http://www.worldbank.org/html/prddr/trans/WEB/trans.htm                            1 9322
THE NEWSLETTER ABOUT REFORMING ECONOMIES
1RANSITION
Volume 10, Number 2      The World Bank in collaboration with The William Davidson Institute        April 1999
Economic Consequences of the Kosovo Crisis
The first authoritative report on the economic effects of the war in Kosovo, issued by the World Bank and the Intemational
Monetary Fund (IMF) in April, contends that the crisis is having a catastrophic effect on the economies of the Balkans. The
war and refugee crisis are wiping out growth, destroying commerce, and placing enormous strain on the budgets of Albania,
Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, and Romania. In all of these countries, except possibly Roma-
nia, more than 5 percent of GDP will be wiped out this year, plunging the region's economies deep into recession and raising
unemployment at a time when hundreds of thousands of refugees must be absorbed. Albania put the 1999 extra costs of the
crisis at $820 million, including the care for the 360, 000 newly arrived refugees in the country The FYR Macedonia claims that
its economy has already lost some $1.6 billion this year.
Region Under Pressure                capital accounts. All six countries, es-
pecially those bordering Kosovo, can be  W hat's  Inside
As a result of the Kosovo tragedy, the  expected to experience a decline in for-
six countries closest to FR Yugoslavia  eign direct investment. Some countries   World Bank Supports Education-
will suffer huge budgetary and balance  (especially Croatia) may be hurt by a   Interview with Boris Pleskovic 4
of payments gaps. The impact will come  loss of tourism receipts. Croatia, Bul-
from various sources:                garia, Romania, and other countries in   Brain Drain Reversed-Repatriating
* The influx of large numbers of refu-  the region may also pay a higher coun-   Russian Academics 7
gees puts strains on the social and  try risk premium on borrowing from in-   Useful Trip to Kazakhstan-Advice on
economic infrastructure. Albania and  ternational capital markets, and private   Open Trade and Realistic Exchange
FYR Macedonia, both poor countries, will  financing may become more difficult to   Rate 10
be most severely affected.           obtain.
* Trade is disrupted. While the mili-  0 Structural reform may be post-   China's Rural Reform  13
tary conflict continues, and perhaps even  poned, adversely affecting develop-   EU Accession Process 14
for some time thereafter, trade with Yu-  ment. Privatizations may be postponed
goslavia will remain suspended. FYR  because of a lack of foreign investor in-   New DHL Customs Report 16
Macedonia and Bosnia and Herzegovina,  terest or lower sale prices.        The William Davidson Institute
Yugoslavia's main export markets, will                                     0 Monetary Policy in Transition 18
be particularly hard hit. A significant por-  As a result of these factors in the six   0 Combating Unemployment 20
tion of transit trade will have to be re-  countries, balance of payments gaps will
routed. Bulgaria and Romania will need  appear in 1999 and probably persist
to find alternative and more costly tran-  through at least 2000. Moreover, even if  Who Is to Blame for Russia's Woes 26
sit routes.                         the international community provides for   World BankIlMF/EBRD Agenda 29
* Investor confidence is falling. Un-  all of the basic needs of the refugees,   Milestones of Transition 32
certainty reduces the confidence of  budgetary gaps will arise. Revenues will  Conference Diary 34
both local and foreign investors and of  fall as incomes and customs collections   New Books and Working Papers 38
consumers, reducing spending and put-  decline, while expenditures will rise as   Bibliography of Selected Articles 43
ting strain on the external current and  spending on refugees, defense, and
Development Research Group                                                               The World Bank



maintenance of public order increases. In  How Much Financing?             immediate aid to relieve the suffering of
the absence of external financing,'adjust-                                 the refugees and ensuring that the six
ment could require additional compression  The World Bank and Intemational Monetary  countries have access to adequate ex-
of domestic demand and imports as well  Fund report, "Economic Consequences of  ternal financing to help them deal with
as cuts in essential social expenditures.  the Kosovo Crisis: A Preliminary Assess-  the crisis. The IMF and the World Bank
ment of External Financing Needs and the  will be able to coordinate the interna-
In particular, in Albania, where the GNP  Role of the Fund and the World Bank in  tional community's response, with the
per capita is only $760, economic growth  the International Response," estimates the  IMF playing a direct role through policy
is likely to fall 5 to 6 percent this year,  1999 external financing needs of these  advice and financial resources and the
from 8 to 10 percent in 1998. In FYR  countries-depending on the duration of  Bank providing emergency financing as-
Macedonia, where the 40 percent unem-  the crisis-between 0.8 and 1.8 billion dol-  sistance to help close the balance of pay-
ployment rate is already the highest in  lars. (Paying for economic reconstruction  ments and budgetary gaps.
Europe, about four out of five enterprises  in the region after the fighting ends could
have stopped working. Broken trade ties  cost as much as $30 billion. That was es-  Just how much assistance will be nec-
with Yugoslavia, severed transport links  timated, at the end of April, by European  essary? The report examines two sce-
with EU trading partners (90 percent of  experts.)                         narios (see table next page). Under the
exports and imports with the EU used                                       first scenario, the military campaign is
to go through Serbia) make the situa-  The response to the tragedy, according  prolonged and the refugee crisis lasts
tion in this country especially difficult.  to the report, must consist of providing  throughout 1999. All official trade with FR
Yugoslavia's Shattered Economy
Already crippled by eight years of international sanctions  high levels. The budget deficit reached about 10 percent of
and decades of economic mismanagement, Yugoslavia's  GDP in 1998, financed largely by monetary emissions. Wage
economy is being dismantled piece by piece by the NATO   and pension arrears were mounting, and inflation had reached
airstrikes, writes the AP-Dow Jones news agency. Accord-  an estimated 50-70 percent, up from 18.5 percent in 1997.
ing to Yugoslav official estimates, $40 billion in damage has
been caused since NATO began its operations on March  Exports of $2.1 billion dollars and imports of $3.5 billion dur-
24. The destruction will shave at least a third off the country's  ing the first eight months of 1998 showed virtually no growth
$15 billion GDP this year, according to independent Serbian  from the previous year. Lack of foreign capital made financ-
economists.                                           ing the trade deficit difficult, and foreign trade transactions
were already being carried out almost exclusively on a cash
Destroyed or heavily damaged so far: Yugoslavia's two larg-  or barter basis. Foreign currency reserves had fallen to about
est oil refineries, in Pancevo and Novi Sad; the October 14  $200 million by the end of 1998.
plant in Krusevac (the largest heavy machinery plant in the  Privatization had ground to a halt, hindered by the high
Balkans); the Zastava auto plant in Kragujevac (which em-  level of indebtedness of large state-owned enterprises and
ployed 38,000 workers and produced the Yugo car); as well  increased uncertainty. Privatization revenues in 1998 barely
as power stations, a domestic appliance factory, chemical  reached $100 million dollars-far from the target of $1.5
factories, airports, bridges, television transmitters and sta-  billion. Meanwhile, enterprise insolvencies rose to a cumu-
tions.                                                lative total of 27,888 companies, with total liabilities of more
Factories are working at a lowcapacity,andagriculturalac-than 20 billion dinars by mid-1998 ($2.0 billion at the offi-
Factories are working at a low capacity, and agricultural ac-  ca  xhnert)  h   akn   etrrmie   ek
tivity has virtually come to a halt. Unemployment has soared  cial exchange rate) The banking  sector remained weak,
to nearly 50 percent. Some 500,000 people have been laid
'                  ~~~~~~recorded losses, which totaled 460.3 million dinars ($46
off since the first strike, adding to the more than 1 million   illi  ) i 1998
previously unemployed. Schools and universities were closed  million) in 1998.
shortly after the first NATO attacks, and fuel rationing has  In Kosovo, out of 1.7 million ethnic Albanian residents, an es-
forced municipal authorities to cut public transport by half.  timated 1.5 million were displaced as of early May, reports the
U.S. State Department. At least 600,000 people were displaced
Yugoslavia's economy was struggling long before the  internally, in addition to the more than 700,000 Kosovo Alba-
airstrikes began. In 1998 both the budget and the current  nians who have been driven into neighboring states since March
account showed large deficits, and inflation had returned to  1998, the report said.
a  TRANSITION, April 1999                                           C) 1999 The World Bank/The William Davidson Institute



Additional External Financing Needs of the Six Most Affected Countries' in  that affected countries should maintain
1999-World Bank and IMF Estimates                                            the momentum of adjustment and struc-
(In millions of U.S. Dollars)                                               tural reform and ensure good governance.
Scenario A                       Scenario B
"Prolonged Military Campaign"       "Crisis Quickly Resolved"    The medium-term development of the
Refugee cost2            311                                 139             region will be discussed during a meet-
Balance of Payment gap 1,515                                 668             ing in Bonn at the end of May. In the
Total financing need    1,826                                807             coming weeks donor meetings, co-
In percent of GDP      2.5                                 1.1             chaired by the World Bank and the Eu-
Memorandum  item:                                                            ropean Union, will seek pledges to close
Budgetary gap            652                                 308             the funding gaps for individual countries.
In percent of GDP      0.9                                 0.4
1. Albania, Bosnia and Herzegovina, Bulgaria, Croatia, former Yugoslav Republic of  World Bank Support to the Region
Macedonia (FYRM), and Romania.
2. Additional cost for displaced persons in Montenegro estimated at $43 million under scenario A
and $22 million under scenario B.                                            The Bank has taken a number of steps
Source: IMF and World Bank staff estimates.                                  to assist countries in the region.
Yugoslavia is suspended, although lim-  cochaired by World Bank President  * Albania-through speedy delivery-
ited transit trade to third countries re-  James Wolfensohn and IMF Managing  receivedemergencybudgetsupportof$30
sumes in the second half of 1999 (at 25  Director Michel Camdessus. Represen-  million. The credit will finance extraordi-
percent of the precrisis level and at a  tatives of 7 international agencies and  nary budgetary needs (social services, civil
higher cost). Required humanitarian as-  33 countries, including the six Balkan  administration, public infrastructure, and
sistance for covering the basic needs of  countries immediately affected by the cri-  domestic security) and compensate for
the refugees reaches more than $300 mil-  sis, participated in the conference.  revenue shortfalls caused by the crisis.
lion in 1999. The combined balance of                                        Two $1 million postconflict grants will pro-
payments gap of the six countries reaches  Conference participants agreed that do-  vide Albania with institutional support to
$1.5 billion, with the worst hit countries  nors should act swiftly; that quick dis_  assist refugees arriving atthe borderarea
in the region-FYR Macedonia and   bursingassistanceoverandaboveearlier  from Kosovo. Several new credits, worth
Bosnia and Herzegovina-experienc-                                               $40 million, are also expected to be
ing increases in their balance of pay-                 Q l|[] Y a befet.rhebreak-up  approved soon. The new projects will
ments deficit of 7-8 percent of GOP.                       ~~~~fund microcredit programs, irrigation
hne ag    ate budgetary gap for the o G                                         and flood prevention efforts, support re-
Th   gregaches $652tar million. th                                          form of the judiciary and civil service,
region  lland privatization of banks and strate-
Under the second scenario, the crisis                         1 *               gic state-owned enterprises.
is resolved quickly. Official trade with                                        0 For FYR Macedonia the Bank has
FR Yugoslavia returns to 75 percent        9-- +b - - -0-                t    Iprovided a $50 million emergency
of its precrisis level in the second half                                      IDA credit to finance critical imports.
Of 1999, and transit trade through FR                          .       6       S- :;=-S1 | A $1 million postconflict grant is be-
Yugoslavia reaches 50 percent ofits                                            Aing prepared to support refugees and
Yuolevel. Aothreae   0pre-quarters                                         help local nongovernmental organi-
precrisis lvlAbuthe-arrszations administer and direct in-
of the refugees return to Kosovo dur-                               ACPU        flows of other aid funds. The World
ing the third quarter of 1999, and all                                          Bank played a major role to orga-
return by the end of the year.                                   THEWAiIrTON PMC nize a donors meeting in Paris on
May 5, that pledged $252 million finan-
The Washington Consensus              planned aid programs will be needed to  cial assistance to FYR Macedonia. The
cover affected countries' external and  meeting of 46 countries and multina-
The international community's response  budgetary gaps for 1999; that financing  tional organizations, chaired by the
to the Kosovo crisis was discussed dur-  on concessional terms is critical; that  Bank and the European Commission,
ing a high-level meeting of governments  strong donor coordination will be essen-  promised additional financial assis-
and international agencies held in Wash-  tial, as most aid will continue to be chan-  tance. Donors agreed to meet again in
ington April 27, 1999. The meeting was  neled on a country-by-country basis; and  the second half of 1999.
( 1999 The World Bank/The William Davidson Institute                                       TRANSITION, April 1999   U



Supporting Economics Education in Transition
Economies-A World Bank-Initiated Partnership
Interview with Boris Pleskovic
On March 30 President Wolfensohn, Senior Vice President and Chief Economist Joseph Stiglitz, and other top officials of the
World Bank met principals of foundations such as: the Aga Khan, Camegie, Eurasia, MacArthur, Soros, and Starr, as well as
representatives of the European Union and the U.S. government, to discuss further support of economics education and
research in transition economies. (With the help of the World Bank these donors have already built several successful
institutions of higher education in transition economies.) Transition editor Richard Hirsch/er asked Boris Pleskovic, Acting
Administrator of the World Bank's Research Advisory Staff and one of the "founding fathers" of what has become an extraor-
dinary international partnership, to explain the goals and future directions of this unique enterprise.
Q. Why is the Bank getting involved  Q. What has happened so far?         Digital Equipment Corporation, the gov-
in economics education and re-                                            ernment of Finland, the International
search in the transition countries?    A. It all started in May 1994 when Will-  Monetary Fund, and the Pew Charitable
iam Bader-then president of the Eurasia  Trusts-have provided significant direct
A. The Bank is aware that well-trained  Foundation-and I initiated a meeting in  or in-kind support to the project. [More
economists and high-level research are  New York between the World Bank and  details on page 8. The Editor].
key to the continued growth and stabil-  U.S. foundations and universities to dis-
ity of transition economies. It is no se-  cuss ways to strengthen economics  Foundation principals, economists, rep-
cret that educational and research                                        resentatives of international lending in-
institutions in many transition econo-                                    stitutions, and government officials met
mies are struggling with declining wages                                  for a second time in June 1997, in New
and diminishing budgets, and as a re-                                     York, where we discussed expanding
sult the best professors and research-                                    funding for Moscow's New Economics
ers are leaving-either for positions at                                   School and also discussed the state of
foreign universities or jobs in the private                               economics education in Central and
sector. Essentially, in transition coun-                                  Eastern Europe and the countries of the
tries there is a lack of Western-trained    g                             former Soviet Union.
economics professors, researchers, and
professionals who can develop the poli-                                   In December 1998 we had another meet-
cies needed to achieve sustainable eco-                                   ing, sponsored by the Eurasia Founda-
nomic growth and stability.                                              tion, the Open Society Institute, the Starr
Foundation, and the World Bank, and
The World Bank recognizes that spec-  education and research capabilities in  chaired jointly by George Soros and Jo-
tacular results can be achieved by  the new independent states. Within a  seph Stiglitz. With some modifications,
forming a partnership with private foun-  year we were able to set up the Eco-  this meeting reaffirmed the findings of a
dations, international financial institu-  nomics Education and Research Con-  reportwehadcommissionedearlier[see
tions, and education specialists to  sortium in Ukraine and Russia (EERC).  page 6]. We agreed that in the short term
invest in Western graduate economics  The EERC has been implemented and  it is vital to train many top-notch eco-
education and research. Thus the Bank  managed by the Eurasia Foundation on  nomics professors-a task best done
is functioning as a catalyst-bringing  behalf of the donors. Consortium mem-  abroad or at high-quality regional cen-
together such prominent figures as  bers currently include the Carnegie Cor-  ters. In the longer term, however, the goal
George Soros, William Bader, John  poration of New York, the Eurasia  must be to develop strong economics
Roberts, James Wolfensohn, Stanley  Foundation, the Ford Foundation, the  education and research in the transition
Fischer, Charles William Maynes, and  Open Society Institute (Soros), the Starr  countries themselves. We would like to
Joseph Stiglitz to form a partnership  Foundation, Sweden's and Norway's  have an institution like Harvard in every
for capacity building in transition   Foreign Ministry, and the World Bank.  country. However, funds are limited, and
economies.                           Other founders-Citicorp Foundation,  we believe that this aim is best achieved
*  TRANSITION, April 1999                                           0 1999 The World Bank/The William Davidson Institute



by first creating a critical mass of eco-  economists, fostering high-quality,  their weak library systems. The Internet
nomics education and research on a re-  policy-relevant economic research while  is a powerful tool for increasing reach
gional basis and only later in each  providing professional development for  and leverage of the proposed regional
country.                             local researchers. This extension of the  education and research centers. And li-
Moscow-based economic research pro-  braries will still need attention-most
Q. What major recommendations  gram should receive $1 million a year in  notably, better access to scholarly jour-
arose from the March 1999 meeting?  funding-the same amount that the  nalsand bettermanagementand admin-
EERC currently spends in Russia. Thus  istration of their existing resources.
A. Two major recommendations to cover  EERC could become the research net-
the gaps in foreign funding and assis-  work hub for the whole region.    Finally I would like to mention corrup-
tance were accepted. First, we have pro-                                  tion-which is still a big problem in most
posed funding three regional centers of  Q. What other proposals have been  of the region. Much has been done to
graduate economics education that will  accepted based on the report?     reduce corruption in the past few years,
start at the M.A. level but eventually de-                                primarily through the introduction of pri-
velop into Ph.D. programs. We aim for  A. Transition countries urgently need  vate universities. But the root solution to
one center to be set up in Central Asia,  more teachers with up-to-date econom-  corruption is to provide adequate sala-
one in the Caucasus, and one in south-  ics knowledge. To create a critical mass  ries so that teachers can live without side
east Europe, possibly in Slovenia. To get  of professors teaching at international  payments. And it is important to promote
these centers off to a strong start, each  standards, resources need to be concen-  tuition-based education systems and
should be funded for at least three years,  trated in a few of the most promising in-  abolish oral examinations-which pro-
at a cost of about $1 million a year per  stitutions in each country; these programs  vide ample opportunity for fraud.
center.                              can become models for other programs
throughout the country. Short-term study  I am sure that these initiatives will yield
New Western-supported economics edu-  tours should be cut back in favor of  visible improvements in economics edu-
cation institutions that have recently been  longer-term stays in both directions; our  cation and research in the region.
set up in the region can serve as mod-  study has found few positive benefits
els for our proposed centers. Such insti-  from brief-visit programs, which amount
tutions include the Central European  to little more than academic tourism.
University (CEU) in Budapest, the Eco-  More teaching fellowships for European    Ready for the Millenium Bug
nomic Education and Research Consor-  and North American professors-through
tium (EERC) in Kiev, the EERC research  Fulbright and other U.S.- and European-
network and New Economics School  sponsored programs-will improve the
(NES) in Moscow, and the Center for  situation. And a fund should be started
Economic Research and Graduate Edu-  to augment the meager salaries of Ph.D.
cation (CERGE) at Charles University in  graduates who return to their countries
Prague-which has a Ph.D. program.   from abroad to teach or work at local
universities or research centers; such a
Second, we have proposed that a re-  fund would both strengthen these gradu-
search center be established for transi-  ates' incentives for returning and promote
tion countries that do not yet participate  the retention of skilled analysts.
in an international economics research
program. With the Action for Coopera-  Other important recommendations in-
tion in the Field of Economics (ACE)  clude supporting internet access and            25�
program already covering East-Central  upgrading libraries. The Open Society
Europe and the Baltics, and the Mos-  Institute has already greatly improved       Compliant
cow EERC research program covering  Internet connectivity in the region, but
Russia, research in the remaining coun-  more could be done to take advantage
tries of the former Soviet Union should  of the Internet and CD-ROM technology.
be funded by extending the Moscow   Electronic resources for teaching and
EERC research program. The EERC can  research could allow countries to offset
develop a new network for professional  some of the shortcomings that arise from   From the World Press Review.
� 1999 The World Bank/The William Davidson Institute                                   TANSMTO>-, April 1999  *



An Assessment of Higher Education in Transition Economies
Proposed Strategy to Address Critical Economics Educa-  countries of the former Soviet Union, although public higher edu-
tion and Research Needs in Transition Economies" (1999), a  cation remains essentially free in East-Central Europe. Public
new report authored by Boris Pleskovic, Anders Aslund, Wil-  financing is heavily focused on undergraduate and business edu-
liam Bader, and Robert Campbell and sponsored by the World  cation and much less on graduate education. There seems to
Bank and the Soros, Eurasia, and Starr Foundations, reveals  be minimal demand for economic research, which is suffering
a mixed picture of the state of economics education and re-  from sharply falling public funding across the region-East
search at universities and other institutions in 20 transition  Central Europe included-and attracts little private funding.
countries. (The countries are Albania, Armenia, Azerbaijan,  While institutions of higher education have multiplied, the num-
Belarus, Bulgaria, Croatia, Estonia, Georgia, Kazakhstan,
Belarus Bulgaria, Croatia, Estonia, Georgia, Kazakhstan, ber of university teachers has declined almost everywhere, in-
Kyrgyz Republic, Latvia, Lithuania, FYR Macedonia, Moldova,  cluding in economics. The teacher to student ratio has fallen
Romania,  ' S'vka S'vei  . Taiitn  'ukeitn and         nneoomc.Tetahe  osuetraohsfle
Romania, Slovakia, Slovenia, Tajikistan, Turkmenistan, and  sharply-to about half of what it was 10 years ago. Teachers are
Uzbekistan.The report is available on request from Boris  overburdened by classroom teaching, with hardly any time left
Pleskovic: email bpleskovic@worldbank.org.)           for research or career development. Their salaries have plum-
A great deal has happened since March 1995 when the  meted, and are especially low in Belarus, Moldova, the Caucasus,
Eurasia Foundation and the World Bank completed their re-  and Central Asia. (Salaries are comparatively decent in Slovenia,
port "Critical Economics Education and Research Needs in  Croatia, and the Baltics.) Private business schools pay teachers
Russia and Ukraine." Most countries in the region have since  up to 10 times as much as public universities do, but they tend
undertaken major reforms of higher education, moving from a  to pay only for teaching and not for research.
Soviet-type education system to a more international (West-  Thus the quality of economics education is generally low
ern) system. Institutions of higher education have more au-  throughout the region. Domestic capacity for economics re-
tonomy, and the Western-style university and degree system   search remains institutionally weak throughout the region,
(granting B.A., M.A., and Ph.D. degrees) is gaining ground.  with institutions still staffed by professors trained in the Marx-
Business administration is developing at a rapid pace, with  ist tradition and lacking analytic or quantitative training. And
more students, better business schools, and higher tuition  many universities need to be rebuilt from the bottom up to
fees than ever before. But while some business programs  eliminate the strong vested interests of insiders.
include elements of basic economics-microeconomics, mac-  Foreign donor organizations spent an estimated $35 million in
roeconomics, statistics-business administration is often  1997-98 to support economics education and related activities
more of an impediment than a boon for economics. Light,  in the 20 countries that this new report covers. The largest
applied business courses are often preferred to more serious,  donor was the European Union, through its PHARE program-
theoretical economics courses. And business training-rather  covering Eastem Europe-and TACIS program-covering coun-
than economics-attracts many of the best students because  tries of the former Soviet Union; these programs cost about
low-paying~ ~ ~ ~ ~ ~ ~ ~~~te acdei has little appeal. Foreign assistancescotaou
low-paying academia has little appeal. Foreign assistance  $14 million. The Open Society Institute spent about $12 million
also goes predominantly to business administration training.  in aid, and the U.S. Information Agency (in association with
Enrollment levels are rising, but public funding of education, in-  IREX, ACTR/ACCELS, and other U.S. organizations) spent about
cluding higher education, is falling in much of the region. About  $4 million. Other major donors included the U.S. Department of
10 years ago most countries in the region spent 5-6 percent of  Education ($2.5 million), the Pew Charitable Trusts, the Eurasia
GDP on education, and while countries in East-Central Europe  Foundation, the British Council and the Foreign Commonwealth
and the Baltics have not radically reduced education spending,  Office, and several Scandinavian countries.
most countries of the former Soviet Union have. In countries of  Funding for research comes mainly through the European Union's
the former Soviet Union public funding of education appears to  economics research program, Action for Cooperation in the field
have fallen to about one-third of its real level 10 years ago. Where  of Economics (ACE). This program allocates funds on a com-
public education funding has fallen sharply, teachers' wages have  petitive basis; PHARE ACE covers Central and Eastern Europe,
also plummeted. Economics seems to have suffered the same' .      '
including the three Baltic states, and TACIS ACE covers coun-
proportional cuts as higher education in general.     tries of the former Soviet Union. PHARE ACE has been allo-
Private financing, meanwhile, has proliferated. Almost all new  cated $11 million for 1999, although funding will be scaled down
institutions are financed by relatively high tuition fees. Tuition  to $7.5 million for the period of 2000-2003. ACE will probably set
fees are spreading to public institutions as well, especially in  aside 1 million euros for Russia alone for the period 1999-2002.
*  TRANSITION, April 1999                                           C) 1999 The World Bank/The William Davidson Institute



