http://www.worldbank.org/htmIIprddr/trans/WEB/trans.htm 1 8 8 .5 THE NEWSLETTER ABOUT REFORMING ECONOMIES TRANSITION Volume 9, Number 4 August 1998 Underneath the Formal Economy Why Are Russian Enterprises Not Restructuring? by Clifford Gaddy and Barry W. Ickes What, if any, special rules prevail in Russia's economy? Why did a series of reform attempts fail to generate the desired effects? One plausible explanation is provided by the following article, which digs below the formal eco- nomic surface to analyze the seemingly strange behavior pattem of privatized Russian enterprises-participants in a "virtual economy." A though Russia formally has cent of its 1990 level. Although some privatized most of its industrial decline in the investment-GDP ratio was W hat's Inside sector, the pace of economic re- a necessary response to the excessive structuring is still grossly inadequate to rates of the Soviet period, this seems to Russia's Virtual Economy 6 ensure stable economic growth. Various be an overcorrection. This is evident in Ruble Collapse 7 pieces of evidence reinforce this picture: the aging of the capital stock. In 1980 the average age of plants and equipment Russia Needs Customs Reform 9 * Last year, Russia's industrial enter- in Russia was 9.5 years; in 1995 it was Interview with World Bank prises produced more output and em- 14.1 years. Director Basil Kavalsky 10 ployed more workers than in 1996. At the 0 Aggregate real profits in industry were same time, they were losing money at a down by 5 percent in 1997. The share of Snapshots from Four Economies 11 faster pace than ever before. manufacturing enterprises that show no World Bank/IMF Agenda 15 * Russian enterprises still employ far profit at all is approaching 50 percent, more workers than warranted by their up from less than 27 percent in 1995. Pension Reform Roundup 16 level of output. While officially measured 0 Enterprises continue to trade with one Interview with Leading Chinese GDP has fallen by more than 40 percent another without the use of money-ei- Economist 20 during the 1990s, employment has fallen ther by not paying each other at all or by Assessing Transition Risks 24 only about 25 percent. Large and me- using nonmonetary means, such as bar- dium-size industrial enterprises hired 6.6 ter or promissory notes, called vecksels. Letters to the Editor 25 million new workers in the first nine (These are notes, issued by commer- months of 1997. As a percentage of pay- cial banks, governments, and enter- ConferenceDiary 28 roll this was a higher rate than for the prises, that serve as an alternative Milestones of Transition 30 same period in 1996. medium of exchange.) Estimates of the New Books and Working Papers 34 * Investment continued to decline last share of sales made in the form of barter Bibiliography of Selected Articles 39 year, bringing the volume of capital in- or other nonmonetary forms run as high Announcement to Our Readers' 40 vestment for 1997 to less than 24 per- as 70 percent. Announcement_to_Our_Readers!_4 Macroeconomics and Growth Development Research Group The World Bank Why do enterprises hoard labor? An im- What explains the failure of Russian kind-occur outside the formal monetary portant explanation is paternalism. In a enterprises to restructure? One popular system and consequently are much less survey conducted by the Russian Eco- argument is that Russian management observable, contrary to "hard goods" that nomic Barometer, 60 percent of enter- is inadequate. We support an alterna- are produced and sold through monetary prises reported surplus labor in 1995-96. tive explanation: managers are rational transactions, (for cash) in the formal Fully 71 percent of those enterprises and the environment induces them to economy. explained that they kept unneeded work- postpone or avoid restructuring. ers out of a sense of social responsibil- A 1997 survey of 350 Russian enterprises ity. Expectation of growth in demand and Life below the Surface found that an average 42 percent of their high redundancy costs were cited as total sales was carried out in barter. (Ac- secondary reasons. And what about the Studying the Russian economy today is cording to a recent government study, profit motive?Privatizationwassupposed similar to examining an iceberg. What 210 of the largest corporate tax delin- to create owners who would seek prof- lies above the surface are the formal quents-employing 23 percent of the its. Only 31 percent of enterprise direc- activities of enterprises. These activities industrial labor force-conducted 73 per- tors mentioned profit as one of their top are reflected in official statistics and re- cent of their transactions in noncash two goals in 1994; in 1995 the share had sult in the cash payment of taxes. But form.) The growth in barter and other declined to 27 percent, in 1996 to 21 below the surface Russian enterprises nonmonetary means of payment has led percent, and in the fourth quarter of 1996, engage in informal activities, as a means to a new demonetization of the Russian the percentage had dropped to 12 per- of survival and as a response to the struc- economy. Initially, barter was seen as a cent! (By comparison, in fourth quarter ture of taxation and the weak system of natural response by some enterprises 1996, 27 percent cited maintaining or in- corporate governance. Informal activities to the high inflation that prevailed in Rus- creasing employment as top priority, 59 involve nonmonetary transactions; the sia after prices were liberalized. But the percent mentioned maintaining or in- "soft goods" are sold against promissory use of barter has increased despite fi- creasing output, and 65 percent listed notes such as vecksels, or exchanged nancial stabilization. This could be ex- maintaining or improving the financial forothergoodsorservices(barter).These plained by the shortage of liquidity, as situation of the enterprise). transactions-including taxes paid in high real interest rates made it hard for Tutayev's Business Strategy The Tutayev Engine Plant is typical of many enterprises in sume that the answer would be yes. But the problem with Russia's heavy industrial sector. The plant, located in a town cash sales, he explains, is that "customers pay only 50-60 of 45,000 (Tutayev, in Yaroslavl oblast), employed 12,000 percent of our official sales price; nonetheless, it does allow people during the 1980s. It is now a private company, al- the plant to obtain at least a minimum of cash." Naturally, though the state still holds a substantial minority stake. This Tutayev has problems making payments to workers. In 1996 plant was the major Soviet-era producer of diesel V-8 engines they only managed to pay 61 percent of their wage bill. That for tractor-trailertrucks, dump trucks, earth-moving equipment, included 36 percent paid in cash, with the rest paid in the and farm tractors. Reform has led to a near total collapse of form of foodstuffs, food coupons, and the like. (In January production. The plant has the capacity to produce about 18,000 1997 the situation was even worse: only 34 percent of wages diesel engines annually, but in 1996 production was 401 en- were paid at all.) gines, that is, capacity utilization was only about 2.2 per- cent. Since 1990 the plant's sales are down roughly 80 percent Tutayev Engine Plant Sales, by Type of Payment, 1996 but employment is down only 17 percent, reflecting the labor (pe ) hoarding typical of Russian enterprises. What is most inter- Share of Share Share esting about Tutayev is the structure of payments for its prod- Product total paid by paid in Product ~~~~sales offsets cash ucts. In 1996, 92 percent of sales were paid for in offsets, and for several categories of production this figure was 100 per- Components for plant 35 100 0 cent. The plant is relying on offsets to pay its taxes and to Spare parts for diesel engines 29 80 20 Diesel engines 7 70 30 purchase inputs. Other products (heat, water, etc.) 29 100 0 Total 100 92* 7* Would the director prefer to sell more for cash? Given that Source: The authors. only 7 percent of sales are paid for in cash, one might as- * Average (percent). * TRANSITION, August 1998 C 1998 The World Bank enterprises to borrow. The impetus to ing for their purchases. Local governments Sverdlovsk. At the local and regional lev- barter, however, often comes from the more frequently use offsets in exchange els, barter and offsets are even more seller. This suggests other motivations for services provided by enterprises. widespread. for the widespread use of barter, includ- These cloud the division of revenues be- ing its usefulness in beating Russia's tween local and federal governments and Tax offsets fundamentally change the set onerous tax system. may be a convenient method for local gov- of choices available to Russian enter- ernments to capture a larger share. Tax prise directors. By allowing enterprises If an enterprise is delinquent in its tax offsets allow enterprises to play off one to pay taxes in "soft goods" (that is, out- obligations, its money-if it flows through level of government against another. (They put for which there is no effective de- the banking system-can be seized can also facilitate the barter process. A mand), tax offsets provide an incentive immediately by the State Tax Service. hospital director in Kostroma suffered from to avoid restructuring. For many enter- This motivates enterprises in arrears to a shortage of linens. Her response was prises it is easier to produce soft goods avoid using money, as the effective tax to call a local textile producer and inquire than to restructure and earn additional rate on their revenue is 100 percent. The about its tax situation. The textile firm, of cash income to pay taxes in cash. Soft use of barter also allows enterprises to course, had outstanding local tax liabili- goods production allows for use of idle record the value of transactions in ways ties, so the hospital director arranged to capital and labor and offers an additional that reduce overall tax incidence. By in- have these offset, in exchange for the explanation for labor hoarding. flating their production costs, profitable delivery of linens to the hospital.) enterprises can reduce their tax pay- Whether or not an enterprise chooses ments. Payment of taxes in kind affords great to restructure depends on the fundamen- flexibility to managers, who can pay tal opportunities it faces. We can as- Barter is quite costly-especially multi- taxes with in-kind services and tax off- sume that the enterprise's initial lateral barter that requires the creation of sets. In-kind services are important for conditions consist of the physical and chains of exchanges. One means of re- local taxes, tax offsets for federal taxes human capital stock it possesses, on ducing costs is through the use of (in lieu of payments from the govern- the one hand, and its stock of relational vecksels which has become widespread: ment). The following table gives some capital, on the other. Relational capital by some estimates the outstanding stock idea of the extensive use of offsets: is goodwill that can be translated into of these promissory notes is roughly two- special favors (exemptions from regula- thirds of the ruble supply, calculating cash Federal Tax Collection, 1995-97 tions; condoning of informal economic and bank deposits (M2). Enterprise (trillions of 1997 rubles) activity, such as barter, etc.). vecksels are issued by large established Tax collection 1995 1996 1997 firms (for example, Gazprom, or the elec- Some enterprises (directors) have better tricity utility, UES), are circulated among total taxes due 366.0 333.6 333.6 relations with local and federal officials chains of enterprises that owe goods to Taxes collected than do other enterprises. Interenterprise the issuer, and eventually are redeemed in cash 189.9 184.9 134.7 relations (or relational between directors) by customers of the issuer. They are par- Taxes collected will also vary. They require investment, of ticularly useful in relieving the problem of in noncash form 59.5 59.6 59.0 one type or another-such as bribes, both mutual nonpayment. An enterprise with Taxes not collected of money and in kind, and "bartering" fa- a blocked account can make and accept in any form 116.6 89.0 104.0 vors. Just as enterprises invest to aug- payments and avoid taxation because Source: The authors. ment their physical capital stock, so can vecksels circulate outside the banking they invest to build relational capital. An system. In 1997 less than 60 percent of all fed- enterprise can, for example, perform ser- eral taxes collected were paid in cash; vices for the local government, thus en- Soft Goods Preferred the rest were in the form of offsets. In 12 hancing its relationships with local of Russia's 89 regions, cash accounted officials. This will increase its capacity to Russian governments at all levels are in- for less than 40 percent of federal tax conduct informal activities in the future. creasingly willing to offset enterprises'tax payments. These regions are home to Augmenting relational capital is costly, obligations against goods or services (tax some of the country's biggest taxpay- however. offsets) delivered to the government. At ers, including some of its largest and the federal level the government cancels most paternalistic enterprises, based in These factors govern the possibilities for tax arrears or taxes due instead of pay- Kemerovo, Nizhny Novgorod, Perm, and producing marketable products through © 1998 The World Bank TRANSITION, August 1998 m restructuring,orfortryingtosurvivewith- your inputs, especially fuels, electricity plant. An enterprise that has a large out restructuring. and so on. It is best if you have some stock of social assets. If the plant has products that utilities need. Then they its own housing and schools, it is in the Igor's Way of Profit Maximization will pay you in vecksels that you can best position to provide services to these redeem for the inputs. "customers" in lieu of local taxes. In ef- Igor, manager in a big Russian plant, of- 0 Have the capability to provide munici- fect it operates in a seller's market in fers four principles for successful man- pal services so that you can offset local supplying these services. Enterprises agement planning in the current Russian taxes. An ideal method is to have a con- that follow Igor's rules could produce environment: struction division that can fix schools. more but they do not. They could restruc- * Sell some percentage of your output ture, but they do not. Why? to the federal government, ideally at Igor's final injunction: Whatever you do, about the level of your estimated federal don't make a profit-the government will Formal profits are costly for enterprise taxes. You know you will not be paid for take it all in taxes. Of course, what Igor directors under current circumstances, these sales, but you use them to offset really means is do not make a profit that entailing risks that directors seek to taxes. can be observed. avoid: they attract the attention of tax * Export something to a paying, hard authorities, of criminal organizations, currency market. You need some cash Which enterprises can best follow Igor's and also of potential investors, who for your operations, mainly for urgently rules? Large, diversified, integrated, pa- might see a given enterprise as a po- needed inputs. Your exports need not ternalistic enterprises that enjoy good re- tential takeover target. Formal profits be of your major product. lations with both federal and local also make it harder to delay paying * Set up barter operations for the rest of authorities. For example, a defense wages to workers. Virtual Statistics from a Virtual Economy In December 1997 the Inter-Agency Balance-Sheet Com- economy appeared to have a large manufacturing sector that mission of the Russian government reported: "An economy produced value; in fact, manufacturing destroyed value, but is emerging where prices are charged which no one pays in this was masked by arbitrary pricing. The roots of the virtual cash; where no one pays anything on time; where huge economy lie in the maintenance of this pretense. mutual debts are created that also can't be paid off in rea- sonable periods of time; where wages are declared and not paid. This creates illusory, or virtual earnings, which in turn This system has significant negative consequences on en- lead to unpaid, or virtual fiscal obligations, with business terprise restructuring (see main article), GDP, and output. conducted at non-market, or virtual prices." Output in the virtual economy is overpriced by a factor of two or three, even up to five times. Russia's GDP is inflated. What has emerged in Russia is something that arguably Russia's economy is probably even smaller than official fig- qualifies as a new type of economic system with its own ures suggest (not bigger, as many people say). rules of behavior and criteria for success and failure. Russia's virtual economy is based on illusion, or pretense, about al- Its year-to-year growth is also exaggerated. When value- most every important parameter of the economy: prices, subtractors increase their output, it is bad news, not good, sales, wages, taxes, and budgets. At its heart is the ulti- even though in the virtual economy it shows up as increased mate pretense that the Russian economy is larger than it GDP. According to fiscal statistics Russia's GDP grew by really is. This pretense allows for larger government, and larger expenditures, than Russia can afford. It is the cause 0.8 percent in 1997. The extra value added it reports is al- of the web of nonpayment and fiscal crisis from which Rus- most surely "virtual," not real. sia cannot seem to emerge. From Clifford Gaddy and Barry Ickes's recent paper, "Beyond Industry in the Soviet economy was subsidized by under- the Bailout: The Roots of Russia's Economic Crisis," Web priced raw materials and insufficient charges for capital. The site: http://wwwbrookings.org/fp/w-papers/gaddy/gaddickl.htm TRANSITION, August 1998 C) 1998 The World Bank Formal goods are typically high-effort products, especially when directed to On the Web: Publications ___ export markets. They require marketing and, often, new suppliers. Hard goods of the William Davidson Institute sold for cash yield monetary tax liabili- ties as well as income that must be paid to shareholders and other stakeholders. The William Davidson Institute is pleased to announce that its working papers Soft goods are exempt from these de- by top scholars in the field of transition and emerging economics are now posted mands. on the Worldwide Web, at the Web site of University of Michigan Kresge Li- brary: http://lib. bus. umich.edu/. Clicking the "Working Papers" icon will provide Traditional customers are likely to be access to the Davidson Institute's papers, which are generally posted within illiquid, so selling hard goods requires three to four weeks of receipt. Copies of the working papers are also available attracting new customers, which in turn by contacting Sharon Nakpairat, Research Manager, 701 Tappan Street, 9th may require producing a better product. Floor, Ann Arbor, Michigan 48109-1234, United States, tel. 313-763-5020, fax On the plus side, high-effort goods are 313-763-5850, Email: sharonch@umich.edu; or davidson.institute@um. easier to translate into cash, which may cc.umich.edu; Internet: http://www.wdi.bus.umich.edu. Following, is a list of be needed to procure important inputs. some of the Institute's recent working papers dealing with restructuring issues. Soft goods are typically the enterprise's traditional products, so less restructur- Hartmut Lehmann, Jonathan improvements in their management in- ing is required to produce and sell them. Wadsworth, and Alessandro Acquisiti, formation systems. Human resource Soft goods do, however, require invest- Grime and Punishment: Employ- policies involved better compensation ment in search of barterable goods. En- ment, Wages and Wage Arrears in systems and an emphasis on educa- terprise bartering relies heavily on the Russian Federation, Working tion and training for managers and historical relations, with firms produc- Paper 103, October 1997, 52 p. workers. On the other hand, shedding ing low-effort goods as long as there is of redundant labor and investment in a market for them. But there is a tradeoff: Richard E. Ericson, Restructuring In- new technologies or equipment were to continue to produce low-effort goods, vestment in Transition: A Model of considered less important. an enterprise must maintain good rela- the Enterprise Decision, Working tions with government. Obviously the Paper 129, January 1998, 34 p. Susan J. Linz, Ownership and Em- firm chooses to produce a mix of soft ployment in Russian Industry: 1992- and hard goods. John P. Bonin and Istvan Abel, Will 1995, Working Paper 138, March Restructuring Hungarian Companies 1998, 16 p. Russia appears to be generating a dual Innovate? An Investigation Based economy.Alongside a modernizing private on Joseph Berliner's Analysis of In- Wendy Carlin and Michael sector, a paternalistic, unrestructured in- novation in Soviet Industry, Work- Landesmann, From Theory into dustrial sector continues to hang on, and ing Paper 131, March 1998, 31 p. Practice? Restructuring and Dyna- even to regenerate. mism in Transition Economies, Josef C. Brada, Management 101: Working Paper 155, June 1997, 105 p. Clifford Gaddy is at the Brookings In- Behavior of Firms in Transition Karen L. Newman, Leading Radical stitution, Washington, D.C. 20433, Economies, Working Paper 133, Change in Transition Economies, cgaddy@brook.edu. Barry W. Ickes March 1998, 26 p. Working Paper 156, June 1998, 40 p. is a professor in the Department of Economics, Pennsylvania State Uni- Successful firms in the Czech Repub- Hartmut Lehmann, John O'Flaherty, versity, University Park, PA 16802, lic, Hungary, and Poland made signifi- and Patrick P. Walsh, Structural Ad- bwickes@psu.edu. Their paper To cant improvements in their marketing justment and Regional Long Term Restructure or Not To Restructure: organization and expenditures to Unemployment in Poland, Working Informal Activities and Enterprise make up for the collapse of the state Paper 158, June 1997, 25 p. Behavior in Transition, was pub- distribution network. They also placed Annette N. Brown and J. David Brown, lished in 1998 as a William Davidson tremendous emphasis on quality con- Does Market Structure Matter? New Institute Working Paper (no. 134). [To trol, and undertook major internal re- Evidence from Russia, Working Pa- obtain a copy see details in box.] organizations, often supported by per 159, June 1998, 31 p. © 1998 The World Bank TRANSITION, August 1998 U The Virtual Economy-A Closer Look by Edwin G. Dolan I n the early days of reform in Russia, adder (in this case, Gazprom) reduces to meet a pressing cash constraint. many Western advisers (myself in its tax liability. 