http://www.worldbank.org/html/prddr/trans/WEB/trans.htm
_ THE NEWSLETTEE ABOUT REFORMING ECONOMIES
TRNBSJTJON
Volume 9, Number 3                                                                                   June 1998
"Economic Neoliberalism Became Almost Irrelevant..."
Poland's Grzegorz W. Kolodko on New Treinds in Development Strategies
New development policies are emerging   after 10 years of experience with the transition process. Both theoreticians and
policymakers are revising earlier theories about the market-state relationship, scrutinizing privatization processes, tackling de-
regulation arrangements with a fresh attitude, and attempting to deal with the far-reaching consequences of globalization. The
World Bank is at the forefront of this revision process. Grzegorz W Kolodko, Poland's first vice prime minister and finance
minister between 1994 and 1997, is a visiting fellow in the Bank's Development Research Group. Having gained both theoretical
underpinning from years of studies on transition issues while a professor at the Warsaw School of Economics and Yale Univer-
sity, and practical experience as a policymaker, he is currently working on a study titled 'Transition to a Market and Sustained
Growth: Implications for the Post-Washington Consensus." Revision of the Washington Consensus was a major topic of the
following interview with Transition editor Richard Hirschler.
Q. There are more and more signs that  tion has been paid to their distinguising
we have entered the era of post-Wash-  characteristics.                        W hat's  Inside
ington Consensus. It would help to
clarify what the Washington Consen-  Western experts assumed that these    Beyond the Washington Consensus 4
sus meant in the first place.         postsocial st economies simply were af-
Dangers of State Retrenchment 6
fected by inancial disequilibria, nonper-
A. The transition strategies in Eastern  forming debt, and high inflation similar to    Russia's Emergency Program 8
Europe and in the states of the former So-  the distorted economies of Latin America.   Would Ruble Devaluation Help? 10
viet Union have been based, and in some  But these countries had system-specific
countries still are largely based, on the  defects: these were shortage-ridden    China and the Asian Crisis 12
so-called Washington Consensus. Origi-  economies (in some cases 100 percent   Vietnam's Unique Growth Path 14
nally the Consensus was a response to  owned by the state), economies without
Latin America's structural crisis in the  any type cf market organizations or insti-   Vietnam's Economic Rethinking 16
1980s, a kind of policy advice agreed in  tutions. Western advisers also preferred    Milestones of Transition 18
Washington between important organiza-  to believe that market institutions-even
tions such as the International Monetary  if they were unsophisticated, underdevel-   Ukraine's Troubled Finances 19
Fund (IMF), the World Bank, and the U.S.  oped, or in any embryonic state-were    DHL on EU Customs Reform 21
Treasury. It had the following message:  present in these economies. It's by no
"Liberalize as much as you can, privatize  means a coincidence that the few coun-   World Bank/lMF Agenda 22
as fast as you can, and be tough in fiscal  tries that had some earlier experience with    Conference Diary 27
and monetary matters!" This policy advice  markets--Hungary, Poland, and Slovenia
,  .            ~~~~New Books and Working Papers 29
has been applied-mainly through the  (Yugoslavia) included-were able to over-
IMF and the World Bank-to the transi-  come their transition pains much faster   Bibliography of Selected Articles 35
tion economies. Unfortunately, little atten-  than the ethers. For the other economies
Macroeconomics and Growth                      Development Research Group                   The World Bank  u



the erroneous advice of international in-  kets. The negligence of institutional ar-  Q.Wouldyousaythenthatneoliberalism,
stitutions cost dearly in loss of national  rangements has been a grave miscal-  as an economic ideology and policy, has
wealth, economic mis-  ,                      culation of the orthodox  become irrelevant?
management, wasted                            approach, for example, in
resources, and social            i            Russia. If the governments  A. Almost. Not completely yet, but hope-
misery. It became obvi-                       are unable to set up institu-  fully soon. There is good reason to ex-
ous that without proper                       tions that can facilitate mar-  pect such an outcome after the harm that
institutional arrange-                        ket economies, a "neither  this train of economic thought and policy
ments, liberalization and  ,                  plan nor market" situation can  has caused in the final decade of the
privatization can pro-                        arise-a systemic vacuum  twentieth century. And not only by mis-
duce problems-as is  |                        that will be filled in by infor-  handling transition issues in postsocialist
now the case in Russia  | 17 mal arrangements. It can be  economies, but also by economic mis-
and Ukraine, for ex-             l            run by organized crime or  management in the aftermath of the East
ample.                                         fraudulent financial interme-  Asia crisis.
