           good policies and severe poverty, there is  rise to the psychological phenomenon
a limit to how much aid can be effectively  known as "reactance." According to clini-
* Aid for reform faces what economists  absorbed. This limit is about 20 percent  cal psychologists, if someone tries to force
call a time consistency problem. Unless the  of GDP Conversely, even in environments  you to do something, your natural reaction
government actually wants the reform, it with poor policies, the first few million dol-  is to do the opposite (unless the other per-
has little incentive to maintain it once the  lars of aid are worthwhile.  son has total power over you). Only by do-
aid has been delivered. If it supports the                                ing the opposite can you reestablish your
reform, it normally does not need aid to  Conditioning aid on policy change instead  freedom of action. Governments may have
implement it.                        of policy levels not only leads to inefficient  found the reversal of reforms attractive
allocations between countries but to inef-  because it reestablished this freedom.
* Aid for reform faces a moral hazard  ficient allocations over time. Consider a  Electorates may have gone along be-
problem. The agencies that should enforce  democratic government that periodically  cause they had often been told that the
the conditionality also have an interest in  faces elections. Typically, such a govern-  reforms had not been a national choice.
seeing their loans repaid. Enforcing the  ment will be more reluctant to change poli-
conditionality will reduce the probability of  cies the year before an election than the  Improving Policies and Institutions
repayment.                           year after an election. The cycle of elec-
tions thus creates a cycle of policy change.  Aid for reform was well intentioned, but it
* While the development agencies may  If aid flows are conditioned on the rate of  was based on a misunderstanding of how
have wanted to use conditionality to induce  policy change, they tend to destabilize the  policies and institutions are changed on
policy reform, other OECD interest groups  macroeconomy: in the run-up to an elec-  a sustainable basis. At the risk of over-
had their own agendas and so could be  tion, just when a government is increasing  simplification, I suggest that within reason
expected to try to subvert conditionality to  its expenditures, its aid will tend to get  we now know what constitutes a good
induce different behavioral change. The  squeezed.                         macroeconomic policy environment butwe
possibility that the economic objectives of                                have rather less idea as to what consti-
conditionality were subverted by political  Finally, aid for reform may have weakened  tutes good institutions. We know, for ex-
goals should not be dismissed out of hand.  governments' capacity to work out and  ample, that the design of legal institutions
communicate their own strategies. Gov-  is much less important than how they are
While aid for reform was not very effective  ernments were often little involved in the  operated in practice. This suggests that
in achieving sustained policy improvement,  preparation of the documents they signed.  the processes by which institutions and
it was effective in undermining the credibil-  The documents were sometimes prepared  macroeonomic policy are reformed may
ity of governments. Bad governments de-  in Washington even before missions ar-  be different.
stroyed their reputations by reneging on the  rived in the United States. Governments
spirit of agreements, but even good gov-  knew that donor negotiators were going  Policies depend largely on the balance
ernments faced a problem: when a govern-  to attempt to coerce them to agree to more  among domestic political constituencies.
ment implemented and sustained policy  than they appeared to want to do. Hence  In countries with very poor policies, there
reform, donors claimed the credit.   rational governments should appear to  are large latent constituencies for policy
want to do even less than they really  change because poor policies inflict poor
Allocating Aid Efficiently           wanted. The incentive was thus to impede  outcomes. The process of policy reform
rather than assist even those reforms in  depends on strengthening these constitu-
Aid for reform also diverted aid from those  which governments believed.   encies. Constituencies for reform are
countries in which it could be most effec-                                 those that suffer from poor policies. Dur-
tive in reducing poverty. We now know   Governments also had little incentive to  ing the 1 990s there was greater empow-
what a poverty-efficient allocation of aid  sell reform policies to their electorates. In-  erment of these constituencies. The visible
would look like. It would take three factors  deed, a whole doctrine was evolved in  failure of the Soviet model stimulated a
into account: the level of poverty, the level  Washington about the efficacy of the inter-  wave of democratization and provided a
of policy, and diminishing returns. For a  national financial institutions as scape-  massive injection of information into the
© 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000  U



debate on development policy. Govern-              ro _                    B
ments were pressured into improving the How  Proitable Is Buying State
economic environment, albeit fitfully. We        a        n                 i       E             m
now know that pressure from civil society Ofricials in TransitJon Economies?
is effective in improving government per-  by Joel S. Hellman, Geraint Jones, and Daniel Kaufmann
formance. Civil liberties, such as freedom
of the press, for example, increase the re-
tum on public investment.            Most studies of corruption focus on the role  sioned jointly by the European Bank for
of politicians and bureaucrats inherent in  Reconstruction and Development and the
Creating an effective reform process is  the conventional definition of corruption by  World Bank, provides firm-level data on
thus essentially synonymous with creating  looking at the abuse of public office for pri-  obstacles in the business environment in
an effective knowledge discovery pro-  vate gain. We shift attention to the role of  22 transition economies.
cess. The core of such a process is ex-  firms, suggesting that some firms possess
periment and competition. There needs to  sufficient freedom to choose a strategy of  The transition economies can be divided into
be sufficient institutional variation and in-  corrupt interactions with the state that maxi-  high capture and low capture countries,
stitutional choice that some institutions are  mizes their rents. We attempt to measure  based on scores on the state capture index.
revealed to be better than others.   the costs and benefits to the firm of altema-  The low capture group includes Albania, Ar-
tive strategies of corrupt and noncorrupt  menia, Belarus, the Czech Republic, Esto-
What Role Can Donors Play?           interactions with the state in different envi-  nia, Hungary, Kazakhstan, Lithuania, Poland,
ronments, focusing on state capture and  Slovenia, and Uzbekistan. This is an unusual
What does this imply for the donor role?  corruption of public procurement.  group because it includes some of the most
Donors can do much to assist both policy                                  reformist and least reformist countries in the
reform and institutional reform. In terms of  We define state capture as the capacity  sample in terms of both political and eco-
policy reform, they can help pro-reform  to influence the formation of the basic rules  nomictransition. In countries such as Belarus
constituencies, within the constraints of  of the game (laws, rules, decrees, regula-  and Uzbekistan-wheretherehasbeenonly
appropriate conduct. The international  tion) through private payments to public  minimal privatization, the private sector re-
community can encourage standards of  officials. An index of state capture (table  mains small, and important elements of the
good practice for information disclosure.  1) can be constructed based on firms' re-  command system are still in operation-the
It can provide the analysis that shows the  sponses on the extent to which the follow-  capacity of private sector interests to cap-
true effects of policy.              ing forms of corruption have had a direct  ture the state might be expected to be low
impact on their business:            (and indeed the concept may have little
With respect to institutional reform, donors  * Sale of Parliamentary votes on laws to  meaning in this context). In contrast, the most
can show governments that there are a  private interests.                  reform-minded countries (such as Hungary
wide range of potentially viable options  * Sale of presidential decrees to private  and Poland) haveachieved the mostprogress
and stress that diversity and experiment  interests.                      in liberalizing the economy, strengthening bu-
are legitimate responses to uncertainty.  * Mishandling of funds bythe central bank.  reaucraticaccountability, and promotingpo-
They can finance pilot institutional reforms  * Sale of court decisions in criminal cases.  litical contestation-all factors that might be
that, if successful, can be scaled up  * Contributions paid by private interests to  expected to place limits on the capacity of
through imitation. However, the interna-  political parties and election campaigns.   powerfulfirmstocapturethestate.
tional community cannot supplant the role
of the government. The government can-  Public procurement corruption is defined as  The high capture group includesAzerbaijan,
not abdicate responsibility for working out  efforts to secure public contracts through  Bulgaria, Croatia, Georgia, Kyrgyzstan,
a development strategy. There are good  payment of kickbacks to high-level officials.  Latvia, Moldova, Romania, the Russian
reasons why this process should be a part-                                 Federation, the Slovak Republic, and
nership between the government and the  High Capture and Low Capture       Ukraine. Most of these countries could be
intemational community rather than an ac-                                  considered partial reformers in both po-
tivity undertaken entirely by the govemment  To identify the costs and benefits of alter-  litical and economic transition. Most have
native strategies for both individual firms  made significant advances in liberalization
Paul Collier is director of DECRG at the  and the broader economic environment,  and privatization, with much less progress
World Bank. This article is excerpted  we use data from the 1999 Business En-  in concomitant institutional reforms to sup-
form his paper "Consensus-Building,  vironment and Enterprise Performance  port a legal and regulatory framework for
Knowledge, and Conditionality '      Survey (BEEPS).' That survey, commis-  the emerging market. Although most have
* TRANSITION, April 2000         The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies C) 2000



adopted the basic rules of democratic  Table 1: Share of Firms (% of sample) that Believe Other Firms' Corrupt Prac-
elections, there remain concems in nearly  tices Influence Rules of the Game
all of these countries regarding the con-                                                    Capture
centration of political power and limitations    Parlia-                     Criminal         index
on political competition. Capture might be      mentary   Presiden- Central Courts'  Party (avg. of Classi-
expected to thrive in an environment of  Country legislation  tial decrees Bank Decisions finance firms) fication
partial economic reforms and concen-  Albania       12          7        8       22      25     16      Lo
trated political power.              Armenia        10          7        14       5      1       7      Lo
Azerbaijan    41         48        39      44      35     41    High
Kickbacks: Benefits and Costs        Belarus        9           5       25        0      4       8      Lo
Bulgaria      28         26        28      28      42     28    High
Croatia       18         24        30      29      30     27    High
In countries in which there is a market for  Czech Rep.    18  11       12        9      6      11      Lo
state capture-that is, where firms can pur-  Estonia  14        7        8        8      17     10      Lo
chase laws, regulations, or decrees from   Georgia  29         24       32       18      21     24    High
politicians and bureaucrats-"captor"  Hungary       12          7        8        5      4       7      Lo
firms perform substantially better than  Kazakhstan    13      10        19      14      6      12      Lo
other firms in terms of sales growth. But  Kyrgyzstan  18     146       59       26      27     29    High
engaging in state capture entails costs in  Lithuania  15       7        9       11      13     11      Lo
terms of greater insecurity of property  Moldova    43         30       40       33      42     37    High
rights among captor firms, and firms do  Poland     13         10        6       12      10     12      Lo
not expect these performance advantages  Romania    22         20       26       14      27     21    High
to be maintained overtime.           Russia         35         32       47       24      24     32    High
Slovakia      20         12        37      29      20     24    High
In contrast, in countries in which the mar-  Slovenia  8        5        4        6      11      7      Lo
for state capture is restricted, captor  Ukraine  44        37       37       21     29      32    High
ketforstate capture is restricted, captor  Uzbekistan  5        4        8        5      4       6      Lo
Overall       24         21        25       18     20     22
Table 2. Average Bribery Payments as  Source: author's survey.
Share of Gross Firm Revenues
Level of bribery  firms perform worse than other firms. In  enues in Croatia to more than 5.7 percent
Country         (% of firm revenues)  these environments, firms that choose rent-  in Azerbaijan.
Albania                  4.0         seeking strategies in dealing with the state
Armenia                  4.6         based on kickbacks for public procurement  The percentage of firms that are captors or
Azerbaijan               5.7         show substantially greater gains than other  provide kickbacks also varies across coun-
Belarus                  1.3         firms. There are, however, costs in terms of  tries (table 3). Belarus has the lowest per-
Bulgaria                 2.1         time spent dealing with state officials.  centage of captor firms (2 percent), while
Croatia                  1.1                                               Azerbaijan has the highest percentage (24
Czech Rep.               2.5         We also find that there are significant so-  percent). Among firms that trade with the
Georgia                  436         cial costs of state capture. Partial political  state, only 4 percent pay kickbacks in
Hungary                  1.7         and economic reforms generate the high-  Belarus, while nearly half doso inAzerbaijan.
Kazakhstan               3.1         est levels of state capture. Yet there is a
Kyrgyzstan               5.3         threshold beyond which enhancing civil lib-  Where there is a market for state capture
Latvia                   1.4         erties and advancing economic reforms  (that is, a market in which state actors en-
Lithuania                2.8         systematically lowers the level of state cap-  gage in "selling" laws, rules, and regulations),
Moldova                  4.0         ture in transition economies.         a strategy of seeking to influence the basic
Poland                   1.6                                               rules of the game may be most effective for
Russia                   2.8         The most general measure of corruption  extracting rents from the state. Where the
Slovakia                 2.5         in the survey is the proportion of annual rev-  market for state capture is constrained, a
Slovenia                 1.4         enues paid to public officials to "get things  strategy of distorting the implementation of
Ukraine                  4.4         done" (table 2). The results reveal consid-  government policy might generate greater
Uzbekistan               4.4         erable variation in the level of unofficial pay-  gains to the firm. In high capture countries,
Overall                  3.0         ments across transition economies,  firms appear to realize gains from trading
Source: author's survey. ranaina from 1 1 nercent of aross firm rev- with the state only if they are willina to nay
C) 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000   C



kickbacks to public officials. Firms that do  In addition to higher bribes paid, captor  although the contrast between kickback
not pay kickbacks in such counfrfes  firrm's also spend substantially more senior  and nonkickback firms is somewhat less
underperform corruptfirms in terms of invest-  management time dealing with govern-  stark. Kickback firms pay more than twice
ment and employment grovvth.         ment officials. In high capture countries,  as much of their annual revenues in bribes
captorfirms spend nearly 50 percent more  than nonkickback firms. Although large,
The survey results allow us to calculate both  Of their management time dealing with the  this difference is smaller than the differ-
the direct costs in terms of higher bribery  government than noncaptor firms. This  ence between captor and noncaptor firms.
payments and time spent dealing with gov-  "time tax" tends to be lower in low capture  In high capture environments, kickback
ernment officials and the indirect and less  countries, although even there captor firms  firms spend nearly 20 percent more of their
tangible costs to the firm potentially asso-  spend more time with government officials  time than nonkickback firms dealing with
ciated with greater uncertainty and inse-  than noncaptor firms. These results sug-  government officials. In low capture envi-
curity. Across the entire sample, captor  gest that capturing the state does not ap-  ronments, paying kickbacks appears to be
firms pay more than twice as much of their  pear to buy firms greater protection from   associated with a minor reduction in this
annual revenues in bribes than noncaptor  government incursions on management  time tax. Capture generates more costs
firms. In high capture countries the gap is  time. In fact, it could well be that we are  to the firm in terms of bribe payments and
even wider. Captor firms report paying 6.6  measuring a proxy for a deliberate corpo-  time than public procurement corruption.
percent of their annual revenues in bribes.  rate strategy of investing in time with poli-  Whatever the private costs and benefits
On top of the already high tax obligations  ticians and high-ranking officials in order  to these different forms of corruption, the
of firms in this region, this constitutes a con-  to effect state capture (in contrast with the  social costs are significant
siderable financial burden. Although cap-  time wasted by firms due to arbitrary red
tor firms in low capture countries appear  tape harassment by bureaucrats).  How to Fight Corruption
to gain few benefits from capture in terms
of improved performance, their bribery  Public procurement corruption has a simi-  Policymakers need to focus on strategies
burden is still considerably higher than that  lar pattern of costs to the firm across dif-
of noncaptor firms.                  ferent firm types and environments,  fo aressate capture  and corion
In large-scale procurement. Doing so imn-
Table 3. Share of Firms that are 'Captors' and Pay Kickbacks               plies implementing national-level measures
that deepen economic and sociopolitical
Full sample                  Firms that trade with state       liberalization.
Pay                      Pay Kickbacks
Captors      Kickbacks  Trade with state  (% of firms
Country (% of sample)  (% of sample)  (% of sample) trading with state)    Regarding economic liberalization,
Albania       11            21             45             48               demonopolization, deregulation, fuller
Armenia       7              6             23             26               trade liberalization, and facilitating entry to
Azerbaijan    24            11              23            49               the enterprise sector are conventional rec-
Belarus       2              3             74              4               ommendations that, where feasible, need
Bulgaria      11             5             46              11             to be supported. In some countries, where
Croatia       10            16             63             25               state capture has led to entrenched inter-
Czech Rep.    7              18            46             38               ests, breaking up monopolistic structures
Estonia       5             20             71             28               will represent a particularly daunting chal-
Georgia       8              8             47             17              lenge, the success of which will depend
Hungary       4              5             38             14               en  the  suess ofiwich lladepend
Kazakhstan    6              7             40             18               on the role of the political leadership.
Kyrgyzstan    7              7             43             16               Where this is not feasible in the short term,
Latvia       14             11             50             21               strategies need to be formulated that com-
Lithuania    14              2             24              9               bine a more gradual demonopolization
Moldova       12             5             65              8               strategy with an activist stance on compe-
Poland        9             17             58             30               tition (and entry) policy. At the same time,
Romania      13             14             41             35               societal "voice" needs to be mobilized, and
Russia        9             12             56             22               the social cost of state capture needs to be
Slovakia     12             17             54             31
Slovenia     10             15             58             25               madetransparenttothe population, proreform
Ukraine      12             20             67             30               groups, and NGOs. Policymakers could also
Uzbekistan    2             19             79             24               consider introducing innovations already
Overall       9             12             52             24               prevalent in Latin America, such as public
Source: author's survey.                                                   hearings to determine the rules of the game
*  TRANSITION, April 2000        The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies (C 2000



in large procurement contracts and pub-  new ways to increase transparency and  and income sources by government offi-
lic audiences and NGO monitoring of the  reduce corruption and costs in public pro,  cials and their dependents can help reduce
public procurement bidding itself. In a  curement. Local NGOs (possibly in col-  corruption.
country in which a handful of oligarchs has  laboration with external donors) could
come to exercise control through state  conduct and disseminate periodic in-  Joel S. Hellman is senior political coun-
capture of the lion' s share of productive  depth diagnostic surveys on state capture  selor at the Chief Economist's Office.
assets, a multiyear strategy of competi-  and public procurement corruption, detail-  Geraint Jones is a consultant at the Euro-
tion, privatization of remaining state as-  ing the extent and manifestations of such  pean Bank for Reconstruction and Devel-
sets, and foreign direct investment  practices in different institutions and by  opment. Daniel Kaufmann is Manager of
policies could be aimed at strategically  different industrial groups.   the Anti-Corruption, Regulation, and Fi-
empowering a second and third tier of do-                                nance Division at the World Bank Institute.
mestic industrial and financial groups and  Recognition of the serious problem of state
enterprises that would become more  capture and public procurement corruption   1 Survey data were collected through
prominent over time.                suggests that given the reality of state cap-  face-to-face interviews with firm manag-
ture in some settings, the strategy of eco-  ers or owners in site visits conducted be-
The ongoing revolution in Internet and  nomic liberalization may need to be more  tween June and August 1999. In all but
knowledge-based services can foster the  complex than merely promoting fair com-  three countries, 125-150 firms were inter-
emergence of a new cadre of potentially  petition and demonopolization per se. The  viewed. Larger samples were used in Po-
powerful entrepreneurs. The Internet revo-  potential gains from promoting activist citi-  land (250), the Russian Federation (550),
lution also allows for the wide dissemi-  zen voice, political liberalization, and trans-  and Ukraine (250). The sample was struc-
nation of data on corruption and state  parency reforms (including support of an  tured to be representative of the domestic
capture, helping to expose the extent of  independent and well-informed media)  economies, with quotas placed on size,
the problem and mobilizing public opin-  can be substantial. Introduction of periodic  sector, location, and export orientation
ion. The Internet also offers revolutionary  mandatory public declarations of assets  (see Transition, December 1999, p. 6).
China's Future Depends on Further Reforms
by Chi Fulin
Today as China's economy struggles and social conflicts are on the rise, system innovation through reform is becoming vital and
urgent. In fact, with its accession to the WTO likely, China has no altemative to reform if it wants to reap the benefits of economic
globalization. Benefiting from globalization will demand that China relinquish administrative control, phase out sectoral monopoly,
and provide enough leeway for the effective functioning of market mechanisms while creating a level playing field for all market
participants. Consequently, if we want China to meet the challenges of WTO accession, we should encourage the involvement of
the nonstate economy in such sectors as finance, telecommunications, civil aviation, and education. Accelerating reform is neces-
sary to facilitate economic growth and maintain social stability.
China's economic reform has come to a  tion, and health care services-sectors con-  earlier article (Transition, February 2000,
critical crossroad; now is the time for sub-  sidered off limits to nonstate investors-are  p. 13), China has great investment poten-
stantial breakthroughs. China was sup-  unable to keep up with demand. As a re-  tial, with savings deposits of enterprises
posed to establish a socialist market  suit, in recent years prices of many indus-  and the public amounting to nearly 7,000
system bythe end of the 20th century. Itis  trial products continued to fall, while  billionyuan.Thishugepool, however, has
fair to say that significant breakthroughs in  service fees increased more than 10 per-  remained practically frozen, as the
the strategic restructuring of the state  cent a year on average.        government's expansive fiscal policy has
economy, in the establishment of a new in-                               failed to stimulate investments by enter-
come distribution system, and in the shift in  Stimulating Demand        prises or individuals. In 1998 fixed asset
the government's role are yet to come.                                   investment by the state grew 19.6 percent,
The government's efforts to counter defla-  while private investment increased only 6.1
Relative surpluses and relative shortages  tion in the past two years by invigorating  percent and fixed asset investment by
coexist in China. The supply of commodi-  the economy were less than successful,  town and village enterprises dropped 3.5
ties and manufactured products exceeds  because of fundamental systemic con-  percent. The situation remained much the
demand, while financial, housing, educa-  straints and barriers. As I pointed out in an  same in the first quarter of 2000.
© 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TR.NSITION, Apnl 2000   X