Brain Drain Reverse-Repatriating Russian Academics
by Oleg Glebov
S   ince the exodus of Russian aca-  What is the exact size and composition  studies abroad? Do they want to work in
demics began in the early  of the expatriate community of Russian  academia or the private sector? Do they
1990s, a significant number of                                   prefer teaching, academic or policy re-
young Russian students have enrolled                                    search, or both? Are they professionally
in graduate programs at some of the   Teaconodern Ecool:                interested in Russia? In the process of
best economics departments in the   TeachingModernEconomics             economic transition? What financial and
United States and Europe. For the next                                  professional incentives would make them
five years, bringing these students back   The New Economics School (NES)  likely to come back?
to Russia will be the core element of  was founded in 1992 through a part-
the strategic plan of the Economic Edu-   nership between the Central Econom-   To answer these and many other ques-
cation and Research Consortium    ics and Mathematical Institute (CEMI)  tions, EERC has been carrying out a
(EERC) in Moscow (see box next page).  of the Russian Academy of Sciences,  pilot survey among Russian students in
the Hebrew University in Jerusalem, and   about 50 top economics departments
The EERC and a numberof Moscow's lead-   Moscow State University, with financial  in the United States, Canada, Europe,
ing research and teaching institutions-  supportfrom the Soros Foundation, the   and Australia. The survey's findings
New Economic School (NES), the Higher   Eurasia Foundation, the Ford Founda-   should help in designing a retention ini-
School of Economics, the Russian-Euro-  tion, the MacArthur Foundation,  tiative and in forming a wide coalition of
pean Center for Economic Policy, the Eu-   Citicorp Foundation, and the World  institutions that can work to reverse
ropean University (St. Petersburg), the   Bank. NES offers a two-year M.A. pro-   Russia's brain drain of the early 1 990s.
Bureau of Economic Analysis-have dis-  gram in modern economics, to which   The survey is being conducted by
cussed launching a joint retention initia-  it admits about 50 students a year.  Lyudmila Ledeneva of the Institute of
tive. All have agreed to join in designing                              Economic Forecasting and Elena
and implementing a comprehensive initia-   During the first six years of NES, nearly   Tyuryukanova of the Institute for Social
tive that will meet the professional needs   80 of the 180 students that graduated   and Economic Problems of Population,
of talented young Russian economists.   from NES have pursued Ph.D. studies,  both of the Russian Academy of Sci-
primarily at the best universities in the   ences in Moscow.
But before such an initiative can be   U.S. and Western Europe. The remain-
launched, we must address the reasons   ing one hundred NES graduates have   Surveys were sent to 85 students-
for the exodus of these economists.   accepted positions as professional   nearly all of the Russian economics
Many Russian postgraduate students-   economists in the Russian government,  graduate students abroad. Of these, 39
and obviously the best ones-have good   the Central Bank of Russia, as well as   students completed the questionnaire,
chances to stay in the West by finding  foreign and Russian companies. Afew   20 from the United States and the rest
either an academic or nonacademic job.   among them assumed teaching jobs at  from the United Kingdom, the Nether-
And the current economic situation in   NES and in other universities.  lands, Spain, Denmark, Japan, and Aus-
Russia is hardly conducive to a home-                                   tralia. Respondents' average age was
coming; Russian investment firms and   In the future NES plans to further diver-  28; most had studied in Moscow.
Western companies that were operating   sify its curriculum, develop its research
in Russia before the crisis are not going   and outreach, and expand its admis-   About half of the completed questionnaires
to hire anybody for a long time to come.  sions to 100 students a year. NES also   were received in May 1998, before
Economics in Russia lacks any state   plans to launch an in-house policy-   Russia's crisis; the rest arrived in Sep-
support or commissions. So how realis-   oriented group. And as graduates who   tember, when one could already assess
tic is it to expect young economists to   have received Western Ph.D.s return,  the crisis' consequences. Nevertheless,
come back from other countries, and how   NES will develop a permanent faculty  there were no significant changes in the
can we convince them to return?      and start its own Ph.D. program.   respondents' attitudes. Many felt that de-
mand for their professional skills in the
To answer these general questions, more  economists? What are the goals of stu-  West was stronger than in Russia. The
specific questions must first be asked.  dents as they approach the end of their  reasons for this are obvious: uncertain
( 1999 The World Bank/The William Davidson Institute                                 TRANSITIoN, April 1999  a



professional prospects in Russia (such  tal becomes increasingly mobile. In ad-  would stay in an environment that could
asabsenceofviableteachingorresearch   dition to the "pure" strategies of perma-  help them make contacts, raise funds,
opportunities), weak ties between Rus-  nent residence and work in Russia or  and develop research projects. (Such an
sian and Western research centers, and  abroad, we could discern "mixed" strate-  environment can exist in Russia; in 1998
poor integration of Russian economic tra-  gies that included the options of perma-  three young graduates came back to
dition into the international academic  nent residence in Russia and temporary  Russia and were inundated with job of-
community.                           work abroad, or vice versa. Career  fers in Moscow. They are now teaching
choices were determined more by purely  and working on a number of international
The results of the survey brought some  professional factors than financial factors;  research projects supported by overseas
surprises. They showed that the tradi-  respondents were willing to settle in ei-  foundations.)
tional concept of migration based on a  ther the East or the West if offered pro-
return or no return dichotomy may be  fessionally satisfying positions (preferably  Survey responses confirmed the need to
inadequate, as intellectual human capi-  in academia). Respondents said they  provide professional, financial, and orga-
EERC: Consortium with a Good Cause
The Economics Education and Research Consortium (EERC) was founded in 1995 to improve economics education and
research in the former Soviet Union, with an initial focus on Russia and Ukraine.
Ukraine: Spreading the Word of Modern Economics    Russia: Policy Oriented Research
The Ukraine Economics M.A. Program, which began of-  Launched in the Summer of 1996, the Economic Education
fering classes in September 1996, is an internationally-  and Research Consortium's (EERC) program in Russia pro-
recognized graduate teaching program  conducted in  vides individual grants, training, and technical assistance to
cooperation with the University of Kyiv-Mohyla Academy  Russian economists engaged in original policy-oriented re-
(UKMA). The M.A. program started with the admission of  search-and complementary publication and dissemination
50 students a year; since then the number has increased,  services for EERC-sponsored research. During 1996-97
and in fall 1999 it will reach its full capacity of about 100  EERC has carried out three rounds of research grant com-
students a year. The program's two-year full-time curricu-  petition, holding three research workshops for economists
lum  prepares graduates to work as economists in  to present new proposals and report on work in progress.
policymaking positions in Ukraine or to pursue Ph.D. stud-  The competition has resulted in more than 50 individual grants
ies abroad-which will enable them to further the econom-  to Russian researchers.
ics discipline in Ukraine through teaching and research.
A series of methodological seminars provides training, tech-
For their first year, students at the Ukraine M.A. program take  nical assistance, and publication of research results. The
the core economics courses-microeconomics, macroeco-  first such seminar, "Panel Data Analysis: Theory and Practi-
nomics, statistics and econometrics, and mathematics-all  cal Applications," was held in May 1998 in cooperation with
instructed in English. The second year offers a range of courses  the Moscow's New Economics School. EERC's first annual
in applied econornics, in areas such as financial institutions  conference, "Economic Transition in CEE and Russia: Theory
and markets, economics of the public sector, international  and Empirical Evidence," convened in December1997. EERC's
finance, market failure and regulation, labor economics, in-  semiannual newsletter, "Research in Transition," started pub-
dustrial organization, and the economics of transition. During  lication in December 1997. In 1998 EERC has introduced its
the second year each student completes a research project  Working Paper Series.
related to Ukraine's transition to a market economy.
In its first two years the program has provided research
The Ukraine program has cost about $900,000 a year to  funding for more than 150 Russian economists-who have
operate, including significant capital expenditures in the first  now become the nucleus of a nationwide academic net-
year. As the student body grows to its full capacity, the op-  work. More than 250 young Russian economists have re-
erating budget will have to grow too, but the operating cost  ceived training at EERC research workshops and
per student per year be kept under $11,000.           methodology seminars.
3 TRANSITION, April 1999                                           (C 1999 The World Bank/The William Davidson Institute



CERGE: Ph.D. Program Offered in Prague
The Center for Economic Research and Graduate Educa-  CERGE-EI provides a full-fledged American-style Ph.D.
tion (CERGE) was founded in 1991 as an American-style  program, stimulates academic and policy-oriented re-
Ph.D. program and research center of Charles University in  search, and disseminates research and policy informa-
Prague. The center's chief mission is to educate the next  tion to a wide global audience. CERGE-EI now admits
generation of leading economists in former Soviet bloc coun-  approximately 25 students each year-accepting only
tries. Since 1992 CERGE has cooperated closely with the  about 1 in 12 applicants. About 30 percent of students in
Economics Institute (El) of the Academy of Sciences of the  CERGE-El come from the Czech Republic; most of the
Czech Republic.                                        rest are from various post-communist countries. CERGE-
El's annual budget for teaching and research is $2.5 million-
This joint initiative has become known as CERGE-EI. The  about $1.4 million for education and $1 million for research.
two founders of CERGE-EI are Jan Svejnar, professor at the  The average annual cost per student (both on- and off-
University of Michigan, and Josef Zieleniec, professor at  campus students) is $13,500-for teaching expenses and
Charles University.                                    scholarships.
nizational incentives that will encourage  mail at EERC-Russia, 3 Kochnovskii  0601/0121; or by email at glebov
Russian postgraduate students study-  Proezd, Suite 420, 125319 Moscow, Rus-  @eerc.ru. The EERC-Russia website is
ing abroad to return to Russia despite  sia; by telephone or fax at 7095-152-  http./www.eerc.ru.
the country's social and economic in-
stability. Proper compensation and a
high-quality research environment are    When Bad Debts Hurt
the most important incentives. Incentives
should also include job independence,
a flexible work schedule, the possibility
of rapid career advancement, prospects    M
of international professional contacts,~
and travel abroad.                              .*.
While continuing to collect data and sur-  Y       X
veys from Russian graduate students
abroad, EERC is developing strategies to
repatriate human capital. EERC has re-
cently received a grant from the govern-
ment of Sweden to fund an economics
professorship in Russia; the appointment
of a highly qualified young Russian econo-
mist to this post will be finalized in late    : 
May. EERC is working to procure fund-
ing for professorship positions at Russian
regional education centers such as
Novosibirsk and Khabarovsk-where
many members of the growing EERC eco-
nomics research network have their offices.
The EERC's current primary task is to or-
ganize an 'orientation office' that can sup-
port and guide the consortium in developing
and implementing repatriation strategies.
Oleg Glebov is Deputy Program Director of
the EERC-Russia. He can be reached by From the Hungarian Economy.
� 1999 The Wlorld Bank/The William Davidson Institute                                   TRANSITION, April 1999



The Benefits of Open Trade and a Realistic Exchange Rate:
World Bank Experts' Useful Insights in Kazakhstan
On April 2, 1999 Kazakhstan devalued the tenge, its national currency, and announced the elimination of the protectionist
policies that had been introduced to support the overvalued exchange rate. This decision was partly instigated by constructive
discussions in mid-March between the govemment and a team headed by World Bank Lead Economist David Tarr-discus-
sions that helped sway the country's trade and exchange rate policy in a more market-oriented direction. A recent policy paper by
Tarr and Howard Shatz, "Kazakhstan: Appropriate and Inappropriate Trade and Exchange Rate Policies in Response to Adverse
External Shocks'" which incorporates comments from discussions with Bank and IMF Kazakhstan country teams-was well
received by Kazakh economic policymakers. Highlights from Tarr and Shatz's paper are presented here.
T        he series of shocks that adversely  tries that favored trade protection have  (see box next page), in Kazakhstan there
affected the Kazakh economy in  reassessed their policy.          were concerns about the other option-
1998-the East Asian crisis, the                                   devaluation. Policymakers worried that
fall in commodity prices, the Russian  The Overvalued Tenge             devaluation would lead to an unstable
crisis-demanded a response from                                         downward spiral of the exchange rate and
policymakers. This response could take  Kazakhstan's trade protection increased  possibly a Russian-style financial crisis.
one of two forms: either increased pro-  in recent years mainly because of the  But the Russian banking crisis was
tection or progressive liberalization of  country's overvalued currency. Although  mostly triggered by the government's de-
the country's trade regime, integrating  the tenge has depreciated in real terms  fault on ruble-denominated debt-which
Kazakhstan into the world trading com-  against the dollar-by 15 percent be-  dramatically reduced the assets of many
munity and improving its growth pros-  tween July 1998 and January 1999-and  Russian banks overnight. These condi-
pects for the medium to long term.  many other Western currencies, it has  tions are not present in Kazakhstan.
Moreover, worldwide experience, Russia's
Why an Open Trade Regime?              David Tarr                       experience, and recent experience in
Ukraine and Moldova have shown that de-
Cross-country experience over the past                                  fending the exchange rate has no me-
50 years has demonstrated the ben-                                      dium-term benefits, because falling
efits of open trade regimes. The OECD                                   reserves will eventually force devaluation.
countries, which have reduced trade                                     It is better that the devaluation be accom-
barriers through successive GATT-                                       plished sooner, without further debilitat-
WTO  negotiations, have experienced                                     ing losses in reserves and lost productivity
sustained growth in trade and incomes.                                  due to import controls. And worldwide ex-
And virtually all recent development               _                    perience with devaluations shows that
success stories-Chile, Hong Kong                                        after a devaluation the exchange rate will
(China), Malaysia, Mauritius, the Re-                                   reach a new equilibrium, strongly influ-
public of Korea, Singapore, and Taiwan                                  enced by the policies of the central bank
(China)-have been based on strong in-  significantly appreciated in real terms  and the government.
dustrial export growth and relatively low  against the Russian ruble-by 68 per-
or falling barriers to imports. The in-  cent between July 1998 and January  Prohibitive protection of selected prod-
dustrial sectors in these economies  1999. The overvaluation led to a loss of  ucts or from selected countries will be
have experienced higher export and  competitiveness relative to partners in the  ineffective in reducing the demand for for-
employment growth, and trade reforms  region, especially Russia, and difficulty  eign exchange. Such protection can
have usually been accompanied by in-  in defending the exchange rate.   mean increased imports through infor-
creased flows of foreign investment.                                    mal channels. And while some sectors
Over the past 10 years, evidence has  Although imposition of trade controls in  will be protected, the costs of adjusting
accumulated that open trade regimes  response to an overvalued exchange  to the overvalued exchange rate will be
are more conducive to growth than pro-  rate has consistently had disastrous  borne by the unprotected sectors, the
tective regimes, thus developing coun-  consequences for economic growth  export sectors and those sectors that
M   TRANSITION, April 1999                                        � 1999 The World Bank/The William Davidson Institute



are more susceptible to informal or ille-  trade policies and competitive exchange  economic environment and a regulatory
gal imports (a significant problem in  rate policies of its recent past, while  regime that provides for the rule of law
Kazakhstan).                         continuing to open its trade regime to  and does not place excessive burdens
international competition. The best indus-  on business.
Conclusion                           trial policy for the growth of Kazakhstan
is to avoid picking winners and losers  David Tarr is Lead Economist with
It is recommended that Kazakhstan  among industries and firms, and instead  DECRG, the World Bank, and Howard
make a quick return to the more liberal  provide uniform tariffs, a stable macro-  Shatz is a consultant, also with DECRG
Overvaluation Hurts-Learning From Others' Mistakes
An overvalued real exchange rate impedes economic growth  Developing economies that followed a classic import-substi-
because:                                               tuting industrialization strategy after World War II provide
good illustrations of the negative effects of an overvalued
* Overvaluation discriminates against exports. Because ex-  exchange rate combined with trade controls. In the 1950s
porters receive relatively less in domestic currency for the  and 1960s Argentina, Chile, and Uruguay all followed im-
foreign currency they earn, and a significant portion of the  port-substituting industrialization policies that led to a bias
costs of production are paid in domestic currency, exporters  against exports, extremely uneven protective tariff rates in
have reduced incentives and ability to compete in foreign  trade across sectors, and controlled financial systems.
markets. This chokes foreign exchange receipts and dam-  By the early 1970s they experienced recurrent balance-
ages a country's ability to purchase the imports needed for  of-payments crises, accelerating inflation, bottlenecks in pro-
economic activity.                                     duction, slow export growth, and capital flight (capital flight
being especially pronounced during the 1979 to 1982 period
* Import-competing domestic industries face increased pres-  when all three used the exchange rate as a nominal an-
sure from foreign companies, causing industrial and agricul-  chor). Between 1950 and 1980, Turkey also had three epi-
tural lobbies to increase their calls for protection against  sodes of overvalued exchange rates defended by high import
imports. The political pressure for protection eventually proves  protection. In each case export earnings crashed, severely
overwhelming, and governments give in by increasing the  retarding economic activity; in 1958 Turkey did not have
tariffs on imports. This closes the economy to international  enough foreign exchange to buy the gasoline needed to move
competition and reduces access to needed imported inputs  the harvest to port. The devaluations that followed these cri-
and technology-causing growth to decline.              ses led to expanded exports, imports, and economic growth.
* Productivity advances are less rapid because the export  Chile provides a good illustration of how a country can get out
sectors and the import competing sectors are disadvantaged  of this vicious circle. After its 1982-83 crisis in which real GDP
by an overvalued exchange rate, and it is in these sectors  fell 15 percent, Chile tried to increase tariff rates so its people
that productivity advances are often most rapid.       would buy domestic products. But the strategy was not sus-
tainable; by 1985 the government had embarked on the export-
* Overvaluation induces capital flight, as domestic citizens  oriented structural adjustment strategy it maintains to this day.
anticipate a devaluation. As a result, less foreign exchange  This strategy included a devaluation and a staged lowering of
is available to finance imports.                       uniform tariffs from 35 percent in 1984 to 11 percent by 1991.
Improved incentives for exporters led to an expansion of nontra-
* Foreign exchange may be rationed by the government-  ditional exports and efficient import substitution. Macroeconomic
and allocated inefficiently.                           stabilization, tax reform, and cuts in government spending helped
to promote savings and investment. Privatization of state-owned
* Efforts to defend an overvalued exchange rate through  firms and rehabilitation of the financial sector through recapital-
very tight monetary policy may plunge the country into se-  ization and the strengthening of bank regulation combined to
vere recession. (In Kazakhstan monetary and fiscal policies  spur private business activity. Chile's average annual rate of
were under too much pressure to defend the exchange rate,  real GDP growth has been more than 7 percent since 1984.
resulting in very high real interest rates and a risk of adverse  And in 1998 the Chilean legislature approved further lowering
effects on investment and output.)                    the uniform tariff-in stages-to 6 percent.
(C 1999 The World Bank/The William Davidson Institute                                   TPANSITION, April 1999



Kazakhstan Devalues the Tenge and Prevents a Trade War
On April 4 the Kazakh government and National Bank an-  Regarding the removal of highly protective trade measures
nounced a free float of the tenge's exchange rate-in other  against Russia, Uzbekistan, and the Kyrgyz Republic,
words, devaluation of the national currency. They also an-  Balgimbayev noted that Kazakhstan's borders with those
nounced an end to highly protective trade measures against  countries are open for thousands of kilometers. Cheap goods
Russia, Uzbekistan, and the Kyrgyz Republic. At first, the  from those countries easily compete with local producers
tenge slumped to around 150 to the dollar, but by mid-April it and take foreign currency out of the country. It is practically
had stabilized between 110-120 to the dollar-not too far  impossible to close the borders, and it is also wrong from
above the pre-devaluation rate of 88 tenges to the dollar. The  both economic and political points of view. "Russia and Cen-
float was intended to boost Kazakh exports and to allow the  tral Asian neighbors are our friends, and there is no reason
National Bank to cease its costly efforts to support the tenge,  to develop trade wars. From this point of view, the only solu-
which have depleted hard currency and gold reserves to $1.7  tion is to introduce a floating exchange rate regime." The
billion, down from $1.9 billion in January.         IMF and the World Bank have supported the move (see lead
article).
In recent months Kazakhstan has come under pressure;
foreign investment inflows have waned as low oil prices have  Based on reports from news agencies and from Oxford
reduced interest in the country's hydrocarbon reserves. In  Analytica, the International Research Group (Oxford, UK).
addition, the Russian financial and economic crisis hit de-
mand for Kazakh metals, the other main export revenue-
earner. The trade deficit tripled from $627 million in 1997 to  Financial Planning
$1.8 billion in 1998. Real GDP contracted 2.1 percent in
1998, compared with growth of 4.0 percent the previous year.
Industrial output in the first two months of 1999 was down
about 5 percent from the same period last year.                 i      0     v
Commenting on the government's actions, Prime Minis-                               6Q
ter Balgimbayev said that devaluations among neighbor
countries had made Kazakhstan-produced goods non-                 S                 4 
competitive, causing Kazakhstan's industry to suffer, its      .*                            /
enterprises to stop operating and its unemployment to
increase. The prime minister said that foreign trade turn-
over of Kazakhstan was reduced almost 9 percent, or $1.3
billion, with exports reduced by $1.25 billion. Kazakhstan's
urgent measures, according to the prime minister, were                                /
due to purely external factors and economic policies of
neighbor countries. The trade protection was a response
to those pressures.                                       X
Balgimbayev said that from now on the dollar exchange rate
will depend on supply and demand on the foreign exchange    I
market. The National Bank of Kazakhstan (NBK) will not    "    31                - 
substantially intervene in this process. Before, the NBK was
spending its gold and foreign currency reserves to keep the
exchange rate at a certain level. This will not happen any  I a ,
longer. Balgimbayev said, "We have no doubts regarding eco-
nomic stability and our ability to manage the economic
situation.... NBK has significant gold and foreign currency
reserves, but what is the reason to give the currency away
and support an excessively expensive tenge?"         From the Russian daily Komsomolskaya Pravda.
E   TRANSITION, April 1999                                        C) 1999 The Norld Bank/The W'illiam Davidson Institute