diaries, such as the manag-
Q. So what should be the major fea-  ers of Albania's financial pyramids.  Q. Thus the revised, enlarged role of
tures of a hopefully "gentler and  Russia's seven tycoons-heads of the  governments isan importantfeatureof
kinder" post-Washington Consensus?  country's seven industrial-financial-media  the post-Washington arrangement. But
empires-function as a "shadow govern-  wouldn't the East Asia crisis warrant
A. Primarily, the government's role has to  ment," combining their enormous eco-  doubts about the soundness of gov-
be put in its proper place. The interna-  nomic power with wide-scale political  ernments' judgement?
tional institutions realized that the real  influence. The price is paid by the major-
question is not whether a government is  ity of the society. It also demonstrates  A. I don't think so. The message is clear:
big or small, but whether a government  that there is a link between the lack of  the market has failed more so than the
is able to provide leadership, introduce  proper institutional arrangements, on the  state. I wouldn't claim that governments
right policies, or is unable to do so. Thus  one hand, and widening inequality and  in Indonesia, Malaysia, Thailand, or the
the state must remain active in shaping a  growing poverty, on the other hand.  Republic of Korea didn't make mistakes.
country's political-economic policy, not as  * Investing in human capital. To assume  They have to learn the hard way that cer-
an owner of assets or an administrator of  that the market per se takes care of its  tain policies don't work. But much of the
state companies, but as an architect of  education needs is wrong. Postsocialist  blame for the contagion of the Asia crisis
institutional arrangements, as a guard of  economies have no organizabons, no net-  can be put on the panicking markets. The
financial fundamentals, as an investor in  works, and most important, not enough  problem is the lack of proper regulation
the human capital, as a financier for in-  private resources for that. Many parents  of capital flow that should be re-regulated
frastructure development, and as a man-  cannot afford to send their children to high  instead of being even more deregulated.
ager of global integration. I would like to  schools, vocational schools, or universi-
highlight three areas that need to be ad-  ties or even to retrain and redeploy them-  Q. Consequently, should the effects of
dressed:                            selves if necessary, therefore, the  globalization also be included in the
* Taking care of financial and economic  govemment has to take over these tasks.  post-Washington Consensus?
fundamentals. Here I do not differ from
IMF orthodoxy or a classical mainstream   Thus the role of government, especially  A. Absolutely. This is the most sensitive
liberal approach. Fiscal balance has to be  in the postsocialist transition economies,  element of the post-Washington Consen-
restored, current account has to be sus-  seems to be on the rise. It contradicts the  sus. Whether we want it or not, hardly
tainable, inflation has to be brought down,  intentions of the neoliberal approach that  any major decision or policy can be ex-
liberalization has to proceed vis-a-vis  didn't have much to say to the govern-  ecuted in the world-be it in Moscow or
prices and trade, and privatization has to  ment, except that it should "liberalize ev-  Bangkok, Budapest or Jakarta-without
be completed.                       erything, privatize everything, and then  international backing, primarily from
* Creating and maintaining institutions,  pull back." However, governments can fail  Washington, D.C., the location of the
such as antitrustagenciesandlaws, com-  or succeed, but they cannot afford to pull  World Bank, the IMF, the U.S. Treasury,
mercial and investment banking, social back. What should pull back instead is  Congress, and other influential organi-
safetynets, securities exchange commis-  neoliberalism as an economic theory and,  zations and think tanks. Globalization
sions, and re-regulation of capital mar-  especially, as an economic policy.  reached a point where governments are
* TRANSITION,June 1998                                                                   © 1998 The World Bank



not able to resist the rapid fluctuations  Q. You claim that as Poland's deputy  our stewardship, lots of measures, includ-
of the international capital flows alone.  prime minister and finance minister  ing deregulation, destatization, and de-
Countries in East Asia watched help-  between 1994 and 1997, you were  nationalization of the economy, gradually
lessly as the market panicked and more  able to achieve a "therapy without  mitigated the negative social effects of
than $100 billion leftthe region in a blitz.  shock," contrary to the "shock  these changes. We have been extremely
To say, "fix the fundamentals, privatize  therapy" that characterized Poland's  radical if justified and quite gradual when
whatever has been left for privatization,  economic policy in the early 1990s.  itwas necessary, depending on the chal-
overhaul the banking sector, get rid of  What were the major differences be-  lenge. Also, and that is a crucial institu-
fiscal deficit, sustain the exchange rate,  tween your policy approach and your  tional difference, we strongly opposed
and bring the inflation down," is not  predecessor's?                     the approach that claimed that the best
enough for the post-Washington Con-                                       industrial policy is not having one at all.