0 The virtual sector does not restruc- cluded) took the view that the form of ture: firms don't shed labor, they don't privatization-vouchers, buyouts, give- Clearly, the whole idea of the virtual invest, they don't change their Soviet- aways, whatever-was a secondary is- economy needs a closer look. Let's ex- era product lines. sue. Whether state property ended up amine the concept from three perspec- 0 There is little investment in the virtual in the hands of party bureaucrats, work- tives: characteristics of the virtual sector, sector. ers, Red Directors, or simple thieves, it factors that encourage firms to operate * The virtual sector is dominated by priva- was argued, the new owners would be in the virtual sector, and factors that fa- tized firms and not entrepreneurial start- motivated to maximize the value of their cilitate operations in the virtual sector. up firms. Although the latter may often property. If they were not competent to Doing so may help formulate some ideas participate in barter, they are not part of do so themselves, they would, to serve about what, if anything, can be done to the virtual economy. They invest, mini- their own self-interest, realize the value redirect Russian policy toward true mar- mize costs, and otherwise behave like of their loot in a lump sum by selling out ket reform. market entities. to someone who would undertake the * Virtual sector firms are managed by needed restructuring. As it turns out, the Characteristics of the Virtual Economy Red Directors rather than the new man- failure of privatization to bring about more versus the Real Economy ager/entrepreneur class. Gaddy and rapid restructuring is, together with pro- Ickes tend to downplay low managerial found mismanagement of monetary and * Barter versus money. skills or ideological factors as causes of fiscal policy, a principal reason that Rus- 0 Value-subtracting versus value-adding the virtual economy, and to place greater sian reform has stalled out. activities. Much activity in the virtual weight on rational response to con- economy produces goods that have a straints. This is good economics, but it Clifford Gaddy of the Brookings Institu- market value less than the market value probably shouldn't be taken too far. The tion and Barry Ickes of Penn State Uni- of their inputs. (The distinction between attitudes and skills sets of the Red Di- versity have made a major contribution value-subtracting and value-adding activi- rectors are probably of real importance. to this discussion with their writings on ties can, however, be a matter of per- 0 Virtual property rights of directors dif- the "virtual economy." Their main thesis spective. For example, a firmn with large fer from nominal property rights. It is im- is that much of Russia's economy is en- sunk costs may add to GDP by produc- plicit in Gaddy and Ickes that the gaged in value-subtracting activities (pro- ing a product worth less than long-run managers of virtual sector firms can and duction of "soft goods") rather than total costs-including replacement of doactindependentlyofthenominalown- value-adding activities (production of capital-until its capital is fully depreci- ers of those firms. Despite possible ideo- "hard goods") and that Western aid pro- ated. Also, an activity or product may logical or paternalistic inclinations, they viders often mistakenly encourage growth be value-adding at one interest rate and are basically out to maximize their per- of the virtual economy. Gaddy and Ickes value-subtracting at another. Put another sonal wealth. Financial theorists call this emphasize that firms prefer to produce way: Does putting a lock on a refrigera- an "agency problem." There is a huge soft goods because these can be bar- tor add value? It does if you live in a com- disconnect between maximization of the tered in the virtual sector even though munal apartment.) manager's wealth and maximization of they cannot be sold profitably in the 0 Soft versus hard goods. If we define shareholders' net present value (let alone market sector. Given the lower transpar- soft goods as those produced by value- the firm's net contribution to GDP). ency and the greater ease of tax eva- subtracting activity, it highlights the fact sion associated with barter transactions, that the line dividing the barter sectorfrom Why Would Firms Prefer to Operate the managers can skim off more for their the market sector is not always the same in the Virtual Economy? personal accounts than they can by as that dividing the value-subtracting sec- making and selling hard goods. They can tor from the value-adding sector. Market- 0 The effective tax rate is lower for barter also enter into mutually beneficial barter oriented firms can, and often do, barter transactions. Barter transactions are in- transactions with value adders like their outputs. At the same time, soft herently nontransparent and hard to audit. Gazprom in which the virtual sector ob- goods can often be sold for cash. It may 0 Low transparency of barter transac- tains an in-kind subsidy while the value- be worth selling soft goods everi at a loss tions facilitates skimming. * TRANSITION, August 1998 (© 1998 The WNVorld Bank * Restructuring may not be an option 0 Cut taxes. Russian taxes are too high, privatization, especially the vision of cre- for the "inherently nonviable" firms. High not too low. They drive people into the ating dispersed ownership with vouch- interest rates (high opportunity cost of virtual economy. ers, mutual funds, and worker- capital) prevent even the "potentially vi- * Cut interest rates. shareholders. able" firms from getting needed capital 0 Devalue the ruble. This would help * Improve bankruptcy procedures. Too and restructuring. Directors also might achieve a lower interest rate and shift often the creditor is an unwilling partici- be deterred from bringing in new capital the frontier between the virtual and mar- pant in the system, with little legal re- as it might entail a loss of control, re- ket sectors, improving domestic pro- course. quire greater transparency, and reduce ducers' chances of competinge with opportunities to skim-in short, it could imports. The author is president of the American involve the loss of valuable "virtual prop- 0 Improve corporate governance. For- Institute of Business and Economics, erty rights." eign advisers were naive regarding Moscow, and head of its MBA program. * Red Directors have good relational capi- tal but weak market skills. Take a po- T S t Ru l tentially viable firm, put a Red Director Xhe Summ er the Ruble in charge, and he may be quite able to get rich by operating in the virtual sec- Collapsed-Default by Default tor. Put a Wharton MBA in charge of the same firm, and she may be able to get he long, protracted ruble crisis Duma wants to bring down the govern- richer by restructuring and joining the took a sudden turn on August 17: ment. [Shortly before this newsletter market sector. the government threw in the towel, went to press, President Yeltsin fired the * There is a paternalistic streak in many stopped propping up the ruble with the entire government and appointed Victor Red Directors, who see it as their duty central bank's depleted foreign exchange Chernomyrdin as prime minister.] to provide jobs to as many workers as reserves, and let the exchange rate sink possible, even if the jobs are of poor until it was de facto devalued by 35 per- For a while it looked as if the $22.6 bil- quality. cent. The government has suspended lion international rescue package-put foreign debt payments by banks and en- together by the IMF, the World Bank, Institutional Sectors Facilitating Op- terprises (but not by the state) for three and Japan in mid-July-would bring re- orations in the Virtual Sector months and has decided to restructure lief to the Russian government, which the $40 billion domestic bond market, had to face declines in the price of oil These conditions include: converting short-term Treasury bills and gas, Russia's main exports; con- * Weak corporate governance. Owners (GKOs) to 3-5 year debts. In an effort to front contagious effects from turmoil in do not control managers in firms with pump some liquidity into the paralyzed the Asian markets; and meet escalating worker-shareholders, government owner- banking system, the central bank has domestic resistance to expanded tax ship stakes, or minority stakes of out- decided to help the 12 biggest and po- collection and controlled government side investors, both domestic and litically best connected banks. But many spending. But the psychological effect foreign. (Stories of minority sharehold- of the 1,900 mostly small and inactive of the bailout fizzled, and bond and stock ers victimized by dilution scams, trans- banks may be forced to shut down, as prices continued their downward trajec- fer pricing, and the like are a staple of the gap between their ruble assets and tory. (Between March and August the the Russian business press.) dollar liabilities has widened. Moscow stock exchange, which was the * Weak court/bankruptcy system. Credi- world's best-performing market in 1997, tors have no leverage over managers. The government is trying to expand its lost more than 80 percent of its value.) * Subsidies available from value-adders, political base but the opposition and the Local governments may also provide trade unions do not seem ready for com- The financial sector was on the verge of subsidies, out of corrupt or employment- promise: organized labor is calling for collapse. Even Russia's big banks are maximizing considerations. inflationary indexation of wage arrears struggling with solvency problems. Inter- * Government accepts taxes in kind. that have reached $11 billion (the value est rates on Treasury bills have climbed of unpaid wages increased another 6 per- from about 20 percent in March to over What Can Be Done about The Vir- cent in July) and is preparing for nation- 150 percent by mid-August. The govern- tual Economy? wide work stoppages in the fall, while ment has been unable to finance its debts the Communistled opposition in the with such an exorbitant interest rate. A (C) 1998 The World Bank TRANSITION, August 1998 * liquidity crisis has virtually halted lend- whose party controls almost half the seats be set at 20 percent for almost all goods, ing between Russian banks, some of in parliament. In fact, the Russian Land taxes would be increased fourfold which were already failing to make pay- economy continued to contract at a rapid and a 3 percent customs tax increase ments on their foreign loans. Moody's rate. GDP fell by 4.5 percent in July com- would be imposed. Investors Service and Standard & Poor's, pared with last year-the sharpest monthly the international credit rating services, drop since September 1996, according to These measures require broadly based downgraded Russia's foreign debt, which the State Statistics Committee. Overall public acceptance. Instead, social un- already had been ranked as "junk," or GDP decline in the first seven months of rest is rising. Russians' real income speculative. They also lowered the rat- 1998 was 1.1 percent compared with the dropped 8.9 percent in the first seven ings of many Russian banks. same period in last year. months of this year compared with last year, according to government statis- Before the weekend ofAugust 15-16, the President Yeltsin can implement many tics. Wildcat strikes are multiplying Russian authorities realized that without fiscal measures by decree. Proposed across Russia's vast hinterland, where further action, panic selling of the ruble changes include lowering the corporate millions of workers have gone without by foreign and domestic investors would profits tax to 30 percent from 35 percent, wages for months due to the economic beunavoidable-andthe"run"couldover- and scrapping 16 local taxes that cost crisis. Coal miners have been block- whelm the limited resources of the cen- more to enforce than they generate in ading railroad tracks in several regions, tral bank. Itsreserveshaddroppedto$15 revenue. These would be replaced with and trade unions are promising a gen- billion and were being consumed at a rate a new sales tax of up to 5 percent, with eral strike this autumn over the huge of $1 billion a week. The devaluation revenues staying in the regions. Small buildup of wage arrears and the losses seemed the only plausible solution (see businesses, some of the biggest tax- caused by the ruble devaluation. also "Who Believes the Ruble Will Not evaders, would be subject to a flat tax of Be Devalued?" by Evan Scott, Transi- sorts, to replace a number of other busi- (Based on Oxford Analytica and news tion, June 1998), although it could have ness taxes. The value added tax would agency reports) some negative consequences, including: * Sparking immediate, sharp consumer Subculture price rises (foreign producers provide 60- L- 70 percent of the goods in local stores). - Raising the ruble cost of repaying for- eign currency loans. Several banks may 0 fail, hurting an already fragile banking system. El * Jeopardizing the financing of govern- ment debt-if trust in the ruble's future wanes. * Accelerating capital flight away from the ruble and toward the dollar. Earlies, the government had wanted the Duma to hold an emergency session on nXt the crisis and consider 17 draft laws to slash spending, raise taxes, and stabi- lize state finances; but the opposition had another agenda: "Russia is on the "Isn't it tragic, professor, that people are not reading any verge of financial collapse, and we are more?" now facing sharp political struggle," said Communist leader Gennady Zyuganov, From the Hungarian magazine H6cipo * TRANSITION, August 1998 ( 1998 The World Bank Customs Reform Is Urgent in Russia 3w1$ff by Peter Davies W,E aJS Regular readers of Transition will be imposed a 15-day time limit for submit- chinery should be treated differently from, aware of our campaign for a reform of ting the product declarations needed to say, a freight shipment of several hundred customs laws across Central and East- import certain kinds of goods, but did not cars. Consequently, four simplified cus- ern Europe, to make it easier for major impose similar time limits on the various toms categories should be introduced for investors to trade effectively with (and (state-controlled) agencies that supply express shipments: documents; low- invest in) the region. Without a doubt, the necessary conformity certificates. If value nondutiable consignments; low- one country where reform is most ur- the certificate is not sent in time, the busi- value, dutiable consignments; high-value gently needed is Russia. ness community will be penalized for consignments. The first three categories something that is beyond its control. would be given "fast track" clearance on When we asked major multinationals the day of arrival. The high-value category which countries in Central and Eastern Once the declarations are submitted, would obviously need extra documenta- Europe and the CIS had the most straight- customs officers often reject them in or- tion, but could also be cleared quickly if forward customs procedures, Russia der to dictate a different tariff that allows all VAT and customs duties had been didn't even register. In fact, a recent re- them to maximize revenue. Every decla- guaranteed. port by the Economist Intelligence Unit ration must be processed through a gave Russian import procedures bottom lengthy procedure of checks and physi- There is a need to upgrade the resources marks when it came to the volume of pa- cal inspections, conducted by dedicated available to the customs authorities, as perwork needed, the speed of process- officers in a misguided attempt to control in other transition countries. We are com- ing, and the prevalence of corruption corruption. If the officer assigned to the mitted to extending the use of electronic (although the competency of Russian of- job is ill or on vacation, severe backlogs clearance systems, and to the electronic ficials was rated relatively highly). and delays cannot be avoided. Consis- exchange of information between the Cus- tency is also a major problem. We have toms Authority and ourselves. In addition What Are the Root Causes of the found that the way rules are interpreted to increasing productivity, this would help Customs Problem in Russia? can vary greatly between different border Russian Customs meet its goal of in- posts, and even between different cus- creasing compliance with customs rules It cannot be easy for the State Customs toms inspectors. And the Customs Au- and regulations. Service to use customs to facilitate trade thority regularly imposes restrictive and foreign investment, while it is also legislation, which is often implemented As a major employer in Russia and a under pressure from the federal govern- retroactively without adequate warning. company that serves most of the top ment to increase annual customs Western and Russian companies oper- recepits of more than $10 billion. Valery What Is the Solution? The situation ating in the country, we have a direct in- Draganov, head of Russian Customs, cannot and will not change ovemight. The terest in seeing Russia succeed and turn agrees that lowering import tariffs would Russian authorities have appeared will- the corner economically. We believe that raise customs revenue (by increasing ing to review the customs code. Thus, a liberalization of the customs regime imports) and reduce corruption. But in together with the other express carriers, will be an important step in the right di- the current economic climate, events are we have submitted a list of recommen- rection. moving in the other direction-recently, dations that, if implemented, should ease Western investors have been confronted considerably the customs clearance pro- The author is DHL's director for Central with an extra 3 percent emergency im- cedures. and Eastem Europe and the CIS. DHL is port duty. both the leading air express carrier in the We have suggested that the Russian CIS and the largest importer (measured As our experience has shown, there is a Customs Service officially recognize the in transactions) into Central and Eastern real lack of understanding about business concept of "air express"; by their very hearing any comments from Transition needs, and a reluctance to meet major nature, express shipments of such items readers about customs procedures in the foreign investors halfway when it comes as bank documents, computer disks with transition countries. Please contact Dirk to import rules and regulations. For ex- information, medical samples, or spare Singer, dirks@redconsultancy.com, tel. ample, the customs authorities recently parts required for the urgent repair of ma- 44-171-465 7700. © 1998 The World Bank TRANSITION, August 1998 U "We Are Providing More Than Financial Resources." Interview with Basil G. Kavalsky, Country Director for Poland and the Baltic Countries vPoland's grandiose venture to restructure its coal industry will rely in many ways on the World Bank's resources and advice. Despite the abundant availability of foreign investment capital in Poland and the Baltics, the countries in that region-which has become one of the most dynamic growth areas in the world-are seeking further support from the Bank, primarily nonlending services-Country Director Basil Kavalsky told Transition editor, Richard Hirschler, in his interview, Q. The World Bank is in negotiations However, environmental aspects of the A. The Bank is helping Poland prepare with the Polish government about restructuring, including the safety and foraccessiontothe European Union, first possible assistance for restructuring aesthetics of the pits that are slated for and foremost by restructuring some of its the coal mining industry, closure in the months laggard, ailing sectors. The coal program an estimated $1 billion '0' X ahead, should not be mentioned earlier deals with the sector program. In a recent neglected. Both the cur- that has the most acute budget implica- press conference you re- ;' rent environmental plan tions; accordingly, this is the area of our ferred to the importance and coordination with the most extensive commitment. But agricul- of an implementation f Ministry of Environment ture is the sector that affects most of the plan that ensures effi- need strengthening. The population. The Bank has moved away ciency and safeguards Bank is proposing a full from direct agricultural projects, looking environmental and social ; environmental assess- instead at indirect ways-through rural objectives. Would you g ment. On this basis, a development and employment pro- explain this in detail? program can be outlined grams-to encourage consolidation of that will address some of farms and greater rural productivity. A A. The Polish government's _ the coal-related causes third operation will support Poland's pen- restructuring program is and consequences of sion reform, to make it financially sus- sound, and if implemented consistently, water and air pollution in Upper Silesia. tainable and create the basis and the country's coal extraction will undergo The social aspects of the program are incentives for private pension funds. Fur- fundamental changes. We are assisting very well designed, offering various in- ther, we plan a number of smaller-scale our Polish partners who are working out centives to miners who voluntarily leave activities-in most cases, nonlending details of the implementation arrange- their jobs, including retraining, and finan- services, although we are also providing ments. Primarily, the right incentives cial support for those who wish to start Learning and Innovation Loans. We are should ensure efficient operation in the their own enterprise. also involved in reform of the tax adminis- mines. Besides good business plans, an tration; training of civil servants as part of overhaul of the present management However, the institutional channels for the regional decentralization program; structure is needed. Managers of indi- delivering these programs need to be fur- developmentof innovative and atthe same vidual mines should have more indepen- ther strengthened to ensure that social time affordable ways to meet the EU's dence from the state coal agency. Right assistance reaches the target group. environmental standards; assistance with now, the agency is practically running the privatization of Poland's infrastructure, the daily operations in the mines, allow- Q. The recent $15 million World Bank particularly in such areas as energy, tele- ing little scope for company-level loan to Poland will support the es- communications, and ports; and estab- decisionmaking. On paper, each com- tablishment of a wholesale fruit, veg- lishment of an effective regulatory pany is supervised by a government-ap- etable, and flower market in the framework. pointed board of directors. But in most