China's Rural Reform-The "Rights" Direction
by WangJingxin
Since the introduction of the Contract Responsibility System in the late 1970s and early 1980s, China's systems of rural land
management have improved considerably. New policies allow rural households to lease land for longer periods of time than
before, and the rural population has been granted increased land rights. As a result of these land policy changes, China's rural
production has increased impressively. But land policies still need reform in some key areas.
Collective Ownership                 firmed the government's commitment to  gered a sharp fall in the contribution of all
preserving the autonomy of household  agricultural activities-including crop farm-
China's three-tier system of collective  decisionmaking in farm production and  ing, forestry, animal husbandry, and fish-
ownership was inherited from the old  related activities through household-  eries-to rural gross value output, from 74
commune system  in which land was  based and output-related contract re-  percent in 1978 to 33 percent in 1996.
owned through a top-down hierarchical  sponsibility systems.               (About 70 percent of China's approximately
structure that included:             0 The 1998 Plenum stressed stability and  1.2 billion people are still classified as ru-
guaranteed land use rights. The Plenum  ral residents.)
* The commune.                       also emphasized the need to further de-
* The production team.               velop socialized services-access to  Although the current land policies have
* The production group.              large machinery, technical extension ser-  brought significant progress, they also
vices, the provision of credit.      carry with them a number of problems:
With the collapse of the commune sys-  0 Peasants' land rights have been ex-
tem, these levels were changed. Com-  panded. Where once they could only farm   0 It has not been clarified which collec-
munes disappeared and were replaced by  on leased land, now farm households have  tive units may claim ownership rights. Al-
townships, which are not economic units  acquired partial land disposal rights, and  though ownership rights should generally
but administrative units representing the  farmers can trespass neighboring collec-  be assigned to local villagers' groups, bu-
lowest level of government administration.  tive land-if necessary leading watering  reaucrats of administrative villages often
Production teams were replaced by ad-  trenches and subsurface pipes through this  appropriate the rights to contract out land
ministrative villages, which govem a num-  land. Rural collectives may auction off the  and to collect proceeds from its use.
ber of villagers' groups. And production  land use rights they own for wasteland,  * The law defines contractual rights am-
groups were replaced by villagers'groups.  waste hills, and mountainous areas.  biguously; as a result these rights are nei-
Through the transfer of land use rights,  ther clear nor stable. The vague term
Although land in China is still collectively  large-scale farming and land concentration  "overall stability with small readjustment"
owned, its three-tier system of collec-  develop; land-related profits gradually shift  in land policies offers an excuse for many
tive owners-townships, administrative  from the collective to individuals.  local bureaucrats of administrative villages
villages, and villagers' groups-is chang-                                  to make unilateral changes in land use
ing. The top tier, townships, has lost its  As a result of these new features, the ag-  contracts.
usefulness, since it now represents the  ricultural sector expanded about 6.7 per-  0 The land taxation and fee collection
government more than the farmers.    centayearduring1979-97,andfoodgrains  systems lack clearly-defined rules.
output increased 2.7 percent. (Population  0 A compensation mechanism has not
New Agricultural Policies            growth during this period averaged just 1.3  been clearly defined for conversions of
percent). The value-output of animal hus-  agricultural land to land used for other
In recent years China has developed sev-  bandry increased fivefold. Since 1978 the  purposes.
eral new thrusts to its agricultural policies:  share of crop farming in agricultural gross  0 A market for land transfer has not yet
value-output has fallen from 80 percent to  been developed.
* Land leases are being extended to  56 percent, while the share of animal hus-
ever-longer periods. Many of the 15-year  bandry has risen from 15 percent to 31  Where to Go from Here?
leases that were drawn up in 1984 are  percent and the share of fisheries has risen
being renewed for 30 more years. At its  from less than 2 percent to more than 9  The three-tier system of ownership is
Third Plenum in October 1998, the Com-  percent. Meanwhile the rapid expansion  no longer rational, as townships now
munist Party Central Committee reaf-  of rural nonagricultural production has trig-  represent the government rather than the
(� 1999 The Wvorld Bank/The William Davidson Institute                                  TRANSITION, Apnl 1999  E



farmers. So the government should put   E
an end to townships, and land should EU  Accession Process-How
be owned by administrative villages and
villagers' groups.                  Long Will It Last?
In order to boost farmers' confidence,  Views from   a  Conference
future agricultural reform measures  byWladimirAndreff
should be phrased in clear language, and
based on improved and stable rules.
Peasants' rights-especially their con-   Stop delaying the expansion process!   Dividing the Central and Eastern Euro-
tractual rights-should be precisely de-  was the most important message at the  pean (CEE) countries into two groups is
fined and firmly established, with  recent meeting of the European Asso-  a way of delaying accession. Short-term
long-term guarantees. Farmers should  ciation for Comparative Economic Stud-  economic calculations, driven by narrowly
be granted negotiating rights so they  ies (EACES). The meeting, held in Paris  focused cost considerations, are begin-
may protect their own interests without  in March, examined the question of how  ning to overshadow the historical dimen-
having to depend on the rule of law.  fast expansion of the European Union  sion of EU expansion. An analysis of trade
(EU) should proceed. Most of the speak-  arrangements in the EU and the CEE
The relationship between equity and ef-  ers, from both Eastern and Western  countries has shown that trade liberaliza-
ficiency should be properly handled; ag-  Europe, expressed their strong opposi-  tion by the EU remains restricted while
ricultural reform must strike a balance  tion to stalling accession negotiations  the export competitiveness of CEE coun-
between long-term stability and egalitar-  between the EU and the five countries  tries is taken into account in both sensi-
ian possession. Opinions differ on how  identified in the Agenda 2000 for mem-  tive and nonsensitive commodities.
equity is achieved. Some scholars be-  bership consideration (the Czech Repub-
lieve that an equal start is enough,  lic, Estonia, Hungary, Poland, and  The disappointment that characterized
whereas others argue that "equity in the  Slovenia), all of which are eager to ac-  the conference arose from the eroding
process" should be maintained. Some  cede to EU membership. Resentment  willingness of the EU to allow new mem-
proponents of the latter view suggest that  about the stalling of the process is also  bers on board, its increasing aversion to
5 percent of local land should be held in  building among the five other potential  making sacrifices, and the attitude of the
reserve, for maneuvering purposes. Other  candidates (Latvia, Lithuania, Slovakia,  political elites in the EU, most of whom
scholars disagree, warning that equity  Romania, and Bulgaria).          see expansion as an opportunity for the
should not be maintained in small indi-                                  new members to claim additional sup-
vidual communities at the cost of the  No Timetable Yet                  port from Brussels. Current members are
whole country's efficiency. Instead-                                     more interested in responding to the con-
these scholars argue-efficiency should  The Amsterdam and Hague Councils of  cerns of the average voter and to various
be given a higher priority in agriculture  1997 failed to agree on most of the re-  interest groups than to increasing the size
than in any other sector, because land  forms required for EU expansion, as  of the EU.
is the rarest production factor in China,  southern EU members (Greece, Italy,
Spain, and Portugal) vetoed changes in  It seems unlikely that the EU will en-
Wang Jingxin is Head of the Research  requirements. The Vienna Council of De-  dorse a series of internal reforms that
Department at the China Institute for  cember 1998 failed to agree "to cap the  call for reshaping the CAP and stream-
Reform and Development, Haikou,  CAP," in other words contain spending  lining the structural and social cohesion
Hainan Province, China.             of the common agricultural policy, as the  funds. The general mood has become
keynote speaker, Hungarian economist  one of lack of urgency. Expansion may
Correction: In our February 1999    Laszlo Csaba, put it. The recent Berlin  have to wait for yet another decade or a
issue, the sentence on page 18- "An   Council (March 1999) also failed to come  new external shock like the the fall of
earlier version of this article appeared   to an agreement. The EU harbors an  the Berlin Wall. Notwithstanding EU
in the Far Eastern Economic Review   implicit preference for lengthy case-by-  rhetoric, "deepening" has unambiguously
(February 19, 1999)," was mistakingly   case negotiations and remains reluctant  taken precedence over "widening." Loss
placed at the end of Mr. Chi Fulin's  to fix a timetable for accession of new  of illusions and enthusiasm by Western
article. Its proper location should have   members, claiming that the EU is al-  policymakers has allowed the popular
followed the exerpted article by Kathy   ready unmanageable at its present size  perception that accession is a negative
WilIheIm on page 19.               of more than 20 members.             sum to gain ground.
M   TRANSITION, April 1999                                         � 1999 The World Bank/The William Davidson Institute



Measuring the CEE candidates' degree  common commercial policy, and start a  Studies of the economic and social im-
of compliance with the accession con-  new free trade agreement with Croatia.  pacts of EU expansion have indicated
ditions with the so-called acquis  Requests for various other exemptions  a slightly positive effect on EU mem-
communautaire (defined in Copenhagen  are also expected, in particular, from the  bers' economic growth and significant
in 1993) has been a very time consum-  health and safety norms of the social  improvement in the trade balance with
ing and bureaucratic process. And it is  acquis.                         CEE countries, translating into a size-
a moving target, covering a wide range                                   able export surplus for Western Eu-
of measures, from free movement of  While current EU members are con-  rope. Imports from the EU can help
capital and competition policy to such  cerned that these exemptions will force  CEE countries catch up with other EU
important issues as animal welfare and  them to compete on unfair and unequal  members while providing a growing
boiler temperatures. Verifying compli-  conditions, many in the CEE countries  outlet for EU commodities.
ance with the acquis, initially scheduled  believe that the EU requirements, par-
for completion by end 1998, is likely to  ticularly the social ones, are motivated  As a result, an estimated 1.2 million jobs
be postponed by at least six months.   by protectionism. They have also noted  could be created in the EU over a five-
that several member countries failed to  year period. Expansion is not a gift but
Candidates Seek Exemptions          implement parts of the acquis and ex-  an investment in peace and prosperity
pressed doubt that the exemptions will  that will restore Europe's status as a
The slowdown is not entirely the respon-  be accorded at all.            prominent world economic and political
sibility of the EU: the CEE countries, with                              power and increase European competi-
their impressive growth performance, low  Some speakers at the workshop came  tiveness. Expansion is thus in the EU's
environmental standards, low laborcosts,  up with specific recommendations for  own interests, indicating negotiations
and concentration of exports in a small  speeding up the expansion process and  should be accelerated and new CEE
number of sensitive sectors, increasingly  avoiding the Russian-style economic  members approved without delay.
appear as dangerous new economic  meltdown that is still possible in some
competitors. Their farming lobbies and  CEE countries. Their motto (formulated  Speakers noted that trade exposure to
industrial interests resist tough environ-  before the first NATO bombs fell on Yu-  Russia is lower in the five EU front-run-
mental standards, their banking circles  goslavia):Along-lastingpeacein Europe  ners than in other CEE countries.
want to preserve protected local markets  requires an expanded Europe.   Moreover, the contagion effect of the
or even repeal earlier liberalization. The                               August 1998 collapse of the Russian
new democratic governments of the CEE  The Costs of Nonexpansion         stock market was milder in the more
countries are-either deliberately or out                                 advanced transition countries than
of weakness-adopting policies that fa-  Participants proposed that the costs of  elsewhere. As a result, the former so-
vor special interests.              nonexpansion be calculated (as they  cialist camp is now divided into a group
were in the 1988 Cecchini Report, which  of "converging" and a group of "emerg-
Examplesincludetherestructuringofthe  estimated the costs of nonintegration).  ing" economies. The Russian crisis
Polish steel industry and the conces-  Such a calculation might well conclude  might trigger a fall of output in the
sions recently granted to protesting Pol-  that although the costs of expansion ex-  emerging transition economies, fol-
ish farmers. Even before the start of the  ceeds the benefits, the costs of  lowed by lower foreign capital inflows,
accession negotiations, Poland asked  nonexpansion are even higher. These  provoking further slowdown in the sec-
for several waivers from the acquis, for  costs include the threat of conflict and  ond round of accession.
environmental protection, foreign invest-  instability in the CEE countries.As to
ment in specific sectors, and the sale of  the costs of EU expansion, some-  The author is professor of economics at
land in rural areas and areas bordering  such as the cost of imports of farm  the Universit6 de Paris I-Sorbonne. Email:
EU countries. The Czech Republic re-  products from the East or the threat of  andreff@univ-parisl.fr or richet@univ-
voked rules on gambling and announced  Eastern and Central European job-seek-  miv.fr.
statist restructuring plans for Czech in-  ers undercutting wages in Western Eu-
dustry that will postpone the privatization  rope-have been overestimated. Labor  The EACES workshop, organized by
of large companies. Hungary asked to  cost differences, which are already nar-  the research teams ROSES and GASI
exempt 23 items from EU environmen-  rowing, have also been exaggerated.  at the University of Paris 1, Pantheon
tal legislation, exempt the Hungarian-  Meanwhile, the benefits of EU expan-  Sorbonne. was held on March 22-23,
Kazakh free trade agreement from   sion have been underestimated.        1999.
( 1999 The World Bank/The William Davidson Institute                                  TRANSITION, April 1999



New DHL Customs Report Brings    -NH,
Mixed Results-Red Tape Curtain                                                                  EX PRESi3
Partially Raised
The "red tape curtain" preventing Western investors from trading in Central and Eastem Europe has only been partially raised,
according to the second and most recent customs report by DHL, the leading air express operator in Central and Eastem Europe.
DHL Customs Report 1999 reveals that although some reforms have been implemented, customs problems remain throughout the
region-causing as much aggravation to multinationals in Central and Eastem Europe as currency fluctuations or corruption. The
report also shows a polarization between most of Central and Eastem Europe and the Commonwealth of Independent States (CIS).
Businesses claim that free flow of goods in the CIS, especially in Russia, has become particularly difficult.
T      hrough the Industrial Research  only 2 percent of respondents said that
Bureau, DHL approached the 100  things had gotten worse, while the ma-         Apr99 Nov97 Difference
multinationals-most with a turn-  jority (52 percent) felt that things had im-  Czech Rep.  48  41    +7
over of more than $2 billion-that took  proved. The Czech Republic, Hungary,  Hungary  34      34      0
part in the first survey in November 1997.  and Poland again topped the list of Cen-  Poland  27  12   +15
DHL's goal was to see whether West-  tral and Eastern European countries  Slovakia     10       7    +3
ern companies are experiencing a more  deemedtohavethemoststraightforward   Estonia     8      12    -4
business-friendly trading environment in  customs procedures (see table).  Slovenia     8      12    -4
the region.                                                               Croatia       8       5    +3
S Other Central and Eastern European  Latvia       8      7    +1
General Survey Results               countries. Twenty-seven percent of re-  Romania    8       1    +7
spondents said things had improved in  Bulgaria    6       3    +3
Customs delays are still a major con-  these countries, while only 4 percent  Lithuania  5     11    -6
cern for most Western multinationals op-  thought that the situation had worsened.  Ukraine  3  3      0
erating in Central and Eastern Europe  Slovakia was seen as having the fourth  Bosnia and
and the CIS. However, investors feel that  most straightforward customs proce-   Herzegovina  2  1    +1
the situation has improved in certain ar-  dures (in November 1997 it was ranked  Kazakhstan    1  3  -2
eas. Sixty-two percent of businesses  seventh), while 8 percent of the multina-  Moldova  1     0    +1
still experience customs difficulties in the  tionals now consider Romania straight-  FR Yugoslavia 1  1  0
region, down from 89 percent 18 months  forward to trade with, up from only 1  Uzbekistan    1  0    +1
ago. Thirty-one percent of businesses  percent in November 1997.          Turkmenistan  1       0    +1
have lost revenue due to customs de-                                      Russia        0       0     0
lays, down from 54 percent in 1997. One  0 The CIS countries. In the CIS coun-
in five shipments are held up due to cus-  tries other than Russia, 14 percent of
toms delays; one in three were held up  respondents said customs procedures  Harming Customs Procedures
in November 1997.                    had improved and 18 percent said they
are now worse. Russian customs pro-  The DHL customs report highlights ar-
The multinationals were asked whether  cedures were identified as problematic;  eas where excessive bureaucracy and
the customs situation had improved or  only 9 percent said that Russian cus-  outdated customs procedures are harm-
gotten worse in different areas of Cen-  toms had gotten better, while 34 percent  ing business.
tral and Eastern Europe. The responses  felt that the situation had deteriorated.
confirmed reports that the region has  No multinational described Russian cus-  When asked why they felt there were
split into three tiers:             toms procedures as straightforward.    still delays and logjams at customs
points around the region, 43 percent of
* The first wave of EU applicants. For  Are customs procedures straightforward  the multinationals in the study said that
these countries-the C7ech Republic,  in the given country? Percentage of re-  the rules and regulations changed too
Poland, Hungary, Slovenia, and Estonia-  spondents who answered "yes":    frequently, making it difficult for them to
TRANSITloN, April 1999                                         P 1999 The World Bank/The William Davidson Institute



plan ahead. Sixteen percent said that in  customs authorities are starting to ad-  Customs Report 1999 shows that the red
many cases the rules were applied too  dress some of the issues raised by  tape curtain has been raised slightly.
zealously.                           Western investors in the region.     However, with six out of ten multination-
als still experiencing regular customs
The multinationals gave a number of ex-  Twenty-eight percent of multinationals  problems, there is a lot that needs to be
amples where the letter of the law was  still describe customs authorities in Cen-  done. Constant rule changes and a
deemed more important than the spirit  tral and Eastern Europe as "barriers"  piecemeal approach to reform remain a
of the law. At one border crossing, the  (from 35 percent in 1997), 23 percent see  cause for concern. The situation is par-
computer printout of the shipment de-  them as "duty collectors" (from 33 per-  ticularly bad in Russia and a lot of the
tails was in the wrong color, so the whole  cent), and 18 percent as "policemen"  CIS. Working alongside other express
shipment had to be returned. Another  (from 23 percent). Ten percent now see  carriers, we are doing our utmost to per-
exporter was asked to declare his con-  them as "partners" (from 4 percent in  suade the authorities there that raising
signment of potatoes in Latin.       1997) and 4 percent as "facilitators" (from   customs barriers in response to the cur-
5 percent).                         rent economic crisis will in the long-term
Forty-two percent of multinationals now                                   actually do more harm than good."
feel that customs authorities at least par-  Some Conclusions
tially realize what businesses are trying                                 For further information contact Richard
to achieve. In November 1997 the figure  Commenting on the report, Doug West,  Kanareck or Dirk Singer at The RED
was 22 percent. This shows that while  the DHL Commercial Director for East-  Consultancy, tel. 44-171-465-7700.
customs problems are still severe,  ern and Central Europe, said, "This DHL  Email: dirks@redconsultancy.com.
The DHL Story in Eastern Europe
DHL was the first express distribution company to estab-  Half of that has gone into developing facilities and a proper
lish operations in the Eastern and Central European re-  working infrastructure; the other half has been invested in
gion. It entered the Central and Eastern European market  aircraft, vehicles, staff training, and state-of-the-art com-
in 1983 by opening offices in the former Yugoslavia. The  puter technology. DHL is linking up all its offices in the
following year it opened offices in Hungary, Poland, Bul-  region with a combination of leased lines, satellite links,
garia, and the CIS. By 1986 the other countries in the  and dial-up facilities. DHL has also invested heavily in its
region had also established a service.                airport facilities where shipments are handled and sorted
by their destinations. Many such facilities-known as
Business was more restricted before communism fell.  "gateways"-have been opened, most recently in
Due to the shortage of available office space, offices were  Budapest, Bucharest, Katowice, and Gdansk. DHL al-
often started from apartments or houses converted into  ready uses its own flights to connect most of the coun-
DHL offices. Legislation only allowed DHL to operate via  tries with its international network. This system  of
government-appointed agents or through joint ventures.  connections is being expanded extensively over the next
But after the fall of communism (and as the law allowed),  two years.
DHL quickly established wholly owned subsidiaries
throughout the region, and it has continued to grow. To-  DHL is making a strong effort to integrate into Central and
day DHL has 160 offices and over 3,000 staff throughout  Eastern Europe and to have an overall positive impact on
Eastern and Central Europe. In the CIS alone DHL has 37  this region. The company invests 7 percent of its revenue
offices and serves 200 more cities than any other trans-  in staff training; 99 percent of its 3,000 employees in the
portation company. Major clients include high-tech com-  region are locals. Senior management teams, including
panies, banks, consultancies, agencies, law firms,  general managers, are mostly local people. DHL supports
shipping companies, and heavy industries that produce  local initiatives in the communities, providing financial and
automotive chemicals, coal, steel, textiles, oil, and gas.  skills support for regeneration projects across Central and
Eastern Europe. As DHL management put it: "Alongside
Realizing that Central and Eastern Europe need fast and  an uncompromising focus on quality, cultural empathy and
reliable communications and distribution services, DHL  real understanding of the differences between countries
has invested nearly $100 million in the region since 1989.  are prerequisites for success in the region."
�D 1999 The World Bank/The \William Davidson Institute                                 TRANSITION, April 1999  U