sensus we are searching for. In Malay-  A. During 1994-97 Poland's GDP grew   We in the government have actively and
sia it wasn't enough, so it will not work in  by more than 28 percent, inflation fell by  deliberately supported the restructuring
Russia either. Thus not only weak gov-  two-thirds, unemployment dropped from   of Polish enterprises. I am pleased that
ernments but large speculative portfolio  3 million to :2 million, the accumulated in-  the succeeding Solidarity-led govern-
investors also threaten economic stabil-  flow of foreign capital exceeded 16 bil-  ment has not abandoned industrial
ity and sustainable development. There-  lion dollars, and-as the Wall Street  policy-for example, the restructuring of
fore, paramount international institutions,  Journal put it-Poland had to face a new  the steel and coal industries-even if
such as the IMF, have to step in, advis-  challenge: managing success. Contrary  they have to coordinate it with the Euro-
ing and supporting governments in their  to the opinion of many observers, what  pean Union.
efforts to regulate capital flow, for ex-  really mattered was the efficiency of the
ample, through maturity requirements  policy and not the dose of radicalism or  We have also paid great attention to insti-
and taxation.                        gradualism. Although it is true that, under  tutional arrangements. Those were intro-
Changes of Gini coefficient in transition economies, between 1987/88 and 1993/95
30
25 -
20
15
10
-   m                                             c o  o  Co   C o      C
0   .c -
co0          X0 i
(I)      I   to       N                 E        m    :                 N   °'
D)                                               coC)
(D)
N
Source: The author, based on data provided by B. Milanovic (1998)
Note: The *Gini coefficient is a measure of income inequality. The higher the coefficient, the larger the inequality.
© 1998 The World Bank                                                                   TRANSITION, June 1998  U



d u ced si mu ltaneou sly with further  on the plan, another replaced the bulb, and  1994-97, as "therapy without shock" from
privatization and liberalization, to facilitate  the third drafted a report. How many ex-  the 'shock therapy," exercised in Poland
the emerging private capital, assist in capi-  perts do we need under the market re-  at the onset of the 1990s.1
tal formation, and help to improve efficiency  gime? None. The market will do the job
without an a priori assumption that the mar-  (my predecessors also believed that). I said  Q. Do you think that this reassessment
ket will do the job. A Polish joke illustrates  we still needed somebody to replace the  of the Washington Consensus will
the point well: How many experts were  bulb. That makes a huge difference. That  change the attitude and approach of
needed under a centrally planned economy  is what distinguishes our program, known  international finance institutions, in-
to replace a light bulb? Three. One worked  as Strategy for Poland, implemented in  cluding the World Bank?
Beyond the Washington Consensus
Senior vice president and chief economist of the World Bank  A second component of macroeconomic stability has been re-
Joseph E. Stiglitz earlier this year delivered the 1998 United  ducing the budget deficit and the current account deficit. There
Nations University, World Institute for Development Research  is, however, no simple formula for determining the optimum level
(UNU/WIDER) Annual Lecture titled "More Instruments and  of the budget deficit or the current account deficit. For instance,
Broader Goals: Moving toward the Post-Washington Consen-  the case for maintaining budget surpluses in the East Asian
sus," in Helsinki. We have excerpted some major ideas from   countries in the face of an economic downturn, where the rate
the presentation, which is available in full on the following  of private saving is high and the public debt-GDP ratios are
website: http://www.wider.unu.edufstiglitx.htm        relatively low, is less compelling.