As a solution, nonstate investment in bank-  state-owned banks. Well-to-do large and  notion that employees should own shares of
ing, insurance, telecommunications, public  medium-size state-owned enterprises  their companies. The state should provide
utilities, and infrastructure (including civil  should be transformed into joint stock  legal guaranteesforthestatus of employee
aviation, water conservation, power gen-  companies without delay (a step that  stock ownership and support itwith tax ben-
eration and distribution, railways, and road  would not preclude the state retaining a  efits and preferential bank loans. Capitali-
construction) should get the green light.  controlling interest in some companies).  zation of farmers' land use rights should be
Entry barriers should be lowered or elimi-  In small and medium-size state-owned  legally ensured, with farmers provided with
nated, state monopolies should be re-  enterprises, stock ownership by employ-  long-term and secure land use rights. China
moved, and joint stock companies should  ees or a change to shareholding coop-  has already accumulated some experience
be established. This steps would contrib-  eratives should be encouraged. The  inguaranteeingthe long-term securityof land
ute significantly to the improvement of  ownership reform could help persuade  tenure. Under certain conditions, farmers
China's macroeconomic situation. Through  private and other nonstate investors to put  should be allowed to receive shares in an
increased involvement of private invest-  their money into these companies, which  investment project by contributing their land
ments and financing, the nonstate sector  would diversify their equity structure.  or using their land to receive bank loans.
could gradually switch into high gear.                                     Such a move would stimulate farmers' in-
Reform of the banking sector should also  vestment in land, raising their incomes and
Shifting the Government's Role       be accelerated. China's accession to the  developing the rural economy.
WTO is imminent. Once it joins the WTO,
Strategic restructuring of the state sector  it will have to open up its financial sector  Residents should be able to own their
should take place, based on the principle  to foreign competition. Collective and pri-  apartments. The government should en-
of selective withdrawal in some areas and  vate capital should therefore be allowed  courage home buying through tax cuts and
reinforcement in others. The government  to invest in commercial banks, and es-  provision of low-interest or interest-free
should not and cannot be the major source  tablishment of nonstate financial institu-  loans. In the current deflationary situation,
of investment, and it should not be the di-  tions should be encouraged.   the state should subsidize banks to provide
rect manager of state assets.                                              employees with preferential housing loans.
A way has to be found to resolve the bad
The government's input in competitive  debt problem of state banks. The four ma-  Implementing Political Reforms
sectors has long been much higher than  jor state banks have established separate
its spending on social security. The Chi-  asset management companies to deal  To deal with the problems caused by eco-
nese government is still weak in provid-  with theirnonperforming loans, buttheyare  nomic reform, China needs to combine
ing effective public goods. Its role in public  moving too slowly. Five years ago CIRD  economic reform with political reform. Po-
administration has weakened, and its re-  suggested the creation of debt trustee-  litical reform helps guarantee economic
sponsibility to coordinate conflicts of in-  ships. It is time to move in this direction.   reform. Rural economic reform, for in-
terests and guarantee social stability                                     stance, calls for the development of
cannot be brought into full play.    Maintaining Social Stability          grassroots democracy. Accelerating the
rural democratization process has be-
Both economic growth and social stability  In recent years social conflicts have intensi-  come important for advancing the rural
urgently call for a change in the govern-  fied, as more and more workers have been  economic reform. A similar need exists in
ment's role. To date, the government's  laid off from state-owned enterprises, long-  urban economic reform. Political reform is
social spending-although increased in  term income and job security have been  also needed to help prevent corruption.
recent years-hasaccounted fbronlyafrac-  shaken, and the income gap haswidened. In  Finally, political reform is needed to help
tion of total public finance. Providing social  this situation, it is especially important to es-  China adjust to the knowledge-based hi-
security should be an important task. Social  tablish a general social security system. In  tech industries that will play an extremely
securityshould receiveagreatershareof pub-  order to increase awareness by the general  important role in 21st century China.
licfinance.                          public of the direction and trend of future re-  These sectors are based on human capi-
form, transparency should be enhanced and  tal. It is therefore imperative to foster mar-
Restructuring State-Owned Enter-  the cost of reform should be evenly distrib-  ket competition and drastically change
prises and Banks Together            uted, with special consideration given to the  human resource management. In the face
less affluent members of society.    of economic globalization, system innova-
In my earlier article I pointed out that re-                              tion and input are more important than ever.
form of state-owned enterprises must be  Accelerated reform of the income distribu-  Making the necessary changes will require
implemented hand-in-hand with reform of  tion system should be combined with the  both economic and political reform.
*  TRANSITION, April 2000        The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies C 2000



Only with flexible reform strategies and world economy be effectively carried Chi Fulin is executive director of the
the removal of systemic barriers hinder-  ahead. Reforms are the guarantees that  China Institute for Reform and Devel-
ing China's economic growth and social  China's sustained economic growth and  opment (CIRD) in Haikou, Hainan
stability can China's integration into the  long-term social stability will be preserved.  Province.
China at the Gates of the World Trade Organization
WrO membership will increase China's annual GDP by 2-3 percent, and each additional percentage point of growth willprovide 5 nilion
jobs, predict Chinese economists. Assuming China is admitted to the WT/O this year, the govemment forecasts that China's foreig7 trade
will increase from $320 billion in 1998 to $600 billion in 2005, with foreign investment rising from $45 billion to $100 billicn.
A       recent study by the U.S. Interna-  * The need to level the playing field will jorimpacton farmers in the northeast, where
tional Trade Commission (USITC)  ensure the phasing out of incentives for  many of these products are grown for sale
comes to a similar forecast. Ac-  foreign capital and exporting industries in  to the rest of the country. One major conse-
cording to USITC, the short-term net trade  the country's privileged special economic  quence will be the tendency of southern
benefits to China would be relatively small,  zones.                      provinces to import grain fodder rather than
adding 0.9 percent to annual GDP, and the                                 buy it from the northeast. To meet these
trade balance would deteriorate, as ex-  * The main efficiency gains from WTO  challenges the government has pledged to
ports rise 10.1 percent and imports 11.9  membership will not be in the export sec-  provide funds so that farmers can restruc-
percent. However, a much more efficient tors but in the protected and nontraded sec-  ture their planting operations, improve the
allocation of capital and resources within  tors, which will feel the impact of import flow of market information, and establish
China would add about 4 percent to an-  competition or the arrival of new foreign-  quality standards for agricultural products
nual GDP growth, with import and export  backed competitors. Currently virtual state  with a view to boosting exports.
growth accelerating in response.     monopolies, the telecommunications,
banking, and insurance sectors can be  Banking and Financial Services
Domestic Impact of WTO Membership  expected to grow much more rapidly than
the economy as a whole. Foreign access  Under the terms of the bilateral agreement
The domestic impact of membership  to distribution and import-exportactivities  reached in November 1999 on the terms
would vary across sectors:           currently dominated by state-owned en-  of U.S. support for China's accession to
terprises should also increase rapidly.  the WTO, foreign banks will be allowed full
* The goods-producing sectors, which are  While the government has sought to re-  access to the banking sector within five
dominated by state-owned enterprises  move formal monopolies and has trans-  years of China's membership in the WTO.
and capital-intensive firms (in practice, in- formed ministry-controlled enterprises  China's domestic securities industry will
efficient users of capital) are the most vul-  into stand-alone corporations in the past be significantly liberalized. Foreign firms
nerable to increased competition. These  two years, it has not allowed or encour-  will be allowed to own 33 percent of Chi-
firms will face not merely lower tariffs un-  aged full and free competition.  nese securities brokerage and fund man-
der the WTO regime but the reduction of                                   agement companies, rising to 49 percent
nontariff barriers, such as preferential  * More open trade and internal market lib-  three years after China's WTO accession.
treatment for national industries and  eralization will accelerate technology trans-  The government estimates that within three
nontransparent tendering procedures.    fer. Foreign firms will be more willing to use  years of WTO membership, the number of
modern technology because of greater  foreign banks operating in China will in-
* More recently established automobile  confidence that intellectual property rights  crease from 179 to 279 and there will be
and consumer durables manufacturers will and trademarks will be respected.  a threefold increase in the domestic for-
face highly increased competition and will                                eign exchange deposits held by these
have to undertake fundamental corporate  Agriculture                      banks, which currently stand at $4.6 billion.
reforms, radical reorganizations that could                               Currently, just 25 foreign banks are li-
even include factory closures. Some of their  Dramatic upheavals will confront the farm-  censed to conduct local currency business.
foreign sales will be adversely affected by  ing sector once China joins the WTO. The  Within a few years all will be able to.
WTO membership, although lower input government has made no secret of the fact
prices for some imported intermediate  that increased imports of wheat, soy-  Domestic banks will be confronted with
goods will benefit certain export industries. beans, and vegetable oils will have a ma-  new challenges, as foreign banks compete
C) 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000   C



in low-risk, high-profit areas, such as in-  goods, these countries would have the  members will be allowed to maintain
ternational clearance transactions, enter-  added advantage of proximity to China's  against surges in Chinese exports (par-
prise loans, personal loans, and credit  low-cost labor.                 ticularly in the textiles and clothing sectors),
cards. Greater competition will put pres-                                China's commitments on agricultural lib-
sure on the authorities to commercialize  The United States could have less to gain  eralization (particularly tariff rate quotas)
state-owned banks (by converting them to  from WTO-related trade liberalization  and arrangements for reviewing China's
shareholding institutions), improve regula-  than China's other majortrading partners.  progress in implementing its WTO obliga-
tory oversight, and resolve the large  According to USITC, WTO membership  tions.
amount of bad debt.                 could cause U.S. exports to China to in-
crease faster than imports in percentage  Members seek specific market access
Telecommunications                  terms. However, as U.S. imports from  commitments from China in bilateral talks.
China are now three to four times greater  The bilateral market access agreement
The Sino-U.S. deal reached November  thanexports,theabsolutetradegapwould  between the United States and China-
15, 1999, allows U.S. firms to own up to  widen.                         which includes undertakings for a far-
49 percent of Chinese telecoms compa-                                    reaching liberalization of China's domestic
nies immediately upon China's WTO en-  The largest U.S. merchandise trade ben-  markets-covers a large proportion of the
try, increasing to 50 percent within two  eficiaries of Chinese WTO membership  export interests and concerns of other
years of that date. Last year the Ministry  would probably be the agricultural sector.  WTO members.
of Information Industry banned foreign in-  It is anticipated that exporters of wheat,
vestment in China Unicom, a competitor  cotton, and oil seed will benefit from a re-  China has reached bilateral agreements
of the country's dominant, state-controlled  duction in quotas, licensing, and other with at least 17 WTO members, including
carrier, China Telecom. Earlier some 40  nontariff barriers.             Australia, Hungary, Indonesia, Japan, the
Western companies had invested a total                                   Republic of Korea, Pakistan, Singapore,
of $1.4 billion in Unicom. The WTO deal  How Long Will the Accession Process  and Turkey. Recent market access discus-
retrospectively legitimizes these invest-  Last?                         sions in Geneva between China and about
ments and allows investors to retain their                               20 other WTO members (including Argen-
current holdings. It should clear the way  Although China's accession to the WTO  tina, Brazil, Malaysia, and Venezuela) have
for foreign companies to take stakes up  is getting closer, negotiators still need  also reportedly made progress. Some
to the agreed limits of 49 percent and then  to complete multilateral and bilateral  important issues that need to be negoti-
50 percent in Internet content providers  talks and finalize working party formali-  ated with the European Union include tar-
(ICPs)-ownership that was also de-  ties. Matters of common concern are ne-  iff barriers facing machinery exports, farm
clared illegal last year. In November 1999  gotiated on a multilateral basis in the  products, and other goods; restrictions on
the Ministry of Information Industry threat-  China working party, open to all mem-  the sale of life insurance; and joint venture
ened to impose annual quotas on the sale  bers of the WTO. China has agreed that  requirements for telecommunications ser-
of mobile phones made (in China or  anyoneshouldhavetherighttotrade(an  vices.
abroad) by Nokia, Ericsson, and Motorola,  early and significant commitment) and
which together control 85 percent of this  that administrative decisions affecting  If both sets of negotiations are completed,
market. Under the WTO rules, this plan  trade should be subject to judicial review. the results are recorded in the China work-
will have to be abandoned.                                               ing party's report. If the report is approved
However, on a number of issues China's  by both the WTO General Council and the
External Impact of WTO Membership  proposed commitments remain undefined  Chinese government, China will be able
or not yet acceptable to other WTO mem-  to join the WTO within 30 days. This will
The external economic impact of China's  bers. These include products that may be  happen once bilateral negotiations with the
accession to the WTO would be mixed.  reserved for state trading, the timetable for European Union are completed and the
Some EastAsian economies could ben-  removing quantitative restrictions on im-  U.S. Congress grants China most-favored-
efit significantly from China's member-  ports, maintenance of price controls on  nation trading status privileges on a per-
ship. Japan, the Republic of Korea, and  some goods and services, the phasing out manent basis.
Taiwan (China) provide intermediate  of subsidies, the use of export duties, and
goods and quality consumer durables that  inspection requirements for imports and  (Excerpted from Oxford Analytica Reports.
could gain market share in China at the  exports. Other unresolved multilateral is-  Oxford Analytica is an Oxford (UK)-
expense of some local products. In addi-  sues include theform and duration of safe-  based intemationalreserach group. Their
tion to gaining a larger marketfor capital  guard arrangements that other WTO  Web site ishttp:/h/www.oxan.com/.)
m  TRANSITION, April 2000       The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies C) 2000



Growth is Good for the Poor
by David Dollar and Aart Kraay
While the macroeconomic indicators have often looked good, real wages in many countries have declined, and wage inequality
has increased both within and between countries.
Lori Wallach, leader of the anti-WTO protests in Seattle, on the impact of globalization
The global economy governed by intemational financial institutions, the World Trade Organization, and multinational corpora-
tions proposes structural adjustment for countries in the South in the name of fiscal health. The result is increasing poverty, debt,
and unemployment.
NGO declaration at the UN Conference on Women
Globalization has dramatically increased inequality between and within nations.
Jay Mazur, in ForeignAffairs
We have to reaffirm unambiguously that open markets are the best engine we know of to lift living standards and build shared
prosperity.
President Bill Clinton, speaking at the World Economic Forum
A       n intense debate is going on over growth in income of the poor and overall  on income of the poor is no different in poor
the extent to which the poor are  economic growth? Does the relation dif- countries (or countries in the early stage of
benefiting from the growth the word  fer depending on the level of development,  development) than in rich ones (or countries
economy experienced during the 1990s. At the presence of a crisis, or the time pe-  in later stages of development).
one end of the spectrum are those-includ-  riod?
ing some of the NGOs that disrupted the  * Does policy-induced growth (through, for Second, we find no evidence that income
WTO meetings in Seattle and tried unsuc-  example, increased openness to interna-  of the poorfalls more than proportionately
cessfulily to disrupt the World BankliMF  tional trade) benefit the poor proportion-  during economic crises. Of course, the
meetings in Washington-who argue that ally, more than proportionally, or less than  same proportional decline in income has
in general the poor do not benefit from glo-  proportionally?            a greater impact on the poor if social safety
bal growth and that all of the benefits ac-  * Are there policies that are not neces-  nets are weak, suggesting that crises may
crue to the middle and upper classes. A  sarily pro-growth but that are still impor- well be harder for the poor to bear. The
slightlydifferentviewisthatthepoormay  tantfor increasing income of the poor?    greater hardship crises impose on poor
benefit somewhat in absolute terms but                                   people does not occur because their in-
that they benefit proportionally less than  Growth Increases Income of the Poor  come falls more than that of other seg-
the average household, so that inequality                                ments of society, however.
within countries rises. Finally, there is the  Our analysis indicates that income of the
view (echoed by Bill Clinton) that countries  poor rises one-for-one with overall growth. Third, we find no evidence that growth has
and households that participate in the glo-  Although there is a fair amount of varia-  become less pro-poor than it was in the
bal economy will share in prosperity.  tion, this general relation between income  past. The poverty-growth relation has not
of the bottom fifth of the population and per changed in recent years.
In this article we investigate the link be-  capita GDP holds in a sample of 80 coun-
tween income of the poor (defined as the  tries covering four decades.   A Package of Policies Benefits the Poor
bottom fifth of the income distribution) and
overall income (per capita GDP). We com- A number of popular views about the pov- We next turn to the second set of hypoth-
bine data on income of the poor and mean  erty-growth relation are not true. First, a  eses, concerning the role of institutions and
income in 80 countries over four decades,  well-known idea in the development litera-  policies in explaining deviations from this
giving us 236 episodes in which we can  ture is the Kuznets hypothesis that inequal-  basic relation between growth and income
link growth in the two measures over a  ity tends to increase during the early stages  of the poor. A core set of institutions and
period of at least five years. We use these  of development and decrease later on. We  policies (macroeconomic stability, fiscal
data to investigate some of the hypoth- find no tendency for growth to be biased  discipline, openness to trade, establish-
eses about the growth-poverty nexus:  against poor households during the early  ment of the rule of law) has been identi-
* What is the general relation between  stages of development: the effect ofgrowth  fied as pro-growth in the vast empirical
© 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000  U



literature on growth. It is possible that  nevertheless have an impact on the well-  high inflation) tends to improve income
these policies have a systematically dif-  being of the poor by improving the distri-  distribution, increasing income of the poor
ferent impact on income of the poor. The  bution of income. Most notable among  by more than mean income. Other poli-
popular idea that globalization increases  these are government social spending,  cies, such as establishing the rule of law
inequality within countries can be tested  formal democratic institutions (voice and  and openness to trade, benefit the poor
by determining whether openness can  accountability), and primary school enroll-  and the rest of the economy equally. We
help explain negative deviations in the  ment rates. Voice has a small, statistically  find no evidence that formal democratic
relation between income of the poor and  insignificant effect on growth and offset-  institutions or heavy government spending
average income in individual countries.  ting distribution effects, suggesting that  on social services has any effect on in-
Alternatively, there may be institutions and  income of the poor is not influenced directly  come of the poor. The growth-poverty re-
policies that have not been established  by formal democratic institutions. Primary  lation has not changed overtime, does not
as robust determinants of growth but that  education has a beneficial effect on growth  vary during crises, and is generally the
are often thought to be good for the poor  but no perceptible effect on income distri-  same in rich countries and poor ones.
(notably democracy and social spending).  bution. Public social expenditure shows
The hypothesis that these institutions and  little effect on either growth or distribution.  We do not want to be misinterpreted as
policies are good for the poor can be  This reminds us that in many countries  arguing that growth is all that is needed to
tested by determining whether they ex-  public expenditure on social services of-  improve the lives of the poor. But we do
plain positive deviations in the relation  ten fails to target the poor effectively.  want to get the message out that growth
between income of the poor and mean                                        generally benefits the poor and that any-
income.                              Standard Pro-Growth Policies Are  one who cares about the poor should fa-
Good for the Poor                    vor the growth-enhancing policies of good
We find that openness to international                                     rule of law, fiscal discipline, and openness
trade raises income of the poor by raising  Contrary to popular myths, standard pro-  to international trade.
overall income, with insignificant effects on  growth macroeconomic policies are good
the distribution of income. The same istrue  forthe poor, raising mean income without  David Dollaris team leader andAart Kraay
for improved rule of law and reduced gov-  significantly affecting the distribution of in-  senioreconomistatDECRG-MG The origi-
ernment size, which raise overall per  come. In fact, macroeconomic stability  nal article can be downloaded from http://
capita GDP but do not significantly influ-  (proxied in our analysis by stabilization of  wwwworldbankorg/research/growth/
ence the distribution of income. Stabiliz-
ing inflation is a super-pro-poor policy: not
only does it raise overall income. it aD-  Figure. Income of the poor increases one-for-one with average income
pears to have an additional positi\
on the distribution of income.              12
From this we conclude that the bas       . 11 -
package of private property right           1
10 
discipline, macroeconomic stabil         0                   y  1.07x- 1.78
openness to trade increases inc          6   9                   R2= 0.87
the poor to the same extent th
creases income of other househol        X
is not the result of a "trickle-down" r  ( 7                                  .
in which the rich get richer first an        7
tually benefits trickle down to the     a.  6
stead, the evidence suggests thai        o
property rights, stability, and open     E   5 -
rectly create a good environment i
poor households can increase th              4
duction and income.                          3.
3    4    5    6    7    8    9    10   11   12
We also examine a number of ins
and policies forwhich the evidence.                         L         o r       i      m
growth impact is less robust but which may Source: authors compliation.
m   TRANSITION, April 2000       The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies © 2000