Gdansk-Sopot-Gdynia area, both cases the boards just rubberstamp the helping some 1.5 million shoppers to Q. For the fiscal year that ended agency's decisions. Once the mining buy products more quickly and June 30, 1998, of the three Baltic companies and their boards become ef- cheaply, and improving area farm- countries, only Latvia received a fective corporate entities, privatization ers' ability to market their merchan- loan, in the amount of $7.9 million. will have a better chance of moving dise. What other new projects are Does this mean that the Baltic states ahead. being prepared in Poland? have practically "graduated"-that * TRANSITION, August 1998 C 1998 The World Bank is, reached a development level World Bank in general, it should be- stitution-building, and our commitment where they do not qualify for World especially reassuring that despite the to supervising the implementation-dem- Bank loans? What support can the rapid inflow of foreign investments, these onstrating an awareness that the Bank Bank provide in the coming years, countries are continuing to seek our ad- provides more than simply financial re- before their eventual accession to vice, our groundwork, our support for in- sources. the EU? A. Far from phasing out in the Baltics, Snapshots from Four Booming our assistance program is being main- tained at a high level, just as in Poland. Economies There seems to be a general acknowl- edgment that the Bank can contribute in a major way to completing the structural Poland: Preparing for Accession reform agenda in these countries and assisting the process of accession to the In first-quarter 1998, Poland's economic stance. Inflation data so far support the EU. We are working closely with the Eu- growth reached 6.5 percent compared view that the 9.5 percent inflation target ropean Commission, the European Bank with 7 percent over the same period last set in the 1998 budget can probably be for Reconstruction and Development year. Fast-growing consumption and in- reached. (EBRD), and the European Investment vestment continued to underpin GDP Bank (EIB) to devise programs to assist growth, even though the growth rate of There appear to be two possible threats the 10 countries on the accession list. gross investment slowed from 21.9 per- to the economic outlook this year: The low level of lending in the Baltics in cent in 1997 to 17 percent in the first quar- fiscal 1998 was simply an accident of ter, and consumption expanded by 6.6 0 Poland could suffer as a result of de- phasing. This year we expect loans in sup- percent in first-quarter 1998, against 7 per- velopments in the international economy port of Latvia's rural development, educa- cent for the whole of 1997. Continuing that are beyond its control. If EU-and tion, health care, and tax administration, strong consumption is being fueled by especially German-growth were to be as well as municipal development and growth in real wages. It has barely slowed set back by the effects of the ongoing health care in Lithuania. We do not ex- over recent years and continues to run at economic crisis in East Asia, or by any pect much lending for Estonia as it de- an annual 5 percent. Construction and slowdown in the U.S. economy, demand cided a couple of years ago to keep official services are growing fast. Construction for Polish exports would be hit. borrowing at a low level. However, we are output in January-May was up 19.1 per- likely to provide support for Estonia's cent compared to the same period in 0 There were signs that the zloty appre- transport development and environment 1997. ciation narrowed the gap between export protection in the years ahead. and import growth rates. The fast growth The current account deficit was held to in foreign exchange reserves-these rose In the Baltic countries and Poland, de- 3.2 percent of GDP last year and con- by $3.5 billion between December and mand for the Bank's analytical work, cerns about economic overheating caus- May, when they reached $24.2 billion- advice, and training services (the so- ing a rapid deterioration in the situation boosts the money supply, which risks cre- called nonlending services) has in- have waned. The January-April trade ating inflationary pressures. To address creased, outrunning by far our available deficit, at $4.2 billion, was only fraction- the issue, the finance ministry favored fur- budget resources. To be able to cope ally higher than in the same period in ther interest rate cuts, and further easing with the situation, we are building up the 1997, while the current account deficit of the zloty's monthly "crawling peg" de- capacity of our offices in all four capi- rose to $2.4 billion from $2.3 billion in preciation rate (from the present 0.8 per- tals: Riga, Tallinn, Vilnius, and Warsaw. the first four months of 1997. This sug- cent). The ruble crisis may help ease this gests that the economy is on track for a problem, however, as the zloty was also This surge in demand for our nonlending 1998 current account deficit of less than hit by investor's general loss of confidence services is an extremely encouraging in- 5 percent of GDP. in emerging markets. dicator. At present, Northeastern Europe is one of the world's most dynamic eco- Inflationary pressures remain under con- Given the strength of the macroeconomy nomic growth areas. For those of us trol, thanks to strengthening of the zloty, and the policy consensus between the working in this area, it is-and for the higher interest rates, and the tight fiscal finance ministry, the national bank, and (C 1998 The World Bank TRANSITION, August 1998 U the Monetary Policy Committee, it Estonia: Dampening Demand seems likely that domestic policy will focus increasingly on reform of the gov- Estonia's GDP grew 9.3 percent from Janu- tions are that the current account deficit education, and the pension system, as ary to March of this year, compared with did not decline appreciably. well as on restructuring of the mining and the same period in 1997. The largest growth steel sector, the defense industr, and was registered in goods and nonfinancial For the year as a whole, and based on agriculture, in preparation for European services. The only decrease in GDP was the continuation of demand-dampening agiUlture,nion membeparshion forEuropea in the financial sector. The govemment has policies, the authorities are aiming for a Union membership. estimated that GDP growth for 1998 will reduction in the trade deficit to around The government plans to keep Poland's total 8 percent, after almost 11 percent real 10 percent. The exchange rate peg to economic growth at the current robust GDP growth in 1997. the deutsche mark, as well as the cur- rate of 6 percent. Inflation is set to fall to Last ear's rency board arrangement, will continue. 8 1 percent in December 1999 from this Last year's expansion was led by year's planned 9.5 percent. At the same sharply rising domestic demand-nota- Other highlights of the government's time the government is proposing a ma- bly, private investment and consump- policy goals include: jor reduction in corporate taxes to attract tion-as well as strong export growth. foreign investment. Finance Minister Inflation declined substantially, to an 0 Moving from the current pay-as-you- Leszek Balcerowicz announced that the average 11.3 percent in 1997. Although go pension system to a three-tier, par- finance ministry plans to cut the rate of labor market conditions remained tight tially funded scheme. corporate taxes from 36 percent to 30 and real wages grew by just over 7 per- 0 Rationalizing physician and hospital corporatetaxesfrom36percentwih two y . cent, wage growth was well below pro- care under a five-year health care reform percent within two years. ductivity, as the Bank of Estonia pointed plan, with the assistance of the World out in its June report. Inflation for 1998 Bank. ropean countries in the amount invested as a whole is expected to be around 0 Reforming the civil service. A review of ropeign countries,inthe amounth inved b 11-12 percent, higher than the rates employment in the education sector is byiforeignv covesixears, wt(Hungary's prevailing in major trading partners in expected by September 1998, and in the lion invested over six years. Western Europe. Estonia's external state agencies and local governments foreign investment of $17 billion, makes it the leader in the region in per capita competitiveness does not, however, by December 1998. investment; Hungary's population of 10 appear to have been adversely affected. 0 Strengthening Treasury operations by million is one-fourth that of Poland.) facilitating the exchange of information Zbigniew Olesinski, head of the Polish Reflecting buoyant domestic demand, across departments and regional offices. Agency for Foreign Investment (PAIZ), the current account deficit reached 13 A large-scale computerization program reported that about $4 billion was in- percent of GDP in 1997, with the trade will enhance cash management, debt vested in Poland during the first five deficit standing at 25 percent of GDP, management, and the budget process. months of 1998. A further $5 billion in partly as a result of imports accelera- A master plan has been completed, par- foreign investment is expected by the tion in the last quarter following tial financing has been obtained from the end of 1999, according to Olesinski. The preannounced tax increases. The defi- EU, and implementation will begin in United States is the largest foreign in- cit on the current account was more than 1998. vestor in Poland, with almost $4 billion, covered by a substantial surplus on the 0 Strengthening the legal framework in followed by Germany ($2.1 billion) and financial account, which rose to 17 per- accordance with EU requirements. The international financial institutions such cent of GDP in 1997. Although foreign Competition Law was amended in Feb- internastionalR financial binstiion). su direct investment inflows continued to ruary, to conform to EU norms. It has as the EBRD ($1.7 billion), increase relative to 1996, about 80 per- been reaffirmed under the existing Busi- cent of all capital inflows were debt-cre- ness Law that central and local govern- ating (often with short-term maturities), ments are not responsible for the financial and were primarily directed to commer- liabilities of any state-owned enterprise cial banks; in turn, the banks used these and that there will be no implicit or ex- resources to underpin a rapid increase plicit guarantees on the external and in domestic credit. In the first quarter of domestic borrowing of these enterprises. 1998 the trade deficit remained high * Restructuring and privatization of ma- (around 26 percent of GDP) and indica- jor infrastructure companies, including: * TRANSITION, August 1998 C 1998 The World Bank - Eesti Telekom: The sale of 49 per- Latvia: Mending Fences with Russia cent of the government's shares will start by October 1998, with a major propor- ti tonbei r on98, winternmation stock- Latvia's economy expanded by 6 percent as Latvia's government eased the terms in 1997 and the upward trend has contin- of the naturalization process and seemed exchanges. ued so far in 1998. Annual GDP growth is ready to grant citizenship to those Rus- - Eesti Energia: Two major power sta- forecast at 4-5 percent for the next three sian children under 16, whose knowledge tions are to be separated from the Eesti years. The particularly strong growth expe- of Latvian is less than is currently required. Energia holding company; they will be rienced in 1997 reflected the performance In May, Economy Minister Laimonis transformed into joint stock companies, of the service sector, which accounted for Strujevich offered further gestures: eas- with the minority share eventually sold 54 percent of GDP and grew by 7 percent ing of visa rules for Russian lorry drivers; to foreign strategic investors. year-on-year. Inflation has been brought establishment of a customs cooperation under control, with a 7 percent rate posted law, joint border controls, and a formal in 1997 compared with 13 percent in 1996. border agreement with Russia. -estabishment ofuthe (railwayst lowine h The May 1998 annualized inflation rate of 5.4 percentwas the lowestamong thethree The EU is becoming an increasingly im- ing company (which owns the railway Baltic states. The average monthly wage portant market for Latvia's goods and ser- land and is the sole grantor of conces- in the public sector rose from $242 in De- vices; its member countries took half of sions), the operational and managemet cember 1996 to $272 in December 1997. Latvia's exports in 1997 and provided components have been divided Into five components have been divide ~~~~~~~more than half of its imports. Last No- subsidiaries (freight operations, interna-moetahlffisiprs.LtN- The government accumulated a fiscal vember the government signed a mutual tional passenger travel, domestic pas- g seonge travsel,grepar workse, andomsubpan surplus of 1.3 percent of GDP in 1997, agreementwith Estonia and Lithuania on due to improvements in tax administra- the elimination of nontariff barriers to commuter rail). As of end-1998 the ma- jority of shares in all these subsidiaries tion and increased revenues on the cor- trade. A Baltic Customs Union is also will be sold to private investors. porate income tax. This trend has planned. Last year Latvia's trade deficit continued this year, although for 1998 was close to $1 billion (560 million lats). * Accelerating land reform. Processing as a whole the central budget is ex- In the first-quarter of 1998 the trade defi- claims on 95 percent of all restitution pected to show a small deficit.- cit still totaled 155 million lats. cases have been completed, and thus a major obsale teenompleted,and prati nhas aThe registered unemployment rate is Foreign direct investment (FDI) reached beenr removted Byeland-9 16iva pereont hasabout 7 percent. However, surveys sug- 750 million lats as of end-1 997, a 44 per- of total land had been privatized, and by gest that only 20 percent of the total job- cent increase over the previous year. This end-1998o another 10 percent of total less are registered with the State put FDI per capita at $517, compared landwill9be in private.hands.nLandpur Employment Board, and unemployment with $798 in Estonia and $281 in caseswi by rigneprsvare still. subjet t- may be as high as 18.5 percent. The Lithuania. The largest sources of FDI in casmes legalresioners.arestill Re l to discrepancy is explained partly by the 1997 were Denmark (27 percent), Rus- these galrriestrs ichtions. requrem l tof h fact that registration requires a command sia (14 percent), and the United States these barriers-which is required to har- of the Latvian language. Many unem- (11 percent). Over three-quarters of cu- monize the legal framework of land re- form with EU laws-is expected by ployed Russians may thus be excluded mulative FDI has gone to transport, com- enf-orm , with the lamendments tcthe b from the statistics and hence also de- munications, manufacturing, and trade. end-1998, with the amendments to the' Land Law and the Real Estate Acquisi- nied assistance in job-seeking. tions Law. In mid-April the IMF Executive Board Latvia's treatment of its ethnic Russian cautioned Latvia about the expanded use minority, and the difficulties Latvia's Rus- of tax-free economic zones "that com- sians face in seeking naturalization, plicate tax administration, reduce trans- sparked a debate between Latvia and parency and distort economic decision Russia during the spring. As a conse- making" and called for more appropriate quence, trade relations with Russia de- policies to promote regional development. teriorated for a while. (Russia is still The IMF urged further progress on large- Latvia's largest trading partner, account- scale privatization. But the Fund also ing for one-fifth of its exports and one- lauded Latvia for its excellent economic sixth of imports.) The dispute later abated performance and prudent fiscal policies. C) 1998 The World Bank TRANSITION, August 1998 * Lithuania: Making Progress, Dodging Economic Landmines Lithuania;s economy is set for another implies that most other branches of in- also lead to substantial inflationary pres- strong performance this year: dustry had negative or zero growth last sures that will not be dampened even by * GDP is expected to repeat last year's year. Most consumer goods are not com- the currency board system. 5.7 percent growth rate in both 1998 and petitive with foreign producers. Projected * Extemal imbalances. The trade and 1999. (Last year's growth was primarily industrial growth for 1998-99 is 2-4 per- current account deficits are large and the result of very strong expansion in the cent. High levels of government regula- may deteriorate further. The foreign trade service sector.) tion and the strengthening of the litas deficit in 1997 was around 14 percent of * Inflation last year fell to 8.4 percent. against the deutsche mark have dam- GDP. Imports exceeded exports by a Average annual inflation is forecast at 7 aged exports. ratio of three-to-two. The current account percent in 1998 and slightly less in 1999. 0 Wage growth. Real wage growth is deficit for 1997 was just over 10 percent * The foreign direct investment stock beginning to surge: the average real wage of GDP-higher than the 9 percent re- rose over the course of 1997 from $600 grew by 20 percent in 1997 and average corded in 1996, despite the positive ser- million to $1 billion. This year's rise real wages were up 19.6 percent year- vices balance brought about by should be even larger as the ambitious on-year in February. Average pretax increased transit trade with Russia. The privatization program accelerates. Two wages, once the lowest in the Baltic inflow of foreign capital from privatization "crown jewels," Lietuvos Telekomas and states, now exceed those in Latvia and could help to finance the current account the Mazeikiai oil refinery, will be sold. are only slightly less than those in Es- deficit. However, the government has * The budget deficit and foreign debt re- tonia. The projected rate of real wage promised to put aside two-thirds of the main manageable. In 1997 the budget growth this yearwill be two or three times money earned from the current phase of deficit was 1 percent of GDP, while a projected GDP growth and outstrip pro- privatization as compensation for private deficit of 1.65 percent of GDP is pro- ductivity growth by an even greater mar- savings lost as a result of acute inflation jected for 1998. gin. State salary rises have been funded in the early 1990s. The successful sale primarily by improved tax collection and of Telekomas and the Mazeikiai refinery However, developments in four areas higher excise taxes, without resort to would thus be followed by a substantial endanger stable growth in the medium large-scale government borrowing. But transfer of funds to individuals, at a time term: the rises have prevented the conserva- when local industry is incapable of sat- * Currency controversy. The government tive government from implementing the isfying current demand for consumer remains committed to its plan to elimi- tax cuts that were a key element in its goods. A new surge in imports would nate the currency board and the litas's election program. Real wage rises can thus be likely. current 4:1 peg to the dollar. Instead, the litas will be pegged to the Euro or a basket of Euros and dollars. Prime Min- Inflationary Times: New Shopping Patterns ister Gediminas Vagnorius has long ar- gued that a competitive devaluation would increase exports, improve the trade and current account deficits, and boost lo- --------- cal industry. The Confederation of Lithuanian Industrialists calls for such a devaluation. However, the schedule for abolishing the currency board has repeat- edly been put back and the target date for the step is now 1999. * Industrial sluggishness. The rate of industrial growth is a matter of contro- versy. Many industrial sectors face diffi- culties. The Mazeikiai oil refinery accounts for almost 25 percent of indus- "What's the final price of the green pepper?" trial production and its output increased by more than 20 percent in 1997. This From the Hungarian magazine H6cipo M TRANSITION, August 1998 © 1998 The World Bank World Bank/IMF Agenda Record Loans to Transition Economies while disbursements were $25.5 billion. 0 Banking sector reform. The govern- (By comparison, commitments were ment will target elimination of weak and Countries of Central and Eastern Europe $19.1 billion and disbursements $20 insolvent banks, strengthen bank super- and Central Asia received $5.22 billion billion in fiscal 1997.) vision, improve accounting methods, and in loan commitments from the World promote greater competition between Bank and its arm for the poorest nations, Biggest World Bank Loan Yet to banks. the IDA, in the fiscal year that ended on Russia June 30,1998-about $100 million more The loan is part of the $22.6 billion bail- than in fiscal 1997. The World Bank re- Russia received the first $300 million in- out that the IMF, the World Bank, and ported in mid-July that the four largest stallment of a seven-year, $1.5 billion theJapanesegovernmentnegotiatedwith postsocialist borrowers in the region were World Bank loan, signed in early August Russia in July in an effort to boost the Russia, Poland, Kazakhstan, and in Washington. The rest of the money country's troubled economy. Between Ukraine. Russia was the fifth largest will be made available in installments of now and the end of 1999, the Bank is borrower from the Bank overall in 1998, $500 million and $700 million over the planning to provide loans totaling $6 bil- receiving commitments of $1.6 billion. next 18 months, as agreed reforms make lion. This will be in addition to loans that progress in four areas: finance specific investments, such as Top Five Borrowers in Fiscal 1998 0 Reform of infrastructure monopolies. the currently prepared $400 million road (millions of U.S. dollars) The Russian government will make the construction loan. So far, the Bank's Country IBRD/IDA natural monopolies Gazprom, RAO UES commitments to Russia total about $11.4 Rossii (electricity), Transneft (oil and gas billion for 41 projects. China Rep. transport), and the state railways finan- ina 22,1616.4 cially more transparent and open them World Bank Loans More Expensive up to competition. Gazprom's pipelines Mexico 1,767.2 will be available to other gas producers. The World Bank's Board of Directors has Russia = 1,628.5 (The Russian oil industry annually burns approved the following changes in the Total 13,153.7 off gas equivalent to half the total pro- Bank's interest rate policy, effective July Source: World Bank. duction of France-because the oil com- 31, 1998. panies can't compete with Gazprom.) 