The policies advanced by the Washington Consensus are not  Macroeconomic stability-as conceived by the Washington Con-
complete, and they are sometimes misguided. Making mar-  sensus-downplays the stabilization of output or unemployment.
kets work requires more than just low inflation, it requires sound  Minimizing or avoiding major economic contractions should be one
financial regulation, competition policy, and policies to facili-  of the most important goals of policy. In the short run large-scale
tate the transfer of technology and encourage transparency.  involuntary unemployment is clearly inefficient - in purely economic
These are some of the fundamental issues neglected by the  terms it represents idle resources that could be used more pro-
Washington Consensus. Our understanding of the instruments  ductively. The social and economic costs of these downtums can
needed to promote well-functioning markets has improved,  be devastating: lives and families are disrupted, poverty increases,
and we have broadened the objectives of development to in-  living standards decline, and, in the worst cases, social and eco-
clude other goals, such as sustainable, egalitarian, and demo-  nomic costs translate into political and social turmoil.
cratic development.
The importance of building robust financial systems goes beyond
The success of the Washington Consensus as an intellectual  simply averting economic crises. The financial system can be lik-
doctrine rests on its simplicity. Its policy recommendations  ened to the "brain" of the economy. It plays an important role in
could be administered by economists using little more than  collectng and aggregating savings from agents who have excess
simple accounting frameworks. A few economic indicators-  resources today. These resources are allocated to others-such as
inflation, money supply growth, interest rates, and budget and  entrepreneurs and home builders-who can make productve use
trade deficits-could serve as the basis for creating a set of  of them. The financial system must continue to monitor the use of
policy recommendations. Indeed, in some cases economists  funds, ensuring that they continue to be used productively. In the
would visit a country, look at and attempt to verify these data,  process financial markets serve a number of other functions, includ-
and make macroeconomic recommendations for policy reforms  ing reducing risk, increasing liquidity, and conveying information.
all within a couple of weeks.
Left to themselves, financial systems will not do a very good job
Probably the most important policy prescription of the stabili-  of performing these functions. There is a growing recognition of
zation packages promoted by the Washington Consensus was  the importance of sound legal framework, sound institutions,
controlling inflation. The evidence, however, has shown only  and good information for the effective functioning of markets.
that high inflation is costly. Recent research suggests that  But the agenda for creating sound financial markets should not
low levels of inflation may even improve economic performance  confuse means with ends; redesigning the regulatory system,
relative to what it would have been with zero inflation.  not financial liberalization, should be the issue.
f  TRANsITIoN,june 1998                                                                  (C 1998 The World Bank



A. Following the temper and tone of dis-  the U.S. Treasury, the World Bank, and  But seriously, it is clear that the Fund is
cussions in Washington, which included  scholars from Harvard and Oxford Uni-  paying more attention to equity, not only
the Bretton Woods organizations, I am   versities, but also by trade union repre-  because it now believes that the fruits of
convinced that the priorities and the em-  sentatives and archbishops, including a  the growing economy should be shared
phasis have been shifted. For example,  secretary of the Vatican Council for Jus-  more fairly, but also because if they are
a recent IMF conference on economic  tice and Peace. I said that if the Fund was  distributed more equally it works on be-
policyandequity,organizedbyVitoTanzi  going to take care of equity and the  half of sustained growth. The World
and Stanley Fischer, was attended not  Vatican, efficiency, I preferred to keep it  Bank now focuses more on how to sus-
only by distinguished experts of the IMF,  in the old way...             tain growth, with the broadest possible
The fundamental theorems of welfare economics, the results  protection-is a vital step. But states can also improve their
that establish the efficiency of a market economy, assume that  capabilities by reinvigorating their institutions. This means
both private property and competitive markets exist in the  not only building administrative or technical capacity but insti-
economy. Many countries-especially developing and transi-  tuting rules and norms that provide officials with incentives to
tion economies-lack both. Until recently, however, emphasis  act in the collective interest while restraining arbitrary action
was placed almost exclusively on creating private property and  and corruption. Perhaps some of the most promising and least
liberalizing trade-trade liberalization being confused with es-  explored ways to improve the function of government is to
tablishing competitive markets. Trade liberalizalion and   use markets and market-like mechanisms.