---
THE WILLIAM DAVIDSON INSTITUTE
AT THE UNIVERSITY OF MICHIGAN BUSINESS SCHOOL
Monetary Policy in Transition: Can Inflation Targeting Work?
byJosef C. Brada and Ali M. Kutan
A number of transition economies-  countries in terms of resource allocation,  policy and institutional environment of
including the Czech Republic, Hun-  problems faced by policymakers, and be-  these countries. When we consider the
gary, and Poland-have seemingly  havior and expectations of economic  instruments of monetary policy in these
stabilized their economies, built up the  agents-such that policymakers already  countries, it seems clear that the transi-
institutions required for the functioning of  have some desire to see inflation reduced  tion has not progressed sufficiently far
a modern market economy, privatized the  below the moderate levels of 10-20 per-  for indirect instruments of monetary
greater part of their productive assets, re-  cent a year.                policy to reduce inflation to the levels
structured their industries, and integrated                               being sought. Moreover, we are not opti-
themselves into the global economy.  Whatevertheinstitutionalandenvironmen-  mistic about the ability of monetary in-
These countries have apparently suc-  tal obstacles monetary authorities face in  struments to root out moderate inflation,
ceeded not only in bringing aboutthis great  their efforts to reduce inflation to single-  in part because monetary policy seems
change in their economic system but also  digit levels, they also have to decide what  overburdened by having to pursue mul-
in introducing democracy and generating  kind of monetary policy to implement. In  tiple objectives and because it is inad-
rates of growth of economic output well  the early transition period monetary policy  equately supported by fiscal policy.
above those they experienced in the last  was implemented within the context of an  Finally, we investigate the core causes
decade of central planning and in the first  unorthodox stabilization program using  of inflation in transition economies and
years of the transition. One of the fruits of  multiple nominal anchors. However, the use  conclude that much of the problem of
this success is that these countries have  of nominal anchors, especially for the nomi-  inflation seems to be beyond the control
been able to sign Association Agree-  nal exchange rate, was discarded fairly  of the monetary authorities.
ments with the European Union (EU) and  early in Poland, later in Hungary, and fi-
are in beginning stages of negotiating to-  nally in 1997 in the Czech Republic. The  Effectiveness of Indirect Tools
ward membership in the EU.           abandonment of the nominal exchange an-
chor meant that central banks had to de-  The effectiveness of indirect methods of
The convergence of prospective member  termine a new target for monetary policy.  monetary control now employed in the
countries' inflation rates with inflation rates  The money stock was regarded as an  three countries under consideration de-
of the EU countries participating in the  unsatisfactory target because its velocity  pends on the effectiveness of monetary
EMU would increase the benefits of join-  of circulation was perceived as being too  institutions, including capital markets and
ing the EU. There is no requirement that  variable. Interest rates were problematic,  the banking system. Monetary policy in
Eastern European countries joining the EU  in part because of the tenuous links be-  the three countries still rests on relatively
meet the Maastricht criteria, but by doing  tween exchange rates and the behavior of weak financial markets and institutions
so they will gain a measure of exchange  economic agents and because of the con-  and operates in an environment where the
rate stability in relation to the euro that will  straints on interest rates. So the Czech  agents the policy seeks to influence may
intensify the benefits of economic integra-  National Bank (CNB) and the Polish Cen-  react to it in undesirable ways or not at
tion with the EU. Moreover, the current  tral Bank adopted inflation targeting. This  all. Moreover, monetary policy is not sup-
deflationary climate in world markets-  approach may also be adopted by Hun-  ported by fiscal policy and has a multi-
marked by low interest rates and falling  garian monetary authorities in the future.  tude of objectives that often conflict. The
energy and raw materials prices-is one                                    fact that monetary policy is to some ex-
that seems favorable for successful  In this paper we examine whether a pro-  tent dictated by the need to encourage
disinflation policies. Recent rates of infla-  gram of disinflation intended to reduce  the restructuring of firms, to recapitalize
tion in the Czech Republic, Hungary, and  inflation to single-digit levels, or even to  the banking system, and to enable the
Poland have imposed some costs on these  low single-digit levels, is feasible in the  government to finance its deficits suggests
M   TPANSITION, April 1999                                         (D 1999 The World Bankf/he William Davidson Institute



that monetary authorities in these coun-  time, our finding of the predominance of  window of opportunity now exists. Due to
tries are likely to face severe conflicts in  the exchange rate in causing inflation  global deflation, inflation rates in all three
the formulation of monetary policy.  suggests that nominal appreciation or at  countries fell to single-digit rates at the end
least a fixing of the nominal exchange rate  of 1998 or in early 1999. This should lower
Main Causes of Inflation             is the appropriate policy. This result  inflationary expectations so that both for-
causes some problems for monetary au-  eign prices and inflationary expectations
Our empirical investigation of the determi-  thorities. First, such a policy stance would  work in favor of efforts toward disinflation.
nants of inflation is based on a data set  hardly differentiate a forward-looking in-  Nevertheless, these efforts need to be
consisting of monthly observations for M2,  flation targeting policy from the old one of  supported not only by a measure of inde-
the broad nominal money supply, the Con-  a nominal exchange rate anchor. Second,  pendence for monetary authorities but also
sumer Price Index (CPI), nominal average  it implies a real appreciation of the transi-  by fiscal policy; to a large extent, the abil-
wages, and import prices. Changes in M2,  tion economies' currencies, an apprecia-  ity to capitalize on the current opportunity
nominal wages, import prices, and past  tion that seems incompatible with current  to end moderate inflation is in the hands
inflation are tested as the determinants of  account equilibrium, with promoting ex-  of the governments ratherthan in the hands
inflation, defined by CPI.           port-led growth, and with preventing mas-  of the central banks of these countries.
sive capital outflows.
Our empirical results indicate that import                                 This article is based on William
price changes had a significant but largely  Long-term Implications        Davidson Institute Working Paper 225
transitory impact on inflation, while the past                             by Josef C. Brada, Arizona State Uni-
inflation rate was the main source of per-  The longer-term implications of our find-  versity, and Ali M. Kutan, Southem Illi-
manent changes in the inflation rate in all  ings seem equally disappointing for mon-  nois University, Edwardsville and
three countries we investigated. Compared  etary policy advocates. Our finding that  Federal Reserve Bank of St. Louis. The
to import prices and past inflation, the rela-  past inflation rate behavior has a perma-  authors are grateful to the National
tive contribution of nominal wage and broad  nent impact on future inflation rate implies  Council for Eurasian and East European
money to movements in the inflation rate  that the effects of past inflation shocks  Research for support of the research
was small. This result holds regardless of  on the current inflation rate do not decay  underlying this paper.
what specifications are employed.    quickly; there is a great deal of persis-
tency in the inflation rate. In other words,
Our finding that nominal wage growth and  the main source of current inflation is its   Recent working papers of the
the money supply are quantitatively unim-  past path, which can be interpreted to   William Davidson Institute:
portant contributors to the inflationary pro-  represent the population's inflationary   http://lib.bus. umich.edu
cess suggests that monetary authorities  expectations. Among causes cited in the
in these countries will find it difficult to re-  literature for the persistence of inflation-   Adachi, Mitsutoshi M. Product Mar-
duce inflation using traditional indirect  ary expectations are symptoms of fiscal   ket Competition  in Transition
monetary policy instruments; nominal  dominance, meaning the government's   Economies: Increasing Varieties
wage growth and the money supply are  use of the central bank or of commercial   and Consumer Loyalty. WP 223,
the two factors that monetary authorities  banks to finance its deficit; poor starting   March 1999.
can influence relatively easily.     conditions, especially levels of inflation   Carlin, Wendy, Saul Estrin, and Mark
in excess of 10 percent; and a failure to   Schaffer. Measuring Progress in
Policy Lessons                       eradicate the fiscal roots of inflation.  Transition and Towards EU Acces-
sion: A Comparison of Manufactur-
We also found that changes in import  These factors can be found to a greater or  ing Firms in Poland, Romania, and
prices brought about by changes in the  lesser extent in each of the three coun-   Spain. WP 224, March 1999.
nominal exchange rate are the principal  tries we have examined. Moreover, none
source of transitory shocks to the rate of  of them can be resolved by the monetary   Brechbuhl, Hans, and Sonia Ferencikova.
inflation. This may explain why the Czech  authorities. Indeed, with the exception of  Transition at Whirlpool-Tatramat:
Republic, which maintained a nominal peg  the second factor, the responsibility for   Case Studies. WP 225, March 1999.
the longest and which, by virtue of the  creating appropriate conditions to lower   Puhani, Patrick A. Unemployment
peg's design, actually experienced sig-  inflation rests squarely with the govern-   Benefit Entitlement and Training
nificant periods of appreciation against the  ments of these countries. Given the im-   Effects in Poland during Transition.
Deutsche mark, has the lowest inflation  portance of foreign prices and the current  WP 226, March 1999.
rate of the three countries. At the same  deflationary trend in these countries, a
C 1999 The World Bank/The William Davidson Institute                                    TRANSITION, Apnl 1999  M



Latest from the Davidson Institute's Publication Profiles
Combating Unemployment in Transition: Are Active Labor Market Policies Effective?
The following set of four Davidson Institute Working papers  As with studies of similar programs in Western Europe, the
appear in the March issue of the Journal of Comparative Eco-  four papers find both positive and negative outcomes for the
nomics, vol. 27, no. 1. They were presented at a conference  unemployed. Consistent with evidence from EU countries, Terrell
called "Labor Markets in Transition Economies" held at the  and Sorm, studying the Czech Republic, find that job search
William Davidson Institute in October 1997.            assistance and counseling have a positive impact with limited
use of resources. Training programs have more mixed results
These papers examine the impact of active labor market poli-  in terms of increasing employment and earnings prospects,
cies (ALMPs) in four Central and Eastem European econo-  although Kluve, Lehmann, and Schmidt find positive outcomes
mies: the Czech Republic, Poland, Slovakia, and Slovenia.  in Poland. Most economists would argue that subsidized em-
ALMPs help unemployed people find a job through a variety of ployment is only warranted if the policy objective is to redistrib-
programs, including public works, self-employment start-up  ute opportunities to the target groups. Although this view seems
grants, and direct job creation programs in the form of subsi- justified in the Czech Republic, subsidized employment has
dies to employers. They may also include specific training and  not been as successful in Poland and Slovakia. Several stud-
job search assistance and counseling in the form of scheduled  ies are concemed with potential stigmatization effects of pub-
interviews, back-to-work plans, and job clubs. Given the high  lic works employment; if employers perceive that labor offices
and persistent unemployment that has resulted from the tran-  select the least employable people for public works programs,
sition process, the Central and Eastern Europe (CEE) coun-  they may not hire such people. Kluve, Lehmann, and Schmidt
tries have invested significant resources on programs for the  conclude that such stigmatization is not occurring in Poland
unemployed. Evaluation of these programs is necessary to en-  and Lubyova and Van Ours reach the same conclusions for
sure efficient allocation of scarce government resources.  Slovakia, but Vodopivic does not rule it out for Slovenia.
Active Labor Market Policies in Poland: Human Capital Enhancement, Stigmatization or Benefit Churning? Will-
iam Davidson Institute Working Paper Series Number 215, Jochen Kluve, University of Heidelberg, Hartmut Lehmann, LICOS
Center for Transtion Economics, and Christoph M. Schmidt, University of Heidelberg
This paper provides microeconometric evi-  being biased by differences in the mac-  The negative results from intervention and
dence on the effectiveness of active labor  roeconomic environment, the authors re-  public works have two possible explana-
market policies in Poland. The authors  strict their comparisons to people in the  tions. The first is stigmatization. Employ-
evaluate whether, after participating in an  same phase of the transition cycle.  ers may have a bias against hiring people
active labor market policy (ALMP) pro-                                    who have participated in public works-
gram, a person finds himself or herself  How effective are Polish ALMP pro-  perceiving them as low-productivity work-
better positioned in the labor market than  grams? Training and retraining is the one  ers. A competing explanation is "benefit
if he or she had not taken part in the pro-  policy measure that performs well. Post-  churning." Polish employment programs
gram. They do this by comparing employ-  treatment employment rates for both fe-  may be the intermediate stage between
ment and unemployment rates of persons  male and male participants who have  two spells of receiving unemployment ben-
who have undergone treatment (theALMP  been trained are higher than they would  efits. Citing some statistics on this phe-
program) with the corresponding rates of  have been had these individuals not par-  nomenon, the authors conclude that while
persons who were not subjected to the  ticipated in the program. In contrast to  stigmatization might play some role, ben-
treatment ("controls"). To ensure that their  training, employment creation programs  efit churning explains most of the negative
results reflect the true impact of the pro-  in Poland seem burdened by major dis-  effects of these programs. Since the au-
gram, they compare participants and non-  tortions. Despite their intention to en-  thors find that officials in local labor offices
participants who  have the same  hance or rebuild the human capital of the  deem male heads of household particu-
observable characteristics and an identi-  unemployed, there is no measurable  larly worthy of prolonged income support
cal labor market history before the treat-  benefit for women who participate in the  from the state, they conclude that Polish
ment took place. This ensures that  public works intervention, while there is  employment programs would benefitfrom
differences in unobservable characteris-  a strong negative effect on the employ-  eliminating the interactions between the
tics of the participants and the controls  ment rate of men who take part in the  unemployment compensation system
are minimized. To prevent the results from   public works intervention.   and public works programs.
M   TRIANSITION, April 1999                                        � 1999 The World Bank/The W-Villiam Davidson Institute



Effects of Active Labor Market Programs on the Transition Rate from Unemployment into Regular Jobs in the
Slovak Republic
Davidson Institute Working Paper Series Number 213
Martina Lubyova, Slovak Academy of Sciences, and Jan C. van Ours, Tilburg University
To a large extent, active labor market  regular jobs. The authors determined the  pensating for bad labor market charac-
policies in the Slovak Republic consist  effects of the programs by comparing the  teristics.
of creating short-term subsidized jobs in  percentage of ALMP program partici-
the private and public sectors. The au-  pants who got a regular job with the per-  Unobserved heterogeneity-and therefore
thors of this paper analyze to what ex-  centage of nonparticipants who got a  selectivity-were important in the transi-
tent it is beneficial for unemployed  regular job.                       tion toALMP programs. For both male and
workers who want a regular job to ac-                                    female workers, the authors found that if
cept a temporary active labor market  A striking result of their analysis, con-  they had not accounted for selectivity they
policy (ALMP) job or enter a retraining  trary to the findings for the neighboring  would have erroneously concluded that
program.                            Czech Republic, is that workers who  entering anALMP program stigmatizes in-
were in a better position to find regular  dividuals. Accounting for selectivity in the
The data that the authors use in their  jobs were also more likely to find a sub-  flow of workers into ALMP programs
analysis enable them to describe the flow  sidized job in the private or public sec-  yielded the finding that workers entering
of workers from unemployment to regu-  tor. The jobs created by active labor  these programs benefit from them; after
lar jobs and ALMP programs, and the  market policies seemed to complement  entering an ALMP program, the exit rate
flow of workers from ALMP programs to  the regular labor market rather than com-  to a regular job increased by 150 percent.
Labor Market Policies and Unemployment in the Czech Republic
Davidson Institute Working Paper Series Number 216
Katherine Terrell, William Davidson Institute and Vit Sorm, CERGE-EI
This paper was discussed in the Decem-  faster than they would have on their own?  unemployment spells: women, Roma-
ber 1998 issue of Transition. It is sum-  To what extent are the hard-to-employ  nies, handicapped people, less-edu-
marized here so its findings on active  targeted for ALMP assistance? The au-  cated people, and those who have been
labor market policies in the Czech Re-  thors compare the estimated probability  unemployed before. Labor offices assist
public may be compared with the find-  that someone finds employment in a given  more people who receive unemployment
ings of the other papers.           week with the help of the district labor  benefits than people who do not receive
offices with the probability that someone  unemployment benefits. And the inci-
Towhatextenthavedistrictlaboroffices-  finds a job on his or her own. They find  dence of labor offices assistance is
which carry out active labor market poli-  that ALMPs lower the unemployment du-  higher for those who have been unem-
cies-helped people find employment  ration of groups that tend to have longer  ployed longer.
Does the Slovenian Public Work Program Increase Participants' Chances To Find a Job?
Davidson Institute Working Paper Series Number 214
Milan Vodopivec, The World Bank and GEA College of Entrepreneurship
This paper analyzes the impact of the  the program can be attributed to con-  comparison with public works pro-
Slovenian public works program on  verting temporary public job positions  grams in other transition economies,
helping its participants find employ-  into permanent ones. The longer-term  the Slovenian program seemed to be
ment during the years 1992-96. It  negative impact on finding a job may  more innovative. By shifting the focus
shows that participants often find a job  be related to stigmatization of the par-  from manual to intellectual work, it suc-
immediately upon completing the pro-  ticipants. The study also shows that  ceeded in attracting younger and more
gram, but in the longer run the program's  public works reduce the exit rate to  educated participants. The author found
positive effect dissipates and its im-  inactivity, perhaps by providing moral  that positive effects on employability
pact becomes negative. Some of the  support to the unemployed, and thus  were particularly great for younger
employment gains upon completion of  boosting their workforce attachment. In  workers.
(D 1999 The World Bank/The WVilliam Davidson Institute                                TRANSITION, April 1999   I



Cuba's Economy: Twilight of an Era
by Carmelo Mesa-Lago and Jorge Perez-Lopez
Cuba's economy in the late 1990s remains depressed, unable to overcome the economic malaise that began around 1990.
During 1997-98 nominal growth rates fell substantially short of official targets. The external sector continued to be under heavy
pressure; Cuba's merchandise trade deficit widened and the country continued to have very limited access to intemational credit
markets. Foreign direct investment stagnated, and sugar production sank to a 50-year low. The only significant bright spots in
an otherwise gloomy panorama have been tourism, nickel and oil production, and private remittances.
In 1997 Cuba's GDP grew 2.5 percent  Weak External Sector                 debt service and fluctuations in the value
overall and 1.9 percent per capita, far                                   of the dollar compared to the currencies
less than the official target of 4-5 per-  Cuba's imports expanded faster than its  in which the debt is denominated. Cuba's
cent growth. Cuban officials blamed this  exports in 1997-98, mainly due to weak  hard currency debt includes a substan-
poor economic performance on the failed  world prices and a decline in the quan-  tial debt to Russia-which assumed the
sugar harvest, difficulties of borrowing  tity of sugar exports. In 1997 the value  debt of the former Soviet Union. (Be-
from foreign capital markets, the heavy  of exports reached 1.8 billion pesos-  cause Cuba's official exchange rate is 1
burden of debt repayment, bad weather,  66 percent less than the 1989 level-  peso=1 dollar, the government often re-
and crop devastation by pests.       but it fell again in 1998, to 1.6 billion  ports external sector statistics in pesos
pesos. Imports in 1997 totaled 3.7 bil-  or dollars, interchangeably. In reality, one
Lackluster Growth                    lion pesos-54 percent less than the  dollar was traded for 8 pesos in 1989,
1989 level-and rose to 3.9 billion pe-  roughly 78 in 1993, 95 in 1994, 19 in
In 1998 Cuba's GDP grew just 1.3 per-  sos in 1998. With fewer exports in rela-  1996, 23 in 1997, and 20 in 1998.)
cent-0.7 percent per capita-compared  tion to imports, the merchandise trade
to a planned growth rate of 2.5-3.5 per-  deficit widened, as it had in the 1980s.  Cumulative foreign investment-as offi-
cent. Jose Luis Rodriguez, Cuba's Vice  At that time, however, the Soviet Union  cially reported-reached 2.1 billion pe-
President and Minister of Economy and  routinely paid for the additional imports  sos by 1995 and rose to just 2.2 billion
Planning, said this low figure was due to  that Cuba needed.              pesos by August 1998, suggesting that
the U.S. embargo and the global finan-                                    foreign direct investment was stagnant
cial crisis that has reduced international  Cuba's terms of trade dropped 40 per-  over this period.
credit and driven down commodity prices  cent in 1989-97 as the prices of sugar
for Cuba's exports-particularly sugar  and nickel, two key export commodities,  Economic Bright Spots: Remittances
and nickel. He also attributed the low  fell. In 1993-97 declining volume and price  and Tourism
figure to the excessive rainfall associ-  of sugar caused its share of total exports
ated with Hurricane Georges and the  to decrease from 66.2 percent to 46.6  Private remittances from friends and
severe drought that followed.        percent. The overall decline in terms of  families living abroad have become the
trade was partly offset by a fall in the  most dynamic element of the balance of
GDP per capita reached 1,100 pesos in  world price of oil-Cuba's principal im-  payments. Remittances grew from about
1998>, at 1998 rates of increase it would  port commodity-that reduced the share  18 million pesos in 1991 to 255 million
take nearly 26 years to raise this to even  of oil in total imports from 35.4 percent  pesos in 1993, and-after Cuban citi-
Cuba's meager GDP per capita level of  in 1994 to 26.4 percent in 1997 (com-  zens' use of foreign currencies was de-
1,989-1,861 pesos.                   pared to 32.0 percent in 1989).      criminalized-to 744 million pesos in
1996 and about 761 million pesos in
In 1997 gross domestic investment as a  The external hard currency debt rose  1997. Revenues from remittances were
percentage of GDP reached 10.3 percent  from 6.2 billion pesos in 1989 to 10.5  substantially higher than revenues from
and in 1998 it reached 10.9 percent-  billion pesos in 1995 and declined to  exportsofsugarornickel,ornetrevenue
still about 60 percent less than the1989  about 10.1 billion pesos in 1997. Be-  from tourism.
level. The inflation rate peaked at 25.7  cause Cuba had very little access to
percent in 1994 then practically disap-  capital markets during this period,  Gross revenue from tourism steadily rose
peared in 1996. It slowly picked up after  changes in the value of hard currency  from 168 million pesos in 1989 to nearly
that, reaching 5 percent in 1998.    debt were due mainly to accumulated  1.5 billion pesos in 1997 and in 1998 to
M    TRANSITION. April 1999                                        C) 1999 The World Bank/The William Davidson Institute



1.9 billion pesos-more than ten times  plantains had higher output in 1997  oil-which accounts for about one-fifth
1989 gross tourism revenue. Net tour-  than in 1989.                    of total consumption-is a national pri-
ism revenue was about one-third of the                                  ority since it helps reduce Cuba's very
gross value, however, due to a high share  The new cooperatives created in 1994  high dependence on imported fuels and
of imported inputs. Net tourism revenue  are inefficient and highly dependent on  large oil import bill. Domestic oil extrac-
rose 405 percent during 1989-97.    the state; the state directs their pro-  tion steadily rose in 1992-95 to reach
duction and buys virtually all of their  1.5 million tons. Production was virtu-
Agriculture's Weak Spots            output at below-market prices, creat-  ally stagnant in 1996-97 but recovered
ing severe disincentives. In 1997 these  in 1998 when about 1.6 million tons of
In 1998 sugar production sank to 3.2  cooperatives' share of cultivated land  domestic oil were reportedly produced-
million tons, 61 percent less than the  was 57.6 percent but their share of to-  a new record.
1989 level, and lower than it had been in  tal sales to the public in free agricul-
55 years. (The previous production low  tural markets was 3.6 percent. The  Overall manufacturing output decreased
was in 1943 when 2.8 million tons of  private sector's shares of land and  during 1989-93butbegantorecoverthere-
sugar were produced.) Average annual  market sales were 16.9 percent and  after. In 1997 output was below 1989 lev-
sugar output during 1993-98-3.9 million  72.7 percent while the state farms'  els for electricity (-12 percent), cement
tons-was about half the 1982-89 annual  shares were 25.5 percent and  23.7  (-55 percent), and cigars (-32 percent).
average of 7.4 million tons.        percent, respectively.
Disquieting Social Indicators
The nonsugar agricultural sector has  Oil and Nickel Production on the Rise
also performed poorly and its recovery                                   Employment declined from about 4.4 mil-
has been sluggish and unsteady. 1997  Nickel production decreased 43 percent  lion workers in 1989 to 4.1 million in 1996,
output levels for export commodities  in 1989-94 but shot past 1989 levels in  rising to 4.2 million in 1997. The "open"
were below 1989 levels; fish and citrus  1996 and kept climbing to reach a record  unemployment rate decreased from a
were down 36 and 20 percent, respec-  high in 1998 of 68,000 tons-44 percent  1995 peak of 7.9 percent to 6.9 percent
tively. And production of key domesti-  more than 1989 production. This was  in 1997. Equivalent unemployment-add-
cally consumed commodities was also  mainly a result of Canadian investment.  ing those who are temporarily displaced
well below 1989 levels; milk was down                                   and receiving unemployment compensa-
51 percent, eggs were down 45 per-  Foreign investment has also boosted oil tion-peaked at 35.2 percent in 1993 and
cent, and rice was down 27 percent  production; international oil companies  decreased to 27 percent in 1996. No es-
from 1989 outputs. The same trend  are engaged in numerous production  timates are available for 1997.
characterized output of noncitrus fruits,  partnership agreements with the Cuban
poultry, beef, and pork. Only corn and  government. Production of domestic  In 1995 the government announced that
it would dismiss 0.5-0.8 million redun-
When the Health Care Budget is Tight...                                dant workers in the state sector. Three
years later these dismissals were largely
abandoned, likely due to a lack of job
creation in the private sector. The private
sector could not expand because of gov-
ernment interference-increasing the
cost of business permits 300 percent,
and increasing the various fees for the
self-employed 650 percent. As a result,
in 1996 the number of legally registered
self-employed people dropped 18.5 per-
cent-to 170,000-increasing to just
175,000 by the end of 1997. Average real
"That man who's telling you to get up isn't a             wages in urban areas fell steadily in the
miracle healer but a clerk from the health insurance company."    early 1990s-by 1995, to 58.5 percent
of their 1989 level. They rose slightly in
From the Czech daily Slovo.                                             1996, to 61.2 percent of the 1989 level.
D 1999 The World Bank/The William Davidson Institute                                 TRANSITION, April 1999  U