0 The spread that is charged borrow- The World Bank has committed $32.8 * Privatization/land ownership. The gov- ers, above the Bank's own funding costs, billion in loans to the ECA (Europe Cen- ernment will begin transparent, competi- will be increased to 0.75 percent from tral Asia) region since 1990. tive, quarterly offerings of strategic the present 0.50 percent. enterprises in key areas such as oil, tele- 0 A new front-end fee of 1 percent (of Most transition countries are now facing communications, and transport. A presi- the loan amount) will be charged, pay- a second set of reform issues: improv- dential decree will affirm the rights of able on the date the loan becomes ef- ing the composition of their public ex- citizens to engage in land transactions, fective. This fee may be financed out of penditures; creating effective and fair tax including purchase, sale, rental, and mort- the loan proceeds. systems; strengthening prudential regu- gage. * The current 0.75 percent commitment lation and supervision of financial sys- * Fiscal management. The government charge on the undisbursed loan amount tems; promoting the involvement of will cut payments arrears to infrastruc- (of which 0.50 percent is normally private investors, particularly in infrastruc- ture monopolies, cut wage arrears, and waived) will be maintained. ture and energy; and streamlining pen- bring transfers to municipal governments 0 In recent years the Bank waived 0.25 sion systems, Johannes Linn, Vice to less than 30 days. By December 1, percent from the interest rate spread for President for Europe and Central Asia, the government will present a program countries that are current in their servic- pointed out. for government restructuring, including a ing of existing loans. For the current fis- reorganization of the relationship be- cal year (fiscal 1999) this waiver will be Total new lending commitments from the tween the federal government and the reduced to 0.05 percent. World Bank and IDA to client countries regions, especially regarding tax collec- were a record $28.6 billion in fiscal 1998, tion. Continued on page 32 C) 1998 The World Bank TRANSITION, August 1998 U A New Generation of Pension Reforms Conquers the East-A Taxonomy in Transition Economies by Michal Rutkowski A wave of pension reforms is sweeping over Central and Eastern Europe and is spreading rapidly to Central Asia. Contrary to common beliefs, pension reforms in the transition economies are not replicas of earlier models. They are original reforms which entail unprecedented changes in managing the allocation of people's income during their lifetime. Many experts concluded from the Chil- pensions financing are to be diversified. supplementary pillar has existed in Hun- ean and most other Latin American ex- Both the labor and the capital markets gary for a few years and has formed a periences that a comprehensive pension are to play their roles through the pay- good basis for the introduction of the reform-as opposed to a mere rational- as-you-go and funded part of the sys- second pillar. Since the beginning of the ization of an existing sys- tem, respectively. A part of reform many more Hungarians than ex- tem-had to be based on the mandatory retirement pected have decided to switch to the new replacing a monopoly of system will operate in a system (and pay 6 percent from their the pay-as-you-go, de- pay-as-you-go logic, while total contributions to the funded pillar). fined benefit pension sys- : the other part will be According to the Hungarian rules, em- tem by a fully funded, funded. As each of the pil- ployees can freely decide which system mandatory, defined con- lars is exposed to different they prefer. Only new job entrants have tribution system. [See types of risks, the system's no choice: their enrollment in the new glossary on page 18.] 1| overall risk will be better di- system is mandatory. From the perspective of v ersified. A pay-as-you-go postcommunist econo- g pillar is highly exposed to Latvia also opted for pension reform un- mies, especially in Cen- risks of population aging, der a multipillar system. But it focused tral and Eastern Europe, increasing unemployment, more on major improvements in the pay- this reform option, despite and political pressures. In as-you-go pillar. The reformed first pillar numerous advantages, those areas, funded pillars will be based on the principle of Notional has two essential flaws: are better than pay-as-you-go. On the Defined Contributions (NDC), pioneered * First, it does not really diversify risks other hand, funded pillars cannot oper- in Sweden, and now spreading into other because a pay-as-you-go monopoly ate effectively in an environment charac- countries, such as Poland. Under NDC, (within a mandatory system) is replaced terized by prolonged inflation or financial retirement benefits will be closely related by a funded system monopoly. market crises. In those areas, pay-as- to the (appropriately indexed) notional * Second, because of transition costs you-go pillars tend to be more effective. capital, accumulated by every participant this option is hardly implementable in the during his or her working life. (The capi- countries with a sizable pay-as-you-go Country Inventory tal is notional, or virtual, because this system. Most Central and East Euro- money, even if registered, has been pean countries are such. The status of pension reforms in the re- spent already under the pay-as-you-go gion is presented in the table on page scheme.) If a participant retires, the an- Multipillar Approach 19. Hungary is leading the rush with a nual pension will be determined by di- new multipillar system introduced on viding the accumulated capital with the Hungary, Poland, Latvia, as well as January 1, 1998. The pay-as-you-go pil- average life expectancy at the age of re- Croatia, Romania, Russia, FYR lar is still based on defined benefit, how- tirement. Therefore, the size of the an- Macedonia, and perhaps, Slovenia, Bul- ever, it has been downsized and nual pension benefit will be exceptionally garia, and Ukraine, follow a different op- restructured. A brand-new mandatory dependent on the participant's timing of tion. The key concept of those reforms funded pillar, however, financed with 8 retirement. The incentive to work long will is that the pay-as-you-go monopoly percent of payroll (6 percent until 2000), be strong. The NDC retirement system needs to be replaced by a genuinely and serviced by pension funds, is now mimics the funded system, although the multipillar system. Sources of future fully operational. The third, voluntary and retirement benefits are still to be financed 0 TRANSITION, August 1998 C 1998 The World Bank by current contributions. It thus has the in the region that does not fall into the and supervision fall short of what is microeconomic advantages of a funded "new generation" category, as the needed. pillar, without, however, the macroeco- Kazakh reform mimics the Latin Ameri- nomic benefits, including the contribu- can, in particular, the Chilean, approach. The Polish pension reform program, tion to savings and capital formation. The There will no longer be a genuine pay- called "Security through Diversity," ex- funded pillar in Latvia will not start be- as-you-go pillar for future pensioners. It plicitly emphasizes the advantages of fore 2000, and contribution will be rela- will be replaced by a mandatory funded risk diversification in a multipillar pension tively small (2 percent of payroll). The one. The second pillar will be introduced system. The Polish pension reform is far- introduction of the second pillar is part in the difficult circumstances of an un- reaching. The new system will operate of the approved reform program, but has derdeveloped financial market and prac- in a defined contribution framework, not been adopted as a law yet. tically nonexistent voluntary long-term which will improve transparency, and will savings opportunities (third pillar). There introduce a very close link between con- Kazakhstan started pension reform on could be serious implementation prob- tributions and benefits, thus, strength- January 1 this year. It is the only reform lems, especially if contribution collection ening the incentive to work long. The first Critical Issues in Pension Reform Eight critical issues have emerged from this new generation commitments. (Slovenia has worked out the best and most of pension reforms. professional financing strategy but the reform process-for lack of enough political commitment-has not moved for- 1. Size and structure of the second pillar. The manda- ward as expected.) tory funded pillar should not be too small, otherwise admin- istrative costs-largely fixed-could pose a problem. Before 5. Public support. In most cases the public has supported instituting a second pillar, it seems important to assess pension reform if it believed that (a) benefits and contribu- whether minimum financial market conditions have been met, tions were linked closely, so that benefits would reflect life- and to keep with a few basic rules, such as complete sepa- time contributions; (b) the role of the private sector in pension ration of pension funds' assets from the assets of compa- provision was to be increased, at the expense of the for- nies managing those funds. This separation, both legal and merly omnipotent social insurance institutions. The public physical, ought to go along with the requirement that an should be provided with a wide range of information. Raising independent depository hold the fund assets. public awareness of the implications of demographic sce- narios also facilitates the reform process. (Social support 2. Supervision capacity. Building supervision capacity can be identified through opinion polls, conducted prior to takes time, unless there are already well-functioning super- completing the reform package.) visory institutions for investment funds, banks, or insurance companies, whose experience could be tapped easily. 6. Leadership. It is advisable that the government set up pension reform offices, shielded from political influence and 3. Administration and management. Huge administra- daily operations of pension management, that can focus on tive changes have to take place in the contribution collection professional tasks. process, especially if a centralized collection of both first and second pillar contributions is chosen (a preferred option 7. Working with trade unions. Major trade union groups, to lower administrative costs). It takes time and a lot of tech- if involved in the reform process from the start, could be- nical assistance to introduce modern management informa- come its supporters, as the example of Solidarity in Po- tion and computer systems. land shows. 4. Political will and transition costs. Although prepara- 8. Timing and speed. Work on reform should be fast. Op- tion of a reasonable strategy to finance transition costs (in- portunities for pension reform come and go. Political sup- volving a combination of expenditure adjustment, debt, and, port varies depending on circumstances that may have if possible, privatization revenue) is a sine qua non, political nothing to do with pension reform. It is critical that the re- will is ultimately the deciding factor. As part of its strategy, form team seize the opportunity and move ahead quickly the government will have to renege on some pay-as-you-go and decisively. © 1998 The World Bank TRANSITION, August 1998 E The World Bank's Overarching Role The rush for pension reform poses a challenge for the World The Bank has done quite well so far. In the future, however, it Bank. The key issue is to move ahead quickly with an appropri- needs to be even more imaginative and come up with new, ate package. In Hungary, Kazakhstan, Russia, Croatia, FYR sometimes unconventional, nonlending services. Resident Macedonia, Kyrgyz Republic, and Bulgaria, the Bank has as- advisory services, for example, are of paramount importance, sisted, or will assist, pension reform efforts through adjustment as the example of Hungary, Slovenia, and Poland shows. loans and technical assistance (knowledge transfer). Techni- Spending significant resources up front, at the right time, cal assistance and investment projects, focused on adminis- can bring a huge payoff, as demonstrated in Hungary. The tration and management, are already in place in Latvia and Bank also has played an important role as coordinator of Romania, and are being prepared in Poland, Kazakhstan, international donors. Benefits of the Bank's increasing in- Slovakia, Moldova, and the Czech Republic. It seems advanta- volvement in assisting this new generation of pension re- geous that the Bank provide a single assistance package, even forms are hard to overestimate. The Bank serves future though its elements may be developed in separate operations, generations, including those who are now children. Let them as has been the case in Kazakhstan and Russia. smile when they retire. set of reform laws, including the law on possibly Ukraine, set up task forces to programs that include introduction of the organization and operation of pension prepare comprehensive pension reform second pillar, major reform of the pay- funds (funded pensions), was passed in as-you-go pillar, and introduction. of a le- mid-1997. The government approved a sec- gal framework for voluntary long-term ond set of laws, including the law on pen- Glossary savings. (The table on the next page sions (reforming the pay-as-you-go marks the reform status on all four fronts system), in April 1998, and it is now being Pay-as-you-go (PAYG) system: The pen- as being "in preparation.") In the Czech debated in the parliament. Poland's new sion is paid out of current tax revenues (usu- Republic it was expected that an expan- multipillar pension system is set to begin ally payroll tax), rather than out of an sion of the voluntary (third) pillar would operation on April 1, 1999. It consists of: accumulated fund; contrasts with funded pen- trigger partial privatization of the pension * PAYG first pillar, based on notional sions. system. This did not work out well (not defined contributions. Funded system: The pension is paid out of surprisingly: in Western Europe it took * Mandatory, fully funded second pillar, an accumulated fund built up over a period of decades for the third pillar to reach a sig- based on defined contribution (9 percent years from the contributions of members; con- nificant share of retirement income). of payroll), serviced by private pension trasts with pay-as-you-go pensions. Another group of countries have not funds, and managed by joint stock com- signed up for moving toward a multipillar panies that are formed by major invest- Defined benefit pension plan: The system yet, but some have restructured ment funds and insurance companies. individual's pension is based on the number their first pillar (including Lithuania, Es- * Voluntary third pillar, based on em- of years in service and the sum of final sal- tonia, Georgia, Armenia, and Albania) ployee pension plans. ary; contrasts with defined contribution sys- and others are planning to restructure it tem. (Kyrgyz Republic, Azerbaijan, Just a few months ago, Croatia's gov- Defined contribution pension plan: The Uzbekistan) while they contemplate a ernment approved a reform program that individual's pension depends only on the size multipillar option. will introduce a multipillar pension sys- of and rate of return to accumulated pension tem. The first pillar will remain in a de- contributions; contrasts with defined benefit Unique Features fined benefit, pay-as-you-go framework, system. but it will be streamlined and modern- In all these cases the origins of the pen- ized. A mandatory funded pillar financed Notional defined contribution plan: un- sion reforms are closely linked to an in- by 5 percent of payroll will be introduced funded defined contrbution plan. Contributions creasingly poor performance of the old beginning January 1, 2000. are immediately paid out as other contributors' system, based on a pay-as-you-go mo- pensions (pay-as-you-go); however, future nopoly. Those systems are already un- The rush does not end here. A group of pension depends exclusively on those contri- sustainable in most Central and East countries, including Slovenia, Romania, butions and notional (virtual) rate of return to European countries, with 10-15 percent Russia, FYR Macedonia, Bulgaria, and them. of GDP spent on retirement, disability, * TRANSITION, August 1998 © 1998 The World Bank and survivorship pensions. Demographic Latvia it took several years of muddling Unlike Latin American reforms, which are forecasts indicate that without a reform, through before comprehensive reform heavily focused on a funded pillar, and those expenditures will have to increase packages were produced. It also took unlike most OECD countries, which es- to about 25 percent of GDP in 2050. In time to recognize that real pension re- sentially maintain pay-as-you-go mo- the FSU countries pensions are less form is about escaping the fatal logic of nopolies within their mandatory systems, generous but tax bases are correspond- the pay-as-you-go monopoly and mov- transition economies are increasingly ingly smaller. Those systems are equally ing to a system that allows for taking likely to end up with mixed systems that unsustainable, primarily because of the advantage of capital market develop- balance advantages of intergenerational low effective retirement age and wide- ments-without, however, eliminating solidarity with advantages of long-term spread occupational privileges, and less pay-as-you-go advantages. Making the individual mandatory savings. because of the levels of the average pen- system sustainable means reducing sion. dependency on, but not eliminating the Michal Rutkowski is a sector leader for strength of, intergenerational solidarity. Social Protection in Europe and Central Putting the reform packages together Thecentralfeatureofthereform program Asia Region, the World Bank, and a and getting them approved by the gov- is the funded pillar, which coexists with former director of the Office for Pension ernments and parliaments has been an a reformed PAYG pillar. The system's Reform of the Polish Government (Oc- extraordinary difficult task, primarily be- transparency dramatically increases tober 1996-September 1997), while on cause of the many special interest with the elimination of privileges and spe- /eave from the World Bank. groups and lobbies involved in defending cial provisions, as well as the move to- the status quo. In Hungary, Poland, and ward a defined contribution principle. Progress of Pension Reform in 25 Transition Economies Fundamental Reform Second Pillar Major First Pillar Major Third Pillar Pro-ram Introduction Reform Introduction In pre- Legis- In pre- Legis- In pre- Legis- In pre- Legis- Country paration Approved lated paration Approved lated paration Approved lated paration Approved lated Hungary © ( © ( Latvia © © © © Kazakhstan © © ( Poland © © © ( Croatia © ( M ( Romania ( © a © FYR Mac. ( M Russia ( ( ( ( Slovenia © ( ( - Bulgaria 0 ( © 0 Czech Rep. ( © © Slovak Rep. © ( Ukraine ( © ( © Armenia © © © Georgia © 0 © Lithuania © ( © Estonia C 0 Albania ( © Kyrgyz Rep. ( © © Uzbekistan 0 0 0 Azerbaijan ( © ( Moldova © ( © Belarus © Bosnia & Herc © © Tajikistan © Source: The author. C 1998 The World Bank TRANSITION, August 1998 China's Economic Policy and the Southeast Asian Crisis Transition Interview with Professor Gao Shanquan Two years ago, when scholars and investors were still under the spell of the East Asia miracle, the prominent economist Gao Shangquan produced a report waming China's leaders that Southeast Asia was on the brink of a potential financial crisis. The Beijing University professor, who also served in the government between 1985 and 1991 as Vice Minister of the State Commission for Restructuring the Economic System, and since 1991 has presided over the Haikou (Hainan)-based China Institute for Reform and Development (CIRD), currently is conducting research as a visiting scholar at the World Bank. In the following interview with Transition editor Richard Hirschler, Professor Gao analyzes the likelihood of a yuan devaluation, describes China's efforts to maintain the economic momentum, notwithstanding the slump in the region, and predicts further strengthening of China's ties with the World Bank. Q. Two years ago, when you re- firm despite the devaluation wave of the first five months of 1998. Our current vealed the fragility of the East Asia the neighboring currencies. China is account balance is in good shape. The miracle, how did you know what oth- sitting on a mountain of gold and labor costs of our foreign sales are still ers had not yet even dreamed of? hard currency reserves (US$140 bil- lower than in the competing Southeast lion), while Hong Kong's reserves ac- Asian countries. About half of our ex- A. Of course I was aware of the outstand- count for almost US$100 billion. But ports is made up of processing foreign ing performance of the regions' econo- semiproducts. This processing trade is mies; but I realized early on that their not affected by the exchange rate. The currencies were vulnerable to specula- other half would benefit from a devalua- tion. Weakness of the current accounts tion only moderately because of the and the unstable political situation made relativly high import contents of our these monies easy prey for investors manufacturing exports. Further, if we de- who operate with a huge pool of short- value our currency, it could trigger a new term, hot money. In 1996, when I sent depreciation wave in the region. Domes- this report to the heads of our State tically, the costlier imports would drive Council (the Cabinet), I was in charge of up inflation. Therefore, instead of devalu- an economic team that helped prepare ing, we are trying to open up new mar- the ground for the Hong Kong reunifica- kets for our products and increase export tion. We intended to safeguard the sta- incentives, for example, through tax re- bility of the Hong Kong dollar at any price, bates. and tried to avert any speculative attacks. So in a confidential note I drew our Q. Nevertheless, over the past six government's attention to the looming months, not only has there been a perils and suggested measures to abort officials of the foreign trade ministry slowdown of the export dynamics the inflow of destabilizing short-term capi- recently disclosed that year-on-year and the inflow of foreign direct in- tal and keep the HK dollar firm. export growth dropped to 7.6 percent vestments, the economic growth rate in the first half of this year, compared has dropped to 7 percent and the Q. Maybe you should have shared with 26.2 percent in 1997. How long 1998 target is just 8 percent. Even 7 this insight with others, including can China afford to resist devalua- percent growth is envied by neigh- those who, as late as mid-1997, were tion? boring countries-Singapore's wild- still