privatization are important, but we are unlikely to realize their
full benefits without anti-trust laws and enforcement and other  The Washington Consensus advocated the use of a small
policies to increase competition.                      set of instruments (including macroeconomic stability, liberal-
ized trade, and privatization) to achieve a relatively narrow
Chinese policymakers not only eschewed a strategy of outright  goal: economic growth. The post-Washington Consensus rec-
privatization, they also failed to incorporate numerous other el-  ognizes that a broader set of instruments is necessary and
ements of the Washington Consensus. Yet China's recent ex-  that our goals are also much broader. We seek increases in
perience is one of the greatest economic success stories in  living standards-including improved health and education-
history. One of the important lessons of the contrast between  not just increases in measured GDP. We seek sustainable
China and Russia is for the political economy of privatization  development, which includes preserving natural resources and
and competition.                                       maintaining a healthy environment. We seek equitable devel-
opment, which ensures that all groups in society, not just those
It has proved difficult to prevent corruption and other problems  at the top, enjoy the fruits of development. And we seek demo-
in privatizing monopolies. The huge rents created by privatization  cratic development, in which citizens participate in a variety
will encourage entrepreneurs to try to secure privatized enter-  of ways in making the decisions that affect their lives.
prises rather than invest in creating their own firms. In contrast,
competition policy often undermines rents and creates incen-  Whatever the new consensus is, it cannot be based on Wash-
tives for wealth creation. The sequencing of privatization and  ington. If policies are to be sustainable, developing (and tran-
regulation is also very important. Privatizing a monopoly can  sition) countries must claim ownership of them. A second
create a powerful entrenched interest that undermines the pos-  principle of the emerging consensus is that a greater degree
sibility of regulation or competition in the future.   of humility is called for, acknowledgement of the fact that we
do not have all the answers. Continued research and discus-
The Washington Consensus policies were based on a rejection  sion, not just between the World Bank and the International
of the state's activist role and the promotion of a minimalist,  Monetary Fund, but throughout the world, is essential if we
noninterventionist state. The unspoken premise is that govern-  are to better understand how to achieve our many goals.
ments are worse than markets. Therefore, the smaller the state
the better the state. It is true that states are often involved in too  Hard copies of the paper(WIDER Annual Lectures 2) are avail-
many things, in an unfocused manner. Trying to get govern-  able free at UNUI/WIDER Publications, Katajanokanlaituri 6 B
ment better focused on the fundamentals-economic policies,  00160 Helsinki, Finland. tel. 358-9-615-9911, fax 358-9-615-
basic education, health, roads, law and order, environmental  99333, Email: wider@wider.unu.edu.
© 1998 The World Bank                                                                  TRANSITIONJUne 1998  U



participation of social groups, and has been A. The Washington Consensus some- Decivilization? A
working out new, more productive relation-  times confused the ends and the means,
ships with the govemments as well. World  as Joe Stiglitz revealed several times.  Historic Approach  to
Bank President James Wolfensohn envi-  While searching for a post-Washington  Stat   Retr    hm       t
sions the Bank as an organization that dis-  Consensus, policymakers have to con-  ate  renchmen
seminates knowledge worldwide, that  sider three major rates: interest rate, ex-  by Zsuzsa Ferge
functions as a teaching and leaming insti-  change rate, and tax rate, but above all,
tution. Senior Vice President and Chief  respect a fourth rate: the electorate-the  The functions of the state in past centu-
Economist Joseph Stiglitz has provided a  people. The aim of economic policy is not  ries seem to form the shape of a bell
detailed analysis of this new policy design  fiscal prudence, or stable exchange rates, curve. The ascending line promised a "vir-
[see boxe on previous page].        or low taxation, or deregulation. These are  tuous circle" forcing the state to complete
the means that should ensure the final  its self-serving and coercive functions with
Q. In your studies you often refer to the  goal: sustainable development and the  more responsibility for the common good,
big mistake of confusing policy goals  w                                including health, education, and welfare
with policy means.                  well-being of the people.           services. The descending side, on the
other hand, may lead to a vicious circle,
allowing free course to a process of
decivilization.