Overall health standards in Cuba dete-  the medium term-1998-2002-that the  To reverse Cuba's economic crisis, Cu-
riorated during 1989-96; the rate of re-  Fifth Party Congress set in October  ban authorities need to embrace more
ported cases of contagious diseases per  1997. Those targets called for:  profound political and economic reforms.
100,000 inhabitants rose 160 percent for                                 They must reform prices, permit and en-
tuberculosis, 75 percent for hepatitis and  * GDP to grow 4-6 percent a year. (GDP  courage private property and private sec-
syphilis, 53 percent for chicken pox and  actually grew 2.5 percent in 1997, 1.2  tor activity, privatize the large and
22 percent for acute respiratory dis-  percent in 1998, and an average of un-  inefficient state sector, create capital
eases. Surprisingly, the reported infant  der 3 percent in 1994-98.)     and labor markets, and create a social
mortality rate decreased during this pe-  0 Sugar output to increase to 7 million  safety net for the most vulnerable groups
riod, from 11.1 per 1,000 live births in  tons. (Actual output was 3.2 million tons  of the population. The inflexibility of the
1989 to 9.0 in 1996 and 7.2 in 1997.    in 1998 and an average of 3.9 million in  regime on staying the course does not
1993-98.)                           bode well for a meaningful and sustain-
In 1996/97 university enrollment dropped  0 Nickel production to reach 100,000  able economic recovery in Cuba in the
to 112,000 students-significantly less  tons-a 47 percent increase over the  near future.
than the 242,000 students enrolled in  1998 level-and tobacco 50,000
1989/90. Enrollment levels in econom-  tons-a 59 percent jump over the  Carmelo Mesa-Lago is a professor of
ics and education fell 63 percent and 66  1997 level.                    economics at the University of Pittsburgh
percent, respectively. A major reason for  * Attraction of 2 million tourists, bring-  and a professor of international relations
the overall drop has been the lack of in-  ing a gross revenue of $2.6 billion-70  at Florida International University.
centives for university graduates, who are  percent more than 1997 levels.
usually unable to find jobs in the state  0 Oil needs met increasingly through  Jorge P6rez-L6pez is an international
sector and who are prohibited from self-  domestic production, conservation, and  economist at the U.S. Department of
employment. The ratio of extreme in-  savings in private consumption and pub-  Labor.
come inequality in 1995 was 800:1, as  lic transportation.
compared to 4.5:1 in 1987; official fig-  * 50,000 dwellings built each year,
ures released in mid-1 998 reveal that a  mostly in the countryside. (This goal is    A Truly Small Farmer
teacher makes 143 times the salary of  difficult to achieve because little cement
a restaurant operator. Rationing has  is produced domestically, and part of it
been extended to nearly all consumer  is earmarked for exports.)
goods, but is no longer an effective  0 Health care to continue to partly rely
equalizer because monthly rations cover  on traditional and herbal medicine (a
less than two weeks of minimum food  stopgap measure but not a solution to
requirements. Food and other necessi-  the current problem).
ties for the rest of the month have to be  * State pensions supplemented by in-
bought in dollar shops or on the agri-  dividual savings accounts and life insur-
cultural and black markets, at very high  ance. (The question is how many people
prices affordable only to those who earn  can save enough to finance such pen-
or receive hard currency from abroad.   sions.)
0 Income inequalities to be curtailed
What to Expect in 1999              through taxation. (This would however, re-
duce incentives in the nonstate sector.)
In 1999 it is expected that GDP will grow
2.5 percent, domestic investment will  The severe drought of 1998-attributed
grow 11.5 percent, and the budget defi-  to El Nino and reportedly the worst since
cit will be under 3 percent of GDP. Sugar  1941-will likely affect both the 1999
output is expected to reach only 3.6  sugar harvest and the grandiose target
million tons and oil production may ex-  of 7 million tons of sugar envisaged for
ceed 2 million tons for the first time.    2002. The sowing of new cane for the
2000 harvest has been delayed signifi-
These very modest predictions for 1999  cantly; only half of the target crop has
contrast with the ambitious targets for  been sown.                      From the Hungarian Economy.
M   TRANSITION, April 1999                                         � 1999 The World Bank/The William Davidson Institute



Selected Cuban Economic Indicators: 1989-98
Indicators                          1989      1993    1994      1995    1996    1997    1998    1997/1989a
)
Macroeconomic (%)
GDP growth rateb                      1.2      -14.9     0.7      2.5     7.8      2.5      1.2
GDP per capita growth rateb           0.2      -15.1     0.0      1.9    7.1       1.9      0.7
Gross domestic investment/GDPb       26.7        5.4     5.5      7.2     8.2    10.3      10.9
Inflation rate:                      n.a.       19.7    25.7    11.2      0.5      2.9      5.0
Monetary liquidity/GDP'              21.6      73.2    51.8    42.6    42.0    41.1
Fiscal balance/GDP'                  -7.2     -33.5    -7.4    -3.5    -2.5    -2.0        -2.5
External (billion pesos)
Exports (goods)                       5.4        1.1     1.3      1.5     1.9      1.8      1.6        -66
Imports (goods)                       8.1        2.0     2.1      2.8     3.6      3.7      3.9       -54
Trade balance (goods)                -2.7       -0.9    -0.8    -1.3    -1.7    -1.9       -2.5        -30
Terms of trade (1989=100)           100.0       57.5    79.7    70.5    61.0    60.0                   -40
External debt (hard currency)         6.2        8.8     9.1    10.5    10.5    10.1                  +63
Foreign investment                   n.a.       n.a.     n.a.     2.1    n.a.     n.a.      2.29
Exchange rate (pesos per US$1)e         7        78       95       32      19       23       20      +229
Tourism gross revenue (millions)'     168       720      850    1,100   1,380    1,546    1,886      +820
Tourism net revenue (millions)'       101       240      280      363     455      510               +405
Physical output (thousand metric tons)
Sugar                               8,121     4,280   4,000    3,300   4,450    4,252    3,200         -48
Nickel                                 47        30       27       43      54       62       68       +32
Oil                                  718       1,107    1,299    1,471   1,475    1,462    1,600     +104
Electricity (billions kwh)             16        11       12       12      13       14                 -12
Cement                              3,759      1,049    1,085    1,456   1,438    1,702                -55
Fish catch                            192        94       94      106     120      123                 -36
Cigars                               308        208      186      192     194     210                  -32
Citrus                              1,016       644      505      564     662     808                  -20
Rice                                 532        177      226      223     369     388                  -27
Milk                                1,131       585      622      608     640     554                  -51
Eggs                                2,673      1,512    1,561    1,415   1,282    1,460                -45
Labor and social indicators
Employed (thousands)                4,356     4,313   4,195   4,131   4,106   4,183                     -4
Open unemployment (% EAP)             7.9        6.2     6.7      7.9    7.6i     6.8i                 -14
Real wages (1989=100)               100.0      81.8    63.4    58.5    61.2       n.a.
Infant mortality (per 1,000)         11.1        9.4     9.9      9.4     9.0      7.2                -35
University enrollment (thousands)    242        166      141      122     112     n.a.
a. This column compares performance in 1997 and 1989.
b. At constant 1981 prices.
c. GDP deflator.
d. At current prices.
e. Unoffical rate, annual average.
f. Gross revenue includes costs of inputs; net revenue deducts costs of inputs (authors' estimate).
g. Information released by Osvaldo Martinez, Director del CIEM, EFE, Havana, May 17,1998.
Sources: In 1998, after a hiatus of seven years, the Cuban government resumed publishing a comprehensive statistical yearbook,
Anuario Estadistico de Cuba 1996, which has partially filled the economic data vacuum that existed during 1990-96. Selected
statistical data for 1997 are available in reports issued by the Central Bank of Cuba and the Ministry of Economy and Planning and a
handful of statistics for 1998 released by top government officials. These data are supplemented by statistics published by the U.N.
Economic Commission for Latin America and the Caribbean (ECLAC), presumably based on information provided by Cuban govern-
ment agencies. Based on these sources, the above table summarizes Cuba's major economic and social indicators starting in
1989, the year before the current economic crisis began. The last column compares performance in 1997 and 1989.
(D 1999 The World Bank/The William Davidson Institute                                   TRANSITION, April 1999   *



Readers' Forum
Who Is to Blame for Russia's Economic Woes?
by Ivan Szegvari
n the past few months a number of  rent Russian government recognizes-  characteristics, culture, history, and any-
sweeping-and in my view unfortu-  and is keen to assure foreigners-that  thing else that makes a country a place
nate-statements have been made to  market reforms should continue. Having  worth living in. The trouble is that nobody
try to explain the causes of Russia's eco-  experienced the alternatives and ob-  knows what this actually means.
nomic collapse. The essence of these  served the differences between their
statements is captured in the following  economy and the economies of suc-  3. The IMF imposed its narrow-
statements:                         cessful market economies, the Russians  minded, uniform policies on Russia,
understand that the real challenge is to  an approach doomed to failure from
1. Market reforms failed in Russia.  make market reform work.            day one. To confront the above state-
2. The international finance institutions-                               ment let us first clear up some misun-
and the international community in gen-  The Russian government has empha-  derstandings:
eral-paid too little attention and afford  sized that reforms must be combined  * The G-7, not the IMF, made key deci-
too little respect to the national history,  with a strong state. Unfortunately, even  sions in recent months.
culture, and characteristics of borrower  in its latest program, the government did  0 An emphasis on fiscal and monetary
countries.                          not articulate how it perceives the role of  policies was hardly misplaced given the
3. The International Monetary Fund (IMF)  the state. If a strong state means  role of fiscal weaknesses in Russia's
imposed its narrow-minded, uniform poli-  strengthening the government's role in  macroeconomic ailments.
cies on Russia, an approach doomed to  ensuring the rule of law, providing basic  * Since early 1996, the IMF's Extended
failure from day one.               social services, enforcing regulations,  Fund Facility program has combined
4. Privatization (mainly the voucher  and, yes, intervening in matters that the  stabilization targets with an impressive
scheme and the loans-for-shares  markets handles inefficiently or nor at  set of structural reform requirements.
schemes) was ill-conceived and unsuc-  all, the government is absolutely right. If These reforms are badly needed regard-
cessful in Russia.                  it means using administrative interven-  less of the political leaning or composi-
5. The sequencing of reforms the West  tions to replace market mechanisms,  tion of the actual Russian government.
proposed in Russia, including the pre-  especially regarding prices, exchange  * These reform requirements were
cipitate liberalization of capital transac-  rates, or interest rates-in other words,  worked out jointly by the Russian gov-
tions, was ill-conceived and ill-advised.  controlling key market functions and in-  ernment, the IMF, the World Bank, and
6. Institutional reforms are by their na-  struments-the government is fundamen-  to some extent the European Bank for
ture long-term tasks, something that  tally wrong.                       Reconstruction and Development (EBRD).
should have been taken into account                                      * The tough and sometimes unrealistic
upfront in designing policy.        2. The international finance institu-  deadlines or other implementation details
7. Lack of liquidity in the system was  tions-and the intemational commu-  of the program originated in many cases
the main problem underlying the nonpay-  nity in general-paid too little attention  not from the Western partners but from
ment culture and the prevalence of non-  and afford too little respect to the na-  the Russian government, which wanted
monetary transactions (barter) in Russia.  tional history, culture, and character-  to ensure that even if the targets were
8. Russia has made very little progress  istics of borrower countries. In each of  softened during the approval and imple-
in its transition to a market-based demo-  the transition economies there was a long  mentation process, progress would still
cratic society.                     and heated debate about how the transi-  be tangible and significant. Finding an
tion was to proceed. Initially, an attempt  institutional bogeyman (the IMF) that
Let us now turn to each statement:  was made to adopt only those changes  reformers could blame played to the do-
1. Market reforms failed in Russia.  that combined the advantages of capital-  mestic audience.
Market reform or capitalism per se did  ism and socialism. Relatively quickly this
not fail in Russia. What failed was the  third way was shown not to work.  The idea that the West, in conjunction with
manner in which market reforms and  Policymakers then sought ways of com-  a handful of Russian reformers, imposed
capitalism were pursued. Even the cur-  bining capitalism with a country's national  a skewed policy package on Russia that
*  TRANSITIOQN, April 1999                                         C) 1999 The World Bank/The William Davidson Institute



led to disastrous results does not have  Voucher privatization was inevitable-  termsofbothmacroeconomicperformance
merit. Since the onset of the transition  there was no other feasible option at that  and investor confidence. After some initial
process, Russia's track record in imple-  time-and the outcome was a success.  hesitation, the government and the Rus-
menting any kind of program has been  In contrast, postprivatization reforms-  sian central bank reacted to the crisis in a
poor. Between late 1991 and early 1999,  in particular, efforts to impose hard bud-  professional and market-oriented manner.
none of the almost 30 officially endorsed  get constraints and establish efficient  To shore up weakened investor confidence,
macroeconomic programs (with the par-  corporate governance-faltered.The  they fully liberalized the exit mechanism
tial exception of the 1995 IMF stand-by  loans-for-shares scheme was a blunder.  for foreign GKO holders and took decisive
agreement) was implemented. Design-  The idea for the scheme did come from   measures to improve the government's fi-
ing Russia's economic policies and  the West, although in a very different  nances(taxoffsetswerebannedfromearly
programs has always been highly  version. It called for transparent tenders,  1998 and the primary budget balance was
overpoliticized, and policymaking has  open to everyone, including foreign bid-  turned into a surplus throughout the first
responded only loosely to economic  ders. Russian adaptation of the scheme  half of 1998). Russian policymakers also
realities. Russia's economic policies  banned foreign participation and elimi-  renewed and strengthened their commit-
have evolved as a continued series of  nated the requirements for transparency.  ment to the stability of the ruble by intro-
forced reactions to emergencies and  Many supporters of reform, including the  ducing a flat exchange rate corridor for
short-term windows of opportunities.  EBRD, protested. EBRD even wrote a  1998-2000. Although that move proved to
Actual economic and reform policies  letter to the authorities, asking them to  be excessively risky, it was not ex ante a
consistently and fundamentally differ  revise the new rules, but to no avail.  mistake.
from declared policies and programs.
5. The sequencing of reforms the  This policy package worked well for sev-
4. Privatization (mainly the voucher  West proposed in Russia, including  eral months. Massive outflows of foreign
scheme and the loans-for-shares  the precipitate liberalization of capi-  portfolio investment did not occur. The
schemes) was ill-conceived and un-  tal transactions, was ill-conceived  monetary reform of early 1998 was car-
successful in Russia. Effective control  and ill-advised. Since mid-1996 the  ried out in a smooth and orderly fash-
over medium and large-scale companies  local authorities (in full agreement with  ion. GKO yields fell again, albeit not
was handed over to enterprise manag-  the West) have gradually liberalized for-  quite to the precrisis level. What really
ers during the perestroika period, while  eigners' access to the GKO (Russian  brought down the Russian financial
formal ownership and the inherent need  Treasury bond) market. The objective of  markets was neither the liberalization
for subsidizing inefficient industrial giants  the move was to lower the extremely high  of capital account transactions nor the
remained with the state, creating an un-  real interest rates, thereby encouraging  Asian crisis but shattered investor con-
sustainable drain on the budget.The  lending to the enterprise sector and miti-  fidence provoked primarily by President
voucher privatization (carried out be-  gating the debt servicing burden of the  Yeltsin's still unexplained sacking of the
tween 1992 and 1994) simply formalized  state, and to build confidence by increas-  Chernomyrdin-Chubais-Nemtsov gov-
what had already happened. Russia's re-  ing the openness of Russia's capital  ernment in March 1998 and the weak-
formist government realized early in 1992  markets, thereby providing a self-imposed  ening of the pol icy implementation
that to cut this Gordian knot they needed  disciplining factor for policymaking in  capacity of the executive branch.
to privatize as soon and as quickly as  order to speed up long overdue fiscal
possible, give managers and workers  adjustments. In most aspects, the  6. Institutional reforms are by their na-
stakes in the privatized enterprises (in  strategy worked remarkably well. GKO   ture long-term tasks, something that
order to make privatization politically fea-  yields fell to 16-18 percent by October  should have been taken into account
sible and palatable), and depoliticize  1997, bank lending to the real sector  upfront in designing policy. Propos-
decisionmaking at the enterprise level.  started to grow, and Russia was on the  ing a carefully structured policy sequenc-
verge of qualifying for an investment  ing requires a well thought-out and
The idea was that once voucher (insider)  grade from the rating agencies.  comprehensive policy program and a
privatization was over, product competition                               committed government with strong policy
and hard budget constraints would bring  At that stage, the Asian crisis began to  implementation capacity. Reforms in
about the concentration of shareholding.  play havoc with investor confidence,  Russia have always been made as emer-
And, if supported by a new round of cash-  sharply intensifying Russia's fiscal woes.  gency reactions to crisis situations.
based privatizations, the corporate gover-  The sharp and sustained fall in commod-  Moreover, the implementation and en-
nance problem would be solved.       ity prices exacerbated the situation in  forcement capacity of the government
C 1999 The World Bankf/he William Davidson Institute                                   TPANSITION, April 1999   i



has been very weak throughout the tran-  government policies, and everything else  authority building, and firm establishment
sition process. Establishing a rule of law  that matters in economics. It must be  of the rule of law. An environment must
takes a long time, perhaps even genera-  frustrating to see that the more money  be created in which profit is a measure
tions. Should the government, then, slow   you pour into the system, the less con-  of success; the incentives for creating
stabilization and other reforms-even the  fidence (money) you really have.  small and medium-size enterprises, pri-
thinking process-and permit the au-                                        marily in the official economy, are strong;
thorities to operate with administrative  8. Russia has made very little progress  and bankruptcies represent a credible
controls (thereby inducing even more  in its transition to a market-based  threat to inefficient managers.
corruption), or should it push ahead vig-  democratic society. Let me contradict
orously with institutional reforms?  this statement with a surprising asser-  How to start? By providing strong political
tion: Russia has already become a mar-  backing for those who know what can and
Russia's problems are exemplified by the  ket economy and a democratic society.  should be done. Russian citizens will have
way it has dealt with bankruptcies. The  True, it is a badly built, badly managed,  a great opportunity to do so, perhaps in a
inability to enforce bankruptcies has been  and hence badly operating market  few months, when the joint parliamentary
one of the single greatest institutional fail-  economy and a chaotic democracy.  and presidential elections take place.
ures in the Russian transition process.  Even so, what has happened in Russia
The few thousand bankruptcies have been  is an extraordinary development of his-  The author is senior economist at the
insignificant, largely providing a channel  toric proportions. What Russia needs  Office of the Chief Economist, European
for embezzlement. What was missing?  now is a stronger state (but not more  Bank for Reconstruction and Develop-
Definitely not the legal framework, as  civil servants, as there are currently more  ment (EBRD). The views expressed here
Russia has adopted two full-fledged bank-  than there were under the Soviet regime),  are the author's and do not reflect the
ruptcy laws since 1993 and an amended  reform of the civil service, institution and  official view of the EBRD.
third law was recently sent to the Duma.
The necessary legislative and regulatory
framework for implementation is also in  "Why Are Russian Enterprises Not Restructuring?"
place. A federal agency for insolvency and
bankruptcy exists, and its qualified staff  In response to the question, "Why Are  sector recovered as from 1993 because
understands what should be done.  Russian Enterprises Not Restructuring?"  successive governments lowered taxes,
Courts, receivership, and other institu-  (Clifford Gaddy and Barry Ickes, Transi-  instituted an active restructuring policy,
tional players have also been set up.  tion, August 1998), the short answer is that  and closer oversight of state-owned en-
What has been lacking throughout the  restructuring is impossible under existing  terprises. Economic growth, in turn, at-
reform process has been the political re-  macroeconomic and microeconomic con-  tracted foreign investors. Such a policy
solve to allow this market selection  ditions and with old managers, locked in  is missing in Russia.
mechanism to operate in earnest. Politi-  by the current privatization policy.
cal resistance to bankruptcy has become                                    Lucja Swiatkowski Cannon, Center for
more and more explicit. A series of de-  I traveled across Russia in 1995 as a  Strategic and International Studies,
crees and government resolutions came  consultant to regional governors and en-  Washington, D.C.
out recently to prevent the bankruptcies  countered strong efforts to restructure.
of defense enterprises, energy distribu-  This desire was translated into an intense
tors, other strategic enterprises, and ag-  search for foreign investors, not only for  ment rate in the Transition Newisletterm
ricultural farms. Is this problem related  their capital but also for import and ex-
primarily to the time-consuming nature of  port contacts and restructuring advice. (In  February 1999, page 38, indicates reg-
institutional reforms? Hardly so.    Western Siberia, German consultants  istered unemployment which Is a much
received $1,000 an hour to write business  tionallY accepted Slovenia's comparable
7. Lack of liquidity in the system was  plans). But foreign investors have been  tnaloyaept fioves  omparable
the main problem underlying the non-  repelled by the same conditions that  und 19e98mly   7en , 7fgr  fod r 17 p9 9t
payment culture and the prevalence of  make it impossible to restructure.  instead  of 14.4, 14.8, and 14.1 percent
nonmonetary transactions (barter) in                                      instead iof   ,      ands 14.1
Russia. The value of money is based on  In Poland in 1989-90 employee councils        Y
confidence-confidence in contracts, in-  replaced "martial law managers" with  Borut Repansek, Executive Director's
terest rates, exchange rates, regulations,  more market-oriented ones. The public  Assistant, the World Bank.
*  TRANSMON, April 1999                                             ( 1999 The World Bank/The William Davidson Institute