Surveys Help Improve the Business Climate in Estonia
by Terri L. Ziacik
The Estonian InvestmentAgency regularly  cific area targeted for investment, the  Problem cited differed across the two sur-
makes use of survey methods to assess  mode of entry, the size of the company, the  veys. This should not be surprising, since
the Estonian investment climate and study  proportion of foreign participation, and ear-  perceptions of problems should change as
the inflows offoreign direct investment (FDI)  lier links to Estonia (or the lack of such  long as the host country is actively pursu-
into Estonia (box). It has used the results of  links) affect investors' motivation and their  ing solutions. Several policy changes-in
these surveys to successfully rec-                                                areas such as work and resi-
ommend policy changes to the  The Use of Surveys to Assess Investment Climate   dence permits, VAT payments,
govemment.                                                                        and customs procedures-went
The uneven distribution of FDI has prompted empirical research  into effect after the 1997 survey
While poor in natural resources  into the determinants of investment location that often include was conducted.
and small in size, Estonia has  an assessment of the host country investment climate. This
attracted a great deal of invest-  research frequently takes the form of investor surveys, which  Bureaucracy and corruption, the
ment from Europe and North  provide firm-specific information. Because surveys generally  two top-scoring problems in
America, especiallyfrom Finland  address FDI issues from the perspective of foreign investors  1998, are considered serious
and Sweden. It has received the  in a given set of host countries or from a given set of home  problems for all investors; they do
most FDI of any former Soviet  countries, their scope is limited. Nevertheless, surveys can  not affect one type of investor
state in cumulative per capita  yield an abundance of information to host country govemments. more than any other. Policies to
terms; among the transition                                                       remedy these problems should
economies, only Hungaryand the  Surveys can be conducted through the use of in-depth inter- thus target all investors rather
Czech Republic have received  views or questionnaires. Interviews provide lengthy, detailed in- than a particular subset.
more FDI per capita. Estonia's  formation on such issues as investment motivation and
success is attributed to the adop-  difficulties, and they allow for clarification by the interviewer. The  This type of analysis can serve
tion of strict and credible eco-  tradeoff is a smaller number of respondents than a question- as a useful tool to governments
nomic reformsfromthe beginning  naire survey would yield because of the time and resources of countries wishing to attract
of its transition process.  involved in administering an interview survey. Questionnaires  more FDI. Lack of FDI can indi-
are easier and less expensive to distribute to a large number of cate perceived riskiness of the
The Estonian Foreign Investor  respondents, and the responses need little adjustmentforcom- host country; surveys of this sort
survey series, sponsored by the  parison and analysis. However, the researcher has less control can pinpoint where the greatest
Estonian lnvestmentAgency, is  overthe quality of the responses, since the questionnaires are  obstacles lie. The results for Es-
now in its fourth year. It evaluates  often not completed in the presence of the researcher. Because  tonia show that no group of in-
investors' perceptions of Esto-  of time constraints or misunderstandings of certain questions, vestors is having significantly
nia, covering a wide range of in-  questionnaires are often returned incomplete. Any misinterpre- more difficulty than others. This
vestment issues in questionnaire  tation of an answered question is likely to remain undetected.  probably reflects the fact that Es-
form. Because it samples only                                                     tonia has already made great
investorswhohavealreadyinvestedin Es-  attitudes toward problems.Thefirstthree  progress in its transition to a market
tonia, it cannot be used to determine why  factors are of primary interest, because  economy. Results might be different in
investors chose Estonia over other coun-  they represent specific areas that can be  countries still undergoing major transition
tries. It can, however, be used to determine  targeted more easily through policy.  reforms. Thus there is a need for more re-
how certain groups of investors evaluate dif-                              search in transition countries not yet receiv-
ferent aspects of the Estonian investment  The results indicate that investor charac-  ing large amounts of FDI.
climate and identifywhat difficulties inves-  teristics explain the evaluation of certain
tors are experiencing.               aspects of the Estonian investment cli-  Terri L. Ziacik is a Ph.D. candidate in the
mate. Exporters, for example, rank the im-  Department of Economics at Indiana Uni-
Results from the 1997 and 1998 surveys  portance of "entry into a new market" and  versity. This article is based on her article
were analyzed to determine whether inves-  "potential for market growth" much lower  "An Assessment of the Estonian Invest-
tor characteristics can explain their moti-  than do nonexporters. They are much  ment Climate: Results of a Survey of For-
vation and problems. Previous surveys  more influenced by cost factors than are  eign Investors and Policy Implications."
indicated that export orientation, the spe-  nonexporters.                 BOFIT's Discussion Paper 3/2000.
(D 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000   X



Improving Latvia's Business Environment
by Lars N. Grava and Sanda Putnina
The Latvian govemment, in cooperation with  country is handled by the Latvian Devel-  toms, and real property acquisition, con-
the business community, is making broad-  opment Agency, which is supervised by  struction, and inspection-were included
based efforts to create an investment-friendly  the Ministry of Economy. A comprehensive  in a report by the Foreign Investment Ad-
environment. It is reducing administrative  action plan that the agency drafted for im-  visory Service (FIAS) of the World Bank.
barriers to investment, creating effective  proving the business environment contains  Recommendations of the FIAS experts,
public-private consultative mechanisms, pro-  more than 50 targets the government  based on international experience, were
viding access to up-to-date information (for  should implement within the next three  presented to the Latvian government and
example, placing draft legislation on the  years.                          the business community in 1999. Simulta-
government's Web site), and ensuring that                                  neously, the Foreign Investors' Council in
appeals procedures are effective.    The action plan, available on the Internet  Latvia, made up of the country's foreign
at http://www.lda.gov.lv/foreigninvestors/  businesses, formed several ad hoc groups
Latvia's Action Plan                 businessenvironment, identifies the barri-  composed of foreign and local entrepre-
ers to conducting business cited by entre-  neurs to discuss these and other topics (in-
The job of attracting foreign investment,  preneurs. These complaints-which cover  cluding training of the work force, crime,
promoting exports, and "marketing" the  employment, immigration, taxation, cus-  and corruption).
Baltic Outlook: Currencies Remain Stable Despite Worsening Current Accounts
Economic recovery in the Baltic states and the Russian Fed-  ings with Fitch IBCA and Moody's, allowing it to borrow on
eration, as well as strong growth in the European Union, will  international markets at acceptable rates. The reduction of
boost exports from the region, although the depressed value of the budget deficit and a new standby agreement with the IMF
the ruble will limit the ability of Baltic producers to recover mar-  should further strengthen the lat. A sharp increase in imports
kets in Russia. Imports should rise even faster, fueled by pent-  is not expected this year, as economic growth is projected to
up consumer demand and dependence on imported energy  be about 2 percent and the government has adopted an aus-
and other raw materials-predicts Oxford Analytica.     terity budget. However, export recovery could be even more
modest, as efforts to increase penetration of European Union
The trade and current accounts in all three Baltic states improved  markets as a substitute for Russian markets have not been
considerably in 1999, as a consequence of the regionwide eco-  too successful so far.
nomic downturn prompted by the 1998 Russian financial crisis.  0 Estonia intends to retain its currency board until it joins the
Imports fell dramatically as the demand for capital goods in all  European Monetary Union, no earlierthan two years after it joins
three states declined. Falling consumer confidence and tighter  the European Union. The peg that tied the kroon to the deutsche
state budgets reduced the demand forconsumergoods. Exports  mark in 1992 at a rate of 8:1 remains unchanged. Estonia's
also fell, although not to the same extent, as opportunities in the  return to growth this year will help stabilize the currency further.
Russian market contracted following the devaluation of the ruble.  In an ominous sign, Estonia's trade deficit rose to 1.5 billion
kroons ($91.9 million) in February. Exports totaled 3.6 billion
Despite improvement last year, the current account deficit in the  kroons and imports 5.1 billion.
Baltic states will probably remain high for several years. Exports  0 Lithuania's litas is still pegged to the dollar, despite severe
of food products, textiles, and wood cannot balance imports Of  economic difficulties last year and frequent calls by exporters
high value-added products, such as transport equipment and elec-  for a competitive devaluation. In the second half of 2001, the
tronics. The need for foreign capital equipment to modernize in- dollar peg will be replaced by the euro peg. Like Latvia,
dustrial production is likelytogrowratherthan diminish, aswill the  Lithuania has begun to reduce its sizable budget deficit. The
demand for oil and gas. Demand for computers, mobile phones,  government has signed a standby agreement with the IMF and
and electronic and telecommunication equipment is also increas-  retained its favorable credit rating. Although the Russian
ing. Despite the sizable current account and trade deficits, how-  economy is expected to grow in 2000, the demand for
ever, the currencies of all three countries should remain stable:    Lithuanian exports and construction services is unlikely to re-
* Latvia is the only country without a currency board. The lat is  turn to earlier levels. Imports are expected to pick up, placing
pegged to the SDR. Latvia has retained its favorable credit rat-  further strain on the current account.
M   TRANSITION, April 2000       The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies (D 2000



Using Surveys to Identify Problems    To involve interested parties-civil servants,  A risk is that the government appears to
representatives of the domestic, British,  show partiality to foreigners at the expense
Surveys proved useful for identifying prob-  German, Swedish, and U.S. Chambers of  of domestic entrepreneurs. The most per-
lems and priorities. The 1999 Survey on  Commerce in Latvia-in implementing  suasive counterargument is that improve-
Latvia's Business Environment focused on  measures to improve the business environ-  ments in the business climate are not
various aspects of doing business in Latvia,  ment, a working group was established. focused on a single group but benefit the
including difficult to quantify but important  Business associations are gradually be-  whole economy. Latvia's efforts to improve
factors such as the availability of information  coming aware that they can become part  business environment have found overall
on government procedures, trust in appeals  of the decisionmaking process; govern-  acknowledgement by Nordic and Baltic
mechanisms, transparency of government  ment officials, in turn, have learned to con-  business leaders. During their recent meet-
action, heipfulness of civil servants, and ad-  sult with their private sector counterparts.  ing they proposed that other countries of
equacy of border crossing and immigration  To provide feedback once the recommen-  the region adopt the Latvian model.
procedures. (Results of the survey are avail-  dations are implemented, the Latvian De-
able on the Internet, at http:/lwww.lda.gov.lv/ velopment Agency continuously consults  The authors are legal consultants for the
foreigninvestors/businessenvironment. Ex- with government officials and business rep-  European Union PHARE/Latvian Devel-
cerpts from the Latvian Development  resentatives. If necessary, it provides legal  opmentAgency Project, aimed atimprov-
Agency's Web site appear in the box.)  assistance and intervenes in deadlocks.  ing the business environment in Latvia.
Why Invest in Latvia? Excerpts from the Latvian Development Agency's Website
(http://www.lda.gov.lv/foreigninvestors/reasonsforinvesting/why.htm)
In 1998 by reaching a level of $1.5 billion, Latvia ranked among  Spain's wage level only in 2010. The average monthly salary of
the top Central and Eastern Europe countries in terms of foreign  a software engineer is just over $400, making one tenth of the
direct investment (FDI) inflow per capita. In 1998 the growth rate  rate for a comparable post in the United States.
of FDI slowed down as compared to the increase in 1997, which
had happened due to the accelerated privatization of state prop-  Latvia's corporate tax rate is 25 percent, which is one of the
erty. It is expected that the inflow accelerated in 1999. The Euro-  lowest rates in Europe. Foreign-owned companies are eligible
pean Union countries with which Latvia has the highest trade  for a range of discounts and allowances: substantial deprecia-
turnover contribute in excess of 50 percent of all FDI in Latvia.  tion rates on fixed assets and the possibility to transfer losses
The largest inflows originate from Denmark, the United States, within a five-year period, exemption from VAT and custom du-
and Russia followed by Germany and the United Kingdom. Trans-  ties, and exemption from import duties and VAT on goods im-
port and telecommunications has been the most attractive sec-  ported on a temporary basis for processing. Foreign investors
tor, receiving nearly a third of the total stock of FDI. Wood- and  can settle in special economic zones with unique incentives:
food-processing have been the most popular sectors in manu-  80-100 percent rebate on property corporate income, zero
facturing. Latvia promotes high-tech industries in particular since  percent VAT on services, exemption from customs duty and
it can provide an abundant reserve of high-skilled workers.  excise tax on imports and exports, 100 percent depreciation
and transfer of losses within a 1 0-year period.
Today about 50 percent of university graduates in Latvia are
educated in the field of information technologies, highlighting  The Latvian DevelopmentAgency offers foreign partners "one-
the commitment of both the education system and Latvians to  stop shopping" services that include:
next-generation industries. Knowledge of foreign languages is  * Information about the business environment and business
widespread in Latvia and is on the constant increase. Today  opportunities in Latvia.
Latvia has one of the highest percentages of scientists and  * Help in establishing contacts with potential domestic part-
engineers in Europe, and this is contributing to the country's  ners.
development as a successful high technology and R&D center.  0 Organization of business visits, as well as tours of compa-
nies and locations throughout Latvia as requested.
Latvia's BBB credit rating awarded by IBCA and Standard &  0 Assistance in locating real estate, manufacturing facilities,
Poor's places Latvia among the top investment locations in  offices, or land for investment needs.
Eastern Europe. At the end of 1998 the average monthly wage  0 Assistance in handling the legal and bureaucratic require-
was $238, more than 10 times lower than in Finland and over  ments that are involved in a business launch.
20 times lower than in Germany. Latvia's wage level will reach  0 Postinvestment assistance.
© 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000   V



Currency Substitution: ALatvian Puzzle?
byVadims Sarajevs
If macroeconomic uncertainty is high (high and volatile inflation, large budget and current account deficits) and the politicalenviron-
ment unstable for prolonged periods of time, foreign currency can take over the basic functions of domestic money, becoming a
store of value, a unit of account, and even a medium of exchange. This is the phenomenon of currency substitution/dollarization If
it becomes widespread, the economic environment in which govemment, producers, and consumers operate will drastically change.
nitial conditions were similar in most  In Latvia both measures have moved to-  environment with large foreign exchange
transition economies: a period of high  gether (except during the banking crisis of flows (as individuals and banks get used
inflation caused by price liberalization  May-June 1995, when CS1 averaged  to dealing with high levels of currency sub-
at the onset of reforms was coupled with  about 45 percent and CS2 about 31 per-  stitution, there are extra costs of turning the
high economic uncertainty and the ab-  cent).Currencysubstitutionfellduring 1993,  situation back).
sence of developed financial markets. In  as a consequence of the introduction of the  * Asharp increase in the openness of the
many countries these conditions triggered  lat, a strong national currency fully backed  Latvian economy increased foreign ex-
currency substitution and dollarzation. This  by foreign reserves. Public confidence in  change balances.
development can seriously hinder the ef-  the new money increased as macroeco-
fectiveness of monetary policy-setting  nomic stabilization accelerated. Since Feb-  Apart from its negative and potentially de-
money supply targets, safeguarding the  ruary 1994 the lat has been pegged to the  stabilizing effects, currency substitution can
stability of the exchange rate, ensuring that  SDR rate, and monetary policy has given  act as a disciplinary device by making it
the state receives the revenue from the "in-  priority to stabilizing the exchange rate. The  more difficult for the government to re-
flation tax" (seigniorage)-on which gov-  level of CS1, however, remained extraordi-  nege on its economic stabilization pro-
ernments in transition economies rely  narily high, even by the standards of Latin  gram and fall back on the use of the
heavily to achieve macroeconomic stabi-  American countries.              inflation tax. However, in the presence of
lization. In the presence of currency sub-                                 both inflation and currency substitution,
stitution, households can easily switch  What explains this surprisingly and stub-  poor people suffer more than others from
between domestic and foreign currencies.  bornly high level of currency substitution in  inflationary taxation, because they cannot
This, in turn, can make the money supply  Latvia? A number of competing explana-  afford to use financial markets instru-
process endogenous and increase the in-  tions can be suggested:           ments (including foreign currency) to
stability of money demand, impairing the  * Latvia is a safe heaven for foreign ex-  avoid the inflation tax.
ability of the monetary authorities to con-  change dealers from the former Soviet
duct effective policies and destabilizing the  republics. The lack of restrictions on capi-  Vadims Sarajevs is at Queen Mary and
domestic banking system.             tal flows means that a significant share of  Wesffield College, University of London.
foreign currency deposits in Latvian banks  Email: vadim_saraev@yahoo.com. This
How can the degree of currency substitu-  probably belongs to nonresidents.  article is based on "Econometric Analysis
tion be measured? Ideally, one would in-  0 A lag occurs as financial markets and  of Currency Substitution:A Case ofLatvia,"
clude the value of foreign currency notes  economic agents adapt to an economic  BOFIT Discussion Papers 4, 2000.
circulating in the economy as a means of
Currency Substitution in Latvia   -Cs 1  - Cs 2
payment and a store of value and all                        c         S   t      i                      =atvi
checking accounts and short-term depos-     0.60                         0.400
its in foreign currency held by residents in  o_.5_5 -A l   l0-O.3 7 5
domestic banks and abroad. Such data
are not available even for industrial coun-  0.50              1                   -               0.3 5 0
tries, however, let alone transition econo-    01  45        -10.325
mies. Most studies therefore generally      0.40
employ CS1, the ratio of foreign currency     4                                                     .3 0 0
deposits to M2 (broad domestic monetary     0.3 5                                                 0.2 75
aggregates). Another measure, CS2, the      0                             ___I_     ____-_0.2_5_
ratio of foreign currency deposits to broad      c  c  t  T  LO L  co CD >  I  00  0            o C
monetary aggregates including foreign cur-                     (,   I <5 '                   75 '
rency, is also used.                                
*  TRANSIIION, April 2000        The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies (D 2000



Pension Reform in Ukraine: How Extensive? How Soon?
by David Snelbecker and Marta Dekhtiarchuk
U      kraine's pension system, like  popular at the moment envisions a slight  proposal, however, raises several ques-
those in many countries of the  reduction in the mandatory PAYG pillar  tions that merit careful consideration:
former Soviet Union and Central  from the current contribution rate of 33
Europe, is facing immediate financial cri-  percent of wages to about 26 percent. In  Long-term  Fiscal Sustainability of a
sis and is not sustainable in the long run,  parallel, a mandatory fully funded pillar  Large PAYG Pillar
given an aging population. Progress has  would be created, with contributions start-
been made in planning reforms to address  ing from 1 to 3 percent of wages and gradu-  To maintain fiscal balance in the proposed
the short- and long-term problems through  ally increasing to about 7 percent. This  PAYG pillar, pensions would have to be
downsizing the pay-as-you-go (PAYG) pil-
lar and introducing mandatory capitalized  Figure 1. Ukraine's Population by Age and Gender, 1998 and 2040
individual pension accounts. Most experts
recognize the necessity of gradually rais-                        Birthyear    age
ing pension ages from 55 for women and                                        97 
60 for men and of eliminating early retire-   ren, 1998                   1901                          1998
ment privileges for many professions.                                     1919 81
Implementation of these changes would                                     1917   _
require considerable political commit-                         _          1925 73
ment.                                                                     1933 65
1941 57
Ukraine differs from most of its Central                                  1949 49
European neighbors in several important                                   1957 41
respects:                                                                 1965 33w
1973 25
* Pensions are quite low relative to                                      1981 17
wages. The average pension in Ukraine                                     1989  9
is roughly one-third the average wage. (In                                1997  1
Poland this "replacement ratio" is roughly
607r    ecn.                              500CC0 400000 300000 20000 100000  0   0  100000 2000D0 3000 400C0D0 500000
60-70 percent.)                         #oIpwpe                                                         #a pecpe
* Ukraine's informal sector is huge: it is                         Birth year   Age
generally assumed to be roughly the same                                  |1943 97 L
size as the formal sector. One of the main                             -1951  89i _
challenges is persuading enterprises and                          _        1951
individuals to contribute to the mandatory                                 1967 73
pension system.                                                            1975 65 
* The level of outstanding pension liability                               1983 57
is relatively low by international standards.                             1991 49           W
It is 85-105 percent of GDP, about half the                                1999 41
level in Poland and below that in many coun-                               2007 33
tries that have undertaken comprehensive                                   2015 25
pension reform. It lessens Ukraine's cost                                 2023 17
of changing to a more comprehensive, fully                                 2031  9
funded pension system.                        __39  1_
500000 400000 300000 200000 100000  0  0  100000 200000 300000 400000 500000
Of the several reform proposals being con-   #of peopl# of people
sidered in Ukraine, the one that is most  Source: authors compilation.
© 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000   *



Table 1. Administrative Fees in Latin America's Fully Funded Systems, 1999,  low contribution rates in an economy with
and Projections for Ukraine                                                  low wages, administrative costs may be so
Fee as a percent  Percent reduction in final          high relative to the level of capital that the
Country                   of wages          capital andpension               system is not cost effective. Table I shows
Argentina                   2.30                   23.0                      some projections for Ukraine under two
Bolivia                     0.50                    9.5                      scenarios: a small fully funded system (7
Colombia                    1.64                   14.1                      percent contribution rate of wages) and a
Chile                       1.84                   15.6                     large fully funded system (15 percent rate)-
El Salvador                 2.13                   17.6                      with comparison to administrative expenses
Peru                        2.36                   19.0                     in Latin American countries.
Mexico                      1.92                   22.1
Uruguay                     2.06                   14.3
Average                     1.84                   16.9                      Thus a small fully funded pillar with a 7
Ukraine-small scheme        1.84                   27                        percent contribution rate in Ukraine (in-
Ukraine-large scheme        1.84                   12                        creased gradually from an initial 2 percent)
Source: James, E., Smalhout, J., Vittas, D. Administrative Costs and the Organization of would lead to quite high administrative
IndividualAccount System:A Comparative Perspective, p.38. Numbers for Ukraine are HIID  costs relative to the level of capital-far
projections.                                                                 higher than in any Latin American system.
reduced substantially as a share of wages,  tal, are only 1.0, suggesting the possibil-  For individuals, we can calculate the ef-
to a replacement rate of roughly 20-25  ity of a worsening trend as the country  fective rate of return of contributions to the
percent, even assuming a universal in-  develops and urbanizes), then a large  funded system, which can be defined as
crease in retirement age to 65. That is, the  PAYG pillar would be even less feasible  the actual return earned on contributions
average individual would be expected to  than we have calculated. The current  after administrative costs are factored in.
contribute 26 percent of wages to the  population and a projection for the future
PAYG system during working years, in ex-  are given in figure 1.             As shown in table 2, if the funded pillar is too
change for a pension amounting to only a                                     small, these rates will be quite low compared
fourth or a fifth of the average wage. For  Size of the Fully Funded System  to the market interest rate. Looking at the
an average full-time worker (working from                                    results from the first 10 years of the reforms,
age 20 to 65 and living to 80), this would  Setting up such a system requires tracking  the retum on contributions will be negative. If
be equivalent to setting aside savings for  each person's contributions, reporting regu-  contributors have to expect negative real
maiy years with a real effective rate of re-  larly to all account holders, and managing  retum from the PAYG system and a similarly
turn of minus 1-2 percent.            and investing assets securelyfor long peri-  negative returnfromthefullyfunded system,
ods of time-all of which entail certain fixed  at leastforthe important first 10 years of tran-
Most modeling of the long-term trends of  administrative costs-whatever the size of sition, then this refrom alternative is not pre-
thepensionsystemshowthatanysubstan-  assets of the system. If these assets are  sentingacredibleincentiveforashiftinwage
tial PAYG pillar in Ukraine will result either  relatively small, as would be the case with  payment out of the informal sector.
in a considerable deficit of the system, if
pensions of reasonable size are paid, or
in a poor return on contributions for indi-  Table 2. Effective Rate of Return of the Fully Funded System
viduals. And with such a poor return on  (percent)
contributions-that is, with such a high im-                    Small fully funded pillar
plicit tax in the mandatory PAYG system-                         (Contribution rates:
asubstantialshiftinwagepaymentfromthe                         2 % in 2003, 3 % in 2004,
informal to the for-mal sector seems unlikely.                       5 % in 2005       Large fully funded pillar
and 7 % thereafter)   (Contribution rate 15 %o)
These results are driven by demographic  Administrative costs as
trends. Inourcalculations weassume(p   percentofwage                 1.84    1.00          1.84    1.00
trens. n orcaculaion, w  asume(op-  Effective rate of return
timistically) that fertility rates will increase   (Market interest rate=5 percent)
from the current crude level of 1.3 children  S At retirement        3.32    4.24          4.35    4.69
perwoman to 1.8 (the level of several de-
cades ago). If rates stay at the current  * After 10 years of contributions -6.52   -0.06  1.74    3.44
level or even fall (rates in Kyiv, the capi-  Source: authors compilation.
C  TP-ANSITION, April 2000       The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies { 2000