Recession and growth in transition economies, 1990-97                   Rethinking and reshaping the role of the
Number Did GDP                                                state-which, among other things, in-
of years fall again      Average annual                       volves the far-reaching reform of social
of GDP    after            GDP growth           1997 GDP      policies-is on the agenda worldwide. The
Countries decline recovery?  1990-93  1994-97   1990-97  (1989=100)    World Bank's World Development Report
Poland      2        no        3.1       6.3      1.6       111.8       1997: The State in a Changing World re-
Slovenia    3        no        -3.9      4.0      0.0        99.3      flects tosomeextent onthepost-Wash-
Czech R.    3        no        4.3       3.6      -0.4       95.8      fneton tons ent, on tew aproash
Slovakia    4        no        -6.8      6.3      -0.3      956         ington Consensus, noting a new approach
Hungary     4        no        -4.8      2.5     -1.1       90.4        of the Bank to the relationship between
Uzbekistan   5       no        -3.1     -0.3      -1.7       86.7       state and market. One would have ex-
Romania     4        yes      -6.4       2.1      -2.2      82.4        pected that the Bank's policy toward the
Albania     4        yes      -8.8       4.9      -2.0      79.1       transition and developing economies
Estonia     5        no        -9.7      4.1      -2.8      77.9        would change and that the Bank would
Croatia     4        no        -9.9      3.0      -3.4       73.3       become more responsive to the social
Belarus     6        no        -5.4     -2.6     -4.0       70.8
Bulgaria    6        yes    : -7.4      -3.6      -5.5      62.8        consequences of its actions. However, the
Kyrgyzstan   5       no        -9.3     -2.4      -5.8       58.7       arguments, pro and con, remain rather
Kazakhstan  6        no        -6.7     -6.0      -6.3      58.1       ideological and less embedded in history
Latvia      4        yes      -13.8      2.2      -5.8       56.8      than might be desirable.
Macedonia   6        no       -12.9     -0.8      -6.9      55.3
Russia      7        no       -10.1     -5.3      -7.7       52.2      In the early period of state formation the
Lithuania   5        no       -18.3      0.5      -8.9      42.8        military function dominated. The protec-
Turkmenistan 7       no        -4.5     -15.0     -9.8      42.6       tion of the lives and property of the sub-
Armenia     4        no       -21.4      5.4      -8.0      41.1        bon  olicing  prope   ost  s
Azerbaijan   6       no       -14.5     -5.7    -10.1        40.5      jects (policing) became almost as
Tajikistan  7        no       -12.2     -8.4     -10.3      40.0       importantasduringtheearliesttimes. On
Ukraine     8   no recovery  -10.1    -12.1    -11.1        38.3       the other hand, the handling of the poor
Moldova     7        no       -12.6    -10.2    -11.4       35.1        was the duty of the smallest available
Georgia     5        no       -24.1      2.9     -10.6      34.3        helping unit-the family, the landowner,
Source: National statistics, international organizations and author's own calculations.   the parish, the guild, the local community.
Note from page 4: 'See also The Polish Altemative-Old Myths, Hard Facts, and New  The evolving market economy changed
Strategies in the Successful Transformation of the Polish Economy, by G. W. Kolodko  the face of poverty. With increasing so-
and D. M. Nuti, UNIJ/WIDER, Research forAction No. 33,1997).            cial densityand mobility, the poorand their
* TRANSITION,June 1998                                                                  © 1998 The World Bank



miserable conditions became more vis-  if itwould entail increasing funding in other  welfare functions the state had is also
ible in the fast-growing cities. The poor  realms, paiticularly in the administrative  on the agenda. The intensity of these
have also become more dangerous to the  and policing functions of the state. The  endeavors seems to be even greater
safety, property, morality, and-because  dangers of social polarization, increased  than in Western Europe. The countries
of epidemics-even the health of the  resentment, violence and desperation, the  are poorer. Those late-arrival state func-
nonpoor. The state was forced to take over  spread of lawlessness, and the retreat of  tions have been less well rooted and
both the policing of the poor and the alle-  "civilization" are in the offing. If the soci-  their quality is less worth defending.