World Bank/IMF/EBRD Agenda
World  Bank  Guarantees Funds  20 for a standby loan of $475 million to  long-term project finance toward short-
Raised on Private Capital Markets    Romania. The agreement must be ap-  term working capital for Russian export-
proved by both the IMF's board and  ers. Speaking at the bank's annual
The World Bank is introducing a policy-  Romania's parliament by June. The loan  meeting, held in April in London, EBRD
based guarantee to help member coun-  will help Romania avoid defaulting on  Chief Economist Nicholas Stern said the
tries raise money-for example issue  its foreign debt obligations, which total  bank would continue to invest in Russia
bonds-on private capital markets. The  about $2 billion for the rest of this year.  but that the volume of its investment
Bank is offering to guarantee a part of                                   would depend on the business climate.
theborrowedamountinsupportofagreed  The lMFexpectsthegovernmenttomake  Citing the role of Russia's central bank,
structural, institutional, and social poli-  significant progress on economic reform   EBRD President Horst Kohler said that
cies and reforms. A pilot program will have  if it is to secure the quarterly disburse-  the EBRD will become more involved in
$2 billion available in credit guarantees.  ment of tranches. Romania's deputy  helping to set up a regulatory framework
Other new operational instruments in-  central bank governor, Cristian Popa, ex-  for Russia's banking sector. "We have
clude Learning and Innovation Loans,  pressed hope that $315 million will be  to be aware that the transition is a much
Adaptable Program Loans, and Special  available this year and that the first  longer process than we had thought," he
Structural Adjustment Loans. New loan  tranche-worth more than $100 million-  is quoted as saying. The bank had un-
and hedging products will enable IBRD   can be drawn after an IMF board meet-  derestimated the importance of building
borrowers to better manage their market-  ing in June. Privatization receipts are  sound financial institutions in countries
related risks and offer greater scope to  expected to reach $1.4 billion this year.  like Russia.
tailor loan maturities to project needs.
These products are planned for introduc-  On the back of the IMF agreement, Ro-  A report prepared by the bank's econo-
tion September 1, 1999.              mania hopes to tap $600-800 million in  mists before the outbreak of war in Yu-
financing this year, including financing  goslavia points out that the region's GDP
IMF's Contingent Credit Lines to Help  through private placements and bridge  fell 1.3 percent last year and is forecast
Prevent New Crisis                  loans. It also hopes to issue a new sov-  to decline another 1 percent this year.
ereign bond by the end of the year, ac-  But while in Russia, along with the rest
As a precautionary line of defense, readily  cording to Mr. Popa. Utility and other  of the Commonwealth of Independent
available against future balance of pay-  companies may also seek to issue bonds  States, output fell by 3.5 percent in 1998
ments problems that might arise from in-  with sovereign cover.           and is expected to drop a further four
ternational financial contagion, the IMF will                             percent in 1999, output in Central and
provide contingent credit lines (CCL) to  Early last year the IMF froze a $430 mil-  Eastern Europe increased 2.3 percent
member countries with strong economic  lion standby agreement after criticizing  last year and is expected to grow 1.9
policies. Commitments under the CCL  Romania's center-right coalition for its  percent this year.
would be expected to be in the range of  sluggish progress on privatization and
300-500 percent of the member country's  othereconomicreforms.WhileRomania's  IMF Official Sees No Growth in
quota. Approval of financing underthe CCL  privatization effort has gained steam in  Czech Republic in 1999
will signal the IMF's confidence in the  recent months, worries about the
member's economic policies and its deter-  country's solvency have intensified since  The International Monetary Fund esti-
minationtoadjustthosepoliciesasneeded,  the beginning of NATO's bombing cam-  mates that GDP growth in the Czech
should contagion hit. The CCL is being es-  paign in neighboring Yugoslavia. The  Republic in 1999 will at best be zero,"
tablished for a two-year period and will be  conflict has disrupted transit links with  said IMF European I Department
reviewed after one year's experience.  Western Europe and will cost Romania  Deputy Director Jacques Artus, who
an estimated $175 million this year.    recently visited the Czech Republic as
Romania Closer to IMF Standby, Ex-                                        head of an IMF delegation. The Fund
pects No Default                     EBRD Shifts Russia Strategy          expects Czech inflation to remain low,
reaching 4 percent a year by the end of
IMF representatives signed a memoran-  The EBRD is adjusting to the Russian  1999. "The immediate priority is to stop
dum of understanding in Bucharest April  financial crisis by shifting its focus from  the deterioration in the economy and to
�) 1999 The World Bank/The William Davidson Institute                                  TPANSITION, April 1999  U



foster recovery through tackling the  MIGA Doubles Capital to $2 Billion   have voted to double MIGA's capital to
structural problems that have accumu-                                    a little more than $2 billion. The boost
lated for a nLImber of years in the bank-  Delegates of the 149 member countries  in reserves will allow MIGA to substan-
ing and industrial sector," he warned.    representing MIGA's shareholder base  tially increase its guarantee services to
Russia Resumes Borrowing from World Bank and IMF
Our newsletter went to print on the day that President Yeltsin dismissed Prime Minister Yevgeny Primakov and named
Sergei Stepashin as acting prime minister Stepashin has pledged to implement all the agreements reached with the IMF
World Bank President James Wolfensohn confirmed that the Bank's lending to Russia is continuing.
On April 28 the World Bank and the Russian government fin-  ability of counterpart funds-funds that match World Bank
ished negotiating a revision of the third Structural Adjustment  loans in domestic currency.
loan, and the International Monetary Fund (IMF) agreed to
lend $4.5 billion to Russia pending the country's execution of  Despite the uncertainties in Russia, the Bank continues to
previously agreed actions. Disbursements from the revised  supervise ongoing operations, meet payment requests if they
World Bank loan could begin in the summer-once it is ap-  are underpinned by active contracts, and review procure-
proved by the Bank's Board of Directors. The IMF program   ment documentation of implementing agencies. From 1992,
will begin after Russia takes measures to bring down its bud-  when Russia joined the World Bank, until April 1,1999, Rus-
get deficit and strengthen its loss-plagued banking system,  sia has received cumulative disbursements of $6.55 billion-
and the program is approved by the IMF's executive board.   $2.12 billion in investment loans and $4.4 billion in
quick-disbursing adjustment loans. The Bank currently has
The Bank's revised loan brings its total pledges in Russia to  35 active projects in Russia with a budget of $11.8 billion.
about $2.3 billion for 1999-2000. Russia's net gain would be
slightly more than $1 billion considering debt service obliga-  The International Monetary Fund's agreement to lend $4.5
tions the ccuntry will assume as grace periods on the older  billion to Russia-completed one the sMe'a su the World
loans in the Bank portfolio begin to expire over the next two  Bank s loan negotiations-resumed the IMF's support for Mos-
years. Priority in lending to Russia for the fiscal year 2000-  e itha ollhs after the IMF  halted a previous rescue that
which starts in July 1999-would be given to operations that  ended with a collapse in the ruble. The April accord, which
are socially targeted and support the development of basic  must be approved by the IMF's executive board, would be a
.  . .            .                    ~~~~~~~~~~~new step in the cooperation between the IMF and Russia,"
institutions. World Bank representatives stated that a suc- 
cessful resumption of adjustment loans will depend "on the  IMF Managing Director Michel Camdessus said in a state-
cessful resumption of adjustmentloanswlment issued after meetings with Russian First Deputy Prime
progress of the Russian government in implementing the  MinisterYuri Maslyukov and Finance Minister Mikhail Zadornov.
reform programs to which it has committed itself."
The agreement aims primarily to keep Russia's economy
The original third Structural Adjustment Loan (SAL 3), for  fro  delnnt    the pamoun t ee    d tolndm
$1.5 billion, was approved by the World Bank's  oadi  from decining further; the amount the IMF agreed to lend is
$1.5 billion, was approved by the World Bank's Board in  just enough to prevent Moscow from defaulting on debts that
August 1998, and its first tranche, for $300 million, was dis-  will be due to the IMF itself in the next couple of months. Of
bursed at that time. The original loan supported reform of  the $4.5 billion the IMF intends to lend over the next 18
infrastructure monopolies, development of the private sec-  months, $3 billion is to be disbursed in the first year, mean-
tor, improvement of fiscal management, and reform of the  ing that during the term of the loan Russia would receive
financial sector (banks and the capital market). The August  less from the IMF than it owes the IMF; to pay the full amount
crisis has interfered significantly with this and other Bank  it owes, Moscow has to use some other reserves of foreign
projects: $1.2 billion of the SAL 3 remains undisbursed, as  currencies that it holds. However, the new IMF loans will
do $400 million of the $800 million Second Coal Loan and  unlock additional Western aid and allow Moscow to resched-
$250 million of the $800 million Social Protection Adjust-  ule much of its other debt to foreigners, giving the Primakov
ment Loan.                                           government considerably more financial breathing space.
The collapse of the banking system resulted in the freezing  Anton Surikov, Maslyukov's spokesman, said Russia must
of Special Accounts-accounts opened in commercial banks  take "prior actions," including the enactment of a legislative
to disburse the Bank's loans-and lines of credit. The ruble  package. After these actions are completed, the IMF board
devaluation reduced the repayment capacity of the final bor-  of directors will convene to consider the memorandum and
rowers, including local governments, and weakened avail-  start providing credits.
TRANsITON, April 1999                                            ( 1999 The World Bank/The William Davidson Institute



foreign investors interested in investing  Central Asian state. The loans include  adviser in Ukraine, said. The country's
in the agency's 127 developing mem-  support for reform in public sector man-  National Bank had only $685 million in
ber countries. Under recently revised  agement, civil service and pension re-  foreign debt, $1.17 billion of which falls
operating guidelines, MIGA increased  form, and road and irrigation projects.   due this year. The govemment estimates
the amount it can guarantee in a single                                  that it needs $2.2 billion in external financ-
investment project from $75 million to  Among the loans is a $42.5 million loan  ingthisyeartocoverdebtoglibationsand
$200 million; its exposure in each host  to finance health care reform. The loan  replenish dwindling bank reserves.
country rose from $350 million to $620  is the first of three Adaptable Program
million. The recent capital increase will  Loans totaling $162.5 million over eight  IFC Invests in Moldova's Telecoms
allow MIGA to expand these levels fur-  years to finance improved health care in  Sector
ther in the future.                 Kazakhstan. The first loan will finance
institutional arrangements that will pay  The International Finance Corporation, to-
MIGA was formed in 1988 to act as the  health care providers on the basis of qual-  gether with German and French banks,
World Bank's political risk insurance  ity and efficiency, make continuous  finalized the largest private financing ever
arm for investors. The agency estimates  progress on "priority health status tar-  undertaken in Moldova. The beneficiary is
that it has issued $4.6 billion in insur-  gets," and allow patients to choose their  Voxtel, a private cellular operator that will
ance covering $27 billion in foreign di-  primary doctor. The health care loan is  establish a nation-wide cellular telephone
rect investment in 63 countries.    repayable over 20 years, with an initial  network in Moldova. Voxtel was granted a
grace period of five years. Since 1992,  15-year GSM (Global Systems for Mobile
Euro: CEE Costs and Benefits        when Kazakhstan joined the World  Communications) license by the Ministry
Bank, it has borrowed $2.1 billion for 18  of Transport and Communications. The IFC
The April issue of the IMF Survey reports  projects.                     put together a $40 million debt financing
that the benefits of adopting the euro are                               package that will cover the company's
likely to outweigh the costs for countries  World Bank Resumes Loans to  three years of investment program and the
lining up to join the European Union. Can-  Ukraine                      IFC is also investing 5 percent in Voxtel's
didate countries-the Czech Republic,                                     share capital. To date, the IFC has mobi-
Estonia, Hungary, Poland, and Slovenia-  The World Bank agreed to offer $150 mil-  lized investments of $2.3 billion in telecom-
would enjoy lower interest rates and  lion in loans to Ukraine following the IMF's  munications projects worldwide, of which
higher trade, investment, employment,  decision to resume disbursements of a fro-  $1 billion was the IFC's own investment.
and growth by meeting the terms needed  zen $2.2 billion loan. The Fund had sus-
to adopt Europe's single currency. But  pended its aid to Ukraine last autumn over  Vietnam Donors to Hold Mid-Term
would-be new members would lose the  Ukraine's stalled reforms, as did the World  Meeting in June
ability to use exchange rates or monetary  Bank because its projects are dependent
policy to absorb external shocks, the re-  on sound economic policies endorsed by  Vietnam's major donors will hold a
port said. This could be costly if coun-  IMF funding. Of the World Bank's loans,  mid-term meeting this June to discuss
tries faced pressure to cut costs to meet  $100 million was allocated to support  with the Vietnamese government the
European budget targets.            Ukraine'senterprisedevelopmentprogram,  speeding up of economic reform and
while $10 million will go to support finan-  ways to better coordinate aid. The con-
World Bank to Lend $350 Million to  cial system reform. Furthermore, a new  sultative group meets every December
Kazakhstan in 1999                  $40 million trancheofapreviouslyapproved  to announce its pledges to Vietnam for
$300 million Coal SectorAdjustment Loan  the following year. Last year the World
The World Bank will lend about $350  has been disbursed on April 29, 1999. It  Bank also organized a mid-term meet-
million to Kazakhstan in 1999, including  will help alleviate the social and environ-  ing in Hue in June in order to review
$100 million to support reform of the so-  mental consequences related to the clo-  the progress of reforms. Private sector
cial security system. Traditionally, the  sure of 24 loss-making mines.  representatives attended last year's
Bank lent Kazakhstan about $300 mil-                                     meeting and will attend again this year,
lion a year, according to Bank Country  Ukraine could secure as much as $3.2  when the group meets in Haiphong.
Director Kadir Yurukoglu. Since the cri-  billion in financing from the World Bank  Last December donors pledged $2.2
sis in Russia last August, however, ef-  and the IMF in 1999 and 2000, if the gov-  billion in aid for Vietnam and offered
forts have been stepped up to support  ernmentachievedrealeconomicreforms,  another $500 million if Vietnam accel-
the resource-rich but cash-strapped  John Hansen, World Bank economic  erated reform.
(C 1999 The World Bank/The William Davidson Institute                                 TRANS1TION, April 1999  m



Milestones of Transition
Central and Eastern Europe   recognized investment company. The  than doubled in 1998, to EEK 7.9 billion
industrial revitalization program will help  ($567 million). Foreign investments were
Growth in the Baltics slowed in  improvethepositionsofKomercnibanka  led by Swedish banks seeking to in-
1998. Prelirninary data released April  and Ceska sporitelna, the largest two  crease their presence in the Estonian
1 show that in 1998 Latvia's GDP grew   Czech banks that remain state-owned.  banking sector.
3.6 percent-down from 8.6 percent in  These two banks currently have the
1997-and Lithuania's GDP grew 4.4  greatest share of bad debts in the  Hungary
percent-down from 6.1 percent in  country's economy.
1997. Forecasts for economic growth                                      Hungary aims to revitalize exports
this year have been lowered; Latvia ex-  The Czech government will issue  by boosting productivity. Next year's
pects GDP growth of 2.0-4.0 percent,  bonds worth 29.3 million koruny  economic plan foresees economic
down from 4.0 percent, and Lithuania  ($825 million) this yearto coverthe 1998  growth of 4-5 percent, consumer infla-
expects growth of 4.0-4.5 percent,  budget deficit-which was increased by  tion of 6-7 percent, and a central bud-
down from 5.5 percent. The economic  the government's bailout of Ceska  get deficit of 2.5-3.5 percent of GDP.
slowdown in the Baltic countries was  sporitelna. Similar plans this year to in-  The government expects this deficit to
due largely to the impact of the Rus-  ject capital into banks slated for  fall to 2-3 percent by the end of the
sian crisis.                        privatization will likely bring the budget  current parliamentary cycle. If annual
deficit to 35-40 billion koruny in 1999.  inflation drops below  5 percent,
Wages rose in the Baltics in 1998. The  Debt write-offs may be critical in making  Hungary's finance ministry will abolish
average monthly wage was $292 in Es-  banks attractive to foreign investors.    the country's crawling-peg devaluation
tonia, $225 in Latvia, and $252 in                                       regime. The balance of payments defi-
Lithuania. During 1998 average monthly  Estonia                          cit is expected to remain in the $2.3-
wages denominated in dollars rose 13.3                                   2.8 billion range. Foreign capital inflows
percent in Estonia, 9.1 percent in Latvia,  The Estonian government endorsed  are predicted to reach about $2 billion
and 23.4 percent in Lithuania.      an austere budget. On May 4 the cabi-  in the year 2000. And gross average
net approved a negative supplementary  wages are expected to rise 8.5-9.5
Czech Republic                      budget that will reduce this year's overall  percent next year-a 2-2.5 percent in-
budget by 1.03 billion kroons (about $70  crease in real terms.
The cabinet approved a final version  million) from last year. Subsidies to farm-
of the industrial revitalization plan  ers-which were to have been cut by al-  On average, male employees in Hun-
in mid-April. Fifteen to twenty firms will  most one-sixth-have been left intact,  gary earn 25 percent more than their
likely be involved in the program; prime  while the biggest reductions were made  female counterparts, according to a
candidates are the chemical conglom-  in the reserve fund and in administrative  1998 survey of 2,000 households con-
erateAliaChem and the engineering com-  costs. Budget expenditures currently  ducted by the Tarki research group. This
panies Skoda Pilsen, ZPS Zlin, CKD  exceed revenues by some 900 million  pay difference is distinct in most occu-
Praha, and Tatra Koprivnice. It is esti-  kroons, and less than one-quarter of the  pations and positions, regardless of age
mated that about $200 million in total  year's revenue target has been collected.  group, education, or region. In March
capital will be needed to help these com-  Prime Minister Mart Laar warned that fur-  1998 women earned an average of 32,500
panies survive. The restructuring will be  ther cuts may be necessary later this  forints while men earned an average of
controlled by the Revitalization Agency,  year; under Estonian law, the budget must 40,740 forints ($1=235 forints). The big-
which is staffed by deputies of the state-  be balanced.                 gest gap between men and women's
owned Konsolidacni banka and represen-                                   salaries was at the executive level, with
tatives from the financial sector. The  In 1998 Estonia's current account  men earning an average of 95,000
Revitalization Agency will also find new  deficit narrowed to EEK 6.3 billion  forints-1.7 times the average salary of
strategic partners for selected compa-  ($452 million)-8.6 percent of GDP-  their female counterparts. Wage differ-
nies or for their viable parts. Key  from last year's figure that was 12 per-  ences were insignificant among agricul-
decisionmaking for the agency will be del-  cent of GDP ($563 million). Meanwhile,  tural laborers, unskilled, and semi-skilled
egated to a pre-selected, internationally  foreign direct investment in Estonia more  workers.
*  TRANSITION, April 1999                                          C) 1999 The World Bank/The William Davidson InstituLe



Poland                               the tenge to float freely (see article on  with the bank owner's approval. Overall,
page 12).                            about 1,000 banks will survive while 400
Over the next 10 years Poland is                                          close their doors, according to Central
scheduled to receive 650 million dol-  Russia                             Bank chairman Viktor Geraschenko.
lars from NATO to upgrade the country's
military infrastructure. This money will  $12-14 billion flows out of Russia  Two U.S. companies, John Deere and
be used to refurbish airports, marine  each year estimates the tax minis-  Case Corporation, plan to invest
bases, and fuel distribution stations.    try. It submitted proposals for tighten-  $400 million in Russia and establish
ing control of hard currency, based on  farm equipment leasing enterprises
Slovakia                             recent international experience. Accord-  there. John Deere will invest $200 mil-
ing to [former] Prime Minister Yevgeny  lion in Rostelmash in the Rostov Oblast,
The government plans to reduce the  Primakov, much more foreign currency  and Case will invest $200 million in Kirov
number of strategic enterprises that  leaves the country every year-as much  Works in St. Petersburg. The companies
by law cannot be privatized-from   as $20-25 billion.                     plan to raise an additional $2 billion from
35 to 6 or 7, Prime Minister Mikulas                                      U.S. investment banks.
Dzurinda announced on April 21 Natural  In 1998 inflation soared to 84.4 per-
monopolies-including energy distribu-  cent from its 1997 figure of 11.8 percent,  Ukraine
tors and railways-will remain under  according to a Finance Ministry report.
state ownership. The government hopes  GDP shrank 4.6 percent in 1998, while  Ukraine's GDP in the first quarter of
that by opening the door to greater  industrial production dropped 5.2 percent.  1999 was 4.8 percent lower than in the
privatization it will attract foreign invest-  Exports dropped to 87 percent of their  first quarter of 1998, worse than the 4.0
ment and raise much-needed revenues.  1997 level, while imports fell 15.1 per-  percent drop predicted, First Deputy Eco-
cent. Meanwhile, Russia's foreign debt  nomic Minister Viktor Kalnyk disclosed. It
The Slovak government expects to  exceeded its GDP-by 18.7 percent-  is expected that GDP will recover slightly
collect 155.7 billion crowns in taxes,  and its domestic debt-by 19.4 percent.  in the second quarter and be about 2.4
assuming parliament approves the neces-                                   percent lower for the year as a whole.
sary legislative amendments. Slovakia's  Reforming the country's banking sys-
1999 budget projects a deficit of 15 bil-  tem will cost at least 100 billion rubles  Ukraine's government has ordered
lion crowns ($361 million)-down from  ($4.2 billion), according to Russia's  12 of the country's industrial giants
19.2 billion crowns last year. If the  Central Bank. The recently established  to prepare immediately for sale to
slowdown continues in Central and  Agency for Restructuring of Credit Or-  private owners. According to the Ukrai-
Eastern Europe-especially in the  ganizations (ARCO) has a charter capi-  nian News Agency, the country's cabi-
Czech Republic-the Slovak govern-  tal of 10 billion rubles-enough, experts  net ordered the State Property Fund to
ment may need to alter its budget.    say, to help perhaps 20-30 troubled  finalize a schedule for selling stakes of
banks. ARCO, which started operations  up to 53 percent in the 12 enterprises-
CIS                                 in April, has released a listing of 16 re-  which include metallurgical plants, oil
gions targeted for assistance. ARCO   refineries, and several big exporters. The
Kazakhstan                           aims to help:                        government needs foreign investment to
0 All banks that have broad importance  revive the economy and help pay off
Kazakhstan's GDP was 4.0 less in the  in their region.                    mounting debts. (In March the parliament
firstquarterof1999thaninthefirstquar-  0 Certain Moscow banks. (Moscow  rejected a draft of a 1999 privatization
ter of 1998, and industrial output was  banks account for 86 percent of payment  program, submitted by President Leonid
down 4.1 percent, according to the Na-  transfers frozen in the banking system.)  Kuchma, calling for the sale of over $200
tional Statistics Agency. In the first quar-  * One or two banks critical to the pay-  million in state assets this year.)
ter of this year industry suffered major  ment system.
market losses due to last year's Rus-                                     Asia's Reforming Economies
sian financial crisis, and key exports  ARCO can provide assistance to restruc-
were hurt by falling world commodity  turing banks as a creditor, a shareholder,  China
prices. On April 2, in an attempt to boost  an external regulator, or an advisor on
export competitiveness and increase in-  financial and regulatory issues. The  Theprivatesectorneedsmoresupport,
dustrial output, the government allowed  agency will only help a bank restructure  Yi Gang, deputy secretary-general of the
C) 1999 The World Bank/The William Davidson Institute                                  TRAN\SITION, April 1999  M