Timing of the Reform                 have sufficiently developed capital mar-  when better developed capital markets
kets, regulatory bodies, or institutions of  can support more comprehensive re-
The main arguments in favor of a later in-  civic society. This speed of reform has high  forms.
troduction of a fully funded system are:    risks if contributions are accumulated in
poorly regulated private pension funds,  David Snelbecker is a project associate
* Capital markets may not be sufficiently  tracking of contributions is inadequate, and  and Marta Dekhtiarchuk is a researcher
developed for pension assets to be safely  the new system threatens with general  at the Harvard Institute for Intemational
invested.                            collapse.)                            Development (HIID) in Kyiv. Snelbecker's
email: dsnel@hiid.kiev.ua
* Government policymaking and regula-  The conflicting need for and danger of a
tory capacity may still be insufficient for es-  speedy reform might be addressed by  The calculations and projections pre-
tablishing and overseeing a fully funded  a debt-financed pension reform, in which  sented in this article are generated by an
system.                              some of the benefits-due to linking con-  HIID overlapping-generations accounting
tributions with future pension payouts-  model of Ukraine's pension system.
* A fully funded system should be intro-  are achieved early, but the gains, coming
duced only after there is a surplus in the  from paying off the outstanding pension  Details and assumptions of the model are
PAYG system with which to pay transition  liability, are deferred to a future time  available from the authors.
costs.
Arguments in favor of a rapid introduction                 .. ..;
of a fully funded system are:
3 Ukraine's pensionsystem isalreadyin
deep crisis, so the sooner reforms are in-        t   .
troduced, the sooner fundamental prob-    i'i.- -
lems will be fixed. 
* The costs of transition may be muc
lower now than later. The low birth rate
during the Second World War means that
relatively small numbers will retire over the
next 1 0 years.
3 The risks of exposure to poorly devel-
oped capital markets might be reduced by
investing initially in safe assets: govern-  .
ment bonds and high-grade foreign instru-
ments. The costs of transition perhaps
could be passed partially to future genera-
tions by issuing debt, so a surplus in the
PAYG system may not be a prerequisite
for beginning reforms.                                   4
Also, a simple organizational structure, for
instance a centralized government asset
management agency-cooperating with        (                                      t .
an international management company-
could initially be preferable to many private
pensionfunds.(Kazakhstanhaspressed            =                                   - .       
ahead with a bold reform to shift to a fully  1    .                                  _
funded system and to phase out the PAYG
system at a time when arguably it did not  From the Moscow based magazine Business in Russia
C 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000   C



Ukraine's State Pension Fund is Cash-Strapped
The pensions awarded to Ukraine's 14 million pensioners fail  hryvni. Pension Fund contributions from corporate payers were
to reflect their employment history. Everyone is paid the same  short 3 billion hryvni at the beginning of the year. The fund's
monthly rate of 59 hryvni ($15), whatever the pre-retirement sal-  debt to pensioners was just over 2 billion hryvni.
ary or number of years worked. Even this is far from guaran-
teed to be disbursed by the cash-strapped state Pension Fund.  * Barterization. Increasing barterization of the economy has
Created specifically to manage the inflow of pension contribu-  left enterprises with little or no cash revenue to make compul-
tions and redistribute them among eligible recipients, the Pen-  sory payments to the fund. A recent analysis of Pension Fund
sion Fund has experienced severe budget problems in recent debtors by industry revealed that the biggest debt was in the
years.                                                 energy sector, where barter reached almost 100 percent.
The Problem                                            0 Taxation. High rates of taxation have driven many busi-
nesses, as well as individuals, to hide their real income by un-
The pension system in Ukraine is pay-as-you-go, with today's  derstating it or failing to report it at all. Manipulation of labor
workers financing the pensions of retired workers. Almost three-  and payroll statistics is widespread. The extent of the problem
quarters of Pension Fund revenues derive from compulsory pay-  is further revealed by the size of Ukraine's shadow economy,
ments to the Pension Fund by enterprises-state and  whichaccountsfor30-45percentofGDP.
private-of 32 percent of the overall salary fund of each com-
pany. The remainder is raised from direct support from state  0 Subsidization. Increasingly irregular and incomplete subsi-
and local budgets (10 percent) and other state-run, specialized,  dies from state and local budgets exacerbate the fund's deficit.
nonpension funds (including the Chernobyl Fund and Employ-  Moreover, the Pension Fund often finds itself financing some
ment Fund), as well as compulsory contributions from individual  programs that are not necessarily related to pensions, such as
salaries (3 percent).                                  special benefits for civil servants. By early 1999 the state bud-
get owed the Pension Fund more than 500 million hryvni, while
Pension Fund revenues are further strained by demographic  the local budget owed around 50 million.
trends. The population is aging (the workforce is shrinking
irrelative to the number of pensioners)-reducing contributions  Reform Imperative
to the Pension Fund just when needs are growing.
Based on international experience, three approaches to pen-
Recent efforts have been made to increase Pension Fund rev-  sion reform are available to Ukrainian regulators:
enues through new taxes. However, the results are mixed:
* Adopted late last year, a combination of sales taxes-1 per-  0 A minimalist solution that seeks to improve the existing sys-
cent on the sale of foreign currency, 5 percent on luxury goods,  tem by raising the retirement age, increasing contributions, or
and 3 percent on cars-will at best bring an additional 345 mil-  lowering benefits.
lion hryvni, only about 3 percent of the fund's total revenues this  0 Creation of private pension funds to complement the existing
year.                                                  system. Participation would be compulsory, and the funds would
* Neither the recent introduction of a 1 percent tax on the sale  be engaged in investment activities.
of real estate nor a flat fee of 10 hryvni for each cellular phone  0 The introduction of a three-pillar system in which the state-
sale to the public is expected to have much effect.    run element is scaled down to deal solely with redistribution
* The most significant development is the introduction of a new  and comlemented by a mandatory, fully funded private system.
fixed-rate agricultural tax, which is expected to raise almost 1  Both pillars would be financed from payroll taxes and supple-
billion hryvni for the Pension Fund. The new taxes are unlikely  mented by a third, voluntary pillar of private funds for those wish-
to reverse the decline in Pension Fund contributions.  ing to receive larger pensions. This option is still largely
academic to the government, although it is actively advocated
Several factors contribute to the lack of Pension Fund resources:  by the National Bank of Ukraine, based on guidelines issued
by the World Bank in 1994. The government introduced a per-
* Wage arrears. Chronic delays in wage payments through-  sonalized pension contribution accounting system in 110 dis-
out the country have meant that the fund regularly receives only  tricts in mid-1999.
88-90 percent of planned revenues from salaries. The first four
months of 1999 alone reportedly brought only 85.2 percent. The  (Excerpted from a report of OxfordAnalytica, the international
total wage debt across Ukraine amounts to around 11 billion  research group based in Oxford, England.)
*  TRANSITION, April 2000        The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies ©D 2000



THE WILLIAM DAVIDSON INSTITUTE
AT THE UNIVERSITY OF MICHIGAN BUSINESS SCHOOL
Conference on Accounting in Transition and Emerging
Economies
by William N. Lanen
T      he first Conference on Accounting  especially those associated with product  (HKUST) and coauthored by Joseph Fan,
in Transition and Emerging Econo-  or service costing and performance mea-  also of HKUST. The concern with complex
mies was held at the William   surement, are essential for effective man-  ownership structures is that voting rights
Davidson Institute in Ann Arbor, Michigan,  agement. At the same time, firms and  (which measure the ability to control the
April 13-15, 2000. The conference at-  markets in these economies offer re-  firm)mayexceedcashflowrights(theex-
tracted 25 accounting researchers from  searchers the opportunities to studyevents  tent of investment in the firm). Earnings
Asia, Europe, and the United States. The  of interest as "exogenous" from the per-  may be "less informative," in the sense that
purpose of the conference was to identify  spective of the individual firm-something  the link between accounting earnings and
researchers from around the world work-  that is not possible in more developed  share returns is weaker in firms in which
ing on accounting issues in transition  environments.                      voting rights exceed cash flow rights be-
economies and to bring those research-                                     cause of the potential for expropriation of
ers together to develop potential research  Seven researchers delivered talks. Anil wealth from minority shareholders. Wong
partnerships. The initial call for papers at-  Makhija, of Ohio State University, presented  and Fan find evidence consistent with their
tracted 25 submissions, 7 of which were  "The Impact of Firm Ownership Structure on  hypothesis for firms in East Asia, exclud-
selected for presentation.           Voluntary Disclosure: Empirical Evidence  ing Japan. They speculate that the reason
from the Czech Republic," coauthored with  Japanese firms may be different is that fi-
Accounting research is often (sometimes  James Patton, of the University of Pittsburgh.  nancial institutions are the ultimate own-
arbitrarily) divided into two areas, financial  Makhija and Patton analyze the impact of  ers of many Japanese firms.
and managerial. Financial accounting re-  ownership structure on the disclosure prac-
search typically examines financial report-  tices of newly privatized firms on the Prague  In a report on an ongoing comparative
ing and disclosure, while managerial  exchange. Classifyingfirmsbytheextentof  study, Carol Frost, of Dartmouth College,
accounting analyzes internal accounting  investmentfund ownership, they hypothesize  presented some descriptive results on dis-
systems. One reason for the separation is  that the extent of voluntary disclosure in fi-  closure requirements of 50 stock ex-
that financial accounting systems are gen-  nancial statements depends on the magni-  changes, including many in transition and
erally subject to disclosure policies dic-  tude of investment fund ownership but that emerging economies. The data collected
tated by a central agency, while internal  the relation is not monotonic. The reason is  from this study will be a valuable source of
accounting systems are not.          that there is a tradeoff between the benefits  information for financial accounting re-
of increased disclosure (lower capital costs)  searchers interested in reporting and dis-
The papers and the discussion at the con-  and the private benefits available from con-  closure issues within and among countries.
ference confirmed that research on ac-  trol. They find evidence consistent with this
counting issues is important in transition  hypothesis.                    Anne Wu of National Chengchi University
and emerging economies and that these                                     in Taipei, presented "The Increased Adop-
economies present some unique oppor-  The issue of complexownership structure-  tion of Formal/Explicit Management Con-
tunities for researchers. Many transition  and the information content of accounting  trols in Chinese Enterprises," coauthored
and emerging economies are in the pro-  earnings for firms with complex ownership  with Neale O'Conner, of City University of
cess of developing securities markets, and  structures-is considered in "Corporate  Hong Kong, and Chee Chow, of San Di-
financial disclosure policies are important  Ownership Structure and the Informative-  ego State University. The paper analyzes
in determining investor assessment of the  ness of Accounting Earnings in EastAsia,"  the factors associated with the adoption
offerings. As state-owned enterprises are  presented by T. J. Wong of Hong Kong  of formal management control systems.
privatized, internal accounting systems,  University of Science and Technology  Using both case studies and survey data,
(D 2000 The World BankJThe William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April2000   *



the authors find that joint venture arrange-  For copies of the papers, contact Sharon  William N. Lanen is area director for
ments as well as market conditions, es-  Nakapirat at shronch@umich.edu. For  accounting research at the William
pecially increased competition, affect the  other research on accounting in transition  Davidson Institute and associate profes-
adoption of formal control systems.  and emerging economies, contact William  sor of accounting at the University of
Lanen at the Institute.              Michigan Business School.
In related papers, Prem Lal Joshi, of the
University of Bahrain, and Robert Luther,
of the University of Exeter, analyze the Markets, Human Capital, Inequality:
diffusion of management accounting
techniques in transition and emerging Evidence from  Rural China
economies. Joshi's paper, "The Interna-
tional Diffusion of New ManagementAc-  by Dwayne Benjamin, Loren Brandt, Paul Glewwe, and Guo Li
counting Practices: The Case of India,"
compares experiences in India and Aus-        arket reforms are generally cred-  villages, is more nationally representative
tralia. Using survey data on past, present,  ited with the rapid growth en-  than our 1995 data. All together 1,920 ru-
and expected adoption and use of man-   V     joyed by China's rural sector.  ral households were surveyed.
agement accounting practices, Joshi This growth has not been without some cost,
finds significant differences in use and  however, as inequality has alsosignificantly  Our empirical work confirms some of the
perception of benefits. He attributes  increased. Estimates suggest that the Gini  findings in the literature-namely, that
these differences, at least in part, to cul-  coefficient for per capita income rose from   nonagricultural income has been the driv-
tural differences.                   less than 0.20 in the late 1970s to more than  ing force in increases in inequality and that
0.40 by the late 1990s. Little work has been  the educated have been most able to take
Luther's paper, "ManagementAccounting  done on the causes of this increased in-  advantage of economic transition. How-
in a Society Undergoing Structural Change:  equality and the mechanisms through which  ever, we also show that the literature has
A South African Study," coauthored with  it increased. This article examines these  neglected a number of important points.
Stephen Longden, of the University of  questions, drawing on several unusually rich
Derby, uses both interviews and survey data  household-level data sets.    Spatial Dimensions of Inequality
to analyze differences between South Af-
rica and the United Kingdom. Luther and  We begin by reviewing a number of con-  Contrary to much of the conventional wis-
Longden find significant differences in the  ceptual issues linking the transition from   dom, most of the inequality we observe is
adoption and use of several management  planned to market-based determination of the product of within-village differences
accounting practices, many of which they  income to inequality. We highlight the po-  between households rather than differ-
attribute to the more volatile business cli- tentially crucial roles that human capital,  ences in income between villages. This is
mate in South Africa and to the costs of  such as formal education, and market in-  especially true of the role of nonagricultural
implementation and use.              stitutions might play in affecting the degree  income. For both data sets, decomposi-
of inequality associated with the transition  tion exercises suggest that less than a
Drawing on a different theoretical frame-  process. After providing a brief review of  third of the differences in per capita in-
work, Trevor Hopper, of the University of  theliteratureoninequalityinChina,weturn  come across households can be ex-
Manchester, presented "A Bangladeshi  to our empirical results.            plained bydifferences in percapita income
Soap Opera: Privatization,Accounting, and                                  across villages. An even lower percentage
Regimes of Control in a Less-Devebped  We use two key sources of household-  can be explained by differences across
Country," coauthored with Shahzad Uddin,  level data. The first is the 1995 North and  counties orprovinces. In otherwords, while
of the University of Belfast. The paper,  Northeast China Living Standards Survey  differences in such factors as the level of
based on an intensive field study at a single  (N NCLSS), carried out by the authors and  rural industrial development, soil quality, and
firm, analyzes the transformation of a  Chinese colleagues in 1995. That data set  proximity to urban centers affect mean in-
company as it is privatized. While the ac-  covers 780 households in 6 counties, 18  come across localities, most of the inequal-
counting analysis is concerned with the  townships,and30villagesintheprovinces  ity still comes from differences among
transformation of the accounting system   of Liaoning and Hebei. We also use data  households within these localities. The ba-
during the process, the paper also de-  on rural households collected in 1993 as  sic insight to be gained from these exer-
scribes other changes, especially those  part of the China Health and Nutrition Sur-  cises is that explaining inequality in rural
dealing with labor relations in the firm dur-  vey (CHNS). The CHNS survey, which cov-  China requires explaining income determi-
ing the process.                     ers 8 provinces, 32 counties, and 96  nation within villages.
*  TRANSITION, April 2000        The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies (D 2000



Human Capital and Its Interactions  Conclusion                            opportunities can change rapidly. Given the
with Market Development                                                   current distribution of education, many of
Our research yields a number of sugges-  these institutional developments will dis-
The role of human capital is paramount in  tive results linking economic transition to  proportionately benefit the better edu-
determining the evolution of inequality.  income inequality in China. Two important cated. Compounding this, current patterns
Human capital is unequally distributed in  themes emerge. First, "economic oppor-  of capital accumulation suggest that the
rural China. Interestingly, much of this in-  tunity" appears to play an important role in  rich will be better positioned to increase
equality is the product of within-cohort dif-  determining the position of winners and  their income and thus future wealth.
ferences rather than differences among  losers in transition. Second, human capi-
cohorts or villages. One of the effects of tal plays an important role in allowing  Dwayne Benjamin and Loren Brandt are
economic reform has been to increase the  households to access these opportunities.  in the Department of Economics at the
returns to human capital, which were esti-  Inequality of economic development inter-  University of Toronto. Paul G/ewwe is at
mated to have been negligible under the  acts with the unequal distribution of human  the University of Minnesota. Guo Li is at
collectives. Aggregating all types of  capital, leading to more inequality within  the World Bank. This article was prepared
noncrop income, we estimate a rate of villages than across villages. One relatively  for the IEA World Congress panel ses-
return to education in nonfarm activity of pessimistic implication of our analysis is  sion on "Global Inequality: Where Are We
10 percent. There are significant differ-  that rural inequality in China is likely to  and Where Are We Headed?" Buenos
ences across localities, however,    worsen before it improves. The distribu-  Aires, August 23-27, 1999. It will be pub-
tion of human capital is likely to change  lished as William Davidson Institute
In looking at the effect of human capital on  only slowly, while market institutions and  Working Paper 298.
inequality, it is not just the return to human
capital or its distribution that matters.
Equally important is the way in which these  Recent Working Papers of the William
factors interact with unevenly developed
market opportunities, which are a central  Davidson Institute:
feature of economic transition. Here we find   wwwwdibusumich.edu
that commercialization, market integration,
and economic opportunity can have a pow-
erful equalizing effect on income. The ef-  Aussenegg, Wolfgang. Going Public in  Corbett, Jenny, and Janet Mitchell. Banking
fects are less benign when accompanied  Poland: Case-by-Case Privatizations,  Crises and Bank Rescues: The Effect
by an unequal distribution of education, as  Mass Privatization and Private Sector  of Reputation. No. 290, January 2000.
these opportunities will presumably be  Initial Public Offerings. No. 292, Decem-
taken advantage of most by the more edu-  ber 1999.                       Johnson, Simon, Peter Boone, Alasdair
cated, increasing income inequality.                                      Breach, and Eric Friedman. Corporate
Belk, Russell. Consumption Patterns of  Governance in the Asian Financial Cri-
Differences in Savings Contribute to  the New Elite in Zimbabwe. No. 288,  sis. No.297, November 1999.
Income Inequality                    February 2000.
Kogut, Bruce, and Andrew Spicer. Institu-
Our research suggests that differences in  Bonin, John P., and Bozena Leven. Can  tional Technology and the Chains of
capital accumulation (savings) across  Banks Promote Enterprise Restructur-  Trust: Capital Markets and Privatization
households will contribute to even greater  ing? Evidence From a Polish Bank's  in Russia and the Czech Republic. No.
inequality in the future. Our data are con-  Experience. No. 294, March 2000.  291, December 1999.
sistent with a long-run savings rate of
nearly 30 percent in China. Higher-income  Bortolotti, Bernardo, Marcella Fantini, and  Luke, Peter J., and Mark E. Schaffer.
households, however, are saving more,  Carlo Scarpa. Why Do Governments  Wage Determination in Russia: An
and they control a disproportionate share  Sell Privatized Companies Abroad?  Econometric Investigation. No. 295,
of total wealth. As long as these assets  No. 293, March 2000.            March 2000.
yield future income, the incomes of high-
income earners will rise, thus further in-  Brown, J. David, and John S. Earle. Com-  van Ours, Jan C. Do Active Labor Mar-
creasing inequality. These effects may be  petition and Firm Performance: Les-  ket Policies Help Unemployed Work-
further magnified because of imperfectly  sons from  Russia. No. 296, March  ers to Find and Keep Regular Jobs?
developed capital markets.           2000.                                No.289, February 2000.
( 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000



Upcoming Davidson Institute Research Conferences
Financial Market Development in Emerging and Transition  will also bring together key policymakers in the region with
Economies                                             conference participants, facilitating discussion and the ex-
September 25-26, 2000, London Business School, Sussex  change of ideas. The conference is sponsored by the Center
Place, Regent's Park, London                          for Economic Policy and Research and the William Davidson
Institute, in cooperation with the Economics Education and
This conference will focus on the evolution of financial mar-  Research Consortium, the New Economic School, and the
kets and corporate finance practices in emerging and transi-  Russian European Centre for Economic Policy.
tion economies. Like last year's workshop in Amsterdam
(http://www.fee.uva.nl/fm/Cifra/CIFRA.htm), this year's confer- The meeting will bring together about 50 participants for a
ence will be a small gathering of an elite group of research-  period of four days. Both plenary and parallel sessions will be
ers. The conference is sponsored by the Centre for New and  held to allow longer time for paper presentations. Papers will
Emerging Markets at the London Business School, the Will-  be presented seminar style to allow for interaction among par-
iam Davidson Institute of the University of Michigan Business  ticipants.
School, theAmsterdam Center for International Finance Re-
search (CIFRA), and the International Review of Finance. As  Information: Ms. Monique Muldoon, the Centre for Economic
last year, the conference committee is composed of Prof.  Policy and Research, email: mmuldoon@cepr.org.
Enrico Perotti, the University of Amsterdam; Dr. Anna
Meyendorff, the Davidson Institute; and Prof. Sheridan Titman,
the University of Texas at Austin and editor of the Review of
International Finance.
Call for papers:
Submissions of theoretical or empirical papers are welcome.
Topics may include market development, the effects of the le-
gal environment, privatization, corporate governance and fi-
nancing, corporate groups, political risk, and the impact of
reform policy on financial markets. Travel and accommoda-
tion for invited speakers will be paid by the sponsors. Papers
should be submitted by June 15, 2000, to Professor Enrico
Perotti, Department of Financial Management Universiteit van
Amsterdam, Roeterstraat 11, 1018 WB Amsterdam, Nether-
lands (enrico@fee .uva.nl), or Dr. Anna Meyendorff, William
Davidson Institute, University of Michigan Business School,
Ann Arbor, Ml 48109 (ameyen@umich.edu). If you would also
like your paper to be considered for publication in the Inter-
national Review of Finance, please send three copies to
Professor Sheridan Titman, Department of Finance, College
of Business Administration, University of Texas, Austin, Texas
78712-1179 (titman@mail.utexas.edu).
The Fifth Annual International Conference in Transition
Economics
Moscow, July 2-5, 2000                                                          _
This conference intends to create a forum in which leading    "You should check your emails more often, I fired you
transition economists from different universities and countries       over three weeks ago."
can present new research, meet and develop long-term col-
laborative relationships, and complete ongoing research. It From Cyberspace.
*  TRANSITION, April 2000      The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies (D 2000