extremely upbeat about the du- est ambition is to reach 3-4 percent rability of the miracle. Indeed, since A. I believe that the yuan will not be de- this year. But in China a faster ex- Hong Kong's reunification both the valued, for the time being. We have pansion is necessary with some 20 yuan and the HK dollar have stood posted a trade surplus of $18.5 billion in million people entering the urban E TRANSITION, August 1998 © 1998 The World Bank job market each year. How will you country of 1.2 billion consumers. Infra- boost lending and corporations will float try to boost the economy? structure investments alone will amount more debt issues. Several economists toabout$1,000billionoverthenextthree also suggest offering more bank loans A. Primarily through stimulating domes- years. To fund infrastructure and residen- to support individual car and home buy- tic demand. Don't forget that this is a tial housing construction, banks will ing. Housing reform is an important new Owning a Home in China The Chinese government has formally spelled out its radical a family of four will need a 40 square meter apartment. Tak- new housing policy, under which most urban residents will ing as an average price 2,300 renminbi per square meter for have to either buy their homes or pay much higher rents. an average apartment in Shanghai (under the affordable hous- Most people still live in heavily subsidized public quarters ing program), the flat will cost almost 94,000 renminbi to provided by their work units. Housing currently accounts for purchase. The downpayment of 28,000 renminbi on such a just 3-4 percent of household expenditure, compared with flat will be equivalent to a household's annual income and 50 percent spent on food. In order to encourage people to well below the average household savings deposit of 43,000 buy homes, the government is raising rentals over the next renminbi. Monthly mortgage repayments would consume 26 three years, until they account for 10-15 percent of house- percent of household income. While this may be high com- hold spending. It is expected that workers will be compen- pared with some Western countries, it is low by Hong Kong sated more in cash than in kind; thus, housing and social standards, where monthly repayments can typically account services can be monetized gradually. For the time being, for up to 50 percent of household income. however, few state enterprises can afford to pay higher wages. Mortgages range from 5 to 20 years, and, as in Hong Kong At present, housing is cheap, but also of very low quality and SAR, lending is capped at 70 percent of the value of the inadequate in terms of living space. The government planned property. For 1998, the central bank has set aside 100 bil- to build 1.2 million square meters of low-cost housing be- lion renminbi for mortgages for low-cost apartments. Of this tween 1995 and 2000. This amounts to 240 million square amount, 30 percent will be available for individual mortgages meters a year and would increase per capita living space through the China Construction Bank (CCB). The develop- from 7.9 square meters to at least 12 square meters by 2000. ment of mortgage facilities continues to be constrained by However, the huge inventory of unsold housing is a reminder the lack of standardized techniques to assess the credit of the last phase of construction-led economic overheating risk of individuals. In the long term, municipal provident funds (1992-94). These apartments have remained empty because supported by both workers and enterprises could provide of oversupply, poor construction quality, and weak demand. the capital needed to make the fledgling mortgage system Property prices are inflated by a host of extra taxes and work. But for the time being, besides the obstacle posed by charges (covering such items as land-use rights, pollution, the shortage of mortgage lending, high land prices in the big and education), which add some 20-30 percent to the cost cities and a weak secondary market hamper the develop- of buying a home. ment of China's real estate market. The government's affordable housing program-under which Banks will be a major beneficiary of the extended mortgage low-cost housing is sold to low-income buyers at around facilities. Under the tight credit policy, banks have been inun- 2,000-2,300 renminbi per square meter, or one-half of the dated with individual deposits. They have had to service the market rate-has enjoyed little success to date. (In Beijing deposits with extremely high rates of interest that have been the market rate is reaching 5,000 renminbi-US$600-per made even higher by interest rate subsidies intended to at- square meter.) Developers of low-cost housing are required tract as much money into the banking system as possible. to set aside 10 percent of their stock to sell under the The policy has been effective in helping to bring down inflation scheme. However, two-thirds of housing built under this pro- (yearly retail price inflation fell to 0.9 percent in the first half of gram remains vacant because qualifying buyers cannot af- 1998), but it has constrained the bank's ability to lend. Banks ford to purchase the apartments. If units are not taken up have some 4,000 billion renminbi in individual deposits that for a certain period of time, they are sold at the market rate. can be diverted toward home ownership. Investment in hous- ing is expected to become a major engine of growth. The government target is to raise the per capita living space to 10 square meters by 2000. Assuming this target is met, (Based on Oxford Analytica and news agency reports) © 1998 The World Bank TRANSITION, August 1998 * growth area. To encourage greater pri- ther losing money or barely making coming three years, the labor ministry vate home ownership and reduce state a profit. Many have already stopped plans to find new jobs for 10 million expenditure, the government plans to production and ceased paying their laid-off workers by 2000, chiefly through abolish the welfare housing system and workers. Government statistics put retraining, hiring for public investment quadruple rents for state-owned apart- the current urban unemployment projects, and incentives to the private ments during the second half of 1998. rate at 3-4 percent, or 5 million sector and service industries. The un- Naturally, affordable mortgage lending people, excluding the estimated 10 employed workers will receive support rates and affordable apartment prices are million xiagang workers, those who to set up small private businesses, and necessary [see box on page 21]. Sell- have been sent home from their fac- firms that recruit laid-off workers will be ing off subsidized apartments to resi- tories but are receiving some salary, eligible for wage subsidies and tax ex- dents within the next two years is one though only a fraction of their ear- emptions. Social welfare payments will proposal circulating among government lier wages. Finding a job in the coun- be dispensed for those who have lost not officials. tryside is hardly an option: of a rural only their jobs but also the right to dip labor force of 450 million, 130 mil- into the "iron bowl," the guaranteed life- Q. Despite these demand-boosting lion are thought to be unemployed. time benefits. Although enterprises and efforts, unemployment is expected to local authorities are obliged to build so- rise further this year, as a result of A. The increasing unemployment is one cial funds and compensate their re- both the economic slowdown and of the most important issues the gov- trenched workers for lost benefits, this the structural reform program, with ernment has to deal with. It is compli- compensation is rather small. But sev- its attendant sale, merger, and bank- cated by the restructuring process: while eral psychological barriers have to be ruptcy of ailing state firms. Some state-owned factories would let go an ad- overcome. Many workers still think that two-thirds of state enterprises are ei- ditional 8-10 million workers over the the iron bowl is their only option for new Stitching a National Safety Net China is trying to stitch together a nationwide social welfare safety to the Ministry of Labor, first at the county, and then at the provin- net from a fragmented system based largely on individual state cial level. The goal is to make individual pension accounts trans- enterprises. China's 110 million urban workers have traditionally ferable from one job to another. To date, nearly 90 million urban enjoyed a cradle-to-grave welfare system that included an old- workers have joined the pension system. One difficult issue is age pension and hospital care. But the system was inefficient that the elderly workers accumulated relatively little funding dur- and could not be sustained over the long term. A 1995 Labor ing their active life. Although about 50 billion yuan (US$6 billion) Law stipulates that all Chinese enterprises must provide pen- have been accumulated in pension schemes nationwide, most sions and medical benefits to their workers, but many cash- cities and provinces have already run up a deficit. For now, the strapped enterprises are unable to comply; some cannot even authorities allow the funds to be invested only in government manage a small severance payment. 'The most urgent task is bonds, or else deposited in savings accounts. Later on, private to change the enterprise pension system into a social, or na- pension funds are supposed to play an increasing role. tional system," Duan Qixiang, an official with the Ministry of Labor's Social Security Department, pointed out recently. Free health care has also become a thing of the past as enter- prises require workers to foot a porbon of the bill amid soaring In the new urban pension system approved by the State Coun- medical costs. Hospitals, cut off from the once-generous govern- cil, the employees' individual pension account, which should ment tap, now demand cash payments. Under the city-based total 11 percent of an employee's monthly wage, will be main- medical care system, employees and employers contribute about tained through the joint contribution of workers and employers. 1 0 percent of wages to the fund. About 50 percent goes to the In addition, employers must pay into the social "subsistence" employee's personal account, the remainder to a mutual fund or fund, which will guarantee all Chinese citizens a basic pay- unitary financing account. People covered by the system are to ment in retirement, equal to 20 percent of the prevailing average first use the money in their personal account to pay their medi- provincial wage. Employees initially will contribute at least 4 cal care costs. When their individual account is depleted, they percent of their wages, a proportion that will rise by 1 percent can apply to make use of the mutual fund. every two years until it reaches 8 percent. A key aspect of the plan is to transfer management of the funds from the enterprises (Based on Oxford Analytica and news agency reports) m TRANsmoN, August 1998 © 1998 The World Bank employment, and that the state will more frequent as army enterprises ex- A. As a member of the government dur- sooner or later provide them with a new ploited their special position. For ex- ing the late 1980s and early 1990s, I wit- job. Instead, they themselves should take ample, army-run business trucks do not nessed and facilitated cooperation with the initiative, go to the job market, call pay tolls and are rarely stopped by po- the World Bank. The Bank, through its on private companies and businesses in lice for inspection at border crossings. support of projects and provision of tech- the service sector, and try to find a re- Most of these enterprises are small or nical advice, has played a paramount role warding career. Many unemployed still medium-size, and may become joint in China's modernization efforts. This pro- regard taking a new job in the service stock holding companies; the fewer big cess should continue. Our demand for sector as degrading, compared with their ones will merge into other companies, foreign capital and know-how is un- earlier position in the manufacturing in- be listed on the stock exchange, get abated. We have many unresolved prob- dustry. reorganized. Just as line ministries in the lems-for example, how to strengthen civilian state sector are being detached the legal, political, and social institutions Q. The nationwide economic re- from enterprise management, PLA com- of our socialist market economy? How structuring is liquidating the com- panies will be separated from the army to maintain rapid economic growth? Help mercial empire of the People's management. first, in familiarizing ourselves with other Liberation Army. "To get the army out countries' experiences and, second, in of the business of making money and Q. After having spent several months adapting those experiences to our own back into the business of defending in the Bank as a visiting fellow, and circumstances are important areas in China,"as a Washington Post corre- having met with President which we are counting on the World spondent put it, President Jiang Wolfensohn, what is your impres- Bank's support. So I hope that our col- Zemin in mid-July ordered the PLA sion-will China be able to keep its laboration with the Bank will remain at to relinquish its huge network of en- position as one of the most impor- its present high level. terprises, which includes airlines, tant client countries of the Bank? mining, manufacturing, telecommu- nications, and transportation busi- .n . nesses; real estate; restaurants; Transiton discotheques; and a tourist cruise line on the Yangtze River. Some 400 PLA pharmaceutical firms produce X 10 percent of China's medicine. Army-owned factories churn out about 20 percent of the car and truck output and 50 percent of the motor- cycle production. The PLA runs 1,500 hotels. Exports from the military sec- tor reached $7 billion in 1997, half from civilian products. And PLA en- terprises had overseas sales of con- sumer goods worth US$3.5 billion. Why has this drastic curtailment of PLA economic activity become nec- essary? What will happen to these businesses? A. The PLA started its business opera- tions in the early 1980s, partly to help overcome shortages in the civilian 7 ., economy, and partly to boost soldiers' living standards. But during the early 1990s economic misconduct, corruption, profiteering, and smuggling became From Russian cartoonist Vladimir Kremlev D 1998 The World Bank TRANSITION, August 1998 U Assessing Risk in the Transition Economies- A New Approach by Robert A. Cord M uch of the literature on mea- 0 Macroeconomic risk. Factors in this ing risk profiles, underpinned both by po- suring business risk in the category include real GDP growth and litical systems based on democratic emerging markets of Eastern the sustainability of growth arising from principles and by steady progress in es- Europe and the former Soviet Union fo- variables such as inflation and the fiscal tablishing the cornerstones of a capital- cuses on macroeconomic indicators, balance as a percentage of GDP. especially fiscal performance and cur- * External risk. This comprises factors Dun & Bradstreet's Country Risk In- rent account balance. These variables such as the strength of the current ac- dicators for Selected Countries, are important, but to derive a compre- count and the size of the foreign debt July 1998 hensive view of the business environment stock. Country Grade in these countries, a number of other 0 Commercial risk. Included here are Hong Kong SAR DB2d factors must also be considered. This is concepts such as payment terms on China DB3a where the Dun & Bradstreet model of exporters' contracts and the degree of Slovenia DB3a country risk comes in. systemic corruption. Czech Republic DB3b Poland DB3b In most transition economies the ability Each variable is then scored and Hungary DB3c of domestic firms to produce quality weighted to give a country risk indicator Vietnam DB4b goods for the home market has been that runs from the least risky, DBl, to Estonia DB4c undermined. In conjunction with trade lib- the most risky, DB7. The top six bands, Latvia DB4d eralization policies, this has provided D11 to D06, are also subdivided into Lithuania DB4d Western manufacturers with the chance a,b,c, and d quartiles. (The difference be- Slovakia DB4d tocapturemarketsharethroughsaleand tween DBld and DB2a is the same, in Romania DB5a foreign direct investment. Inauspiciously, terms of risk, as that between DB2a and Croatia DB5c consumer goods have so far dominated DB2b.) Kazakstan DB5c imports in the majority of transition Bulgaria DB5d economies. This trend has been fueled It should be noted that the Dun & Azerbaljan DB6a by fiscal laxity and excessive consumer Bradstreet model assesses the risk of Kyrgyz Republic DB6a credit, with attendant problems on the doing business in a country and does Uzbekistan DB6a current account. Meanwhile, imports of not tackle the altogether different ques- Belarus DB6d more productive capital goods have re- tion of sovereign risk, that is, the willing- Cuba DB6d mained relatively low in a number of ness and ability of a government or a Russian Federation DB6d these countries. publicly backed entity to fulfil its debt Tajikistan DB6d obligations in full and on time. Ukraine DB6d Given such a situation, Western com- Albania DB7 panies wishing to trade with the transi- The following table provides a snapshot Yugoslavia D17 tion economies must have an objective of the risk indicators for a group of se- measure of the relative maturity of the lected countries. At the positive end of Source: Dun & Bradstreet's Economic business environment. Dun & Bradstreet the scale, Hong Kong SAR, with a DB2d Analysis Group. designed a global model of country risk, score, represents one of the least risky ist economy. Moreover, these countries the basis of which is a risk indicator. It countries to do business with, while Yu- were among those chosen by the Euro- comprises a composite index of four goslavia, at D17, is one of the riski- pean Union (EU) to begin accession talks overarching country risk categories: est countries. in early 1998, with a view to full mem- * Political risk. This covers variables bership possibly by 2003. As negotia- such as the stability of the executive, Countries such as Slovenia, Hungary, tions progress further and a number of social stability, and policy competency. and Estonia all have broadly encourag- issues, such as ongoing disputes over M TRANSmT1ON, August 1998 © 1998 The WorldBank agriculture reform, are settled and as the chance, with General Aleksandr Lebed, interest among foreign investors. For ex- aspirant countries continue to implement the newly installed governor of the re- ample, business sentiment in the Far the necessary structural reforms, an un- source-rich Krasnoyarsk region, cur- East region has been helped by the es- stoppable momentum will develop. This rently the front-runner. However, despite tablishment of Russia's first free eco- should have a positive impact on these his popularitywith ordinary Russians and nomic zone, at Nakhodka, east of countries' risk indicators. the financial backing of business tycoon Vladivostok. But for the most part invest- Boris Berezovsky, Lebed remains an un- ment continues to be deterred by cor- Less encouraging is the situation in sev- known quantity and, inauspiciously, ruption, an inefficient local and federal eral FSU countries, scoring in the lower freely admits to ignorance on economic tax system, poor infrastructure, and in half of the table. While the business com- matters. His governorship should provide some cases-such as the North munity might be drawn east-in particu- further indications as to whether or not Caucasus-by the very real threat of lar, to countries, such as Kazakhstan he is fit to be president. social instability. Also, investor confi- and Azerbaijan, that promise lucrative re- dence is being dented by high-profile turns from oil and gas exploration-key * Significant macroeconomic and cases of incompetence on the part of problems worry potential investors and external risks have pushed Russia to the federal government, most notably trade partners. For example, in Ukraine the verge of economic collapse. The demonstrated by its recent inability to and Tajikistan progress in structural re- government's debt-servicing costs, cur- privatize the Rosneft oil company, be- form, in particular privatization, contin- rently estimated at $1-1.5 billion a week, cause the asking price was too high. ues to be hampered by political will continue to grow, suggesting that the indifference. In Belarus, President levelofaid beingofferedbythelMFmay Clearly, conditions in Russia are highly Lukashenka is holding back much- be woefully inadequate. The chances of unstable and likely to remain so until the needed reform in both the political and a default will increase significantly over next presidential election. economic fields. The low rating of the the coming months. most important country in the region, The author is an economist with Dun & Russia, deserves closer analysis. [This * Commercial risk across Russia re- Bradstreet's Economic Analysis Group was written before the ruble devaluation mains high. Some regions of the Fed- based in High Wycombe, United King- and the three month debt moritorium, an- eration are beginning to generate more dom, E-mail: cordr@dnb.com. nounced on August 17. The editor.] To explain why Russia's rating is so low, Letters to the Editor it is worth looking at how it performs within each of the four risk categories We received a large number of responses to our interview with Grzegorz Kolodko outlined above: on "New Trends in Development Strategies" (Transition, vol. 9, no. 3, June 1998, p. 1). Please feel free to join the discussion. v In the political arena, matters re- main highly uncertain. True, President Boris Yeltsin has in recent months Three Pillars for Success openly signaled his enthusiasm for the young, reformist wing of Russian poli- Gerhard Fink, Jean Monnet Professor 1. Equilibrium and stability-oriented poli- tics; this was demonstrated by Sergei forApplied Microeconomics in European cies. Kiriyenko's appointment as prime min- Integration: 2. Institution building. ister in April 1998, despite heavy oppo- 3. Humanity. sition from the State Duma. However, In the early 1990s I pulled out of transi- such developments continue to be over- tion discussions. I was fed up by the Ist Pillar. Equilibrium and stability-ori- shadowed by the question of who is likely extreme positions: on the one hand the ented policies. I share the view that these to succeed Yeltsin when his term ends extreme liberals, and on the other hand policies require fiscal balance, a sustain- in 2000 (assuming he himself decides the "third way excommunists" who were able current account, and low inflation. I not to run for