State Council's Monetary Policy Com-  public projects. In order to create ratio-  intervention in capital markets must be
mission, pointed out. "The government  nal competition, private businesses  halted and stock market listings for en-
should narrow the area of investment  should be allowed to enter sectors mo-  terprises decided by the market rather
for state-owned enterprises and focus  nopolized by state-owned enterprises. than the government. Yi added that the
on expanding investment areas and  This would lead to the demise of  commercialization of state-owned
channels available to the private sec-  loss-making state-owned enterprises  banks should be accelerated to ensure
tor," Yi said, as quoted in Xinhua. Yi,  and ensure China's sustainable eco-  their improved management and ser-
who is also deputy director of monetary  nomic development.             vices and lending of profit-making
policy at the Central Bank, added that                                  loans.
the private sector should be allowed to  Yi also called for equal treatment of en-
invest in areas dominated by the gov-  terprises in financing, regardless of  We appreciate the contributions of Ra-
ernment, including infrastructure and  ownership type. He said government  dio Free Europe.
Conference Diary
Investment Management in the Tran-  49-4502-803-200, Email: ostseeaka  sitive management-costs and benefits.
sition Economy                      demie@tonline.de, Internet: http://  Information: Research Institute for Eu-
May 26-28, 1999, Novopolotsk, Belarus  www.balticnet.de/Ostsee-Akademie/  ropean Affairs, Wirtschaftsuniversitat
Ostseeakademie-lnfo.html            Wien, Althanstrabe 39-45, A-1090
Organizer: Polotsk State University Fi-                                 Wien, tel. 431-31336-5084, fax 431-
nance Department.                   Tax Administration: Institution Builging  31336-752, Email: Meierewe@fgr.wu-
Languages: English, Russian.       in Transition-Tax Evasion, Compli-  wien.ac.at.
Information: Polotsk State University,  ance Costs, and Taxpayers' Rights
Blokhin str. Novopolotsk, Belarus, tel.  June 3-5, 1999, Zagreb, Croatia  The World Bank's First ABCDE Eu-
375-2144-56395, fax 375-2144-54263,                                     rope Conference
Email: admin4@psu.belpak.vitebsk.by  Organizer: The Institute of Public Fi-  June 21- 23, 1999, Paris, France
nance, Zagreb, Croatia in cooperation
Third International Conference on  with International Bureau for Fiscal Docu-  Keynote addresses by Lionel Jospin,
Enterprises in Transition           mentation, Amsterdam, the Netherlands  Prime Minister, France; James D.
May 27-29, 1999, Split, Croatia     and Center for Public Affairs Studies,  Wolfensohn, President, the World Bank;
Budapest University of Economics,  Jean-Louis Beffa, Saint-Gobain; James
Organizer: Faculty of Economics, Uni-  Budapest, Hungary.               A. Mirrlees, University of Cambridge;
versity of Split.                  Information: Natalija Spehar, Institute  Joseph E. Stiglitz, and Jean-Francois
Information: Faculty of Economics Split,  of Public Finance, Katanciceva 5, PO.  Rischard, the World Bank. Session one:
Radovanova 13, Hr 21000 Split, Croatia,  Box 320, HR-10000 Zagreb, Croatia, tel.  The New Comparative Economic Sys-
tel. 385-21-366033 or 362465, fax 385-  385-1-481-9363, fax 385-1-481-9365,  tems-Roundtable: Institutional Infra-
21-366026.                          Internet: http://www.ijf.hr.        structure (Oliver Hart, Mustapha Nabli,
Katharina Pistor, Jean Tirole); Paper:
Germany and the Baltic Countries in  Cultural Standards in Business and  Transition-The First Ten Years (John
the New Europe: The Experiences of  Society in the European Union       S. Flemming). Session two: Market
One Decade of the New "Neighbor-  June 7-10, 1999, Vienna, Austria      Organization-Roundtable: Capital and
hood"                                                                   Labor Markets (Isher Judge Ahluwalia,
May 28-30, 1999, Kiel, Germany      Organizer: Institute for the Danube Re-  Masahiko Aoki, Rudiger Dornbusch,
gion and Central Europe; supported by  Assar Lindbeck); Paper: Poverty and
Organizer: Ostsee Akademie.        the European Commission.             Inclusion (Anthony Atkinson, Francois
Language: German.                   Topics: Culture and management; simi-  Bourguignon). Session three: The New
Information: Ostsee-Akademie, Trave-  larities and differences in management  Global Economy; Papers: Global Finan-
muende, Europaweg 3, 23570 Lubeck,  styles in Europe; European manage-  cial Markets (Richard Portes), Global Ex-
Germany, tel. 49-4502-803-203/205, fax  ment; global management; culture-sen-  ternalities (Domenico Sinscalco), and
M   TRANSIIION, April 1999                                       (D 1999 The World Bank/The William Davidson Institute



Global Govemance (Michael Camdessus,  is sponsored by Pierre-Alain Muet,  mies: The Impact of Transformation
James D. Wolfensohn). The first two af-  Conseiller aupres du Premier Ministre,  on Individuals, Organizations, and
ternoons will each have five parallel work-  France; and Joseph E. Stiglitz, Senior  Society
shop sessions. June 21 st: New Thinking  Vice President Development Econom-  June 22-23, 1999, Bucks, United Kingdom
on Security In Labor Markets, Knowl-  ics and Chief Economist.
edge and Development, Gender Eco-  Information: Boris Pleskovic, Research  Organizer: Buckinghamshire Business
nomics, Expertise, Rrational Decision  Advisory Staff, World Bank, 1818 H  School.
Making and Democratic Accountabil-  Street, N.W., Room MC4-391, Washing-  Information: Margaret Levell, CREEB,
ity, and Capital Flows and Develop-  ton, DC 20433, e-mail: bpleskovic  Buckinghamshire Business School,
ment. June 22nd: Social Insurance  @worldbank.org tel. 202-473-1062, fax  Buckinghamshire Chilterns University
and Social Security Reform, Trading  202-522-0304.                      College, Newland Park, Gorelands Lane,
Blocs and Regional Integration, Global                                  Chalfont St. Giles, Bucks HP8 4AD,
Environment, The Global Financial Cri-  Fifth Annual Conference of the Cen-  United Kingdom, tel. 44-1494-603159,
ses and Debt and Debt Relief. Partici-  tre for Research into East European  fax 44-1494-874230, Email: creeb@
pation by invitation only. The conference  Business and Transforming Econo-  buckscol.ac.uk, Internet: http://www.
buckscol. uk.
Anniversary                                                           Fifth Bruehl Conference for Young
Experts on Eastern Europe
June 24-26, 1999, Bruehl, Germany
Organizers: Ost-West-Kolleg der Bun-
R{                         deszentrale fuer politische Bildung,
Deutsche Gesellschaft fuer Osteuro-
*  < d                    ~~~~~~~~pakunde, Bundesinstitut fuer ostwissen-
schaftliche und internationale Studien
(BIOST).
Language: German.
Purpose: To bring together young re-
searchers in the social sciences (gradu-
ates, Ph.D. candidates, and recent
Ph.D.s) to discuss current research on
Eastern Europe.
Potential topics: Aspects of the social,
economic, political, and legal transforma-
/    .   \.                 tion in Central and Eastern Europe and
J~  \the countries of the former Soviet Union.
Information: Hans-Henning Schroeder,
Bundesinstitut fuer ostwissenschaftliche
und international Studien, Linden-
bornstrasse 22, D-50823 Koeln, tel. 49-
221-5747-151, fax 49-221-5747-110,
Email: rogo01@  mail.unikoeln.de.
__ S     t                     Econometric Evaluations of Active
Labour Market Policies in Europe
June 25-26, 1999, Mannheim, Germany
"Tell me friend, do you remember why we were so damned eager for
capitalism 10 years ago?"                        Organizer: ZEW Centre for European
Economic Research.
From the Hungarian magazine H6cipo                                      Information: Michael Lechner, University
( 1999 The World Bank/The William Davidson Institute                                 TRANSITION, April 1999



of St. Ga/len, Dufourstr. 50, CH-9000 St.  in an International Perspective  Department of Economics, Harvard Uni-
Gallen, Switzerland, Email: Michael.  November 6-7, 1999, Hong Kong        versity, Cambridge, MA 02138, United
Lechner@vwl.uni-mannheim.de, and                                           States, fax 617-495-2911, Email:
Friedhelm Pteiffer, Centre for European  Organizer: Center of Asian Studies, Hong  dperkins@hiid.harvard.edu.
Economic Research (ZEW), P. . Box  Kong University and the Centre Francais
103443, 68034 Mannheim, Germany,  d'Etude sur la Chine Contemporaine  Sixth ICCEES World Congress
Email: pfeiffer@zew.de, Internet: http://  (Hong Kong) et le GASI.         July 29 - August 3, 2000, Tampere, Finland
wwweval.zew.de.                      Information: Maison des Sciences
Economiques Universite de Paris I, 106-  Organizers: The International Council of
Third Budapest European Associa-  112, boulevard de I'Hopital, 75647 Paris  Central and East European Studies, Finn-
tion for Comparative Economic Stud-  cedex 13, France, tel. 01-55-43-41-87-  ish Association for Russian and East Eu-
ies (EACES) Workshop                 41-90, fax 01-55-43-41-91, Email:  ropean Studies (FAREES), Finnish Institute
September 3-4, 1999, Budapest, Hungary  roses@univ-parisl.fr.             for Russian and East European Studies
(FIREES), and the University of Tampere.
Language: English.                   31st National Convention of the  Call for Papers: Proposals for panels and
Information: Zoltan Bara, Budapest Uni-  American Association for the Ad-  roundtables are invited, presenting the
versity of Economic Science, Department vancement of Slavic Studies        results of new research on countries of
of Comparative Economics, Fovam ter  November 18-21, 1999, St. Louis, Mis-  Central and Eastern Europe and the
8, 11, em. 212, H-1093, Budapest, Hun-  souri, United States               former Soviet Union. Deadline is Janu-
gary, tel. 361-217-6320, fax361-217-7940,                                  ary 1,1999.
Email: h8O65bar@ella.hu.             Organizer: AAASS (American Association  Information: Sixth ICCEES World Con-
for the Advancement of Slavic Studies)    gress Secretariat, Finnish Institute for
Regional Potentials in an Integrating  Information: http://fax.harvard.edu.    Russian and East European Studies,
Europe                                                                     Annankatu 44, FIN-00100 Helsinki, Fin-
September 18-21, 1999, London, United  Eastern Transition Trajectories: Mea-  land, tel. 358-9-2285 4434, fax 358-9-
Kingdom                              surement, typologies, differentia-  2285 4431, Email: iccees@rusin.fi,
tions, interpretations               Internet: http.//www.rusin.fi/iccees. Ad-
Information: Myriam Erro, Conference Of-  December 10-11, 1999, Grenoble, Europe  dresses of Program Committee mem-
ficer, Regional Studies Association, 15                                    bers responsible for Economics: Dr.
Micawber Street, London, Nl 7TB, United  Organizer: International Conference  Franz-Lothar Altmann, Suedost-Institut,
Kingdom, tel. 44-171-490-1128, fax 44-171-  GTD-Espace.                    Guellstr. 7, Muenchen, Germany tel. 49-
253 0095, Email: sa@mail box.ulcc.ac.uk,  Topics: Transition typologies and poli-  89-74613320, fax 49-89-74613333; Pro-
Internet: http://www.regional-studies-  cies: History, culture and economic  fessor Urpo Kivikari, Institute for
assoc.ac.uk.                         behaviours; Diffusion of innovations of  East-West Trade, Turku School of Eco-
norms of behaviours; and Irreversibilities,  nomics and Business Administration,
Annual Meeting of the Association for  thresholds and pawl effects.        Box 110, FIN-20521 Turku, Finland, tel.
Social Policy-Society for Economic  Information: I Samson (Director), L.  358-2-3383570, fax 358-2-3383268,
and Social Sciences: Enlarging the EU   Bensahel, E.Brunat, V Lamande, A.  Email: urpo.kivikari@tukk.fi: Academi-
September 28-October 1, 1999, Mainz,  Tretyak, F. Coulomb, R. Ponsard,  cian Nikolai Shmelev, Institute of Eu-
Germany                              lvan.Samson@upmf-grenoble.fr, Sec-  rope, Russian Academy of Sciences,
retariat: Zinab: tel +334 76 82 55 92  Mohovaja ul. 8, dom 3, RU-103873 Mos-
Organizer: Eberhard-Karis-Universitat,  fax: +334 76 82 58 62, Keo : tel/fax 76  cow, Russia, tel. 7-095-2037237, fax 7-
Tubingen.                            82 59 46.                             095-2004298.
Language: German.
Information: Prof. Dr. Wolfgang Wiegard,  Association for Comparative Eco-  We appreciate the contributions of the
Eberhard-Karis-Universitat, Abteilung  nomic Studies (ACES) Meeting        Cooperation Bureau for Economic Re-
Volkswirtschaftslehre, Mohlstrabe 36, D-  January 2000, Boston, Massachusetts,  search on Eastern Europe, Koenigin-
72074 Tubingen, Germany              United States                         Luise-Str. 5, D14195 Berlin, Germany,
tel. 4930-8977708-68, fax 4930-897708-
The Emergence and the Structuring   Language: English.                     99, Email: tribakova@diwberlin.de or
of Corporate Groups in P.R. of China  Information: President Dwight Perkins,  dbowen@diw-berlin.de.
*  TAN~iiuSTON, April 1999                                          (3 1999 The World Bank/The William Davidson Institute



Conference Announcements of the Davidson Institute
Human Resource Conference           discussion and creating a learning cli-  are being addressed in these economies.
May 10-12,1999, Prague, Czech Republic  mate, faculty are skilled at making each  Are financial practices in emerging mar-
session flexible to meet the needs and  kets the cause of existing crises? Is fun-
The Davidson Institute is sponsoring a  expectations of the participants.  damental reform  of the legal and
3-day conference in Prague May 10 and                                    governance framework taking place? Will
12 for human resource managers with  Participants come from a wide variety of  the new financial systems develop as
regional responsibilities for business  organizations and countries and typically  market-centered or bank-centered sys-
operations in Central and Eastern Eu-  establish policy at corporate or divisional  tems? Will corporate groups remain, and
rope. The conference, entitled "Ten Years  levels. They should be familiar with ba-  will they expand as a form of gover-
of Transformation: Lessons Learned from  sic business functions and be ready to  nance? Can the transition economies
Managing Change in Transition Econo-  adopt new perspectives on these func-  learn from the Asian economies' experi-
mies," addresses how to transform or-  tions. Instruction is in English and all  ence, or vice versa?
ganizational cultures, implement change  participants are expected to have suffi-
and best practices in human resources,  cient fluency in the language to contrib-  The conference calls for submissions of
and face future challenges. Sessions will  ute to class discussion and group work.  theoretical or empirical papers along the
include panels of participating compa-                                   lines of these issues. Topics may include
nies moderated by Davidson Institute  The program fee is US$5,300. Tuition  new issues, privatizations, corporate
faculty with expertise on organizational  includes instructional materials, lunches,  governance and financing, corporate
change and issues affecting firms in tran-  and coffee breaks. Fee is payable upon  groups, and the impact of reform policy.
sition economies.                   registration.
Information: Ms. Keven Burchfield, Pro-  Information: Ms. Jasminka Vlaic, Pro-  The conference committee consists of
gram Manager, tel. 734-763-5020, Email:  gram Administrator, Ekonomski Institut,  Professor Enrico Perotti of the Univer-
burchk@umich.edu.                   Zagreb, tel. 123-35700, fax 123-35165,  sity of Amsterdam, Dr. Anna Meyendorff
Email: vlasic@ekist.eizg.hr.        of the Davidson Institute, and Professor
General Management Program: A                                            Sheridan Titman of the University of
Course for Senior Managers from   Equity  Market Development in  Texas inAustin. ProfessorTitman is also
Transition Economies                Emerging and Transition Economies  editor of the Review of International Fi-
June 28-July 8, 1999, Zagreb, Croatia    December 12-14, 1999, Amsterdam, the  nance.
Netherlands
The General Management Program                                           Travel and accommodations for invited
(GMP) is an intensive two-week program   Organized by: The William Davidson Insti-  speakers will be paid by the sponsors.
designed for senior managers from firms  tute at the University of Michigan Business  Papers must be sent by July 15 to: Pro-
in transition economies. In its second  School, in cooperation with CIFRA (the  fessor Enrico Perotti, Universiteit van
year, the program is geared toward indi-  Amsterdam Centerfor International Finance  Amsterdam, Roeterstraat 11, 1018 WB
viduals with an interest in general man-  Research), the Tinbergen Institute, and the  Amsterdam, United States, the Neth-
agement concepts that apply to more  International Review of Finance.    erlands, enrico@fee.uva.nl., or Dr.
than one functional area of their firm. The  Call for papers: Southeast Asia, Central  Anna Meyendorff, Department of Finan-
courses combine both theory and prac-  Europe, and the countries of the former  cial Management, The William Davidson
tice. Many of the cases and examples  Soviet Union are all going through a pe-  Institute, University of Michigan Busi-
used in the classroom are based on the  riod of financial transition and reform,  ness School, Ann Arbor, Ml 48109,
Institute's experience with companies  spurred by systemic transformation, fi-  ameyen@umich.edu.
operating in Central and Eastern Europe  nancial crisis, and globalization of finan-
and the countries of the former Soviet  cial flows. This conference will examine  If you would also like your paper to be con-
Union. The program is conducted by  the evolution of financial markets and  sidered for publication in the International
leading business faculty who have ex-  corporate finance practices in these  Review of Finance, please send three cop-
perience teaching in top-rated executive  emerging and transition economies.    ies to Sheridan Titman, Department of Fi-
education programs and have worked                                       nance, College of Business Administration,
with companies operating under new  In the context of pressure for internal  University of Texas, Austin, Texas 78712-
market conditions. Adept at facilitating  reform, important structural questions  1179, titman@mail.utexas.edu.
(C 1999 The WVorld Bank/The W07illiam Davidson Institute                              TRANST1ON-, April 1999  m



New Books and Working Papers
The Macroeconomics and Growth Group regrets that it is unable to provide the publications listed.
World Bank Publications             Women were less mobile in both coun-  growth and income policy is important
tries, however, allowing men to dispro-  during the transition.
To receive ordering and price informa-  portionately fill new jobs in expanding  * With the support of international finan-
tion for World Bank publications, con-  sectors. Women who remained em-  cial institutions, countries must monitor
tact the World Bank, P.O. Box 7247-  ployed had higher average education lev-  and control short-term capital liberaliza-
8619, Philadelphia, PA 19170, United  els.Women'srelativeimmobilitywilltend  tion.
States, tel. 202-473-1155, fax 202- 676-  to reduce their early relative gains. Their  * The Bretton Woods organizations
0581, Email books@world bank.org,  relative wages will also continue to fall if should reconsider their policies toward
Internet http://www.world bank.org or  theirshareoftheexpandingsectors con-  transition economies, providing more
http://www worldbank. org/html/dec/Pub-  tinues to fall.                support for institution-building and equi-
lications/Workpapersltranecon.htm, or  To order, contact Sheila Fallon, Room  table growth.
visit the World Bank bookstore in the  MC3-638, tel. 202-473-8009, fax 202-522-  To order, contact Jennifer Prochnow,
United States, at 701 18th Street, NW   1153, Email: sfallon@worldbank.org.  room MC3-378, tel.202-473-7466, fax
Washington, DC, or France, at 66, av-  The author may be contacted at mvodo  202-522-1152, Email:jprochnow@world
enue d'lena, 75116 Paris.           pivec@worldbank.org.                bankkorg. The author maybe contacted
at gkolodko@imf. org.
Working Papers                      Grzegorz W. Kolodko, Ten Years of
Post-Socialist Transition Lessons for  Estelle James, Gary Ferrier, James
http://www.worldbank.org/html/dec/Pub-  Policy Reform, WPS 2095, April 1999,  Smalhout, and Dimitri Vittas, Mutual
lications/Workpapers/home.html      29 pp.                              Funds and Institutional Investments:
What Is the Most Efficient Way to Set
Peter F. Orazem and Milan Vodopivec,  A new post-Washington consensus is  Up Individual Accounts in a Social
Male-Female Differences in Labor  developing, based on lessons from ex-  Security System? WPS 2099, April
Market Outcomes During the Early  perience . Post-socialist experience is  1999, 60 pp.
Transition to Market: The Case of  also reorienting development policy.
Estonia and Slovenia, WPS 2087,  Among the realities policymakers must A social security scheme based on indi-
March 1999, 41 pp.                  recognize:                          vidual accounts invested in the institu-
* Appropriate institutional arrangements  tional market, with constrained choice
Estonia adopted liberal labor market  are needed for growth.            among investment companies, appears
policies. Slovenia took an intervention-  0 Institution-building by its very nature  to reduce administrative and marketing
ist approach. Relative wages for women  must be gradual.                costs, allow significant worker choice,
rose in both countries (real wages fell  * The size of government is less impor-  and provide more insulation from politi-
for both men and women, but women lost tant than the quality of government policy  cal interference than a single centralized
less than men did). Certain factors fa-  and how the government changes.  fund or individual investments in the re-
vored women:                        * If the formation of institutions is left to  tail market.
spontaneous forces unleashed by liber-  To order, contact Marianne Leenaerts,
* Returns to human capital rose during  alized markets, the vacuum will be filled  room G2-030, tel. 202-458-4264, fax
the transition.                     by informal institutions.           202-676-0961, Email: mleenaertsk
* Relative labor demand shifted away  0 The judiciary system must be trans-  @worldbank.org. The authors may be
from traditionally male sectors (agricul-  formed to serve the market economy.   contacted at ejames3k@worldbank.org
ture, manufacturing, mining, transporta-  *  Deregulating the post-socialist  or dvittas@worldbank.korg.
tion) toward predominantly female  economy requires shifting competence
sectors (health, education, financial ser-  and power from central to local govern-  Lev Freinkman and Plamen Yossifov,
vices, retail trade).               ments.                              Decentralization in Regional Fiscal
* Women with low wages had a dispro-  * Development of nongovernmental or-  Systems in Russia: Trends and Links
portionate incentive to exit the labor  ganizations must be accelerated.  to Economic Performance, WPS
market, especially in Estonia.      0 Government concern about equitable  2100, April 1999, 50 pp.
TRANSITION. April 1999 (                                           1999 The World Bank/The William Davidson Institute