Don't Eliminate the Welfare State, Redesign It:
Social Policy Lessons for Transition Economies
by Michael Eliman
S      ocial policy choices in Central and  of full employment that existed under the  The quality and affordability of housing con-
Eastern Europe should take ac-  old regime-and that still exists today in  tributes a great deal to welfare. Caution
count of ongoing policy debates  some transition economies-is incompat-  should be exercised in rushing to adopt a
both at home and in countries that have  ible with the goals of the transformation  system of high "market" rents sustained by
already developed market economies. It  process. The challenge to policymakers is  housing allowances, which may deepen the
would clearly be undesirable and unsus-  to recognize their responsibility to devise  poverty trap. Improvements in targeting in
tainable to introduce social programs that  policies that generate sufficient numbers  this area may be especially damaging if
in the medium term may be unsustainable. of real jobs to combine low unemployment they encourage further geographical seg-
with transformation. This necessitates con-  regation of different social and economic
Unfortunately, the neoliberal bias of much  tinuing the transformation process and  groups. Allowances must be tapered, and
initial discussion of the policies to be fol-  implementing job creation on both the de-  efforts must be made to minimize housing
lowed in the transition economies put so-  mand and supply side.          segregation. There is a clear need to im-
cial policy in the shade. This was largely a                              prove the capacity of young families to en-
result of the traditional doctrine that saw an  Changes Are Needed in Education,  ter the housing market and to increase the
inevitable tradeoff between equity and. Health, and Housing               abilityoftheunemployedtomovetoplaces
growth. This doctrine ignores the fact that                               where there are job opportunities. A good,
welfare programs can function as a water-  On the supply side, education and training;  if limited, social housing program can ad-
ing can. People who benefit from adequate  active labor market policies (that includejob  dress these issues. Such a program is
nutrition and medical care as babies-and  counseling, training and retraining, and  more effective than a program of higher
adequate housing and education as young  public works); and attention to social co-  rents coupled with housing benefits.
adults-have a good chance of turning into  hesion are particularly important. The de-
productive members of society. Hence ap-  cline in school enrollment, the widespread  Unsustainable Pay-As-You-Go Pen-
propriate welfare programs can contribute  cuts in education funding, and the deterio-  sions Need to Be Reformed
to both equity and growth.           ration of the quality of education in some
countries are alarming and may lead to a  For countries that inherited unsustainable
The False Dichotomy between Equity  decline in the quality of human capital in  pay-as-you-go systems, the bestwayto pro-
and Growth                          the future. The provision of good primary  ceed is to first scale down the generosity of
and secondary education for all is a basic  the system (by indexing benefits to prices
The discussion of the "crisis of the welfare  public responsibility.      rather than wages, for example) and in-
state" in the OECD countries has shown the                                crease contributions (by improving collection
need not to abolish the welfare state but to  The transition economies inherited a  of mandated contributions or mandating a
modernize it. The need is to focus on pro-  daunting set of health policy challenges. A  longer working life). In addition, if there is a
viding social insurance against risks that in- decade after transition began, overall  positive political assessment of the net ad-
complete markets or lack of information  progress is unsatisfactory. Priority should  vantages of a fully funded system, it should
make difficult to insure on an individual ba-  be given to the question of what kind of be introduced bytransformingthatpartofthe
sis.                                 health care is needed. As far as the effi-  pay-as-you-go system that is not financed
cient use of financial resources is con-  by contributions (but is paid for out of gen-
The fundamental task of social policy in  cerned, there is no advantage in social  eral taxation) into individual accounts within
transition economies is to balance the  insurance or "Bismarck" systems overthe  the new funded pension scheme. At the
need for redistribution of income that un-  Swedish or British system of funding  same time, the govemment should promote
derpins human dignity and equality of op-  through taxation. The most important chal-  athird pillarofvoluntary private savings. If
portunity, high labor market participation  lenge is increasing the efficiency of the  the advantages of a funded system are
and low unemployment, and the dynamism  existing system. Creating a group of well-  deemed overwhelming, such a system
of the market economy. The best social  trained health professionals with high mo-  should be gradually extended on a partial
policy is full employment. However, the kind  rale is central to this process.  basis (that is, coexisting with a reformed
© 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000  *



pay-as-you-go system) to new employees  in which the state is primarily a source  gets, Soft States: Social Policy Choices in
if the cost of switching from a pay-as-you-  of loot for the rich, powerful, or well con-  Central and Eastern Europe, edited by J.
go to a funded system can be borne by  nected, it would be naive to expect gov-  Eatwell, M. Ellman, M. Karlsson, D. M.
the government budget.               ernments to implement effective social  Nuti, and J. Shapiro (London: Institute for
programs.                            Public Policy Research). To order, contact
Pay-as-you-go schemes are often criticized                                Central Books, 99 Wallis Road, London
for being essentially Ponzi schemes. This  The author is professor of economics at E9 5LN, United Kingdom, teL.: 4420-8986-
misses the point, since they are viable  Amsterdam University. He is a coauthor  5488; fax.: 4420-8533-5281; email: ippr@
Ponzi schemes run by governments with  of the recentlypublished book Hard Bud-  centralbooks.com.
the power to compel participation and levy
taxation. Forgiven numbers of pensioners
and given levels of contributions, there will 1Newv Books and 'Work'ing Papers
always be some level of pensions that will
be affordable. Furthermore, administrative  The Macroeconomics and Growth Group regrets that it is unable to provide the pub-
costs of pay-as-you-go schemes are low, lications listed.
and coverage is universal.
World Bank Publications              Jose I. dos R. Furtado, Tamara Belt, and
The idea that fully funded schemes gener-                                 Ramachandra Jammi, (eds.), Economic
ate extra resources for pensions is an illu-  To receive ordering and price informa-  Development and Environmental
sion. Extra resources are generated only  tion for World Bank publications, con-  Sustainability: Policies and Principles
if a fully funded scheme leads to additional  tact the World Bank, P.O. Box 960,  for a Durable Equilibrium, World Bank
investmentand highergrowth, lowertaxes  Herndon, VA 20172, United States, tel.:  Institute Learning Resources Series,
lead to higher growth, or pension funds  703-661-1580, fax: 703-661-1501, E-  March 2000, 128 pp.
lead to a net inflow of property income from   mail: books@worldbank. org, Internet:
abroad.                              http://www.worldbank.org/publications, or Winners and Losers of EU Integration:
visit the World Bank InfoShop in the  Policy Issues for Central and Eastern
Universal Child and Family Benefits  United States, at 701 18th Street, NW,  Europe, 2000, 340 pp.
Need to Be Restored                  Washington, DC (tel.: 202-458-5454).
Ten accession countries in Central and
The inefficiencies of means-tested benefits  The Road to Stability and Prosperity  Eastern Europe could gain from exchang-
suggest that an effective policy option is to  in Southeastern Europe: A Regional  ing lessons of experiences and best prac-
restore universal child benefit and family al-  Strategy Paper, March 2000, 184 pp.   tices with one another. The EU integration
lowances. The factthat children have been                                 network of research institutes in the 10
hardest hit by transition is an unacceptable  This report-prepared in response to the  countries provides a valuable forum for
long-term risk. Moreover, thevery lowtrans-  mandate given to the World Bank and  such exchanges. This volume contains the
actions costs of universal child benefits  the European Commission to coordinate  papers presented at the first meeting of
make it one of the most cost-effective ways  a regional approach to Southeastern  the network, as well as some background
of tackling poverty. Benefits in kind (hous-  Europe-outlines four broad thrusts for  papers, identifying the main economic,
ing, nutrition) can play a useful role in com-  action: moving rapidly toward trade in-  social, and political groups that would gain
bating poverty. In countries with significant tegration with the EU and within the re-  or lose from accession.
Roma populations, protecting them from   gion, fostering social inclusion and
persecution and cooperating with Roma  social change to reduce tensions, im-  Technical Papers
organizations to raise their income and  proving institutional capacity and gover-
provide them with jobs, medical care, edu-  nance structures, and investing in regional  Csaba Csaki and Zvi Lerman, (eds.),
cation, and transfer payments (where ap-  infrastructure to integrate the region physi-  Structural Change in the Farming
propriate) must form part of effective  cally within Europe.              Sectors in Central and Eastern Eu-
antipoverty programs.                                                     rope: Lessons for EU Accession, Sec-
Dominique Dwor-Fr6caut, Francis X.Colaco,  ond World Bank-Food and Agriculture
Social policy is a matter not just of  and MaryHallward-Dreimeier, (eds.), Asian  Organization Workshop, June 27-29,
adopting the right policies but of public  Corporate Recovery: Findings from   1999, TP 465, 2000, 272 pp.
debate and support for those policies  Firm-Level Surveys in Five Countries,
and their implementation. In countries  2000, 250 pp.                                 Continued on page 44
*  TRANSITION, April 2000       The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies (D 2000



EU Standards: Political Anchor for Russia?
by Pekka Sutela
Why have the economic transitions of the postsocialist countries of Central Europe, including the Baltic states, been success stories, while
the countries of the former Soviet Union continue to lag?A growing body of econometric research suggests that it is necessarynot only to
achieve macroeconomic stability and establish appropriate prices but also to implement structural reforms and institutional development
Moreover, the relative importance of structural reforms and institutional development seems to grow overtime.
C    entral European nations wanted  will never become a member of the Union.  been too much of that already. A prece-
to return to Europe to become  For reasons that remain unclear, Russia's  dent has been created with the reaffirma-
.'normal European countries"  size is often invoked-a strikingly pecu-  tion of the membership prospects for
again. Reintegration with Europe meant  liar argument. Some assert that the pos-  Turkey, another country whose member-
plunging into the Euro-Atlantic alphabet  sibility of Russian membership is so distant ship might be distant but for which pros-
soup of organizations-EU, NATO, OECD,  that even mentioning it raises unjustifi-  pects of accession may offer a goal and
WTO, and so forth -as quickly as pos-  able hopes-and perhaps claims for  thus a policy anchor.
sible. Joining a group of clubs, all with the  premembership privileges and resource
same underlying mentality, imposed a high  flows. Such claims for resources should  Vladimir Mau, one of Russia's cleverest
degree of policy conditionality on these  not be accepted. The aim of offering the  policy experts, recently proposed that all
countries. It obliged consistency and far-  prospect of EU membership is to provide  national economic policies should be
sightedness in decisionmaking.       a clear and demanding goal, not to pro-  aimed at facilitating membership in the
vide additional soft finance. There has  EU. Whether Russia actually becomes a
In contrast, the Russian Federation lacks
a clear goal and has little wish to make a
clean break with the past. This does not   Visiting Researchers Program for 2001
mean that Russia is willing to choose any   The Bank of Finland Institute for Economies in Transition (BOFIT) conducts high-
road. Few would seriously argue for a re-  level research on transition economies and monitors economic developments in the
turn to the old regime. After a decade-long    Russian Federation and the Baltic states. Research focuses on (but is not limited to)
learning process, Russians generally sup-   issues related to macroeconomic performance, the public sector, and financial mar-
port a market economy, openness, and    kets in transition economies. The Institute publishes two research-oriented discus-
democracy of some sort. But the lack of a   sion paper series and regular economic reviews.
binding conditionality has tended to ren-
der policies captive to vested interests, rent-   BOFIT welcomes applications for posts in its Visiting Researchers Program. Two-
seeking, and no-holds-barred struggles for  to six-month scholarships are available for scholars undertaking high-level research
projects in areas pertinent to the Institute's research objectives. The deadline for
power.                                application for the 2001 program is June 15, 2000.
Several conclusions follow:           Visiting scholars will be expected to conduct research based on a mutually agreed on
research plan. Articles stemming from the research are expected to be included in the
* Russian policies and their support by   BOFIT Discussion Papers Series and may be published elsewhere as well. Visiting
the international community have been   scholars are expected to give a lecture in the Institute's seminar series on their research
overly influenced by an exaggerated fear  topic and to interactwith other researchers engaged in projects in the same area.
of a Communist comeback.               BOFIT offers an active but relaxed research environment, excellent library facilities,
* The partial, weak conditionality that in-   and support from other research facilities. Remuneration is commensurate with the
ternational financial institutions offer is, at   researcher's experience. To apply for a scholarship, send a brief research proposal,
best, a poor substitute for the conditional-   a curriculum vitae describing your academic and research background, two or three
ity of a return to Europe.            references, and a copy of a research article to: Bank of Finland Institute for Econo-
* It is impossible to define a return-to-Europe   mies in Transition P.O. Box 160 Helsinki, Finland 00101 fax.: 358 9 183 2294, Email:
path for Russia.                       bofit@bof.fi. Applications should reach BOFIT no later than June 15, 2000.
For more infonmation about the program, contact Pekka Sutela, Head of Institute,
Unfortunately, the EU's approach to Rus-  tel.:358 9 183 2297 or Pekka. Sutela@bof.fi, or Jukka Pirttila, Research Supervisor
sia has been less than accommodating.   tel.: 358 9 183 2986 orJukka.Pirttila@bof fi
Members regularly point out that Russia   _
© 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TPANSITION, April 2000   A



member is a political issue, he stresses,  once Sweden takes over the EU Presi-  the rest of us to start rethinking Russia's
adding that in any case the country is not dency next year. Sweden has declared  possible role in Europe.
ready to discuss the matter. In the long  that relations with Russia will be a prior-
term, Russia' position could be similar to  ity under its presidency. According to  The author is head of BOFIT. email:
that of Norway, which meets membership  Pagrotsky, the EU needs a concrete long-  Pekka. Sutela@BOF Fi. This article is a
requirements but is not an EU member.  term program for Russia's inclusion in Eu-  slightly shortened version of his article
ropean cooperation structures. He is pushing  published in the BOFIT's Russian
A parallel approach was recently taken by  for Russia's gradual entrance into internal  Economy, the Month in Review.
Leif Pagrotsky, Sweden's Minister for For-  markets, with possible fast-tracking for
eign Trade, who will play a central role  Kaliningrad. It may also be high time for
World Bank/IMF Agenda
Ukraine Seeks World Bank Help to  ing MF loan paymentstotaling $675 million.  continue to support its 10 projects under
Fight Corruption                     One of the factors on which the payments  implementation, including the social in-
were based was the level of the country's  vestment fund and projects on social pro-
During his visit to Washington in May, Ukrai-  monetary reserves. Although reserves were  tection management, education, private
nian Prime Minister Victor Yushchenko  overstated, there were no signs of illegal use  sector development, energy, rural finance,
sought World Bank assistance to fight cor-  of the funds during this period, auditors of  and land registration. It will also continue
ruption and strengthen the rule of law in  PricewaterhouseCoopers confirmed.  to fund its technical assistance program.
Ukraine. "I was particularly pleased by the  Yushchenko headed the central bank from   Preparation of new operations (health,
prime minister's requestand conveyed our  1993 to 1999. U.S. Treasury Secretary  publicsector reforms, agricultural services,
readiness to offerthe World Bank Group's  Lawrence Summers said he supports the  energy) will not be suspended. Since
support in this critical area," World Bank  IMF's recommendation that central banks of  Moldova joined the bank in 1992, the Bank
President James Wolfensohn said in a  countries that receive IMF funds be subject  has committed more than $400 million to
statement May 9, following talks with  to "appropriate external audits."   the country, more than $160 million of
Yushchenko in Washington. The Bank is                                      which has yet to be disbursed.
currently discussing with the Ukrainian  World Bank, IMF Working Out New Fi-
government, the Ukrainian Parliament,  nancial Program for Moldova         New Environmental Strategy
and NGOs an assistance package that will
be used to shore up social services and  The World Bank and Moldova will start  The World Bank Group is preparing a new
improve official administration. A country  working out a new financing program   environmental strategy aimed at integrat-
assistance strategy is also being prepared  aimed at eliminating poverty there, but  ing environmental concerns into its main-
thatwould underpin future Bank assistance  loans will hinge on the pace of privatization,  stream poverty alleviation and economic
and lending to Ukraine.              Roger Grawe, World Bank director for  development efforts. The draft strategy
Moldova, told a news conference in  was presented to the Council of the Glo-
Yushchenko also metwith executive direc-  Chisinau, Moldova's capital, in early May.  bal Environment Facility May 8. Over the
tors of the IMF and officials of the U.S.  Thenewthree-yearstrategywillbe imple-  next six months, consultations will be held
Treasury. The IMF froze installments of a  mented in close contactwith the IMF, which  with client country governments, NGOs,
$2.23 billion loan program to Ukraine last  plans to start work on its own poverty re-  and other partners around the world.
September, after Ukraine failed to meet  duction program.
economic targets. There were also some                                     The Bank's discussion draft report, Toward
accusationsthatthe Ukrainian central bank  In mid-April the World Bank suspended a  an Environment Strategy for the World
had misled the IMF over the size of its for-  $20 million loan to Moldova under a $40  Bank Group, released in April, summa-
eign exchange reserves between 1996  million loan program, after Parliament re-  rizes the emerging strategy framework that
and 1998. Ukraine's central bank was  jected draft laws on fair and transparent  should be finalized by December 2000. Its
suppossed to transfer almost $1 billion of  privatization of the lucrative wine and to-  three main objectives are to:
foreign exchange through various third par-  bacco industries. (The IMF suspended a
ties, often double-counting its reserves.  $35 million installment of its loan under the
At the time, the government was receiv-  Extended Fund Facility). The Bank will        Continued on page 41
*  TRANSITION, April 2000        The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies ( 2000



SITE
Stockholm Institute of Transition Economics
STOCKHOLM SCHOOL OF ECONOMICS
Flexing BICEPS: Bringing Home the Best and the Brightest by
Building a Centre of Excellence for Economic Research in the Baltics
The Baltic International Centre for Economic Policy Studies (BICEPS) project is making a groundbreaking contribution to the
renewal of the economics profession in the Baltic states. The aim is to build a full-fledged research institute and think tankwith a
broad program of world-class research and a strong and active presence in the policy debate in the Baltic countries and the EU.
Initiatives such as EuroFaculty, established in 1993 by the Council of Baltic Sea States, have helped induce the first Baltic
students with Ph. d. s earned abroad to return home. This is a promising start, but additional action and resources are needed to
achieve the critical mass necessary for the long-run sustainability of economics in the Baltic states.
T      he BICEPS project supports the initial return of talented  Strengthening Economic Research Capacity
young researchers and encourages others to follow by
building an attractive environment for research. The  BICEPS' "virtual faculty" are already participating in research
project brings together Baltic economists with strong training  projects and advising Baltic graduate students. Seminar series,
in economics and local knowledge and EU-based research  conferences, and workshops will be organized to strengthen re-
institutes with experience with capacity building in transition  search ties and increase the center's visibility. Based on the ex-
economies. Led by the Stockholm Institute of Transition Econo- perience of local institutions, talented young people in the three
mies (SITE), the consortium of European institutes includes  Baltic countries will be recruited to participate in research, distri-
the Bank of Finland Institute for Economies in Transition  bution, and information networks. The networks will be modeled
(BOFIT), in Helsinki, and the Centre for Integration Studies  after the National Bureau of Economic Research (NBER) in the
(ZEI), in Bonn, both of which have expertise in transition eco-  United States and CEPR in Europe. Affiliates and fellows of these
nomics, as well as Europe's largest economics research net-  networks will be invited to participate in training programs, at
work, the London-based Centre for Economic Policy Research  BICEPS and at the institutions in the consortium. Through its in-
(CEPR). Members of the core network in the Baltic states in- teraction with policymakers in government and business, BI-
clude EuroFaculty, the University of Latvia, the Stockholm   CEPS will promote capacity building of economics in those
School of Economics in Riga, Tallinn Technical University, Tartu  institutions.
University, and the University of Vilnius.
Contributing to the Policy Process
Building a Sustainable Institution
Through interaction with policymakers, BICEPS wants to partici-
In spearheading BICEPS, SITE is drawing on the experience it pate in formulating economic reform policies in the Baltic na-
gained creating the Russian-European Centre for Economic  tions. To be sustainable, reforms must be homegrown and
Policy (RECEP), funded by the EU's Tacis. CEPR has been in- command political support. This can be achieved only by devel-
strumental in attracting leading European academics to partici- oping a vigorous public policy process and creating a deep-
pate in RECEP's research; it has also contributed its experience  rooted, indigenous capacity to carry out high-quality research and
in dissemination and policy outreach.                 policy analysis. Analysis of and advice on economic policies will
be offered to core government agencies, national parliaments,
The aim of the project is to develop a sustainable institution  and the central banks.
whose academic staff teach at local universities and advise
local governments on policy. Creating a sustainable institution  Developing an Institutional Network
will require long-term financial and institutional commitment from
Western institutions. An important task is to build a broad stake-  The project will link institutions, integrating the new center into
holder base and diversify the sources of funding over the next the international research community in economics and estab-
three years.                                          lishing closer ties with other institutions in preaccession and EU
© 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITmON, April 2000  U