another term of office). A advocating gradualism of the Gorbachev am in favor of a current account-oriented number of high-profile personalities have type. I agree that successful economic incomes (wage) policy. If this is not pos- been mentioned as successors but only development in transition economies sible then exchange rates have to be two or three appear to have a realistic should be based on three policy pillars: adjusted regularly (crawling depreciation) C 1998 The World Bank TRANSITION, August 1998 E to maintain a modest undervaluation of institutions, market agents need to be on the large discrepancy in incomes in the currency. trained so they can effectively apply the Russia and Ukraine as compared with rules, and the population must be pro- Poland and Slovakia. The considerable Although many people (in particular, vided ways to enforce contract sanctity, gap helps explain why private money former communists) claim that, because protect themselves against cheating by feels insecure and moves out of Russia of the catching up process, there is no suppliers, ensure minimum standards for and Ukraine. Devaluation would heighten need for a balanced current account, I food quality, and so on. "Fair competi- insecurity in the ruble marketplace, driv- am against this view. So far in my pro- tion" also means that everybody has to ing out convertible currency, which would fessional life I have not found any proof pay his taxes. have to be replenished by the IMF and that current account deficits are good for other organizations. economic development. Thus, I stick to 3rd Pillar: Humanity. In other words, equal my theoretical argument (supported by opportunities and secured minimum Money in circulation is legal tender. But developments in Germany and Japan) standards. I distinguish four areas: the neoliberal reform plan has overlooked that small (modest) current account sur- 0 Crime prevention (tolerance of crime the legal position of cash tendered in the pluses are the best policy. This means: is the major cause of unequal distribu- marketplace. It has overlooked lawyers first earn and save, then spend. Small tion of opportunities). trained in commercial law, auditors, current account surpluses imply perma- 0 Safety nets: health services, old age valuers and surveyors, and an adequate nent slight undervaluation of the currency pensions, support for the very poor (irre- network of courts. Without courts, how- (from a current account perspective). spective of the reason they are poor, to ever, peaceful adjudication risks degen- There is no need for additional protec- prevent their criminalization). erating into adjudication by weapon. In tion of domestic industries that find it * Income distribution policy. Everybody such circumstances the negotiation of easier to sell abroad than at home; thus, pays taxes, the income tax is progres- commercial instruments and values we have an export-led growth strategy. sive (with the highest bracket set at 50 would have to be conducted through buff- percent), and there is a reasonable la- ers, through armed squads providing pro- 2nd Pillar: Institution building. A well- bor-capital income distribution (70-30 tection. functioning market economy needs fair percent). rules and institutions that are able and 0 Education, training, and research. Edu- Managers in the former Soviet republics willing to implement, apply, and super- cation: universal and obligatory; stress on have been converting the payroll com- vise the rules. My watchword is "fair and acculturation to civil society, industrial ponent of working capital into convert- workable competition." Fair competition (job-oriented) skills, and entrepreneur- ible currency to remit assets overseas. means that the same rules should ap- ship; history should be reframed in terms Unpaid enterprise employees haven't ply to everyone and that too much con- of social achievements, not wars. Train- collected pay for one year. Such arrears, centration (monopoly power) is to be ing: includes both training and retraining which discourage reinvestment of capi- avoided. Workable competition means of young people and adults (that is, life- tal, must seriously affect the climate for that "fairness" should not lead to over- long learning). Research: encouraged by business development. regulation, which is costly and may tax policies and government spending. cause many more inefficiencies than a Particular support should be provided to The debate over the relationship between deviation from what would be considered educating young people for civil society, government and the business sector can- "absolutely" fair. Unregulated markets are coping with present and future technologi- not take place in a vacuum. The viability never fair markets. Manchester liberal- cal challenges, and maintaining a focus of modern liberal economics cannot even ism is supporting fraud. The Czech on humanity in society. be considered exceptwithinaframework economy, as well as others, provide of legal accountability-or businessmen ample examples of the effects of the will have to work with muskets at the "free" free market in the financial sector. Legal Accountability: What ready. Regardless of how we juggle the Counts relative shares of the government sector Mr. Kolodko mentions some of the nec- and the business sector, creating an en- essary institutions: antitrust laws and Wendell W Solomons, Management vironment that will encourage and keep agencies, commercial and investment Research, E-mail: solomons@slt.lk: capital investment will require ensuring banking, securities exchange commis- legal rights and recourse in the market- sions, and the like. I hasten to add that Using the Gini coefficient to reflect in- place. in addition to building such appropriate come inequality, Mr. Kolodko shed light * TRANSITION, August 1998 © 1998 The World Bank makes clear that the building of social seems that the neoliberals forgot about Communicate with the Public! consensus (through communication with the background conditions, about what the public), change and creation of new Ed Crane calls the "soft infrastructure" Boriislav Petkov, Financial Markets, social institutions, and enforcement of of the market. Central Bank of Iceland, Kalkofnsvegur economic rules and rights should be an 1, 150 Reykjavik, Iceland, tel. 354-5699- incremental process. The government I wouldn't like to put it quite your way: 652, fax 354-5699-906, E-mail: boris. should have a clear idea of its general That the problems of reform show that petkov@sedlabanki.is: goals and should implement an unam- the state needs to play a bigger role. biguous industrial policy. And no one The words stick in my throat. But there Professor Kolodko is correct when he should expect too much from the mar- is something to them. If there isn't that emphasizes the importance of wise re- ket-wealth holders and entrepreneurs "soft infrastructure," then bandits take regulation of East European and FSU are seldom interested in larger (macro- control. I do agree-and this is a lesson markets and not simple deregulation. economic) consequences. The relative from Southeast Asia that is not negated Linkages with international markets be- successes of Poland and the Czech by recent financial problems-that the stow benefits by directing capital to its Republic compared with Russia and state has a role to play as investor in most effective use, improving the inter- Bulgaria owe much to those countries' human capital (health and education) and national allocation of resources, and theo- previous experience of democracy. in rural development (especially building retically, equalizing rates of return on rural market infrastructure). It is simply capital. However, large proportions of tragic that the Russian government has these flows are related to purchase and The Classical Liberals Were Right given so little priority to critical needs. sale of financial liabilities on secondary markets rather than investment in real Edwin Dolan, American Institute of Busi- resources and production. These flows ness and Economics, Moscow: Bring More Businessmen into are volatile, consisting of liquid capital Policymaking attracted by the prospect of speculative I agree that reform efforts to date in Rus- capital gain and having little to do with sia have laid insufficient emphasis on Richard Suren Keoseian, Privatization long-term yield on real investment. institution building. I would go further than Investment Funds: that and say that it is not only institu- Such capital "integration" carries sub- tions that are lacking, but the entire cul- Whenever governments, institutions, stantial risk: capital outflow could start ture of a market economy. As a long-time and/or academics attempt to implement suddenly; a lack of consistency in a classical liberal, I find itironicto be agree- solutions solely by analyses and formu- country's macroeconomic policy or ing with you, a member of a Communist las, the results can be disastrous. Gov- simple profit seeking could provoke government(Ihavenoideawhatyourown ernments often get caught up in a speculative attacks. Two examples: the party affiliation is) in criticizing the "firefighting syndrome" without regard for Czech National Bank in May 1997 was "neoliberal" aspects of early reform di- source, content, structure, or the envi- forced to abandon its policy of keeping rections. However, there is some kind of ronment. A "bubble theory": if water can the koruna within a trading band against very basic truth in these criticisms. I put out a fire, more water can put out a a hard currency basket, and had to move think the truth lies, somehow, in a differ- fire better. However, fires must be man- to a floating exchange rate. At the time ence between the so-called neoliberals aged carefully and prevention techniques of writing, the Russian ruble is under and traditional classical liberals like must be implemented. There is already pressure (observable from the dynamics Friedman, Hayek, Buchanan and their evidence of a serious gap between theory in forward dollar quotations) and the risk 19th century predecessors. and practice in the transition economies, of devaluation is very high. and that gap is likely to increase expo- The classical liberals, perhaps Hayek nentially unless realistic strategies are When neoclassical solutions were ap- above all, always placed primary empha- developed to counter the rapid polariza- plied to the problems of transition econo- sis on the institutional framework of the tion of these societies. There is no single mies, their institutional frameworks were market economy-the rule of law, prop- solution that can be applied success- destroyed without creating anything to erty rights, limited government-and fully to many cuitures. replace them. The belief was that the thought that once those principles were market would impose efficiency and ra- established, then the market could be Perhaps we might consider bringing tionality automatically. Mr. Kolodko counted on to "change the light bulb." It more businessmen into policymaking. (C 1998 The World Bank TRANSITION, August 1998 9 Most businessmen are not risk-averse, competition. In Russia, for example, the be linked to growing anti-Western senti- but cognizant of the risk-reward ratio. privatization program conducted (with ment in Russia. They analyze fundamentals and will take hundreds of millions of dollars of G-7 tax- steps to minimize or eliminate risk as a payer monies) encouraged the accumu- As an avid reader of Transition, I would like necessary procedure to achieve their lation of property in a very few hands and to see more such analysis by Eastern Eu- goals. They carefully weigh cause and opened the door to widespread corrup- ropeans with real experience in implement- measure effects; they develop alterna- tion. Indeed, privatization and other ing the policies of the Westem donors and tive plans to increase the probability of Western-supported "reforms" appear to intemational financial institutions. success. If they fail to meet the needs of the consumer, they have to answer to their shareholders. It is also true that Wall Street typically has a one-dimen- Conference Diary sional "buy low-sell high" mentality. Many are just now coming to the real- ization that unstable economies around Training Seminar: Project Manage- Organizer: Center for European and In- the globe can have an adverse impact ment with Partners in Eastern Europe ternational Studies. on their own economy and their invest- and Intercultural Competency Language: English. ments. September 24-25, 1998, Kassel, Information: Nick Tucker, tel. 44-118- Germany 931-6205, fax 44-118-975-5442, E-mail: The "Washington Consensus" and the cpss@reading.ac.uk; Elaine Reid, tel. "post-Washington Consensus" are syn- Organizer: ADAPT-Osteuropa Qualifi- 44-118-931-4741, fax 44-118-931-4741, onymous labels, unless the theoreti- zierung fuerArbeitskraefte aus Industrie, E-mail: E.Reid@lSMAcentre.reading. cians and policymakers decide to tailor Handel und Dienstleistung (Eastern Eu- ac.uk their design from the grass-roots and rope training forworkers in industry, trade, step-structure solutions on a case-by- and the service sector). International Monetary Fund/World case, culture-by-culture basis. Our de- Information: Ost-West-Wissenschafts- Bank Group Annual Meetings 1998 veloping Privatization Investment Funds zentrum, Universitaet Gesamthoch- September 29-October 8, 1998, are an investment in human capital. They schule Kassel, Hollaendische Str. 36-38, Washington, D.C., United States are designed from the bottom up to pro- 34109 Kassel, Germany, tel. 49-561-804- vide long-term investment, retirement, 3609/3567, fax 49-561-804-3792, E-mail: Topics include: The Changing Dynam- and pension opportunities for the "citi- gorzka@hrz.uni-kassel.de ics of Global Finance; Knowledge and zen-worker-voter" in the transition econo- Technology for Development; Regional mies. These voters will ultimately 30th National Convention & 50th and Country Opportunities. determine whether peace and stability Anniversary of AAASS Information: Internet: http://www.world will exist in the region. September 24-27, 1998, Boca Raton, bank.org/html/extdr/pos98/about.htm Florida, United States Sino-Asian Relations after the Finan- More Research Is Needed Organizer: AAASS. cial Crisis Information: Wendy Walker, Convention October, 1998, Shanghai, China Janine Wedel, Associate Research Pro- Coordinator, American Association for fessor, George Washington University: the Advancement of Slavic Studies, 8 Organizer: Shanghai Academy of Story Street, Cambridge, Massachusetts Economy Sciences. My research has shown that the West- 02138, United States, tel. 617-495- Information: Sun Jialing, tel. 86-21-6273- ern effort to aid privatization in transition 0678, fax 617-495-0680, E-mail: 6250, fax 86-21-6241-0596, E-mail: economies was the cornerstone of do- walker@fas.harvard.edu, Internet: http:/ saoes@online.sh.cn nors' endeavors in those countries: it /wwwfas.harvard.edu/-aaass served as a kind of signifier of capital- International Scientific-Practical ism. One consequence of this was that Entering the World Financial Market: Conference: Theory and Practice of a lot of "privatization," carried out with- East and Central Europe and the CIS Mixed Economy out the proper legal and regulatory frame- Countries October 8-10, 1998, Almaty, work, created monopolies, not September25, 1998, Reading, England Kazakstan * TRA.NSmON, AUgUSt 1998 C) 1998 The World Bank Organizer: Department of Economic November 10-12, 1998, Bucharest, zentrum, Universitaet Gesamthoch- Theory, Institute of Economics and Law, Romania schule Kassel, Hollaendische Str. 36- Kazak State National University in 38, 34109 Kassel, Germany, tel. 49-561- Almaty. Organizer: International City/County 804-3609/3567, fax 49-561-804-3792, E- Information: A.B. Sadva-kosova, De- Management Association (ICMA). mail: gorzka@hrz.uni-kassel.de partment of Economic Theory, Institute Information: Alison Powers, International of Economics and Law, Al-Farabi City/County Management Association Third International Conference on Kazakh State National University, Al- (ICMA), 777 North Capitol Street, N.E., Enterprises in Transition Farabi Avenue 71, 480078 Almaty, Suite 500, Washington, D.C. 20002- May 27-29, 1999, Split, Croatia Kazakhstan, tel. 7-3272-47-28-12, fax 7- 4201, United States, tel. 202-962-3543, 3272-47-26-09. fax 202-962-3681, E-mail: apowers@ Organizer: Faculty of Economics, Uni- icma.org versity of Split. Central European Conference: Fi- Information: Faculty of Economics, Split nancial Markets and Strategies for Investing in Central and Eastern Eu- University, Radovanova 13, Hr 21000 Regional Development in the Face rope: The Central European Split, Croatia, tel. 385-21-366033 or of European Integration Initiative's First Summit Economic 362465, fax 385-21-366026. October 1-4,1998, Nowy Sacz, Poland Forum November 19-21, 1998, Zagreb, Croatia Sixth ICCEES World Congress Organizer: The School of Business in July 29-August 3, 2000, Tampere, Nowy Sacz (WSB-NLU). Information: http://www.digit.it/ceinet/ Finland Information: Jacek Leskow, Scientific sefhome.htm Director, Institute of Advanced Manage- Organizers: The International Council of ment, WSB-NLUNowySacz, Poland, tel. German-Polish Seminar: Ecological Central and East European Studies, 48-18-442 20 07, fax 48-18-443 55 82, or Farming Finnish Association for Russian and East 443 52 13, E-mail: Ieskow@sigma.wsb- November 26-27, 1998, Kassel, European Studies (FAREES), Finnish In- nlu.nowy-sacz.pl; or Central European Germany stitute for Russian and East European Conference, Krzysztof Gluc, Conference Studies (FIREES), and the University of Secretary, WSB-NLU Nowy Sacz, ul. Organizer: ADAPT-Osteuropa Qualifi- Tampere. Zielona 27, 33-300 Nowy Sacz, Poland, zierung fuerArbeitskraefte aus Industrie, Call for papers: Proposals are invited for E-mail: kgluc@wsb-nIu.nowy-sacz.pI, Handel und Dienstleistung (Eastern Eu- panels and roundtables to present the Intemet:http:/vwww.wsb-niu.novwy-sacz.pl/ ropetrainingforworkersinindustry,trade, results of new research on Central and conf/ceconf.htm and the service sector). Eastern Europe and the former Soviet Languages: German, Polish. Union. For more information on making Poland, Czech Republic and Hun- Information: Ost-West-Wissenschafts- proposals, see the Website: http:I/ gary on Their Way into the European zentrum, Universitaet Gesamthoch- www.rusin.fi.iccees. Deadline is January Union schule Kassel, Hollaendische Str. 36-38, 1, 1999. October 17, 1998, Berlin, Germany 34109 Kassel, Genmany, tel. 49-561-804- Information: Sixth ICCEES World Con- 3609/3567, fax 49-561-804-3792, E-mail: gress Secretariat, Finnish Institute for Organizer: Konrad Adenauer Founda- gorzka@hrz. uni-kassel.de Russian and East European Studies, tion. Annankatu 44, FIN-00100 Helsinki, Fin- Language: German. East-West Technology Transfer- land, tel. 358-9-2285 4434, fax 358-9- Fee: DM 20 (reductions available for stu- Product Design and European Mar- 2285 4431, E-mail: iccees@rusin.fi, dents, unemployed, etc.) keting Internet: http://www.rusin.fi/iccees Information: Bildungswerk Berlin, December 10-11, 1998, Kassel, Germany Konrad-Adenauer-Stiftung e.V., 10907 Addresses of the Program Committee Berlin, Germany, tel. 49-30-26996-0, fax Organizer: ADAPT-Osteuropa Qualifi- members responsible for Economics: 49-30-26996243, Internet: http:// zierung fuerArbeitskraefte aus Industrie, Franz-Lothar Altmann, Suedost-Institut, wwwkas.de Handel und Dienstleistung (Eastern Eu- Guellstr. 7, Muenchen, Germany, tel. 49- rope training forworkers in industry, trade, 89-74613320, fax 49-89- 74613333; or Mobilizing Community Resources for and the service sector). Urpo Kivikari, Institute for East-West Local Economic Development Information: Ost-West-Wissenschafts- Trade, Turku School of Economics and © 1998 The World Bank TRANSITION, August 1998 U Business Administration, Box 110, FIN- 103873 Moscow, Russia, tel. 7-095- Luise-Str. 5, D 14195, Berlin, Germany, 20521 Turku, Fin/and, tel. 358-2-383570, 2037237, fax 7-095-2004298. tel. 4930-897708-68, fax 4930-897708- fax 358-2-3383268, Email: urpo.kivikari 99, E-mail: tribakova@diw-berlin.de, or @tukk.fi; or Nikolai Shmelev, Institute We appreciate the contributions of the dbowen@diw-berlin.de of Europe, Russian Academy of Sci- Cooperation Bureau for Economic Re- ences, Mohovaja ul. 8, dom 3., RU- search on Eastern Europe, Koenigin- Milestones of Transition EBRD budget. Bulgaria's current stability is a target for net inflation of 5.5-6.5 percent result of a restrictive currency board and an end-2000 target of 3.5-5.5 per- New President at the European Bank policy introduced in July 1997 to stave cent. Official data released in mid-July for Reconstruction and Development. off a financial collapse. Under the sys- show the June trade deficit at 920 mil- Horst Koehler, 55, former head of tem, the lev was pegged at 1,000 to the lion crowns ($29.6 million)-the small- Germany's Savings Banks Association, mark. The lev's exchange rate is ex- est monthly deficit in four years. The was elected by the EBRD's board to suc- pected to remain a flat 1,800 per dollar first-half deficit was 33.4 billion crowns, ceed Jacques de Larosierefora four-year for the next three years. At present it against 72.1 billion crowns in 1997. The term starting on September 1. He regards trades at around 1,770 to the dollar. data confirm that economic stabilization it as a top priority to help transition coun- is on track, with the full-year trade defi- tries build up businesses that can rival Bulgaria to become CEFTA member. cit likely to be below 100 billion crowns. the German small and medium-size en- Bulgaria in mid-July announced that it will terprises. "If Russia concentrates only on join the Central European Free Trade Hungary privatizing its large conglomerates and Agreement on January 1, 1999. CEFTA ignores the development of smaller en- includes the Czech Republic, Hungary, Budget deficit remains on target. The terprises, there will be an imbalance in Poland, Romania, Slovakia, and Slovenia. central budget deficit was 212 billion social and economic stability." The organization plans to phase out tar- forints (about $9.8 billion) in the first iffs between member states by 2002 and seven months of this year, about half of Bulgaria is seen as a stepping stone to member- the annual deficit target of 427 billion ship in the EU. forints, the finance ministry reported. Government passes three-year aus- Budget revenues over the first seven terity proposal. Bulgaria's government Czech Republic months, excluding privatization income, approved an austere three-yeardraft bud- reached 62.2 percent of the annual tar- get frame that corresponds to its $800 Zero GDP growth. The Czech Statisti- get, while expenditures reached 60.3 million loan agreement with the IMF for cal Bureau (CSU) has cut its estimate percent. The foreign trade deficit the same period. Following an expected of economic growth for 1998 to zero. amounted to $1.3 billion in the first half 4 percent GDP growth in 1998, Bulgaria GDP contracted by 0.9 percent in the of 1998, just $46 million more than dur- forecasts an annual growth rate of 4.5 to first quarter of the year. For the second ing the same period last year. The eco- 5 percent over the next three years. An- quarter of 1998, a further decline in GDP nomic ministry expects an 18-20 nual inflation is set at 7.4 percent in 1999, may be expected, as a result of a sig- percent increase both in exports and im- 6.1 percent in 2000, and 5.4 percent in nificant decline in household consump- ports this year, and as a result, exports 2001. Inflation for 1998 had been pre- tion and also in aggregate domestic can reach $20-$21 billion and imports dicted to be 16.5 percent, but the gov- demand. Net inflation stood at 6.5 per- $23.4 to $24 billion. A 70 percent growth ernment hopes to curb it to 9 percent. cent in June. The central bank has set in exports from industrial duty-free zones The budget deficit is planned at 2 per- net inflation-consumer price index ex- played a significant role in export growth. cent for each of the three years. The pro- cluding both the effects of changes to Duty-free zones were a determining fac- gram envisages setting up market-based regulated prices and taxes and tariffs- tor in imports, as well, representing a 50 pension and health care systems in a as the sole determinant of its monetary percent growth compared with the first bid to reduce the burden on the state policy in 1998. It has set an end-1998 half of 1997. Work on a commission * TRANSITION, August 1998 C) 1998 The World Bank basis (foreign partner provides primary cent. The budget deficit for the first six ensuring that revenues, particularly from material and design) accounted for one- months reached $112 million, as revenues key privatizations, meet targets, Prime fifth of exports. Machinery and equip- totaled $2.5 billion and expenditures $2.6 Minister Nurlan Balgimbayev announced. ment represented 80 percent of total billion. The trade deficit reached $1.1 bil- The oil-rich Central Asian state's finances exports and 70 percent of total imports. lion in the first six months of 1998; ex- have been hit by weak prices for oil and The annual consumer price index was ports totaled $5.2 billion, imports $6.3 metals-its key hard-currency earners. 