Local governments' relative share of  ment are in danger of stalling on the  sumption per capita. Population statis-
Russia's consolidated budget, although  threshold of the new millennium. Falter-  tics are provided in absolute terms and
substantial at roughly a quarter of the  ing growth in Asia and Latin America,  as growth rates for 1985-97. Environ-
total budget, did not expand after 1994.  uncertain prospects for the transition  mental data are presented on land area,
Local governments collected more rev-  economies of the former Soviet Union,  forest coverage, water use, energy con-
enues in 1996 (6.4 percent of GDP) and  and the continuing spread of HIV/AIDS  sumption, and carbon dioxide emis-
spent more than regional governments.  in Africa will make it increasingly diffi-  sions. The section on states and
They also substantially increased social  cult for the international community to  markets includes data on private invest-
financing (including spending on health,  achieve a series of key development  ment, stock market capitalization, gov-
education, and social protection). Given  goals for the early twenty-first century.   ernment deficits, and infrastructure.
the positive impact decentralization has                                   Global Links covers trade, private capi-
had on regional economic performance  In Eastern Europe and the countries of  tal flows, foreign investment, and inter-
and expenditure structure, the federal  the former Soviet Union, millions of  national tourism.
government should protect local self-  people have seen their living standards
governance and budget autonomy, make  deteriorate sharply during the difficult  Severin Kodderitzsch (ed.), Reforms in
intergovernmental fiscal relations more  transition to modern market economies.  Albanian Agriculture: Assessing a
transparent, develop universal models of  In 1989 about 14 million people in the  Sector in Transition, Technical Paper
interactions between regional and mu-  transition economies of the former So-  No. 431, 1999, 71 pp.
nicipal governments, and impose stricter  viet Union were living under the poverty
limits on total debt and budget deficits  line of $4 a day. By the mid-1990s that  Sixty percent of the Albanian popula-
of subnational governments.          number was about 147 million, or about  tion depends on agriculture for its live-
one out of every three people.       lihood. Although  it is still fairly
Fiscal decentralization seems positively                                   unsophisticated and will probably never
related to the share of education spending  Inequality has increased rapidly in East-  ensure self-sufficiency in major agricul-
in regional budgets. Moreover, regions with  ern Europe and the former Soviet Union  tural commodities, agriculture in Albania
more decentralized finances tend to experi-  since the collapse of Communism. In  represents a useful shock absorber in the
ence less economic decline. But budget  Russia and Ukraine the richest 20 per-  current situation. Since it started its tran-
control is weaker in more decentralized re-  cent of the population receives more than  sition to a market economy in 1991, Al-
gions. Instability and lack of transparency  half the country's income, while the poor-  bania has carried out major reforms in the
in intergovernmental fiscal relations provide  est 20 percent earns less than 5 per-  sector, achieving remarkable increases in
subnational govemments little incentive for  cent. At the same time, adult mortality  both output and total factor productivity.
responsible fiscal policy. Further decentrali-  has increased as a result of smoking,  More needs to be done, however, to re-
zation without greater transparency could  high-fat diet, excessive alcohol use, and  duce rural poverty, stop environmental deg-
bring greater debt and deficits.     the stressful psychological conditions of  radation, and increase integration with
To order, contact Zakia Nekaien-  economic transition.                     regional and international economies.
Nowrouz, Room 04-150, tel. 202-473-
9057, fax 202-522-3607, Email address:  World Bank Atlas 1999, 31st Edition,  World Bank Country Studies
znekaiennowrouz@worldbank.org. The  April 1999, 64 pp.
author may be contacted at Ifreink                                         Czech Republic: Capital Market Re-
mank@worldbank.org.                  A special table provides estimates of  view, 1999, 211pp.
purchasing power parities (PPP) and
Other World Bank Publications        data on relative prices. Per capita GNP  The Czech Republic implemented ma-
figures are converted at PPP for better  jor reforms in the early 1990s and
World Development Indicators 1999,  international comparability and are avail-  achieved impressive economic results.
Third Edition, April, 1999, 400 pp. (Also  able for almost all countries. Economic  Macroeconomic performance started fal-
CD-ROM Single-userorNetworkversion)  data also include GNP and the shares  tering in 1996, however. The regulatory
of exports, agriculture, and investment.  framework for enterprises and financial
After a generation of declining poverty,  Social data include data on life expect-  institutions contained several flaws.
longer lives, and better health for millions  ancy, infant mortality, female labor, child  Minority shareholder rights were weakly
of the world's poorest people, efforts to  malnutrition, girls' school enrollment,  protected, and other important elements
improve key areas of human develop-  access to safe water, and private con-  of internal governance were absent.
C) 1999 The World Bank/The William Davidson Institute                                   TRANSITION, April 1999  m



These regulatory failures prevented  include the real exchange rate, the rule  Security, Proceedings of a Confer-
sound management and active restruc-  of law, predictability of judiciary sys-  ence Sponsored by the Institute of
turing and allowed large shareholders  tems, and the extent to which financing  Policy Studies, Singapore, and the
and managers to abuse the system.    is available to enterprises.        World Bank, November 8, 1997, July
1998, 111 pp.
Slovenia: Economic Transformation  Boris Pleskovic and Joseph E. Stiglitz
and EU Accession, March 1999, Vol-  (eds.), Annual World Bank Confer-  Conference participants discussed the
ume I (Summary), 19 pp.; Volume II,  ence on Development Economics  implications of financing medical care
World Bank Country Study, 209 pp.   1998, April 1999, 411 pp.            and income security for rapidly aging
populations and examined Singapore's
Michael M. Cernea (ed.), The Econom-  The tenth conference dealt with four diffi-  unique approach to managing social risk
ics of Involuntary Resettlement:  cult topics in development: the role of ge-  based on mandatory individual savings
Questions and Challenges, March  ography in countries's success, with Paul  accounts.
1999, 198 pp.                       Krugman, John Luke Gallup and Jeffrey
Sachs; the role and design of regulation  Caroline M. Robb, Can the Poor Influ-
Emerging Stock Markets Factbook  and competition policy, with Paul Joskow   ence Policy? Responding to the
1999, IFC, May 1999, 350 pp.        and Jean-Jacques Laffont; the causes of  Challenge of Inclusion through Par-
financial crises and ways to prevent them,  ticipatory Poverty Assessments, 1999,
The 13th annual survey of emerging stock  with Bruce Greenwald, Asli Demirgu;-Kunt  148 pp.
markets, prepared by the Emerging  and Enrica Detragiache; and how ethnic
Markets Group of the International Fi-  conflicts affects democracy and growth,  How can the poor, so removed from the
nance Corporation (IFC), covers the lat-  with Paul Collier and Donald L. Horowitz.  powerful, influence national policy? Par-
est developments in 45 stock markets  This volume also includes insights from  ticipatory Poverty Assessments (PPAs)
included in the IFC's global, investable,  Nobel Prize winner James Tobin, Stanley  are responding to the challenge of in-
and frontier index series.          Fischer,JosephE.Stiglitz,andWorldBank  clusion by directly presenting to
President James D. Wolfensohn.      policymakers the views of the poor as
Guy P. Pfeffermann, Gregory Kisunko, and                                 part of a national dialogue to influence
Mariusz Sumlinski, Trends in Private  Christopher Gibbs, Claudia Fumo, and  policy. This monograph summarizes
Investment in Developing Countries:  Thomas Kuby, Nongovernmental Orga-  the World Bank's experience in using
Statistics for 1970-1997 and Perceived  nizations in World Bank-Supported  PPAs over the past five years.
Obstacles to Doing Business, IFC Dis-  Projects: A Review, 1999.
cussion Paper 37, 1999, 56 pp.                                           The poor can identify dimensions of pov-
The Bank's guidelines on working with  erty other than income and consump-
The 10th annual edition of Trends in  NGOs are sound, but the guidelines need  tion. These include vulnerability, physical
Private Investment in Developing  to be used more effectively. The report  and social isolation, powerlessness, and
Countries notes that 1997 was a record  makes recommendations to improve part-  undermining of self-respect and dignity.
year for private investment, while public  nerships with NGOs and increase the  If broad policy dialogue on poverty in-
investment declined to its lowest level  benefit to development projects.  cludes civil society groups, the constitu-
since 1975 in the 47 countries covered.                                  ency of reform is widened, ownership
For the first time, China has been in-  Project Finance in Developing Coun-  increases, and the resulting policy is
cluded in this series.              tries: Operations Evaluation Studies,  more likely to be implemented.
1999, 92 pp. (IFC's greenfield project fi-
Based on country-specific results of a  nance activities over the past decade.)  Rick Stapenhurst and Sahr Kpundeh
1996/97 worldwide survey of business                                     (eds.), Curbing Corruption: Toward a
executives, the paper analyzes ob-  Louis Y. Pouliquen, Rural Infrastructure  Model for Building National Integrity,
stacles to doing business in each of the  from a World Bank Perspective: A  February 1999, 264 pp.
74 countries (including industrial econo-  Knowledge Management Frame-
mies) and the correlation between ob-  work, March 1999, 64 pp.          Corruption is the abuse of power, most
stacles and levels of private investment.                                often for personal gain or the benefit
Factors found to be of particular impor-  Nicholas Prescott (ed.), Choices in Fi-  of a group to which one owes alle-
tance to private investment decisions  nancing Health Care and Old Age  giance. Attempts to measure the eco-
M   TRAN-SITION, April 1999                                       (D 1999 The World Bank/The William Davidson Institute



nomic cost of corruption suggest that  Swati R. Gosh and R. Atish Ghosh, East  Jukka Pirttila, Tax Evasion and Econo-
corruption adds 3-10 percent to the  Asia in the Aftermath: Was There a  miesinTransition: Lessons from Tax
price of a given transaction to speed  Crunch? WP 99/38, 1999.          Theory, No. 2, 1999.
the delivery of a government service.
The prices of goods are by as much  Peter Christoffersen  and  Robert  Althoughstandardtaxtheoryoffersmany
as 15-20 percent as a result of corrup-  Wescott, Is Poland Ready for Infla-  insights, certain special features of tran-
tion, and diverted tax revenues can cost  tion Targeting? WP 99/41, 1999.  sition economies deserve attention.
the government as much as 50 percent                                    These include:
of its tax revenues. An effective anti-  Robert Rowthorn, Unemployment,  *The legacy of socialism resulting in a
corruption strategy needs to be multi-  Capital-Labor Substitution, and Eco-  state willing to exercise discretionary
faceted, combine economic reforms,  nomic Growth, WP 99/43, 1999.       powerbut possibly lacking credibility and
and strengthen national integrity insti-                                public support.
tutions. Political commitment is key to  Piritta Sorsa, Algeria: The Real Ex-  *The 'disorganization' phenomenon that
sustaining this effort.             change Rate, Export Diversification,  hampers efficient tax administration, and
and Trade Protection, WP 99/49,  the relationship of restructuring, speed
Financial Institutions-IFC: Lessons of  1999.                           of reform, and the tax system.
Experience Series, No. 6, 1999,136 pp.
BOFIT Discussion Papers             In general, evasion can be deterred by
Michael M. Cernea (ed.), The Econom-                                    imposing heavy penalties or implement-
ics of Involuntary Resettlement:  To order: Bank of Finland Institute for  ing a strict auditing policy. In transition
Questions and Challenges, March  Economies in Transition (BOFIT),  economies, strict auditing seems to be
1999, 198 pp.                       Aleksanterinkatu 36 A Helsinki, or: PO.  the preferred policy as it leads to equi-
Box 160 FIN-0010 Helsinki, tel. 358-9-  table treatment of tax evaders. High in-
IMF Publications                    183-2268, fax 358-9-183-2294, Email:  equality and the failure of the government
bofit@bof.fi, Internet: http://www.bof.fi/ to provide adequate public goods under-
To order, contact IMF Publication Ser-  env/eng/it/iten.stm.            mine public support for the tax system
vices, 700 19th Street, NW, Washing-                                    and increase the incentives for tax eva-
ton, DC, 20431, United States, tel.  Tuomas Komulainen, Currency Crisis  sion. Tax policy should therefore be con-
202-623-7430, fax 202-623-7201, Email:  Theories-Some Explanations for the  sidered in conjunction with expenditure
publications@imf.org, Internet: http:// Russian Case, No. 1, 1999.      policy.
wwwimf. org.
The main reason for the Russian crisis  Centre for Economic Policy Research
Oleh Havrylyshyn and Donal McGettigan,  was the long-standing federal budget  Publications
Privatization in Transition Countries:  deficit. During the past years the defi-
A Sampling of the Literature, WP 99/  cits were financed mainly via short-term  To order, contact CEPR, 90-98 Goswell
6, 1999.                            domestic debt. This created expecta-  Road, London ECIV 7DB, tel. 44-171-
tions of government insolvency and cen-  878-2900, fax 44-171-878-2999, Email:
George Kopits, Implications of EMU for  tral bank financing. Moreover, the  cepr@cepr.org.
Exchange Rate Policy in Central and  Russian economy has its own basic
Eastern Europe, WP 99/9, 1999.      weaknesses, which render the country  Philippe Aghion and Mark Schankerman,
incapable of growth and prone to crisis.  Competition, Entry and the Social
Michael Keane and Eswar Prasad, Con-  TheAsian crisis was a trigger for the Rus-  Returns to Infrastructure in Transition
sumption and Income Inequality in  sian crisis. Lower prices for Russian  Economies, No. 2052, January 1999,
Poland During the Economic Transi-  export products, inadequate financial  21 pp.
tion, WP 99/14, 1999.               regulations and lack of information in
emerging markets in general are factors  Jochen Kluve, Hartmut Lehmann, and
Philip Rother, Explaining the Behav-  explaining this contagion effect. But the  Christoph M. Schmidt, Active Labour
ior of Financial Intermediation: Evi-  main mistakes that led to the crisis were  Market Policies in Poland: Human
dence from Transition Economies,  those of the Russians themselves-the  Capital Enhancement, Stigmatiza-
WP 99/36, 1999.                     federal budget deficits. Thus the repair  tion or Benefit Churning? No. 2059,
work should also start from there.  January 1999, 50 pp.
C) 1999 The World Bank/The William Davidson Institute                                TRANSITION, April 1999



John Micklewright and Gyula Nagy, Liv-  versity of Leicester LEI 7RH, tel. 0116-  Email: f. woodruffe-peacock@mac
ing Standards and Incentives in  252-2892, fax 0116-252-2908.             millan.co.uk.
Transition: The Implications of Un-
employment Insurance Exhaustion  Youri P. Lukashin, Econometric Analy-  China's agriculture growth in the past two
in Hungary, No. 2061, January 1999,  sis of Managers Judgements on the  decades has been called a miracle. An
28 pp.                               Determinants of the Financial Situa-  analysis of the sources of this miraculous
tion in Russia, No. 98/8, December  growth is the focus of this volume. The
John Micklewright and Gyula Nagy, The  1998, 26 pp.                       book also investigates the impact of eco-
Informational Value of Job Search                                         nomic reforms on agriculture, the poten-
Data and the Dynamics of Search  Mikhail Mikhalevich, Ludmilla Koshlai,  tial of grain production in China, and
Behavior: Evidence from Hungary,  and Roman Khmil, Multisectoral Mod-  regional disparities in agricultural produc-
No. 2063, January 1999, 21 pp.       els of Labour Supply for Countries  tion and growth performance. This book
in Transition, No. 98/9, December  adds to the literature and contributes to
Aline Coudouel, Sheila Marnie, and John  1998, 20 pp.                     the current debates on food security and
Micklewright, Targeting Social Assis-                                     rural development.
tance in a Transition Economy: The  Victoria Parkhomenko and Tatiyana
Mahallas in Uzbekistan, No. 2064,  Tereshchenko, Macroeconomic Model  Yanrui Wu, China's Consumer Revo-
January 1999, 36 pp.                 of Ukraine: Some Expected and Un-  lution: The Emerging Patterns of
expected Results, No. 98/10, Decem-  Wealth and Expenditure, Edward
Harvard Institute for International  ber 1998, 19 pp.                     Elgar Publishing, 1999, 168 pp.
Development (HIID)ICASE Publica-                                          To order, contact Marston Book Ser-
tions                                Elena G. Kashtanova and Grigory N.  vices Ltd, P.O. Box 269, Abingdon,
Vechoroko, Influence of Monetary   OXON OX14 4YN, United Kingdom, tel.
To order, contact HIID-Ukraine Macroeco-  and Currency Policy on Inflation, In-  44 1235-465500, fax. 44-1235-465555,
nomic Reform Project, 10-B Khreshchatyk  vestment and Unemployment (The  Email: direct.order@marston.co.uk.
Street, Kyiv, Ukraine 252001, tel. 380-44-  Case of Belarus), No. 98/11, Decem-
228-1349, Email: hiid@hiid.kiev.ua,  ber 1998, 37 pp.                     Yanrui Wu and Qiang Ye (eds.), China's
Intemet: http:/wvvw.harvard.kievua.                                       Reform and Economic Growth: Prob-
Anatoly Peresetsky and Alexander  lems and Prospects, Asia Pacific
Marek Dabrowski, Urban G6rski, and  Ivanter, Interaction of the Russian Fi-  Press, 1998, 500 pp.
Marek Jarocinski, Inflationary Conse-  nancial Markets, No. 98/12, December  To order, contact Bibliotech, ANUTECH
quences of Devaluation Crises in  1998, 49 pp.                            Pty Ltd, ANU, Canberra ACT 0200, Aus-
Russia and Ukraine: The First Obser-                                      tralia, tel. 612-6249-5662, fax 612-6249-
vations, January 1999, 9 pp.         Other Publications                   5677, Email: books@bibliotech.com.au.
Financial Analysis of the Draft Law   Richard J. Hunter, Jr. and Leo V. Ryan,  Cuba in Transition, Volume 8.
of Ukraine "On Obligatory State Pen-  From Autarchy to Market: Polish Eco-
sion Insurance." March 1999, 11 pp.   nomics and Politics, 1945-1995,  This volume contains selected papers
Praeger Publishers, 1998, 304 pp.    and commentaries presented at the
Joel S. Hellman, Winners Take All:  To order, contact Greenwood Publishing  Eighth Annual Meeting of the Associa-
The Politics of Partial Reform in Post-  Group, Inc., 88 Post Road West, PO.  tion for the Study of the Cuban Economy
Communist Transitions, 1998, 6 pp.   Box 5007, Westport, CT 06881-5007, tel.  (ASCE), held in 1998. Topics include the
203-226-3571, fax 203-222-1502, Intemet:  implications of political and economic
Ukraine: Review of Economic Situa-  http://wwwgreenwood.com.              experiences of Latin America for Cuba;
tion, Ukraine Macroeconomic Reform                                        macroeconomic and transition issues;
Project, January 1998, 9 pp.         Kali P. Kalirajan and Yanrui Wu (eds.), Pro-  specific sectors, such as tourism, agri-
ductivity and Growth in Chinese Agri-  culture, and so on.
University of Leicester Publications   culture, Macmillan Press, 1999, 256 pp.   To order this and earlier volumes, con-
To order, contact Macmillan Press,  tact ASCE Books, 2000 Osborn Drive,
To order, contact Faculty of Social Sci-  Houndmills, Basingstoke, RG21 6XS,  Silver Spring, MD 20910-1319, tel/fax
ences, Department of Economics, Uni-  United Kingdom, fax. 44-1256-330688,  301-587-1664, Email:jalonso@erols.com.
M   TRANSITION, April 1999                                         (C 1999 The World Bankf/he William Davidson Institute



Bibliography of Selected Articles
Postsocialist Economies            tion:1-4, February 1999. Electronic ac-  nomic Development (Russia) 10:102-
cess: http://www.iimagazine.com/xp/  110, January-February 1999.
Collinge, R. A. Easing Countries' Tran-  index.htm/.
sitions from Price Controls and Sub-                                   Russia's Economic Quagmire. Econo-
sidies. World Development (United  Terrell, K. Labor Market Policies and  mist (United Kingdom) 351 :69-70, April
Kingdom) 27:375-80, February 1999.    Unemployment in the Czech Repub-  24-30, 1999.
lic. Journal of Comparative Economics
Carre, J. Grey Economy and Tax Ad-  (United States) 27:33-60, March 1999.  Russia: Financial Times Survey. Fi-
ministration. Tax Tribune (Hungary)                                    nancial Times (United Kingdom), Suppl.:
98(03):23-28, 1998.                Torrey, B. Income Transitions in Cen-  I-VI, April 30, 1999.
tral European Households. Economic
Sicherl, P. Distance in Time Between  Development and Cultural Change  Solnick, S. Russia Over the Edge. East
Transition Economies and the Euro-  (United States) 47:237-57, January 1999.  European Constitutional Review (Hun-
pean Union. Empirical Economics                                        gary) 7(4):70-72, 1998.
(Austria) 24(1):101-19, 1999. Electronic  Vodopivec, M. Does the Slovenian
access: http://www.wlu.ca/-wwweej/  Public Work Program Increase Par-  Stoner-Weiss, K. Central Weakness
index.html.                        ticipants' Chances to Find a Job?  and Provincial Autonomy: Observa-
Journal of Comparative Economics  tions on the Devolution Process in
Central and Eastern Europe         (United States) 27:113-30, March 1999.  Russia. Post-Soviet Affairs (United
States) 15:87-106, January-March
Bream, R. Czech Republic: Banks Pre-  CIS                              1999.
pare for Privatization. Euromoney (United
King-dom) 357:78, 80, January 1999.  Aslund, A. Russia's Current Economic  Asia
Dilemma: A Comment. Post-Soviet
Cungu, A. Albania's Radical Agrarian  Affairs (United States) 15:83-86, Janu-  Backwards and Forwards in China.
Reform. Economic Development and  ary-March 1999.                      Economist (United Kingdom) 350:51-52,
Cultural Change (United States) 47:605-                                March 13-19, 1999.
19, April 1999.                    Brown, A. The Russian Crisis: Begin-
ning of the End or End of the Begin-  Coats, W. The Asian Meltdown of
Done, K. Bulgaria: Financial Times  ning? Post-Soviet Affairs (United  1997: The Role of the Financial Sec-
Survey. Financial Times (United King-  States) 15:56-73, January-March 1999.  tor and Bank Exit Policies. Fletcher
dom), Suppl.: -IV, March 8, 1999.                                      Forum of World Affairs (United States)
Dooley, M. Medium-term Financing  23:77-86, Winter/Spring 1999.
Kluve, J. Active Labor Market Policies  Needs of the Independent States of
in Poland: Human Capital Enhance-  the Former Soviet Union. Joumal of Eronen, J. A Geopolitical Approach
ment, Stigmatization, or Benefit Churn-  Policy Modeling (United States) 21:41-  to China's Future. Tijdschrift voor
ing? Journal of Comparative Economics  66, January 1999.               Economische en Sociale Geografie (Hol-
(United States) 27:61-89, March 1999.                                  land) 89(1): 4-14, 1998.
Dyson, J. Ukraine: A Year of Living
Lubyova, M. Effects of Active Labor  Dangerously. Euromoney (United King-  Hamlin, K. China's Choice. Institu-
Market Programs on the Transition  dom) 357:70, 72, January 1999.      tionallnvestor(United States) 33:40-45,
Rate From  Unemployment into                                           March 1999. Electronic access: http://
Regular Jobs in the Slovak Repub-  Integrative Cooperation of CIS Coun-  www.iimagazine.com/xp/index.html.
lic. Journal of Comparative Economics  tries Today. Studies on Russian Eco-
(United States) 27:90-112, March 1999.  nomicDevelopment(Russia) 10:92-101,  Knight, J. Employment Constraints
January-February 1999.             and Sub-optimality in Chinese En-
Slovenia: Institutional Investor Fo-                                   terprises. Oxford Economic Papers
cus. Institutional Investor International  Poduzov, A. A. Poverty in Russia: Scale  (United Kingdom) 51:284-99, April
Edition (United States) 24, Special sec-  and Structure. Studies on Russian Eco-  1999.
( 1999 The World Bank/The William Davidson Institute                                TRANSITION, April 1999



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