member states. The core network in the Baltic states will help  Disseminating Research Results
BICEPS attract leading researchers for joint appointments and
research projects, and itwill give students in the region the op-  ThequarterlyBalticEconomic Trendswill be BICEPS'firstformal
portunity to participate in research.                  channel for disseminating its research. SITE will launch the new
publication, modeled on RECEP's Russian Economic Trends,
Supporting the Accession Process                       in mid-2000. The journal will feature macroeconomic overviews,
feature articles, special reports, and statistics on the three Baltic
The BICEPS initiative aims to play an important role in support-  states. It will eventually include other countries in the Baltic rim.
ing the Baltic states' accession to the EU. Research findings re-
lated to developments in the Baltic economies will be  For additional information about the BICEPS project, visit
communicated promptly to key audiences in the region and be-  our Web site, at www.hhs.se/site; contact SITE, teL.: 468-736-
yond, through publications, discussion meetings, workshops, and  9672; or send an Email to Erik. Berglof@hhs.se or
conferences.                                           Jody. Lanfrey@hhs. se.
SITE/RECEP Research
Club Enlargement and Financial Constraints: Early Versus Late
Admittance
by Mike Burkart and Klaus Wallner
T      his research project analyzes the enlargement strategy  Our research yields two main results. First, an optimal strategy
of a club facing applicants that differ in wealth and reform  is to admit more advanced applicants only after conditions have
status. Much economic activity revolves around clubs,  been met while admitting less advanced applicants early. The
such as free trade associations and trade unions, which exer-  EU, for example, has an incentive to admit less advanced appli-
cise the right to choose their members. Supranational organiza-  cants before they implement reform. Greece, for example, was
tions (such as NATO, the EU, the WTO, the G-7, and the UN  admitted without having to institute reforms, while more advanced
Security Council) also function as clubs, as do many bilateral  applicants, such as Poland and Hungary, were offered condi-
and multilateral international treaties.               tional admittance based on their meeting EU standards and
implementing reforms.
A topical application for our framework is the enlargement of the
EU. Applicants from Central and Eastern Europe are severely  The second finding is related to the financing of desired reforms.
constrained financially. Adopting EU standards in order to join a  Poorer applicants are overfunded. In addition to providing money
group of highly developed and rich countries may require these  for reform, the club finances some additional consumption. All
countries to undertake actions that do not coincide with their pre-  but the most advanced applicants (in terms of reforms) retain
ferred course of development. A club's incumbent members hold  rents from the enlargement process.
a monopoly on membership decisions. In the case of the EU, the
dual roles of financier and enlargement monopolist give incum-  Overfunding can be avoided if the club engages in staged fi-
bents strong influence over applicants' reform agendas.  nancing, which conditions the disbursement of funds on the imple-
mentation of reforms. The article devotes much attention to the
The analysis of club enlargement decisions centers on a basic  problem of opportunism in the dynamic game. In the EU enlarge-
conflict of incentives: the club benefits more if an applicant takes a  ment context, release of funds by the EU generates requests for
costly action, while the applicant desires membership at the small-  more funds from still unreformed applicants in the next stage of
est possible cost. The club can induce the applicant to perform an  negotiations.
action by making club admission contingent on it. In the EU en-
largement context, the EU can make admittance contingent on  Mike Burkart and Klaus Waliner are associate professors. Their
implementation of reforms. It can admit an applicant before it imple- article can be downloaded at www. hhs. se/personal/klauswallner/
ments reform and attempt to bring about reform within the club, or papers.htm. For more information, email the authors, at
it can pursue a strategy of late conditional admittance.  mike.burkart@hhs.se or klaus. wallner@hhs. se.
*  TRANSITION, April 2000       The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies ©D 2000



Dynamism and Inertia in the Russian Labor Market: A Model of
Segmentation
by Irena Grosfeld, Claudia Senik-Leygonie, Thierry Verdier, Stanislav Kolenikov, and Elena Paltseva
F~ rom the rich empirical literature devoted to the Russian  assets in former state-owned firms also increases the entry cost
labor market, four major features emerge as essential:  of new firms. Many new private firms do propose social services
pervasive labor hoarding, the importance of social as-  to their employees. The need to do so slows development of the
sets, mounting wage arrears, and the mobility of some workers.  new private sector.
The first two features can be considered as forces of inertia, the
last two as forces of flexibility.                     This peculiar segmentation of the labor market reflects the weak-
ness of the institutional structure. It is above all linked to the high
This article proposes a model of segmentation based on uncer-  level of uncertainty faced by workers and firms. Russian workers
tainty, worker heterogeneity, and risk aversion. To test some of face greater uncertainty associated with leaving the firm than do
the model's predictions, the authors use a panel of 13,410 firms  workers in other transition or market economies. Uncertainty is
extracted from the Russian Enterprise Registry database. The  greater in Russia because institutions are weaker and macro-
results show that firms react to shocks by adjusting the number economic policy fluctuates more than elsewhere. The weakness
of blue collarworkers ratherthan the numberofwhite collarwork- of the state and the rule of law and the slow pace of institution
ers. Moreover, local labor market conditions have significantly  building in Russia shorten the time horizon of agents and weaken
more influence on the wages of blue collar workers than on the  the quality of their expectations. Reducing uncertainty thus con-
wages of white collar workers.                         stitutes a key condition of the normalization of the situation in
Russia and of the separation of low productivity employees from
The implications of this segmentation on restructuring are am- theirfirm.
biguous. On the one hand, it reflects some adjustment of the in-
dustrial sector-namely, the dynamic employment policy of some  Irena Grosfeld (DELTA, ENS, RECEP); Claudia Senik-Leygonie
firms and the efficient reallocation of the most productive work-  (DELTA, ENS, RECEP); Thierry Verdier (DELTA, ENS); Stanislav
ers. On the other hand, if restructuring means reducing overstaff-  Kolenikov (RECEP); and Elena Paltseva (RECEP). This article
ing, the process isfarfrom being completed in Russia. There is  appeared as CEPR Discussion Paper 2224. For more infor-
a risk that the stagnant segment exerts an eviction effect on the  mation, contact the authors at grosfeld@delta.ens.fr,
dynamic sector, particularly if it receives state subsidies in order senik@delta.ens.fr, verdier@delta.ens.fr, skolenik@recep.
to perform its role of social protection. The presence of social glasnet.ru, or epaltseva@recep.glasnet.ru.
Stuck in Transit: Rethinking Russian Economic Reform
A RECEP-CEPR-SITE publication
In August 1998 Russian policymakers finally had to face the con-  Banking and Financial-Industrial Groups, Industrial Restructur-
sequences of the delays in reforms, lack of fiscal discipline, and  ing, Labor Market Reform, and The Barter Economy.
overvalued exchange rate when the government was forced to
devalue the ruble and default on its debt obligations. This report Special offer: New subscribers to Russian Economic Trends-
identifies the underlying causes and the deep flaws these events  the leading publication of analysis and statistics on the Russian
exposed in the process of reform and discusses the policy op-  economy published by RECEP-will receive a complimentary
tions for rebuilding the Russian economy. The report explores the  copy of Stuck in Transit. For subscription information, visit
long-term policy challenges in key areas of the Russian economy, www.blackwellpublishers.co.uk/journals/ruet. Please mention
including fiscal and monetary policy, the labor market, the financial Transition in your order.
sector, industrial restructuring, and the barter economy.
To order Stuck in Transit within North America, contact the
Stuck in Transit: Rethinking Russian Economic Reform draws  Brookings Institution, Dept 029, Washington DC 20042-0029,
on work by economists at the Russian-European Centre for Eco-  United States; tel.: 202-797-6258; fax.: 202-797-6004. Outside
nomic Policy (RECEP) and top international scholars. Chapters  North America, contact CEPR, 0-98 Goswell Road, London
include Russia's Crisis and Beyond, Macroeconomic Policy and  ECIV 7RR, United Kingdom; Email: orders@cepr.org; tel.:
the Problem of Arrears, Tax Collection and Fiscal Federalism,  4420-7878-2900; fax.: 4420-7878 2999.
© 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000  *



European Corporate Governance Network
T      he European Corporate Governance Network (ECGN) parisons. Even more important, it will improve understanding of the
is a nonprofit research network that brings together schol-  emerging patterns of ownership and control in Central and Eastem
ars and practitioners residing in Europe and elsewhere  Europe and their implicationsforcorporate performance, economic
who take an active interest in European and comparative corpo-  growth, and these countries' eventual accession to the EU.
rate governance issues. SITE is the base for Sweden's ECGN
country team.                                          The ECGN has close links with the Centre for Economic Policy
Research (CEPR) in London and cooperates with other institu-
Lack of data has been a major impediment to comparative corpo- tions active in the field, including the World Bank, the Interna-
rate govemance research in Europe and beyond. The ECGN brings  tional Corporate Governance Network (ICGN), and the Center
together individuals and institutionsfamiliarwith the language and  for European Policy Studies (CEPS) in Brussels. Bureau van
corporatecultureoftheirown countrytoenhance mutual understand-  Dijk, an electronic publisher of company reports and statistical
ing of the functioning of corporate govemance systems and institu- databases, is supporting the network's empirical projects by
tions. The ECGN provides an umbrella for a variety of comparative  supplying data on companies.
research projects and a plafform for exchange (through its Web site,
conferences, general membership, and the ECGN list). The ECGN  The ECGN was started in 1996 by Fabrizio Barca, Erik Berg lof,
Web site is becoming a focal point for up-to-date information on  Francesco Brioschi, and Colin Mayer. Financial and organiza-
corporate governance in Europe. Academics can find information  tional support was provided by Stefano Micossi, Director Gen-
on real world govemance; policy practitioners can find information  eral of the European Commission's Directorate for Industry
on what academics think and knowaboutthe subject.     (DGIII), and Domenico Siniscalco, Director of Fondazione Eni
Enrico Mattei, Milano, a nonprofit foundation endowed by ENI,
Corporate governance is a key issue facing EU members and the  the Italian oil and gas company. The network is based in Brus-
associated countries of Central and Eastern Europe as they un- sels, at the Universite Libre de Bruxelles, the Solvay Business
dergo the transition to market economies and the process of EU  School, and the European Centre forAdvanced Studies in Eco-
accession. The network is extending its data collection to the asso-  nomics and Statistics (ECARES).
ciated countries of the EU, as envisaged in the project Corporate
Governance and Disclosure in the Accession Process. Enlarge- For information on ECGN projects, activities, data, and regis-
ment of the ECGN database will permit wider international com- tration information, visitits Web site at wwwecgn.ulb.ac.be;
Conference Diary
Second Annual Bank Conference on  United States; and Robert Mundell, Nobel  Philippe Platteau). Topic five: Global Gov-
Development Economics in Europe -   Economics Laureate. Joseph E. Stiglitz  ernance: In Search of a New Framework
DevelopmentThinking atthe Millennium  will give the dinner speech, Development (Jean-Francois Rischard, and others).
June 26, 27, and 28, 2000           Theory at the Crossroads. There will be  There will be parallel workshop sessions
http:/lwww.worldbank.org/research/abcde/  one roundtable discussion on Openness  the first two days of the conference. The
andDevelopment(Dani Rodrik, Alan Win- wrap-up and concluding remarks will be
Opening addresses by Lionel Jospin,  ters). Eight papers will be presented on  given by Laurent Fabius, Minister of
Prime Minister, France and James D. five topics. Topic one: 50 Years of De-  Economy, Finance and Industry; Jean-
Wolfensohn, President, World Bank. Wel-  velopment Economics: What Have We  Fran,ois Rischard, World Bank; and
coming addresses will be given by Laurent Leamed? (Nicholas Stern, IrmaAdelman).  Pierre-Alain Muet, Chairman, Conseil
Fabius, Minister of Economy, Finance and  Topic two: Growth, Poverty Reduction,  d'Analyse Economique. Participation is by
Industry, France; Pierre-Alain Muet, Chair-  and Inequality: Lessons Learned (T.N.  invitation only. The conference is spon-
man, Conseil d'Analyse Economique; and  Srinivasan, Francois Bourguignon). Topic  sored by the World Bank and Conseil
Jean-Francois Rischard, World Bank.  three: Knowledge, Innovation, and Devel-  d'Analyse Economique, France.
Keynote addresses by Amartya Sen,  opment (Paul David, Philippe Aghion).  Information: Jean-Christophe Bas (e-
Nobel Economics Laureate; Lawrence H. Topic four: Social Capital, Governance,  mail: jbas@worldbankorg), External Af-
Summers, Secretary of the Treasury,  and Institutions (Jozef Ritzen, Jean  fairs Counsellor, The World Bank, 66
*  TRANSITION, April 2000       The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies © 2000



avenue d'1lna, 75116 Paris, France tel ters; gender issues; governance; and infra-  Call for papers: The last decade has been
33-1-40 69 30 35, fax 33-1-47 23 74 36  structure and civil-military relations.  marked by the process of transition in the
or Boris Pleskovic (email: bpleskovic  Information: Jorge Perez-L6pez, Chair,  former socialist countries-a process that
@worldbank.org), Research Administra-  Program Committee, 5881 6th Street,  has involved the complex task of socioeco-
tor, World Bank, 1818 H Street, N.MW,  Falls Church, VA 22041, United States, tel:  nomic restructuring, reestablishing the in-
Room MC4-385, Washington DC 20433,  703-379-8812, email: perezlop@erols.   terrupted flow of history, and developing
tel 1-202-473-1062, fax 1-202-522-0304.                                    modern social, economic, and political
Marketing Strategies for Central and  structures. The most advanced among
Economics Research Competition:  Eastern Europe                            these countries have now passed the first
Focus on Policy                      December 13-15, 2000, Arcotel Hotel,  stages of transition, but there is still a long
Request for Proposals Research Workshop  Wimberger, Vienna, Austria        way ahead. Many countries are still strug-
July 7-11, 2000                                                            gling with fundamental issues and prob-
Organizers: Kellstadt Centerfor Marketing  lems, trying to find their way toward
Economics Education and Research Con-  Analysis and Planning, DePaul University,  economic and social progress.
sortium (EERC) is organizing Focus on  Chicago, and the Department of Interna-
Policy competition, to support medium-  tional Business, University of Economics  The experience of living with the transition to
term economic policy-related research by  and BusinessAdministration, Vienna.  democracy and the market economy has
teams of Russian scholars. Grants are  Topics: comparative analysis of conditions  motivated the Faculty of Economics at the
awarded for two years, with possible ex-  of market entry in Central and Eastern Eu-  University of Split to organize a global forum
tension to three years. Two grant awards  rope; market entry through exports versus  that brings together scholars and practitio-
of up to $25,000 per project per year may  market entry via capital investment; acqui-  ners in search of solutions to the problems
be awarded at each round (competition  sitions as opposed to joint ventures; mar-  faced by enterprises in transition economies.
rounds will be held annually). Members of  keting strategies to reach Central and  In previous years the Enterprise in Transi-
a research team must be academic or pro-  Eastern European consumers; marketing-  tion conference has highlighted the need for
fessional economists, CIS nationals, living  mix decisions for markets; financial strate-  scholarly consideration of many issues and
and working in Russia.               gies for opening markets; case studies of  problems facing enterprises in transition
Applications must be received no later  Western firms' experiences.        economies. More than 300 conference pre-
than May 15, 2000, at the EERC Moscow-  Abstracts of the papers, in English, should  sentations by 500 authors from 40 different
based secretariat.                   be received by September 15, 2000. The  countries have been published, and many
Information: Economic Education and  final papers must be ready by November  new links have been forged among schol-
Research Consortium, 18, Malaya  15, 2000. For more information or to send  ars interested in these issues-indications
Pirogovskaya, Suite 101, Moscow, 119  abstracts contact either of the conference  of the important contribution this conference
435, Russian Federation. Tel/fax: 7095-  sponsors.                         has made to advancement in the field. To
248-2728, 246-3439, or 232- 3349, fax:  Information: Prof. Dr. Reiner Springer,  further this advancement, we believe it is
1202-478-1968, email: eerc@eerc.ru,  Wirtschaftsuniversitat Wien, Althanstr 51,  necessary to focus attention on some press-
We site: http://www.eerc.ru.         1090 Wien, Austria, tel.: 43-1-313 36/  ing transitional issues that will prove very
4371, fax: 43- 1-313 36/751, email:  important in the 21st century.
Ten Years of the Special Period: Ret-  Reiner. Springer@wu-wien.ac.at, orProf.
rospective and Perspectives          Dr. Petr Chadraba Kellstadt, Center for  In addition to discussion of the transition
August 3-5, 2000, Biltmore Hotel, Coral  Marketing Analysis and Planning, De  from a socialist to a market economy, we
Gables, Florida, United States       Paul University I East Jackson Boule-  encourage and invite authors to consider
vard, Chicago, Illinois 60604, United  issues relating to the growth and devel-
Organizer: The Association for the Study  States, tel.: 312-362-6200, fax: 312-362-  opment of enterprises and economies in
of the Cuban Economy (ASCE).         5647, email: pcha drab@wppost.de  transition, such as competitiveness, re-
Papers on the following topics are welcome:  paul. edu.                    structuring, and growth. The range of issues
developments in Cuba during the last de-                                   to be covered reflects the comprehensive
cade and future prospects; developments  Enterprise in Transition: Competitive-  approach to transitional problems that has
in a comparative framework, the former  ness, Restructuring, and Growth    been a key feature of the conference from
Soviet Bloc, China or Vietnam; macroeco-  May 24-26, 2001                  its very beginning. This concept preserves
nomic and sectoral issues; developments                                   the breadth of our approach to the prob-
in social sectors; international relations; civil  Organizer: Faculty of Economics, Univer-  lems of transition, but at the same time it
society; legal issues; environmental mat-  sity of Split.                  directs researchers' efforts toward a seri-
©D 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000   C



ous and relevant discussion of issues and  Prospectiveauthorsareinvitedtosubmitan   be received by December 31, 2000, in or-
dilemmas related to the development of en-  abstract of up to 250 words in English, in-  der to be included in the review process.
terprises in transition economies. We espe-  ciuding the author's name, affiliation, and  Paper acceptance notification will be Feb-
cially encourage the case study method,  contact details, by August 30, 2000. Notifi-  ruary 20, 2001.
which has the potential to provide deeper  cation of abstract acceptance will be sent  For information: Faculty of Economics
insights intothe underlying processes ofen-  bySeptember30, 2000, along with detailed  Split, Radovanova 13, HR 21000 Split,
terprises in transitional economies. Together  instructions on submitting papers. Two hard  Croatia, tel.: 385 21 362 465, 385 21 366
with more theoretical papers, these studies  copies of the paper, printed on a high-  033, fax. 38521 366 026, e-mail: eitconf
could significantlyenhance the qualityofthe  quality printer, and a computer file of the  @efst.hr, Web site: http://www.efst.hr/
conference and its proceedings.      paper in Word for Windows format should  eitconf.
Milestones of Transition
EBRD                                 with 10countries.Sixofthosecountries-  The 10 poorest regions include 5 of
the Czech Republic, Cyprus, Estonia, Hun-  Poland's 16 regions, 3 regions in Bulgaria,
Jean Lemierre to head EBRD. The EU put  gary, Poland, and Slovenia-are well  the northwestern region of Romania, and
forward French Treasury Director Jean  along in the process and aim to join the  1 region in Latvia.
Lemierre to serve as EBRD president, a  Union by the middle of the decade. The
post left vacant when Horst Koehler was  EU is scheduled to open negotiations with  Balti cs
named Managing Director of the IMF. The  the six countries May 25 on the sensitive
EU controls a majority of votes in the selec-  issue of the free movement of labor.  Baltic countries seek to reduce bud-
tion process, making Lemierre's appoint-                                   get deficits by reining in public spend-
ment a certainty at the Bank's annual  Substantive membership negotiations  ing growth in the wake of last year's
meeting May 21-22. Earlier, Austria pro-  started with five "second-wave" na-  record budget deficits. Pension in-
posed a representative from Central Eu-  tions. Negotiations between the EU Com-  creases and public sector wages have
rope. The United States supported Leszek  mission and Bulgaria, Latvia, Lithuania,  been frozen. Lithuania has also reduced
Balcerowicz, the architectof the reformsthat  Romania, and the Slovak Republic began  subsidies to agriculture and state-owned
transformed Poland into a market economy.  March 28. The EU divides accession nego-  firms.
tiations into 31 subject areas, or "chapters."
European  Union                      It has proposed initially discussing five chap-  According to preliminary figures, budget
ters with the group of Eastern European  deficits in Estonia and Latvia for the first
EU expansion not a serious threat to  countries: small business, education, sci-  quarterof this yearfell belowthe upperlim-
jobs, according to Employment Com-  ence, extemal relations, and common secu-  its set in the economic programs agreed
missioner. The European Union's Employ-  rity policy. The EU has also offered to  on with the IMF. In contrast, state revenues
ment Commissioner played down fears that  negotiate cultural and audio-visual policywith  in Lithuania were below budget, causing
cheap labor from post-Communist coun-  Bulgaria. Latvia, Lithuania, and the Slovak  a larger than expected shortfall in the first
tries would flood the EU when it expands.  Republic have been offered two more areas  quarter. Public sector deficit targets for this
Following Austria's call for immigration  each, competition policy and statistics.  year are 1.3 percent of GDP in Estonia,
curbs on future EU members, Employment                                     1.9 percent in Latvia, and 2.8 percent in
CommissionerAnna Diamantopoulou said  Eight of the 10 Eastern European   Lithuania.
that the impact of expansion on labor mi-  countries negotiating for EU member-
gration should be slight, although transition  ship fell below EU poverty threshold  Central and  Eastern
periods may be imposed [meaning tempo-  in 1995-97, according to Eurostat data  Europe
rary restrictions, the editor]. When Greece,  released April 18. Only the regions of
Portugal, and Spain joined the EU 'We had  Prague and Bratislava registered per  Bulgaria
exactly the opposite, the movement of im-  capita GDP of more than 75 percent of the
migrants back to the new member states,"  EU average. The lowest figure, in the Pol-  Nearly half of Bulgaria's state assets had
she noted. The 15-member European  ish region of Swietokryskie, was 24 per-  been privatized by the end of March,
Union is currently discussing accession  cent of the average EU per capita GDP.  according to Bulgaria's Privatization
0    TRANSITION, April 2000      The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies (C 2000