14.1 percent in July this year, against billion. Most exports went to Germany Kazakhstan had originally planned to 14.2 percent in June and 15.8 percent in (27.4 percent), the Czech Republic (21 spend 314.5 billion tenge this year against May. The national bank considers the percent), and Italy (7.5 percent); 54.1 per- revenues of 203.9 billion. The budgetdefi- 13-14 percent annual inflation projection cent of exports targeted EU countries. cit was set at 110.6 billion tenge, or 5.5 for December realistic. Most imports came from Germany (23.6 percent of gross domestic product. The percent), the Czech Republic (18.8 per- government had also expected to issue Romania cent), and Russia (11.2 percent). up to $450 million in Eurobonds in June or July, but this has been delayed. Spend- Economic decline, worsening trade CIS ing cuts will probably be made in capital balance. Romania's GDP in the first quar- investment and construction. ter of 1998 dropped by 9.4 percent com- Azerbaijan pared with the same quarter of 1997. In Ukraine June 1998 the monthly inflation rate shrank Combating the deficit. Azerbaijan's gov- to 1.3 percent compared with 22.5 percent ernment is slashing expenditures and Conference delegates pay ransom. in December 1997. Officials put the aver- taking wide-ranging measures to address Ukrainian authorities locked 500 local age monthly inflation rate at between 1.7 a growing revenue shortfall. The shortfall and 2 percent by year's end. The number in Azerbaijan's state budget could be as of registered unemployed fell somewhat high as 500 billion manats ($130 million) Shrinking Wages in Russia in May to 907,000, from 933,000 in April. by the end of 1998, if world oil prices re- The trade balance is deteriorating; the defi- main depressed. Spending has been cut cit in the first four months of 1998 amounted by 473 billion manats. Other measures to $813 million. As a national bank official have included improving tax collection- I) explained, the import content of exports especially among the four largest state has reached 80 percent; nonessential im- enterprises (SOCAR, Azenergo, ports, primarily of cars, have not been re- Azerchemiya, and Azerigaz, the state A stricted; and export earnings are low. oil, electricity, chemical, and gas con- / > l Romania's external debt amounts to $8.15 cerns, respectively, which were respon- i billion. Foreign exchange reserves stand sible for 65 percent of all outstanding . | at $3.2 billion. debts to the government). The government . I l !) has established a quota for barter deals 4 / ¼ Slovakia and frozen all mutual claims in the pri- / 4 vate and public spheres. The state bank Economy still in upswing. In the first is to contribute 77 billion manats to the quarter of 1998 Slovakia's total industrial state budget by the end of the year. , Xt1t 1a output reached $4.2 billion (145.5 billion Azerbaijan currently boasts a near-zero X Slovak crowns), up 4.7 percent in year- inflation rate and economic growth of y. 41.L on-year terms. Productivity increased by around 9 percent for the first half of 1999, ; I_ 6.5 percent, largely as a result of lower the best performance in the former So- _ employment. The Statistics Office reported viet Union, according to the IMF. I that at the end of June the unemployment - rate was 13.5 percent, up 0.6 percent from Kazakhstan May. The absolute number of unemployed totaled 375,000. In June consumer prices Curtailing budget spending. rose by 7.4 percent in year-on-year terms Kazakhstan must cut 1998 budget spend- From St. Petersburg cartoonist Victor and the monthly inflation rate was 0.1 per- ing by 45 billion tenge ($580 million) while Bogorad C 1998 The World Bank TRANSITION, August 1998 m and regional officials and 1,700 business- Wl men in a conference center in a bid to orld BankIMF Agenda collect back taxes, and freed them after exacting signed promises to pay. The continued from page 15 participants were invited to Kiev by Ukrai- nian Prime Minister Valery Pustovoitenko for talks on Ukraine's desperate need to * Bank management agreed to consult than 800,000 Azerbaijanis fled their boost budget revenues and reduce bur- with donors on establishing a special homes during the Nagorno-Karabakh geoning arrears to the pension fund. The Trust Fund, through contributions from conflict. In addition to repatriating refu- state is owed more than $3 billion in tax nonborrowing shareholders of the Bank, gees, the project's funds are earmarked and other payments. Ukraine's monthly to help finance nonlending development for construction, health services and edu- budget revenues do not exceed 800-900 activities. These decisions will be re- cation, employment creation, and provi- million hryvni ($400-$450 million), viewed after one year. sion of an electrical system. The project whereas the country's monthly foreign would cost $54.2 million, of which the debt obligations amount to 1.8 billion Not All Is Quiet on the Ukrainian Azerbaijani governmentwould contribute hryvni. During the conference the premier Front $9.4 million. Other contributions will come suddenly announced that only those who from the United Nations and the Euro- promised in writing to pay up could leave. The World Bank will consider financing pean Union. The second credit would be "The fiscal situation has become critical two large projects in Ukraine as soon as for a five-year, $24.5 million project deal- and officials will remain locked in the the International Monetary Fund re- ing with pressing ecological problems, conference center until they pay at least sumes its aid to the former Soviet re- including the removal of mercury depos- 30 percent of their debts to the pension public, Bank mission chief Edilberto its in the industrial city of Sumgait, north fund and at least 5 percent of their fiscal Segura announced. The projects-each of Baku, a former Soviet chemical cen- arrears," a government spokesman said. worth $300 million-would support ter that is now thought to be one of the The IMF has been putting pressure on Ukraine's financial sector and business most polluted cities in the world. Con- Kiev to tighten its tax collection proce- development. The World Bank may also struction of a sturgeon hatchery is dures, as one condition for sorely needed provide $150 million for development of planned; the fish, which provides more economic aid. agriculture. Ukraine has received more than 80 percent of the world's caviar, is than $1 billion from the World Bank since threatened by pollution and overfishing. it became a member in 1992. The IMF Board of Directors is expected to dis- World Bank Managing Director Caio Vietnam cuss a three-year, $2.5 billion loan (Ex- Koch-Weser, meeting with Azerbaijan tended Fund Facility) to Ukraine at its President HeydarAliyev, raised the pos- gseven percent devaluation. In early meeting at the end of August. The gov- sibility of further IDA credits, totaling $200 August, and for the third time since ernment hopes to reduce the budget million over the next two years, to help October, Vietnam devalued the dong, deficit from 5.6 percent of GDP in 1997 improve the country's agriculture, health, setting the target rate at 12,998 dong to 3.3 percent in 1998 and about 2 per- and education sectors. Koch-Weser and to the dollar. Effective devaluation since cent annually thereafter. Real GDP is pro- Aliyev were also reported to have dis- March 1997 has reached 24 percent. jected to grow by 3-5 percent a year. cussed the creation of an "oil fund" into The national assembly's Standing Annual inflation is targeted to be reduced which Azerbaijan would deposit profits Committee has scaled back down its to about 10 percent in 1998, and about from its oil industry; the profits would in 1998 economic growth target from 9 8 percent during 1999-2001. turn be distributed among all sectors of percent to between 6 percent and 7 per- Azerbaijani society. cent. Rehabilitation and Environment: IDA Credits to Azerbaijan Loan to Help Latvian Rural Business We appreciate the contributions from Radio Free Europe/Radio Liberty The World Bank allocated two $20 mil- The World Bank on July 31 granted a Newsline. lion IDA credits to Azerbaijan in mid-Au- $10.5 million loan to Latvia for a project gust, to rehabilitate areas destroyed in to make commercial credit available to the Nagorno-Karabakh war and to reju- small businesses in rural areas of Latvia. venate the country's environment. More A key part of the project will be special * TRANSITlON, August 1998 ©D 1998 The World Bank micro-loans to small-scale rural enter- wages, utilities, and pensions, equivalent tral banks should disclose to help avoid prises to bolster business development. to 3 percent of GDP. The Kazakh deficit the kind of surprises that led to the Asian The project is part of the Latvian is unusually high by international stan- financial crisis. IMF Statistics Department government's 10-year rural development dards because of the costs of implement- Director Carol Carson said in early July program and will also receive funding from ing the country's new pension system. that improvements were needed in the re- the government, participating financial The government must press ahead porting of data, and that reserves and ex- institutions, donors, and the borrowers quickly to adopt a new tax code and in- ternal debt were two critical areas. themselves, bringing the project total to crease tax revenues, as well as stimu- $20 million. late private participation-both domestic IFC Steps in to Fund Vietnam and foreign-in the oil and gas sectors. Scheme IMF Changes ESAF, Invites Comment * Albania: optimistic assessment. Al- The IFC is to lend $25 million to fund the The Executive Board of the International bania is well placed to enjoy rapid eco- completion of Vietnam's first build- Monetary Fund (IMF) recently endorsed nomic growth with falling inflation, but it operate-transfer (BOT) project. The a number of changes to the IMF's En- must fight crime if it is to maintain its Malaysian-owned Binh An Water Corpo- hanced Structural Adjustment Facility momentum. The adverse economic ef- ration (BAWC) was given a BOT license (ESAF). Accordingly, policy debate fects of refugees from Kosovo has been by the Vietnamese authorities in 1995 within government, alternative policy limited and this year's macroeconomic to build a water treatment plant in Ho mixes, and efforts to create a national targets remain achievable. Structural re- Chi Minh City, meeting more than 10 consensus for proposed measures forms appear to be progressing roughly percent of the city's demand. Work on would be encouraged. The changes are on schedule, and the government is the $38 million project began last year, outlined in "Distilling the Lessons from making good progress in winding up and the Malaysian company sought IFC the ESAF Reviews," which, together with outstanding problems from pyramid funding earlier this year, after Malaysia's a summary of the Board's July 8 dis- -scheme companies. However, gover- domestic economic crisis led to the with- cussion, is available on the IMF Website nance problems should be tackled, es- drawal of Malaysian bank funding. (www.imf.org). The Executive Directors pecially the adoption of anticorruption noted that dialogue with the larger pub- schemes, and the budget needs to be Dealing with Romania's Orphans lic is part of a continuing effort to adapt kept on track and customs administra- the Fund's strategy for growth and ad- tion improved. The World Bank in mid-July signed a $5 justment. They have invited comments, million loan for Romania to help finance which may be sent by E-mail to 0 Croatia: large payment deficit. Croatia a special initiative launched by Roma- ESAF@imf.org by September 4, 1998. should deal quickly and decisively with nian President Constantinescu, called its ballooning current account deficit. It 'Romania's Children." The program tries Article IV Consultation-Fund rose to 12.5 percent of GDP in 1997 be- to provide children with community- Assessments cause strong consumer demand, fueled based care, instead of institutional care, by rapid wage growth and a surge in bank and to reintegrate Bucharest street chil- The most recent IMF country reports of- credit, pushed imports up nearly 33 per- dren more fully into society. fer the following assessment for cent while exports remained static. At Kazakhstan, Albania, and Croatia. the same time, Croatia has had success Environmental Aid to Bulgaria with its exchange rate-based stabiliza- * Kazakhstan: arrears still high. tion efforts, achieved robust real growth, A $16 million World bank loan will back Kazakhstan's real GDP growth reached and kept inflation down. Real GDP growth a four-year program in Bulgaria to restore 2 percent in 1997 and first-quarter 1998, was recorded at 6.5 percent in 1997, in- environmental quality in polluted areas and annual inflation had fallen to less than flation remained moderate at 3.9 percent, around a copper smelter. The total cost 10 percent as of May 1998 (from a high and tourism continued to rebound, ris- is $25 million, of which the government of more than 3,000 percent in mid-1 994). ing by almost 30 percent in 1997. will provide $5.7 million and a national Kazakhstan has benefited from large for- ecological trust fund $3.3 million. Heavy eign direct investment inflows, mainly into IMF Seeking Befter Data Disclosure industrial pollution is one of the worst the oil and gas sectors. However, weak- legacies of the communist era that this nesses in tax collection have allowed the The IMF is asking market analysts to Balkan state of 8 million people is trying accumulation of arrears, especially on suggest the type of economic data cen- to cope with. The World Bank has com- © 1998 The World Bank TRANSITION, August 1998 m mitted loans to Bulgaria totaling $1.16 the end of a two-week mission to Bul- McGuirk is quoted as saying. The rest billion for 15 projects since 1990, when garia, Anne McGuirk said she would take is expected to be covered by other inter- Bulgaria joined the Bank. a draft agreement to Washington for fi- national financial institutions, she added. nal approval by the Fund. The signing is IMF to Lend $800 Million to Bulgaria expected in September. "The financial We appreciate the reports by Robert Lyle gap for the three-year period will be $1.6 of RFE/RL. The IMF will lend Bulgaria $800 million billion, and the arrangement will cover over the next three years. Speaking at approximately half of that amount," New Books and Working Papers The Macroeconomics and Growth Group regrets that it is unable to provide the publications listed. World Bank Publications transient poverty, China's poor-area de- population, there has been almost no velopment program may be comple- relationship between countries' eco- To receive ordering and price informa- mented with such policy instruments as nomic policies and the amount of aid tion for World Bank publications, write: seasonal public works, credit schemes, they get. The relatively indiscriminate World Bank, P.O. Box 7247-8619, Phila- buffer stocks, and insurance options for allocation of assistance is one factor delphia, PA 19170, United States, tel. the poor. undermining the potential impact of aid. 202-473-1155, fax 202- 676-0581; or visit the World Bank bookstores, in the Craig Burnside and David Dollar, Aid, the David Dollar and Jakob Svensson, What United States, 701-18th Street, N.W., Incentive Regime, and Poverty Reduc- Explains the Success or Failure of Washington, D.C., or in France, 66 av- tion, WPS 1937, June 1998, 18 p. Structural Adjustment Programs? enue d'lena, 75116 Paris, E-mail: To order: Emily Khine, Room MC3-347, WPS 1938, June 1998, 34 p. books@worldbank.org, Internet: http:// tel. 202-473-7471, fax 202-522-3518, To order: Emily Khine, Room MC3-347, wwwworldbank.org. Internet: kkhine@worldbank.org. The tel. 202-473-7471, fax 202-522-3518, authors may be contacted at cbumside Intemet: kkhine@worldbank.org. The Working Papers @worldbank.org or ddollar@world authors may be contacted at ddollar bank.org. @worldbank.org or jsvensson@world Jyotsna Jalan and Martin Ravallion, De- bank. org. terminants of Transient and Chronic In countries with weak economic man- Poverty: Evidence from Rural China, agement, indicated by poor property To select promising candidates for adjust- WPS 1936, June 1998, 22 p. rights, high levels of corruption, closed ment loans, the World Bank must do a To order Patricia Sader, Room MC3-632, trade regimes, and macroeconomic in- better job of understanding which environ- tel. 202-473-3902, fax 202-522-1153, stability, there is no relationship between ments are promising for reform and which Internet: psader@worldbank.org. The aid and the change in infant mortality- are not. Being more selective may mean authors may be contacted at iialan@ an important social indicatorthat can pro- smaller volumes of lending. In the 1980s worldbank.org or mravallion@world vide indirect evidence that the benefits development assistance shifted largely bank.org. of development are reaching people ev- from financing investments (such as erywhere. In distorted environments, roads and dams) to promoting policy re- Most policies aimed at reducing chronic development projects tend to fail. A gov- form. The authors examine a database of poverty may have little or no effect on ernment that cannot put effective devel- 220 World Bank-supported policy-based transient poverty. Taking panel data for opment policies in place is unlikely to or conditional lending programs to iden- postreform rural China, the authors find oversee the effective use of foreign aid. tify why these programs succeeded or that household demographics, levels of These findings strengthen the case for failed. They find that a few political education, and health status are not sig- targeting foreign aid to countries that economy variables can predict pretty well nificant determinants of transient poverty. have improved their economic policy. But the outcome of an adjustment loan. Vari- These findings suggest that to deal with after controlling for per capita income and ables under the World Bank's control- * TRANSITION, August 1998 ( 1998 The World Bank resources devoted to preparation and Before integrating its financial sectorwith Zvi Lerman, Csaba Csaki, and Victor supervision, number of conditions-have that of the European Union (EU), Esto- Moroz, Land Reform and Farm Re- no relationship with an adjustment nia has to upgrade its capacity for pru- structuring in Moldova: Progress and program's success or failure. When the dential regulation. They should be Prospects, No. 398, 1998, 100 p. candidate is a poor selection, devoting followed by improvements in the more administrative resources or impos- country's capacity to supervise banks Other World Bank Publications ing more conditions will not increase the and an upgrading of the banks' risk man- likelihood of successful reform. agement systems. Harold Alderman, Social Assistance in Albania: Decentralization and Christiaan Grootaert and Jeanine Simeon Djankov, Enterprise Isolation Targeted Transfers, Living Standards Braithwaite, Poverty Correlates and Programs in Transition Economies, Measurement Study WP No. 134, Indicator-Based Targeting in Easternr WPS 1952, August 1998, 17 p. 1998, 60 p. Europe and the Former Soviet Union, To order: Rose Vo, Room MC4-406, tel. WPS 1942, July 1998, 112 p. 202-473-3722, fax202-522-2530, Intemet: Roy L. Crum and Itzhak Goldberg, Re- To order: Gracie Ochieng, Room MC5- hvol@worldbankorg. The authormaybe structuring and Managing the Enter- 158, tel. 202-473-1123, fax 202-522- contacted at sdjankov@worldbankorg. prise in Transition, EDI Learning 3247, Internet: gochieng@world bank. Resources Series, 1998, 424 p. org. The authors may be contacted at Over the past six years several govern- cgrootaert@world bank.org or jbraith ments in transition economies have imple- This book describes adaptations in finan- waite@worldbank.org. mented enterprise isolation programs that cial techniques as it reviews standard combine features of reorganization under financial concepts and tools, adjusts The characteristics of poverty and assis- bankruptcy (as in industrial countries) with them as necessary to the unique condi- tance targeting in three East European severance payments for employees and tions in the ex-socialist enterprises, and countries (Bulgaria, Hungary, and Poland) assistance with labor deployment. Poor then presents the restructuring context differ strikingly from those in three FSU results for financially distressed firms in and some strategies based on the ap- countries (Estonia, Kyrgyzstan, and Rus- Romania suggest that enterprise restruc- plication of these tools. sia). For example, whereas in Eastern Eu- turing under government auspices does rope poverty incidence and the number not work-that transition economies Lithuania: An Opportunity for Eco- of children in a household strongly corre- should privatize rapidly, without first at- nomic Success, Volume Il/Analytical late, this is less so in the former Soviet tempting to restructure enterprises. Background Country Study, 1998, 340 p. Union, except in Russia. The poverty gap is remarkably uniform in East European Stijn Claessens and Simeon Djankov, Boris Pleskovic and Joseph E. Stiglitz countries, especially Hungary and Po- Politicians and Firms in Seven Cen- (eds.), Annual World Bank Confer- land, suggesting that social safety nets tral and Eastern European Countries, ence on Development Economics have prevented the emergence of deep WPS 1954, August 1998, 31 p. 1997, 1998, 315 p. pockets of poverty. But this is much less To order: Rose Vo, Room MC4-406, tel. true in the former Soviet Union. Programs 202-473-3722, fax202-522-2530, Intemet: Jan J. Rutkowski, Welfare and the to help (prospective) entrepreneurs hvol@1worldbank.org. The authors maybe Labor Market in Poland: Social should take center stage in poverty alle- contacted at sdjankov@worldbankorg or Policy during Economic Transition, viation programs. sclaesens@worldbank.org. Social Challenges of Transition Series Technical Paper No. 417, 1998, 100 p. Carlos Cavalcanti and Daniel Oks, Esto- Discussion Papers nia: The Challenge of Financial Inte- World Development Sources 1998- gration, WPS 1946, July 1998, 23 p. Mohinder S. Mudahar, Kyrgyz Republic: First Quarter, CD-ROM, August 1998. To order: Linda Osbome, Room Hll-109, Strategy for Rural Growth and Poverty This source provides information related tel. 202-473-8482, fax 202-477-1440, Alleviation, No. 394, 1998, 144 p. to Bank-funded projects, complement- ing economic and sector papers that pro- lnternet: Iosborne@world bank.org. The Mohinder S. Mudahar, Robert W. Jolly, vide macroeconomic and sectoral authors may be contacted at ccaval and Jitendra P. Srivastava, Transform- background to member countries. canti@worldbank.org or doks@world ing Agricultural Research Systems in bank.org. Transition Economies:The Case of Russia, No. 396, 1998, 106 p. © 1998 The World Bank TRANSITION, August 1998 U IMF Publications Daniel C. Hardy and Ceyla Pazarbasioglu, 06881-5007, United States, tel. 203- Leading Indicators of Banking Cri- 226-3571, fax 203-222-1502, Internet: To order: IMF Publication Services, 700- ses-Was Asia Different? WP/98/91, http://www.greenwood.com. 19th Street, N.W., Washington, D.C. 1998. 20431, United States, tel. 202-623-7430, Valentine Udoh James (ed.), Capacity fax 202-623-7201, E-mail:publications David Hoelscher, Banking System Re- Building in Developing Countries: @imf.org, Internet:http://www.imf.org. structuring in Kazakhstan, WP/98/96, Human and Environmental Dimen- 1998. sions, May 1998, 344 p. Dale Gray, Evaluation of Taxes and Revenues from the Energy Sector in The term "capacity building" refers to the Baltics, Russia, and Other Coun- empowering the local people to carry out tries of the Former Soviet Union, WP/ Business Monitor International Ltd. development processes through strength- 98/34, 1998. Publications ened domestic institutions, and improve- ment of local govemment efforts to sustain The Baltics, Russia, and other countries To order: BMI, tel. 44171-248 0468, fax: infrastructures, social institutions, and of the former Soviet Union are large con- 44171-248 0467, E-mail: busmon@dial. commercial institutions. Capacity build- sumers of energy, and four of these coun- pipex.com. ing also involves the need to recognize tries-Russia, Kazakhstan, Azerbaijan, local interest groups and encourage lo- and Turkmenistan-are large producers Russia 1998, Country Forecast Report, cal efforts. Capacity building encourages of oil and gas. Taxation of energy has with regular updates. a "bottom-up" or grassroots effort for sus- become a major fiscal issue given the tainable development. recent decline in overall tax revenue in Political, Economic and Financial most of these countries and need for flex- Outlook, 1998-2000. ible taxation arrangements. Revenues from the petroleum sector averaged about Urban Institute Publications 4.5 percent of GDP in Russia, Kazakhstan, Azerbaijan, and Centre for European Economic Stud- To order: Publications Office, Urban In- Turkmenistan, compared with between ies Publications stitute, 2100 M Street N.W, Washing- 10 and 30 percent of GDP for other oil ton, D.C. 20037, United States, tel. producers. The actual tax burden in Rus- To order: Faculty of Social Sciences, 202-261-5687, fax 202-467-5775, Intemet: sia remains low because statutory tax Centre for European Economic Studies http://www.urban.org. rates are low and tax structure does not (CEES), Department of Economics, capture monopoly or resource rents; not University of Leicester LEI 7RH, United Christopher Banks, Sheila O'Leary, and all taxes are paid; and there are non- Kingdom, tel. 0116-252-5360, fax 0116- Carol S. Rabenhorst, Privatized Hous- cash settlements for energy, which fa- 252-2908. ing and the Development of Condo- cilitates tax avoidance. Improvements in miniums in Central and Eastern the fiscal regime, along with reform of oil Dean Garratt, Inflation and the New Europe: The Cases of Poland, Hun- transport, could significantly boost for- Political Macroeconomics, 98/2, gary, Slovakia, and Romania, Urban eign investment, enhance economic 1998, 17 p. Institute report prepared for the Review growth, and eventually contribute to of Urban and Regional Development higher tax revenues. Robert Ackrill, The EU Budget and the Studies, Volume 8, 1996, 24 p. Importance of the Balanced Budget Mark De Broeck and Kristina Kostial, Rule, 98/3, June 1998, 25 p. Housing privatization has been a major Output Decline in Transition: The achievementof economic reforms in Cen- Case of Kazakhstan, WP/98/45, 1998. tral and Eastern Europe. Various ap- proaches have been taken to housing Caryl McNeilly and Doris Schiesser- Greenwood Publishing Group Pub- privatization and condominium formation Gachnang, Reducing Inflation-Les- lications in four transition countries. sons from Albania's Early Success, WP/98/78, 1998. To order: GPG, 88 Post Road West, Mark D. Belcher, Victor Cionga, Francis PO. Box 5007, Westport, Connecticut J. Conway, Petru Filip, Valeriu lonescu, * TRANSITION, August 1998 (D 1998 The World Bank Gheorghe Ocneanu, loan Onisei, George Christopher Banks and Juliana H. Pigey, Miklos Szanyi, The Role of Foreign E. Peterson, and Juliana H. Pigey, Ro- Republic of Albania: Opportunities Direct Investment in Restructuring mania: Municipal Creditworthiness and Issues for Municipal Reform, Ur- and Modernizing Transition Econo- and Local Government Centraliza- ban Institute report prepared for USAID, mies: An Overview of Literature on tion, Urban Institute report prepared for January 1998, 77 p. Hungary, No. 244, April 1998, p. 28-57. USAID, April 1997, 114 p. Analyzing municipal organizational and Gabor Hunya, Integration of CEEC Designed to complement technical as- financial framework in Albania, the pa- Manufacturing into European Corpo- sistance offered to Romania through the per examines the delegation of essen- rate Structures via Direct Investment, European Bank for Reconstruction and tiallocalfunctionstolocalauthoritiesand No. 245, May 1998, 24 p. Development, this analysis applies to addresses solutions to overcome im- various forms of local government bor- pediments to local government au- VladimirGligorov, Yugoslav Economics rowing, such as the issuance of munici- tonomy. Facing Reform and Dissolution, No. pal bonds. 247, June 1998, p. 329-61. Michael Lea, Jacek Laszek, and Loic Carol S. Rabenhorst, Condominium Chiquier,AnalysisofContractSavings Dariusz Rosati and others, Transition Renovation in CEE: Impediments to for Housing Systems in Poland, Ur- Countries in the First Quarter 1998: Progress and Prospects for the Fu- ban Institute report prepared for USAID, Widening Gap between Fast and ture, Urban Institute report prepared for March 1998, 32 p. Slow Reformers, No. 248, June 1998, the International Conference on Housing 75 p. in Transition, European Network for Creating contract savings for housing Housing Research, Piran, Slovenia, Sep- institutions in Poland raises issues re- Sandor Richter and others, EU Eastern tember 1997, 10 p. lated to budgetary and financial sector Enlargement: Challenge and Oppor- stability. The two Polish systems cur- tunity, No. 249, July 1998, 58 p. As privatization of the housing stock in rently in place-one established in 1995; Central and Eastern Europe continues, another modeled after Germany's sys- major repairs and renovations are re- tem established in 1997-are compared quired to prevent devaluation and to in- both with each other and with variants Other Publications crease owners' satisfaction with their recently introduced in the Czech Repub- living conditions. There are still consid- lic, Hungary, and Slovakia. Michael S. Bernstam and Alvin Rabushka, erable impediments to such efforts. Fixing Russia's Banks: A Proposal for Some renovation projects have been Growth, Hoover Institution Press, implemented with limited financial sub- Stanford, California, 1998, 114 p. sidies from state and local governments, WIIW Publications To order: Hoover Institution Press, and with USAID-sponsored technical Stanford University, Stanford, California assistance. To order: WIIW, Vienna Institute for 94305-6010, United States, tel. 800-935- Comparative Economic Studies, 2882 or 650-723-3373, fax 650-723-1687. Raymond J. Struyk, ed., Restructuring Oppolzergasse 6, A-1010, Vienna, Russia's Housing Sector: 1991-1997, Austria, tel. 431-533-6610, fax 431-533- There are many more dollars under mat- Urban Institute report prepared for 6610-50. tresses in Russia today than the total USAID, December 1997, 139 p. value of all ruble deposits in Russian Leon Podkaminer, Hermine Vidovic, banks. Instead of real banks, ersatz, This practical guide about implement- and others, Externe Defizite der imitiation banks function today in Rus- ing housing reform in Russia describes Transformationslander Niedriger sia. The collective banking system has changes that have been legislated and Als Befurchtet, No. 178, May 1998, been insolvent since 1991. Russian explains how they work in practice; p. 319-38. banks have been kept afloat by injec- evaluates the effectiveness of major re- tions of inflationary credit; preferred sales forms; and defines the changes still nec- Andrea Elteto, Economic Policy Back- of high-interest bonds; and sales of essary to continue the movement ground to Foreign Direct Investment in shares in state-owned natural resource toward a more market-oriented housing Hungary, No. 244, April 1998, p. 1-26. firms, made available to them at bargain sector. basement prices for final resale to for- © 1998 The World Bank TRANSITION, August 1998 F eigners. The failure to fix Russia's banks Extemal Factors and Emerging-mar- continue in Romania, and output per- risks financial catastrophe and further ket Banking Crises, National Bureau of formance for the year as a whole may economic stagnation or decline. Economic Research, Working Paper well turn out to be below the official zero BernstamandRabushkaofferabold,pro- 6370, January 1998, 16 p. growth target. The 10 percent growth vocative proposal, resting on an elaborate To order: National Bureau of Economic target in Yugoslavia for 1998 is also un- strategy of debt-for-equity swaps, that Research, 1050 MassachusettsAvenue, likely to be met.There remain many would fix the banks, reduce government Cambridge, Massachusetts 02138, uncertainties regarding the outlook for debt, strengthen the independence of the United States. all the European CIS countries. How- central bank, and lay a solid foundation ever, the greatest potential risks both for sustained economic growth. Herman W. Hoen, The Transformation of for the CIS and for Eastern Europe as a Economic Systems in Central Europe, whole arise from the considerable un- Comparison of the Health Situation Edgar Elgar Publishing, Northhampton, certainty surrounding the economic of Population of the Poland and Massachusetts, 1998, 224 p. situation in Russia. Selected European Countries, 1996, 1998, 100 p. Ammon Levy-Livermore (ed.), Hand- Special Publications To order: Statistical Publishing Es- book on the Globalization of the tablishment, al. Niepodleglosci 208, World Economy, Edgar Elgar Publish- Georgian Economic Trends-Quar- 00-925 Warsaw, Poland, tel. 4822- ing, Northhampton, Massachusetts, terlyReview,FirstQuarter1998,Geor- 608-3145; Sales Division: Room no. United States, 1998, 776 p. gian-European Policy and Legal Advice 393, 3rd Floor, tel. 4822-608-32 10, fax Center, TACIS, 1998, 103 p. 4822-608-3867. Peter Palms, Mikhail Lapidus, Viktor To order: Georgian-European Policy and Bukato, Yuri Lvov, and Yuri Golovin, Un- Legal Advice Center, 26 Gabriel Competitiveness of Transition Econo- derstanding Russian Banking-Secu- Episkoposi St., Tbilisi 380003, Georgia, mies, OECD, August 1998, 230 p. rities Markets and Money Seftlements, teL. 995-32-939-161, fax 995-32-939-160, To order: OECD Washington Center, MHP, January 1998, 300 p. E-mail: homepage@get.kheta.ge. 2001 L Street, N.W., Suite 650, Wash- To order: Anke van de Wall, Suite 103, ington, D.C. 20036-4922, United States, 515 Lake Street South, Seattle, Wash- Outreach News, a quarterly newslet- tel. 202-822-3865, fax 202-785-0350, ington 98033, United States, E-mail: ter of the OECD Centre for Coopera- Internet: http://vwww.oecdwash.org. russia@aa.net. tion with Non -members (CC NM). To order: Andrew Maclntyre, 2 rue International trade has played a key role United Nations Economic Commis- Andre Pascal, 75775 Paris Cedex, 16 in the transition process. Exports were sion for Europe-Economic Survey of France, tel. 33-1-45-2419, fax 33-1- essential for recovery from the transition Europe 1998, No. 2, Geneva, Switzer- 45-24-1843, E-mail: andrew.macintyre shock and sustainable growth depends land, July 1998. @oecd.org. on the capacity of each country to reap To order: Economic Analysis Division, the benefits of the openness to interna- UN/ECE, Palais des Nations CH-1211 Review of Economies in Transition, tional trade and foreign investment. This Geneva 10, Switzerland, tel. 4122-917- Bank of Finland publication. book offers a comprehensive and a com- 2718, fax 4122-917-0309, E-mail: To order: Paivi Pellikka, Secretary, Bank parative approach on the different inter- info.deap@unece.org. of Finland Institute for Economies in Tran- actions between trade, FDI, and the sition (BOFIT), P.O. Box 160 FIN-00101, process of economic transformation. It Transition economies forecast: The Helsinki, tel. 3589-183-2268, fax 3589- quantifies both price and nonprice as- short-term economic outlook for the 183-2294, E-mail paivi.pellikka@bof.fi pects of product market competition. transition economies remains positive, or E-mail: bofit@bof.fi Based on this analysis, each country is and, in most cases, economic condi- ranked according to the type and tions likely will continue to be favorable The 4/1998 issue (12/6/1998) contains: strength of its competitive position, and in the second half of 1998. Further ac- "Assessing Casual Linkages between prospects of further economic restruc- celeration of growth can be expected in the Emerging Stock Markets of Asia and turing are analyzed. Hungary and possibly in Slovenia, and Russia," "Central Bank Independence in the Estonian economy is likely to per- Baltic Policy," "The Short and Variable Barry Eichengreen and Andrew K. Rose, form above official expectations. In con- Lags of Russian Monetary Policy." Staying Afloat When the Wind Shifts: trast, economic decline is likely to * TRANSITION, August 1998 ( 1998 The World Bank Bibliography of Selected Articles Postsocialist Economies Trezziova, D. Reasons to Revisit Czech Asia Investment. Intemational Tax Review Holmes. S. Citizen and Law after (United Kingdom) 9:9-10, June 1998. Chen, R. An Analysis of China's Eco- Communism-A Survey. East Euro- nomic Development Policies and pean Constitutional Review (United Veghelyi, M. Hungary: Branches- Prospects. Business Economies (United States) 7(1):70-89, 1998. New Vehicle for Investors. European States) 33:29-37, July 1998. Taxation (Netherlands) 38:223-29, July Central and Eastern Europe 1998. Chou, W. L. and Y C. Shih. The Equi- librium Exchange Rate of the Chi- A Guide to the Polish Securities Mar- CIS nese Renminbi. Joural of Comparative ket. Central European (United Kingdom) Economics (United States) 26(1):165-74, 8, Suppl.:1-7, June 1998. Auezov, M. M. The Development of a 98 Corporate Securities Market in Fisher, J. Choosing the Right Route Bartlett, D. L. Joining the Club: Regu- Kazakhstan. Central Asia Monitor into Vietnam. Interational Tax Review latory Consequences of Regional In- (United States) 3:9-17, 1998. (United Kingdom) 9:37-42, June 1998. tegration in Eastern Europe. Eastl West Letter (United States) 7(2):1, 8, Buch, C. M. Russian Monetary Policy Hanke, S. H. How to Establish Mon- March-April 1998. -Assessing the Track Record. Eco- etary Stability in Asia. Cato Journal nomic Systems (Germany) 22(2): 105- (United States) 17:295-301, winter 1998. Croatia: Financial Times Survey. Fi- 46, June 1998. nancial Times (United Kingdom), p. 27- Jalan, J. Transient Poverty in 30, July 7, 1998. Choudhry, T. Another Visit to the Postreform Rural China. Journal of Cagan Model of Money Demand: The Comparative Economics (United States) Duobaite, R. Lithuania Aims to Latest Russian Experience. Joumal of 26:338-57, June 1998. Strengthen Coordination as It Pre- Intemational Money and Finance (United pares an EU Information Strategy. Kingdom) 17:355-76, April 1998. Lu, D. and Q. Yu. Banking Credit- Public Management Forum (France) Quota Plan as a Macroeconomic 4(3):10-11, May-June 1998. McCoy, P. Levers of Law Reform: Policy Instrument in China: Effective- Public Goods and Russian Banking. ness and Costs. Economic Systems Konopielko, L. and J. Bell. Reinvent- CornellIntemationalLawJoumal(United (Germany) 22(2):147-74, June 1998. ing Aid for SMEs in Eastern Europe: States) 30:45-137, 1997. Lessons from the Implementation of Van der Geest, W. Bringing China into the Struder Program. Regional Stud- Russian Economy: What Bail-Out? the Concert of Nations: An Analysis ies (International) 32(3):290-94, 1998. Economist (United Kingdom) 348:65, Au- of Its Accession to the WTO. Journal gust 1-7, 1998. of World Trade (Netherlands) 32(3):99- Latvia: Financial Times Survey. Fi- 115, June 1998. nancial Times (United Kingdom), p. 1-8, Shelenkov, K. Russia's Money Police. Wang, Z. Tariff Reduction, Tax Re- July 6, 1998. International Economy (United States) placement, and implications for In- 12:44-45, July-August 1998. come Distribution in China. Journal Navratilova H. Czech Republic: Tax of Comparative Economics (United Treatment of Gains and Losses from Tomass, M. Mafianomics: How Did States) 26:358-87, June 1998. Trading Securities. European Taxation Mob Entrepreneurs Infiltrate and (Netherlands) 38:231-33, July 1998. Dominate the Russian Economy? Yin, X. The Macroeconomic Effects of Journal of Economic Issues (United Waiting Workers in the Chinese Skreb, M. K. Value Added Tax in States) 32:565-74, June 1998. Economy. Journal of Comparative Eco- Croatia. Tax Notes International (United nomics (United States) 26(1):150-64, States) 17:393-98, August 10, 1998. March 1998. (D 1998 The World Bank TRANSITION, August 1 998 A To Our Readers! TRANSITION We are pleased to inform you that beginning in calendar year 1999, Transition will Editor: Richard Hirschler restructure its finances and rely on broadly based sponsorship. In this way we will Telephone: 202-473-6982 be able to increase our circulation and once again provide a free subscription. Fax: 202-522-1152 Email: rhirschler@worldbank.org As the first step in this new business strategy, the Transition Newsletter, on July Research Assistant: Jennifer Prochnow 1, 1998, began a close cooperation with the William Davidson Institute at the Telephone: 202-473-7466 University of Michigan Business School, a prominent think tank specializing in the Fax: 202-522-1152 study of transition issues. We will report regularly on their research, new publica- Email: jprochnow@worldbank.org tions, and forthcoming conferences. We would like to extend this collaboration to other research institutes with similar interests and activities. E The World Bank 1818 H Street, NW. Washington D.C. 20433 Telephone: 202-477-1234 THE WILLIAM DAVIDSON INSTITUTE Fax: 202-477-6391 World Wide Web: AT THE UNIVERSITY OF MICHIGAN BUSINESS SCHOOL http://www.worldbank.org/ Em ai: books@worldbank.org .. . . . - g~~~~~~~~~~~~~~~~~~~~~RA.,rsmovis a pubtication of the World Bank and Transition is also working closely with R io the London-based DHL company, and is produced by the Macroeconomics and Growth Group of the Development Research Group. will regularly report on DHL's experi- The World Bank works to reduce poverty and ences "in the field"-at the East-West improve living standards by promoting sustain- crossing points where customs offices are dealing with export-import regulations able growth and investments in people. and other intemational trade matters. We look forward to growing partnership with the corporate world. The opinions expressed are thiose of the, authors and should not be attributed in any manner to the World Bank, to its Board of Executive Direc- tors, or to the countries they represent. Subscribe to TRANSITION T~A,VSITO.v is published six times per calendar year, in February, April, June, August, Octo- If you are not currently on our subscription list, beginning in calendar ber, and December. year 1999 you may receive TRANSITION on a complimentary basis by TmevsirioNwill be sent free of charge to all sub- writing to: scribers begining calendar year 1999. Jennifer Prochnow, The World Bank, 1818 H Street, N.W., 01998 The International Bank for Room MC3-378, Washington, D.C. 20433, USA; telephone: Reconstruction and Development/The WAlorld Bank 202-473-7466; fax: 202-522-1152, Email:jprochnow@worldbank.org All rights reserved Manufactured in the United States of America For a free subscription to the Russian language version of Volume 9, Number 4 TRANSITION, write to: August 1998 ISBNO-8213-4222-3 ISSN 1020-5470 International Center for Privatization, Investment and Management 20 Eugene Pottier Street, 252057, Kiev, Ukraine, telephone: 38044-446-0117 or 38044-230-2624; fax: 38044- 446-8277, Email: root@ICPIM.FreeNet.Kiev.UA Printed on recycled paper