Agency. Contracted revenues from  lice this week charged 11 top managers  Hungarian cabinet approves employ-
privatization in the first quarter of 2000  of the country's largest commercial bank  ment program. The government ap-
amounted to 32.9 million leva ($15.3 mil-  with mismanagement of entrusted property  proved a National EmploymentAction Plan
lion), with 13.5 million leva ($6.2 million)  and violation of their duties. An investiga-  May 9, aimed at creating full employment.
paid in cash. Of the 195 privatization deals  tion in December confirmed that Komercni  The plan proposes reducing social contri-
concluded in the first quarter, 120 were  Banka made an unsecured loan of more  butions paid by employers from 33 per-
handled through direct sales, 56 through  than $175 million (7 billion crowns to the  cent to 30 percent in 2001 and to 27
auctions, 15 through tenders, and 4  Austrian commodities-trading company  percent in 2002. The plan also includes
through mass privatization.          BCL. The Austrian company has since  infrastructure projects, investment incen-
gone bankrupt. The BCL loan was the  tives, and job creation subsidies and gives
Currency Board issue politicized. Mar-  state-run bank's largest default, but it was  priority to employment opportunities for
tin Zaimov, the chief of Bulgaria's currency  by no means the only one. Since the early  Roma, the long-term unemployed, and the
board, refuted press reports that the board  1990s, when Komercni Banka became the  disabled.
mechanism will be drastically changed in  government-designated motor of Czech
the near future. The Bulgarian public sup-  privatization, the bank made scores of  Slovak Republic
ports current monetary policy and would  unsecured loans to various businesses.
notconsenttoanychanges, he pointed out.  Many were never repaid. Recent audits  Government approves draft law on in-
Opposition leader Alexander Tomov  have shown that even when loans were  centives forforeign investors. The law,
claims that the currency board model is  supposedly secured, the real estate, indus-  approved May 10, is aimed at boosting
"destroying production and causing a drop  trial plants, and other collateral the bank  direct foreign investment and helping un-
in exports and a surge in unemployment."  counted on was highly overvalued. The  derdeveloped regions. A 10 percent tax
His party is proposing a new model that  current Czech government now wants to  break will be granted to those who invest
would involve a floating rather than fixed  privatize Komercni. So far, it has spent  atleast100millioncrowns($2.12million).
exchange rate. Tomov concedes that the  some $1.5 billion of the taxpayers money  Those investing 50 million crowns in re-
currency board is not threatened at the mo-  to cover debts resulting from the bank's  gions in which unemployment exceeds 10
ment, because the central bank holds siz-  bad loans. (RFL/RL's Jeremy Bransten)   percent will also be eligible for the conces-
able currency reserves. "Floating of the                                 sion. Investors will be paid 40,000-
currency rate led to catastrophic conse-  Inflation remains lower than expected.  160,000 crowns for every new job created
quences in the 1990s" government offi-  Prices in April remained unchanged from  in the country. The Parliament must still
cials pointed out categorically rejecting  April 1999, and inflation in 2000 is fore-  approve the bill, which will require some
Tomov's suggestion.                 cast to fall below the 3.5-5.5 percent tar-  changes in existing legislation.
get. The low projected inflation rate reflects
Croatia                             lackluster growth and lack of domestic  Slovenia
demand. The central bank, which seeks
Cautious tax incentives offered. The  to counteract upward pressures on the  Slovenia will accelerate EU member-
government will exempt reinvested profits  koruna, may ease interest rates in the near  ship preparations. According to Prime
and wages from the 35 percent corpora-  future. IMF officials praised current poli-  MinisterAndrej Bajuk, the governmentwill
tion tax, Finance Minister Mato Crkvenac  cies but warned that monetary policy  reduce state intervention, abolish mo-
announced in early May. Other taxes, in-  needs to be backed by more sustainable  nopolies, and encourage foreign direct
cluding the 22 percent value-added tax,  fiscal tightening in order to offset the im-  investment, which has lagged other lead-
will remain unchanged. The government  pact of rising capital inflows.   ing EU candidates.
has been criticized by corporate leaders
for failing to encourage business, but  Hungary                          Poland
Zagreb's room for maneuver is limited by
the need to pay wage arrears and meet  Preliminary first quarter current ac-  First quarter GDP grows 6.2-6.3 per-
debt obligations                    count deficit figures were better than  cent over same period last year. Based
expected, the National Bank of Hungary  on industrial production figures, growth
Czech Republic                      announced May 2. The deficit fell to 370  was unchanged from the last quarter of
million euros ($330 million) from 538 mil-  1999, Polish Deputy Finance Minister
Largest bank entangled in scandal. In  lion euros during the same period lastyear.  Jaroslaw Bauc estimated. Unemployment
the Czech Republic's biggest banking  The deficit had been expected to reach  stood at 13.9 percent in March, the high-
scandal since the fall of communism, po-  489 million euros.             est level in years and it is likely to reach
C) 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000  U



15 percent by the end of the year, accord-  Exports rise. The Economics Ministry an-  and companies to be a national threat rose
ing to Polish Labor Minister Longin  nounced that Russian exports jumped41  from 16percentin 1996 to 28 percentthis
Komolowski. Inflation rose to an annual-  percent in the first quarter of this year. Ex-  year. Nineteen percent of those polled fear
ized rate of 10.4 percent in February, up  ports were $17.8 billion, up from $12.6 bil-  Russia's growing dependence on the West
from 8.6 percent in 1998 and 9.8 percent  lion in the first quarter of last year. The  and its turning into a third world country-
last December.                       increase was due partly to rising prices for  up from just 11 percent in 1996.
oil, the country's largest export commodity.
New efforts made to reform tax system.                                     Only a minority of Russians trust de-
Thecenter-rightrulingcoalitionplanstomake   Russia must create a privately funded  mocracy. Just 9.1 percent of the 1,500
another attempt to simplify the tax system in  pension system covering all citizens,  Russians polled in April by the Russian
the coming weeks. Last year President  according to Andrei lllarionov, economic  Public Opinion and Market Independent
Aleksander Kwasniewski, former head of the  adviser to President Vladimir Putin. Pen-  Research Center (ROM I R) believe that de-
biggest opposition party, vetoed some of the  sioners make up about 27 percent of  mocracy is the best form of rule despite
government'staxproposals.            Russia's population. The state spends  certain problems it poses. This view is
about 8 percent of GDP on pensions,  shared to some degree by 38.7 percent of
The first part of the tax reform program of  which fall short of covering basic needs  those polled. As many as 23.7 percent dis-
Finance Minister Balcerowicz, approved in  and are often paid late.        agree to some extent with this opinion, 4.2
1999, cut the Polish corporate tax from 34                                 percent reject it outright, and 24.3 percent
percent to 30 percent in 2000. The rate will  Rich and Poor. The percentage of the  are undecided. The poll covered 94 urban
gradually be lowered to 22 percent in 2004.  population earning more than 2,000 rubles  and rural areas in Russia's 40 regions.
This year's proposals envisage lowering  (about $70) a month rose from 13.2 percent
personal income tax rates to 19,28, and 36  in the first quarter of 1999 to 27.4 percent in  Turkmenistan
percent in 2001, depending on income. The  the first quarter of this year, while the per-
currentratesare19,30,and40percent.Tax  centage of those earning less than 400  EBRD would ban all loans to Turk-
rateswould fall to 19,28, and 35 percent in  rubles (about $14) dropped from 6.9 per-  menistan's public sector, although itwill
2002 and to 18 and 28 percent in 2003. The  cent to 4.0 percent, according to a prelimi-  continue lending to the private sector
bill would also scrap tax relief for real estate  nary report released by the State Statistics  where viable. The move follows President
investors and private medical care users and  Committee. Per capita income in March was  Saparmyrat Niyazov's refusal to discuss
introduce a 5 percent tax on capital gains  1,876 rubles (about $66), up 8.6 percent  political reform with an EBRD delegation.
for individual investors, beginning in 2003.  from February 2000 and 39.8 percent from   Although grounded in the Bank's mandate,
March 1999. The top 10 percent of the popu-  the formal ban is unprecedented in the post-
Cis                                  lation earned 33.7 percent of the country's  Soviet period; even Belarus remains nomi-
cash income in the first quarter, while the  nally eligible for EBRD loans. Niyazov was
Russian Federation                   bottom 10 percent received just 2.4 percent.  made President for life in December, and
the EBRD sees little prospect of political
Russian economic program almost  Russians fear rising unemployment  oreconomic liberalization.
ready. The Russian govemment's economic  most, according to a recent survey by the
program will be ready by the end of May, ac-  Russian National Public Opinion Research  China
cording to Acting Prime Minister Mikhail  Center(VCIOM). The survey polled 1,580
Kasyanov. The Russian cabinet will discuss  people over the age of 18. The percent-  China's dynamic private sector con-
thedocument, makeadjustments, and imple-  age of people who fear increases in un-  tributes almost as much to GDP as
ment the program in June.            employment rose from 30 percent in 1996  state enterprises. Private businesses
to 35 percent in 2000. Other problems that  generated 33 per cent of China's GDP in
Kasyanov's appointment as prime minister  worry Russians include price rises and  1998, while the state sector contributed 37
wasseenasconfirmationthatthegovemment  impoverishment of the population (30 per-  percent, according to a new report by the
would continue economic liberalization.  cent in 1996, 33 percent in 2000); disinte-  International Finance Corporation (IFC),
Kasyanov,whoservedasfinanceministerand  gration of the economy and the country's  the private sector arm of the World Bank.
adeputypremier, hascalledforgreaterfree-  bankruptcy (30 percent in 1996, 32 per-  The balance came from agricultural com-
dom for business and the overhaul of the  cent in 2000); and the increase in crime (26  panies and businesses.
tangled tax system. Kasyanov's appointment  percent in 1996, 29 percent in 2000). The
must still be approved by Parliament, but he  number of people who consider the plun-  We appreciate the contributions from Ra-
is not expected to face major opposition.   dering of national wealth by foreign states  dio Free Europe/Radio Liberty.
9 TRANSITION, April 2000         The World Bankf/he William Davidson Institute/Stockholm Institute for Transition Economies C) 2000



World Bank/IMF Agenda
Continued from page 32
* Improve health by reducing exposure to  policymakers from across Central Asia,  World Bank Pledges Assistance for
environmental factors, such as urban air  Eastern Europe, and the Russian Federa-  Bosnia-Herzegovina and Kosovo
pollution, waterborne diseases, and toxic  tion met in Finland in early April to exam-
substances.                          ine the World Bank's forest policy and  The World Bank plans to allocate up to
* Enhance the livelihoods of poor people  develop ideas for its future strategy in the  $300 million for war-torn Bosnia and
who depend on land, water, forests, and  region. The strategy is important because  Herzegovina through mid-2002. More than
biodiversity by helping to manage natural  28 percent of the world's forests are lo-  half of the funds will be used for the reform
resources sustainably.               cated in the region.                 of public finances and social services and
* Reduce people's vulnerability to natural                               for development of the private sector.
disasters, severe weather fluctuations, and  Far-reaching economic and political re-
the impacts of climate change.      forms in the region have profoundly  The Bank and the United Nations Interim
For more information, visit the Web site:  changed the incentives for maintaining the  Administration in Kosovo (UNMIK) signed
http://www.worldbankorg/environment    region's forest cover and biodiversity. A  a$5 million EconomicAssistance Grantfor
recent report by the Bank's Operations  Kosovo March 20. The grant will be used to
Free Education for Every Child: A New   Evaluation Department found that the  pay salaries, help the Central FiscalAgency
Education Initiative                 Bank's forest strategy, formulated in 1991,  set up a budget management system, and
has a mixed record and needs to be  help the Banking and Payments Authority
At the end of April the World Bank an-  adapted to the changing dynamics of the  improve its bank licensing and supervision
nounced a fast track plan to jumpstart gov-  forest sector and the aspirations of devel-  capability. Through the creation of a Special
ernments into providing all children with  oping countries.               Trust Fund for Kosovo, financed from World
free basic education by 2015. World Bank                                  Bank net income, the Bank intends to sup-
President James D. Wolfensohn told an  Funding Target Exceeded for "Quick-  port an agriculture restart operation-a
international conference on education that  Start" Package                credit line to help dynamic small and me-
if a country has a viable and sustainable                                 dium-size private enterprises-and support
plan, it should be able to achieve the "ed u-  As a result of the regional funding confer-  activities in the energy, water and waste, and
cation for all" target even if it lacks re-  ence for Southeast Europe held in late  social sectors. Total Bank assistance to
sources. Donors must be ready to respond  March, 47 countries and 36 international  Kosovo is expected to amount to $50-$60
quickly and help countries that are ready  organizations surpassed their goal of fully  million over the next 18 months.
to move to meet these goals, Wolfensohn  financing the comprehensive "Quick-Start"  For more information, visit the World
said at the World Education Forum, held  package for Southeast Europe. The pack-  Bank-European Commission Web site,
in Dakar, Senegal.                   age will finance regional projects and ini-  http.//wwwseerecon.org.
tiatives in Southeast Europe over the next
The Bank has doubled its lending for edu-  12 months. More than 2.4 billion euros was  IMF Sees World Bank Playing Greater
cationfrom $920 million to $1.9 billion. Only  pledged or committed for promoting pri-  Role in the Russian Federation
3 percent of the $120-$130 billion spent  vate sector development, supporting
worldwide on education comes from over-  policy and institutional reforms, and en-  The IMF is likely to take a back seat to
seas development assistance. Half of that  couraging democratization, reconciliation,  the World Bank in future dealings with
aid comes from the World Bank. Almost 75  and security. Conference participants  the Russian Federation, according to IMF
percent of education funding comes from   pledged support for specific regional  Deputy Managing Director Stanley
governments, with most of the remainder  projects, including the Albania Water  Fischer. Much of what needs to be done
contributed by the private sector and com-  Project, the Montenegro Transport Re-  is World Bank-related, he notes, add-
munities.                            habilitation Project, the Bosnia and  ing that the European Bank for Recon-
Herzegovina Power Interconnection  struction and Development (EBRD)
World Bank Designs New Forest  Project, the Blace Border Crossing  could also play a more prominent role.
Strategy                             (Kosovo/FYR Macedonia), the Bosnia and
Herzegovina Demobilization Project, and  IMF payments to Moscow under a $4.5
Forestry experts, environmental activists,  the Feasibility Study for the Development  billion facility were halted after only one
industry representatives, and government  of a Regional TV Network.       installment last year, and those funds had
© 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April2000  *



been earmarked solely for repayment of  dard IDA terms and will be repayable in 40  are taken," IMF Mission Chief Emmanuel
Russian debts to the IMF. Few expect the  years, with a 10-year grace period. Alba-  Zervoudakis said. The Romanian Parlia-
Fund to go beyond such arrangements  nia joined the World Bank in 1991. Since  mentapproved astrictnewbudgetfor2000
until it is confident its funds will not leave  1992 the Bank has committed $522.9 mil-  that envisages a consolidated budget defi-
the country. As the Fund suggests, the  lion to the country for 38 projects.  cit of 3 per cent of GDP.
Russian government needs to restore the
rule of law, particularly in the bankruptcy  ... .Latvia Continue Reforms...  So far Romania has received just $73 mil-
field, and make corporate management                                       lion from the IMF. It expects to receive
more accountable to their shareholders.   A $40.41 million Programmatic Structural  about $300 million from the World Bank
Adjustment Loan (PSAL) to support Latvia's  and some 200 million euros ($182 million)
World Bank Helps Develop Mongolia's  reform program was approved in mid-  from the EU this year.
Financial Sector ...                 March. The loan will help correct macroeco-
nomic mbalances, strengthen the credibility  Loans for North Korea?
A $32 million International Development  of the public sector, improve institutional ca-
Association (IDA) credit, approvedApril 20,  pacity to deliver services, and rationalize a  North Korea could receive aid from the
will help Mongolia reform and develop its  transparent relationshipwith the private sec-  Fund once it becomes an IMF member,
financial sector. The Mongolia Financial  tor. The loan will be a fixed-spread loan de-  according to David T. Coe, Senior Resi-
Sector Adjustment Credit will help estab-  nominated in U.S. dollars, with a maturity of  dent Representative of the IMF in South
lish basic financial infrastructure (banking  17 years and a 5-year grace period. Since  Korea. If such loans were made, the
skills, accounting standards, enforcement  Latvia joined the World Bank in 1992, Bank  IMF-together with other international
of financial contracts); consolidate the  commitments to the country have totaled  organizations, such as the World Bank-
country's banking system; develop effective  $355 million for 17 operations.  would offer to train officials there, he
regulation and supervision; and improve the                                noted. Last month Kim Dae-jung, Presi-
payment system in rural areas.       ... and Estonia Improve Traffic Flow    dent of South Korea, said he hoped
North Korea would be able to receive fi-
... China Construct Key Interprovincial  A $25 million loan for a transport project in  nancial assistance from international or-
Highway...                           Estonia was approved in mid-March. The  ganizations, including the World Bank.
loan will help reduce traffic along the Tallinn-
A $200 million loan to China for construc-  Tartu-Luhamaa road and address road  NGOs Form Regional Working Group
tion of a 238-kilometer interprovincial  safety problems by providing assistance for
highway was approved March 28. The  seminars, training programs, education,  Representatives of 67 NGOs met in
new road-which will connect Nanning,  public campaigns, and technical assis-  Vilnius, Lithuania, in early May, for the
the provincial capital of Guangxi, to  tance forthe development of systems and  first assembly of the Europe and Cen-
Shuiren, in the north-will be a key sec-  technology. The loan has a maturity of 15  tral Asia Region NGO Working Group of
tion of China's national trunk highway sys-  years, with a 5-year grace period, at the  the World Bank. NGO delegates elected
tem. Guangxi province has three coastal  standard interest rate for fixed-spread  nine of their peers to represent them for
sea ports in its southern tip, providing the  loans. Since Estonia joined the Bank in  two-year terms. The group will "seek to
shortest route to the sea for landlocked  1992, commitmentstothecountryhaveto-  catalyze NGO efforts to influence and
provinces, including Guizho, Yunnan,  taled$138millionforeightprojects.    monitor World Bank operations in the
Sichuan, and Chongqing. In addition to                                     Europe and Central Asia region and fa-
the Bank loan, the $566.8 million project  Romania, IMF Agree on Preliminary  cilitate communication between inter-
will be financed with $106.7 million from   Standby Loan                   ested parties," according to the mission
the central government and $256.7 from                                     statement adopted by the assembly. Dis-
the Guangxi provincial government.   The Romanian government has commit-  cussion centered on Bank-NGO rela-
ted itself to stringent austerity measures  tions; the Bank's operational role in the
... Albania Build Institutions..,    and strict monitoring of spending in a pre-  region; environmental and social im-
liminary agreementwith the IMF forexten-  pacts of Bank operations, particularly
Two credits to Albania-a $9 million loan  sion of a $540 million standby loan. The  structural adjustment operations; the
for a legal and judicial reform project and  loanwill supporteconomicstabilization and  Bank's policy for disclosure of informa-
an $8.5 million loan for a public administra-  reform. "The Board is expected to consider  tion; and the role of NGOs in the devel-
tion reform project-were approved March  the Romanian program by the end of May,  opment of country assistance and poverty
21. Both credits will be disbursed on stan-  provided that some remaining policy actions  reduction strategies.
*  TRANSITION, April 2000        The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies C) 2000



New Books and Working Papers
The Macroeconomics and Growth Group regrets that it is unable to provide the publications listed.
Continued from page 30
Farm structures in Central and Eastern Eu-  Although the official rhetoric in most tran-  report a team of experts from the govern-
rope today indude small subsistence-oriented  sition economies has supported foreign  ment, the World Bank, and the International
household plots, medium-size commercial  direct investment (FDI), few countries have  Center for Policy Studies (ICPS) in Kyiv
family farms, and large corporations. Con-  succeeded in attracting sizable inflows. examine the issues surrounding the crisis
trary to the earlier expectations of West-  Hungarystands outamong those countries  and formulate recommendations forstrat-
ern experts, the agricultural sector in the  that have done so effectively. Several fac-  egies.
region has not embraced the family farm  tors helped Hungary get ahead of other
as the dominantfarming structure. This vol-  transition economies in attracting FDI. This  Working Papers
ume contains papers presented at a work-  volume analyzes Hungary's achievement,
shop held in Warsaw, Poland, in June  identifying the scope and depth of FDI and  Mitchell A. Orenstein, How Politics and
1999. It is organized around three topics:  assessing the effect of FDI on Hungary's  Institutions Affect Pension Reform in
evolving farm structures and competitive-  economy and foreign trade.    Three Postcommunist Countries,
ness in agriculture, land laws and legal in-                             WPS 2310, March 2000, 75 pp.
stitutions for development of land markets  Discussion Papers
and farm restructuring, and development                                  Hungary, Kazakhstan, and Poland imple-
of farm services for improved competitive-  John R. Hansen and Diana Cook, Eco-  mented mandatory funded pension sys-
ness.                               nomic Growth with Equity: Which  tems as part of reform. The extent and
Strategy for Ukraine? DP 408, 2000, 67  configuration of changes differed greatly
Ayse Kudat, Stan Peabody, and Caglar  PP                                 in the three countries. Countries with more
Keyder, (eds.), Social Assessment                                        "veto actors"-social and institutional ac-
and Agricultural Reform in Central  Whatstrategy should Ukraine follow? This  tors with an effective veto over reform-
Asia and Turkey TP 461, March 2000,  report identifies and evaluates alternative  engaged in less radical reform, as theory
328 pp.                             strategies in terms of their probable im-  predicts. Poland and Hungary generated
pact on fiscal balances, inflation, the cur-  less radical change than Kazakhstan,
John A. Gray, Kazakhstan: A Review of  rent account deficit, economic growth,  partly because they have more represen-
Farm Restructuring, TP 458, March  employment, and equity.              tative political systems, to which more as-
2000, 71 pp.                                                             sociations, interest groups, and "proposal
Country Studies                     actors" (who shape the reform agenda and
Agriculture in Kazakhstan is in crisis: the                              influence the positions of key veto actors)
majority of farms are insolvent, and pro-  Ukraine: Restoring Growth with Eq-  have access.
duction has fallen to the lowest level in 30  uity: A Participatory Country Eco-  To order: Marianne Leenaerts, Room J2-
years. Initial restructuring efforts yielded  nomic Memorandum, World Bank  002, tel.: 202-458-4264, fax: 202-676-
disappointing results and mostly failed to  Country Studies, 2000, 233 pp.  0961, e-mail: mleenaerts@worldbank.
lead to new patterns of ownership or                                     org. The author may be contacted at
management. Since 1998 the govern-  Since independence Ukraine has suffered  maorenst@syr. edu.
ment has pursued a more aggressive  oneofthemostsevereeconomicdeclines
approach to farm restructuring based on  of any country in this century. While other  Michael Lokshin, Kathleen Mullan Harris,
increased reliance on farm bankruptcy.  transition economies in the region suc-  and Barry Popkin, Single Mothers in
Thisreportreviewstheexperienceofthe  cessfully replaced their old command  Russia: Household Strategies for
farm restructuring policies and programs  economies with market economies,  Coping with Poverty, WPS 2300, March
pursued in 1998 and 1999.           Ukraine continued to protect unprofitable  2000, 27 pp.
enterprises to preserve employment and
Bartlomiej Kaminski and Michelle Riboud,  income levels. To support this strategy, the  In the Soviet Union single mothers and their
Foreign Investment and Restructur-  government has borrowed more money  children received government income sup-
ing: The Evidence from Hungary, TP  than it takes in, competing with private  port, subsidized child care, and full em-
453, 2000, 48 pp.                   enterprise domestically for credit. In this  ployment guarantees. Economic reform in
(3 2000 The -World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000  *



the Russian Federation has reduced gov-  bank.org. The authors maybe contacted  Oleh Havrylyshyn and Ron van Rooden,
ernment transfers, eliminated publicly sub-  at Nina Budina/Washington/lmf@lmf or  Institutions Matter in Transition, But
sidized preschool care programs, and  svwheas@wxs.nl.                     So Do Policies, WP/00/70, March 2000.
limited job opportunities for women.
Single-parent families now represent  Dominique van de Walle and Dileni  Christoph B. Rosenbert and Maarten de
nearlyaquarter of all Russian households.  Gunewardena, Sources of Ethnic In-  Zeeuw, Welfare Effects of Uzbekistan's
Half of all single mothers in Russia live with  equality in Vietnam, WPS 2297, March  Foreign Exchange Regime, WP/00/61,
their parents, their adult siblings, or other  2000, 31 pp.               March 2000.
adult relatives. The other half live in inde-
pendent residences and face increased  Vietnam's ethnic minorities, who live  Mark De Broeck and Vincent R. Koen,
risk of poverty.                     mostly in remote rural areas, typically have  The Great Contractions in Russia, the
To order: Patricia Sader, Room MC3-556,  lower living standards than the ethnic ma-  Baltics, and the Other Countries of the
te/.: 202-473-3902, fax: 202-522-1153,  jority. What are the most important factors  Former Soviet Union: A View from the
email psader@worldbank.org. The au-  affecting this trend-economic character-  Supply Side, WP/00/32, March 2000.
thors may be contacted at mlokshin  istics, such as education or quality of land,
@worldbank.org, popkin@unc.edu, or  or the low returns to these characteristics?  Stanley Fischer and Ratna Sahay, The
harris@unc. edu.                     Is there a self-reinforcing culture of poverty  Transition Economies after Ten Years,
in minority groups, reflecting patterns of  WP/00/wo, February 2000.
Cevdet Denizer, Holger C. Wolf, and  past discrimination? Minorities live in less
Yvonne Ying, Household Savings in  productive areas, with poor infrastructure;  Centre for the Study of Public Policy
Transition Economies, WPS 2299,  they have less access to off-farm work and  (CSPP)
March 2000, 14 pp.                  the market economy; and they have less
To order: Ala Cubukcu, Room H4-347,  access to education.                 To order: CSPP, University of Strathclyde,
tel.: 202-473-8449, fax: 202-522-2754,                                    Livingstone Tower, 26 Richmond Street,
e-mail acubukcu@worldbank.org.  Butthe authors find differences in returns  Glasgow GI IXH, Scotland, tel.: 44-14 1-
Cevdet Denizer may be contacted at to productive characteristics to be the  548-3217, fax: 44-141-552-4711.
cdenizer@worldbank.org.              most important explanation for ethnic in-
equality. Policies must be designed to  Marc Morj6 Howard, Free Not to Partici-
Nina Budina and Sweder van Wijnbergen,  reach minority households in poor areas  pate: The Weakness of Civil Society in
Fiscal Deficits, Monetary Reform, and  and to explicitly recognize behavior pat-  Post-Communist Europe, SPP 325, 2000.
Inflation Stabilization in Romania, WPS  terns (including compensating behavior)
2298, March 2000, 33 pp.             that have served minorities well in the short  This study seeks to explain why civil soci-
term but intensify ethnic inequalities in the  ety is extremely weak in postcommunist
Unsustainable fiscal deficits have been the  longer term. It will be important to open up  Europe. Analysis of the 1997 World Values
chief reason for the inflation that has per-  options for minority groups by ensuring  Survey shows that organizational member-
sisted in Eastem Europe since 1989. Defi-  that they are not disadvantaged (in labor  ship is much lower in postcommunist coun-
cits need to be cut back, but by how much  markets, for example) and by changing the  tries than in either the older democracies
for a given inflation target? The authors  conditions that have caused their isolation  of the West or the postauthoritarian coun-
develop a simple framework for debt, the  and social exclusion.          tries of Southern Europe, Latin America,
deficit, and inflation to study the interac-  To order: Hedy Sladovich, Room MC2-  Asia, and Africa. The analysis demon-
tions between fiscal and monetary policy  609, tel.: 202-473-7698, fax: 202-522-  strates that, controlling for other country-
in Romania, which has a history of unsuc-  1154, email: hsladovich@worldbank.org.  level factors (economic, political, and
cessful stabilization attempts. This frame-  Dominique van de Walle may be con-  "societal"), a country's prior communist ex-
work can be used to determine the  tacted atdvandewalle@worldbank.org.   perience has a strong negative effect on
required deficit reduction for a given rate                               contemporary organizational member-
of output growth, inflation rate, and target  IMF Working Papers          ship, including mistrust of organizations
for debt-output ratios and to find the infla-                             and disappointment with the new demo-
tion rate for which no fiscal adjustment is  To order: IMF Publication Services, 700  cratic and capitalist systems.
needed.                              19th Street, NW, Washington, DC 20431,
To order: Anna Regina Rillo Bonfield,  United States, tel.: 202-623-7430, fax: 202-  Richard Rose, Modern, Pre-Modern and
Room MC3-354, tel.: 202-473-1248, fax:  623-7201, email: publications@imf.org,  Anti-Modern Social Capital in Russia,
202-522-3518, email: abonfield@world  Intemet http://www.imf.org.         SPP 324, 1999.
m   TRANSITION, April 2000      The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies © 2000



In Soviet times social capital networks  Preparing for Bulgaria's EU Accession  Oblast during 1992-96, shows that on av-
were widespread, buttheywere inconsis-  Negotiations, September 1999, 42 pp.   erage privatization produces perfor-
tent with a modern society. A specially de-                              mance improvements only in operating
signed 1998 New Russia Barometer  The Role of Political Parties in Acces-  profit margins and, to some extent, the
survey shows that some social capital net-  sion to the EU, October 1999, 40 pp.    productivity of labor. Results suggest that
works do still help Russians obtain food                                 both full privatization and majority state
and provide income security, but conven-  Social PolicyAspects of Bulgaria's EU  ownership is preferable to a state minor-
tional human capital measures, such as  Accession, June 1999, 44 pp.     ity stakeholding. If the state has minority
education and socioeconomic status, are                                  stakes, there is no effective monitoring of
also significant. Russians should use so-  Interstate Statistical Committee of the  managers' activity, and the enterprise's
cial capital networks consistent with a  CIS Publications                performance deteriorates.
modern society to cope with problems of
transition to a modern society.      To order: Interstate Statistical Committee  Center for Social and Economic Re-
of the Commonwealth of Independent  search (CASE) Publications
Greenwood Publishing Group, Inc.  States, 39, Myasnitskaya Str., Moscow,
Publications                         103450, Russian Federation, tel.: 7095-  To order: ul. Sienkiewicza 12, 00-944
207-42-37 or 7095-207-48-02, fax: 7095-  Warsaw, Poland, tel.: 4822-622- 6627 or
To order: Greenwood Publishing Group,  207-45-92, email: cisstat@online.ru.  828-6133, fax: 4822-828-6069, email:
Inc., 88 Post Road West, Box 5007,                                       case@case.com.pl, Internet: http://
Westport, CT 06881, United States, tel.:  Economy of the CIS States in 1999,(in  wwwcase.com.pl.
203-226-3571, fax: 203-222-1502,  Russian), January2000, 96 pp. CD-ROM,
Intemet: http://www. greenwood.com.  1999-4 (in Russian and English).    Miroslav Gronicki and Katarzyna Pietka,
Macroeconomic Model for Ukraine,
Donald M. Hancock and John Logue,  This updated version of a previously re-  190, 1999, 51 pp.
Transition to Capitalism and Democ-  leased CD-ROM of statistics for the CIS
racy in Russia and Central Europe:  states includes data through 1998 for most  Wojciech Maliszewski, VAR-ing Monetary
Achievements, Problems, Prospects,  data series. More than 3,500 indicators  Policy in Poland, 188,1999, 23 pp.
Praeger Publishers, April 2000, 352 pp.  are indicated, starting with 1980. The data
Internet: http:Hinfo.greenwood.com/cgi-bin/  can be exported to a variety of formats,  Barbara Liberda, Household Saving in
eupdget.pl?S=RV&I=0275962148.       including Excel.                     Poland, 187, 1999,43 pp.
Demetrius S. latridis, Social Justice and  Russian Statistical Yearbook 1999:  Malgorzata Jakubiak and others, Public
the Welfare State in Central and Eastern  Statistical Handbook, 1999 (in Russian;  and Foreign Savings, 186,1999, 77 pp.
Europe: The Impact of Privatization,  table of contents in English), 621 pp.
Praeger Publishers, April 2000, 272 pp.                                  Stanislav Gomulka, Comparative Notes
Intemet: http:/Minfo.greenwood.com/cgi-bin/  Economics Education and Research  on Pension Developments and Re-
eupdget.pl?S=RV&I=0275967913.       Consortium (EERC) Publications       forms in the Czech Republic, Hungary,
Poland, and Romania, 182, 1999.
Centre for the Study of Democracy  Free subscription to EERC Working Pa-
Publications                        per Series. To order: Uliana Sharina, 3  Pavel Stepanek and Ondrej Schneider,
Kochnovsky Proezd, Suite 418, 125319,  Present and Future Fiscal Policy Prob-
To order: Centre for the Study of Democ-  Moscow, Russian Federation, tel./fax:  lems in the Czech Republic, 180,1999,
racy, I Lazar Stanev St.,1113 Sofia, Bul-  7095-152-0601/0121, email: wwweerc.ru.  30 pp.
garia, fax: 3592- 971- 2233, e-mail:
csd@online.bg, Intemet: http./Avww csd.bg.  Yuri Perevalov, llya Gimadi, and Vladimir  Katarzyna Zawalinska, Agriculture of the
Dobrodey, The Impact of Privatization  Czech Republic, Hungary, and Poland
Bulgaria's Capital Markets in the Con-  on the Performance of Medium and  in Perspective of Joining Common
text of EU Accession: A Status Report,  Large Industrial Enterprises, 2K/01E,  Agricultural Policy-with Some Fiscal
November 1999, 42 pp.               2000, 84 pp.                         Remarks, 178, 84 pp.
Bulgaria's Participation in EU Struc-  This study, based on panel data from 198  Preaccession agricultural policies in the
tural Funds, May 1999, 79 pp.       industrial enterprises in the Sverdlovsk  Czech Republic, Hungary, and Poland
C) 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000  F



should focus on investing in rural develop-  Daniel Kaufmann and Dalia Marin, Bar-  and Asia is certainly the most momentous
ment and reducing employment, creating  ter in Transition Economies: Compet-  event of the last two decades of this mil-
new jobs opportunities (especially in Po-  ing Explanations Confront Ukrainian  lennium. Its onset has been unpredictable,
land), restructuring the collective farms,  Data, 2432, April 2000.        and most of its outcomes contrast sharply
speeding up the privatization of state farms                               with the initial expectations. While gener-
(especially in Hungary and the Czech Re-  Jennifer Hunt, Why Do People Still Live in  ating an extensive-and still rapidly grow-
public), and changing patterns of settle-  East Germany? 2431, April 2000, 53 pp.  ing-literature on it, many aspects of the
ment inherited from the socialist period.                                  transition process-such as the huge
Further investment targets include build-  Kaspar Richter, Government Cash  cross-country differences in economic and
ing up technical and social infrastructure,  Transfers, Household Consumption,  social performance-remain broadly un-
providing better access to education, cre-  and Poverty Alleviation: The Case of  explained. Until recently, debates over tran-
ating well-functioning land markets, im-  Russia, 2422, April 2000.        sition have been more focused on rapid
proving access to financial markets, and                                   macroeconomic stabilization, liberaliza-
developing agroindustry. Accession coun-  At least 30 percent of the rise in poverty in  tion, and privatization and less on the role
tries can count on preaccession agricul-  Russia between 1994 and 1998 was due  of initial institutional conditions, the politi-
tural aid from the EU.               to the changes in cash transfer policy. Had  cal economy of transition, and the role of
benefits been maintained at the 1994 level,  external advice in this process.
Miroslaw Gronicki and others, Polish  poverty would have been about 20 percent
Economic Outlook: Trends, Analyses,  lower in 1998.                       In this highly original single-authored study
Forecasts, 2/2000, May 2000.                                               on the economics of postsocialism,
Gianmarco Ottaviano and Stefano  Grzegorz W. Kolodko attempts to fill this
GDP growth can reach 5.4 percent in 2000  Manzocchi, Outsiders in Economic  gap. He recognizes the need for sound
in Poland, but given the anticipated net  Integration: The Case of a Transition  economic fundamentals but, at the same
increase in the labor market (of about  Economy, 2385, February 2000.      time, emphasizes the long-term multifac-
160,000) and the continued process of                                      eted nature of the transition process, the
restructuring of some branches of indus-  Jurgen von Hagen and Rolf Strauch, East  influence of historical factors on the out-
try, the unemployment rate may reach 13.4  Germany: Transition With Unification-  comes of the reform process, and the cru-
percent by the end of 2000, higher than it  Experiments and Experiences, 2386,  cial need for developing gradually but
was at the end of 1999. Reducing the cur-  February 2000.                  steadily those institutional arrangements
rent account deficit should be a top prior-                                that are the best guarantees of successful
ity for Polish economic policy, since any  The Kohl government's policy toward East  transition.
further rise in the deficit could cause a cur-  German transition focused almost entirely
rency crisis and a substantial drop in for-  on financing a high standard of consump-  While all readers may not agree with his
eign direct investment in the case of a  tion, with too little emphasis on fostering  interpretation of the transition or his
portfolio capital outflow. Monetary policy is  investment and economic restructuring.  policy approach, they will no doubt ben-
excessively restrictive given continued port-  There is considerable risk that East Ger-  efit from this well-researched and pro-
folio capital inflows and tightening of bud-  many will remain a transfer-dependent  vocative analysis that challenges many
getary policy. By maintaining high interest  economy for the foreseeable future.  of the simplicities of the "Washington
rates (much higher than those in EU coun-                                  consensus." Kolodko places his analy-
tries) and eliminating a crawling peg, fur-  Other Publications            sis of the transition in a broader social
ther inflows of portfolio capital may be                                   and political-economic context and
spurred, leading to the strengthening of the  Grzegorz W. Kolodko, From Shock to  strongly emphasizes the need for a
zloty.                               Therapy: The Political Economy of  gradual build up of institutions. This book
Postsocialist Transformation, Oxford  has been written by a scholar who played
Centre for Economic Policy Research   University Press, April 2000.        a key role in the formulation of the suc-
(CEPR) Discussion Papers                                                   cessful policies adopted in Poland over
From the acknowledgment by former Di-  1994-97.
To order: Centre for Economic Policy Re-  rector of UNU/WIDER Giovanni Andrea
search, 90-98 Goswell Road, London  Cornia:                                Rose Brady, Kapitalizm: Russia's
EC IV 7RR, United Kingdom, tel.: 441 71-                                   Struggle to Free Its Economy, Paper-
878-2900, fax: 44171-878-2999, email:  The transition to the market economy of  back, Yale University Press, April 2000,
cepr@cepr.org.                       the former socialist countries of Europe  336 pp.
TR IRANSITION, April 2000        The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies () 2000



Bibliography of Selected Articles
Postsocialist Economies             Economy: Hungary 1988-98. Interna-  Oldfield, J. D. Structural Economic
tional Tax and Public Finance (Nether-  Change and the Natural Environ-
Castanheira, M. The Optimal Speed of  lands) 7: 209-40, March 2000.     ment in the Russian Federation.
Transition: A General Equilibrium Analy-                                Post-Communist Economies (United
sis. IntemationalEconomicReview(United  Rapid Economic Recovery Earns Po-  Kingdom) 12(1): 77-90, March 2000.
Kingdom) 41(1): 219-40, February 2000.  land Recognition as East European
"Tiger." IMF Survey/lnternational Mon-  Ravallion, M., and Lokshin, M. Who Wants
Kolodko, G. W. Transition to a Market  etary Fund (International) 29(6):90-92,  to Redistribute? The Tunnel Effect in
and Entrepreneurship: The Systemic  March 2000. Electronic access: (Full text):  1990s Russia. Joumal of Public Econom-
Factors and Policy Options. Commu-  http.//Awwwimtforg/external/pubs/tsurvey/  ics (Netherlands) 76: 87-104, April 2000.
nist and Post-Communist Studies (United  surveyx.htm
Kingdom) 33: 1-23, 2000.                                                Asia
Walkenhorst, P. Foreign Direct Invest-
Mattoo, A. Financial Services and the  ment, Technological Spillovers and  Barfield, C.E. China,WTOand [the?] Rule
WTO: Liberalization Commitments of  the Agricultural Transition in Central  of Law. Far Eastern Economic Review
the Developing and Transition Econo-  Europe. Post-Communist Economies  (Hong Kong) 163(15): 29, April 13,2000.
mies. World Economy (United Kingdom)  (United Kingdom) 12(1): 61-76, March
23(3): 351-86, March 2000.          2000.                               Freeman, N. Revving Up for a Revolu-
tion. (Vietnam). Banker(United Kingdom)
Piazolo, D. Growth Effects of Institu-  CIS                             150(887): 61-3, January2000.
tional Change and European Integra-
tion. Economic Systems (Germany)  Anderson, J. Creating a Framework for  Hill, H. Export Success against the
23(4): 305-30,1999.                 Civil Society in Kyrgyzstan. Europe-  Odds: A Vietnamese Case Study.
Asia Studies (United Kingdom) 52(1): 77-  World Development (United Kingdom)
Central and Eastern Europe          94, January 2000.                   28(2): 283-300, February 2000.
Gregory, I. Romanian Holiday. Central Clarke, S., and V. Kabalina. The New  Irvin, G., andA. Izurieta. Will the Growing
European (United Kingdom) 10(2): 23-27,  Private Sector in the Russian Labour  Trade Gap Sink Viet Nam? Some Ex-
March 2000.                         Market. Europe-Asia Studies (United  ploratory Econometrics. Journal of In-
Kingdom) 52(1): 7-32, January 2000.  temationalDevelopment(United Kingdom)
Herzog, H.W., Jr. Employment Uncertainty                                12(2): 169-86, March 2000.
and the Incidence of Job Loss in Transi-  Dyker, D.A. The Structural Origins of
tion Economies: The Case for Central  the Russian Economic Crisis. Post-  Minot, N. Generating Disaggregated
Europe. Southern Economic Journal  Communist Economies (United King-  Poverty Maps: An Application to Viet-
(United States)66(3): 567-89, January2000.  dom) 12(1): 5-24, March 2000.  nam. World Development (United King-
dom) 28(2): 319-31, February 2000.
Hyam, T. Poland Leads Growth of East  Legvold, R. Getting It Wrong: Regional
European Repo. Central European  Cooperation and the Commonwealth  Pal, S. Economic Reform and House-
(United Kingdom) 10(2): 38-41, March  of Independent States. Foreign Affairs  hold Welfare in Rural China: Evidence
2000.                               (United States) 79(2): 170, March-April  from Household Survey Data. Joumal
2000.                               of International Development (United
Lawson, C., and D. Saltmarshe. Security                                 Kingdom) 12(2): 187-206, March 2000.
and Economic Transition: Evidence  Medvedev, R. A Long-Term Construc-
from North Albania. Europe-Asia Stud-  tion Project for Russia: A Strong Re-  Wu, Y. Measuring the Performance of
ies (United Kingdom) 52(1): 133-48,  gime Is Necessary in Combination  Foreign Direct Investment: A Case
January 2000.                       with Democracy. Russian Social Sci-  Study of China. Economic Letters (Neth-
ence Review: A Journal of Translations  erlands) 66(2): 143-50, February 2000.
Newbery, D. M. The Evolution of Tax  (United States) 41(1): 50-93, January-  Fulltextofsomearticlesavailable: http://
Structure of a Reforming Transitional  February 2000.                   www.elsevier.nl/locate/econbase/
(D 2000 The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies  TRANSITION, April 2000



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