viation of some of their sufferings.  ety wants to maintain peace, policing  Civil society has also been much
forces have to be strengthened. With this  weaker. Hence the above dangers are
New mores, new skills, and new types of  switch the state increasingly serves those  more visible in Eastern than in Western
relationships and communications  who have the most to lose and to fear,  Europe.
emerged initially at the top of society, but  and less those who are in the most des-
then slowly permeated into the other lay-  perate situation.               The author is Professor of Sociology at
ers of society. Civilizing agents promoted                                the University of Sciences E6tv6s Lorand,
adjustment to the rapidly changing con-  In Eastern and Central Europe the re-  Budapest, Hungary.
ditions, offered new skills, new norms of  trenchment of whatever civilizing and
behavior and communication, and new
"survival kits." The early agents-from  Consolation
church to factory-fulfilled this need only
partially. The state was forced to step in
to enforce school attendance and literacy,
the use of "modern" ways of coexistence.
The compulsory institutions of health,
education, and income savings have ini-  SS         A
tially affected mainly the "lower" social
groups-workers, peasants, and other
poor people. The coercive aspects then
weakened as the institutions became in-
creasingly collective. The history of the
welfare state after World War II is not only
the history of the expansion of those all-
encompassing compulsory institutions,         S             \
but also of their gradual improvement.                    e'
This process was never smooth. Spells
of "decivilization" bursted upon humanity                  ,,.
during wars or during various forms of
totalitarian dictatorships. These cata-
clysms were often followed-at least in
the past century-by an increase in the
civilizing and welfare functions of the
state.
A new pattern is emerging in our days.    -l
The contraction of the state has been on
the agenda both in Western and Eastern    -.
Europe. The civilizing and welfare func-
tions of the state-those that were added    "It is still better than 4000 years from now working for $2 an
at later stages-are under attack. Cutting               hour in a hamburger factory."
back on these functions is envisaged even  From the Hungarian magazine H6cipO5
© 1998 The World Bank                                                                   TRANSITION,June 1998   e



Russia's Stabilization Program-Will It Work?
P   rime Minister Sergei Kirienko  The price of oil that, together with natural  that is, less than the amount necessary
warned State Duma deputies on  gas, is Russia's main earner of foreign  to purchase sufficient caloric content to
July 1 thatfailure of swift approval  currency, is down by more than 40 per-  maintain physical survival. Child welfare
of the government's stabilization program,  cent this year. Export revenues from oil,  payments, legally mandated until the age
unveiled on June 22 and renamed from  oil products, and gas were almost 20 per-  of 18, are currently about $9 per month
the more dramatic "anti-crisis" program)-  cent down year-on-year in the first quar-  -so low that only the desperately poor
a package of more than 20 draft laws,  ter. The current account is expected to  actually go to collect them. At the end of
could have dire consequences for the  go into deficit. A vast accumulation of un-  last yearthe federal govemment declared
Russian economy. The proposal includes  paid taxes and unpaid wages has pushed  that it would provide funds for children
26 measures (see next page) aimed  half of Russia's economic transactions  only up to three years of age, suggesting
mostly at cutting budget expenditures and  into barter, thus starving the treasury of  that the regions cover older children. But
improving tax collection, bringing down in-  tax revenue. In the first five months of this  no additional federal funding has been
terest rates, and reviving economic  year, tax collections fell around 25 per-  provided.
growth. Some of the measures have al-  cent short of targets. The govemment has
ready been adopted, while others may  been collecting a monthly $3.4 billion in  Devaluation Fears
need to be approved by the State Duma  revenues each month but needed $4 bil-
(lower chamber of parliament).      lion to make ends meet. Only 5 million  The ruble's fate is in the balance. To
out of 150 million citizens fill out income  shore up the value of the ruble, Russia
Tense Situation                     tax declarations. Companies regularly  is seeking a new loan of at least $10-15
stash incorme overseas, and industrial  billion from the International Monetary
* Economic decline again. The Russian  groups, favored by the government, have  Fund. Both the IMF and the government
economy grew by a modest 0.8 percent  ignored their taxes with impunity.  agree that any aid must be accompa-
last year, its first sign of growth in almost  0 The living standard drops further.  nied by financial reforms. Despite the
a decade. But it has declined 0.2 percent  According to Russian officials, real in-  release of $670 million of stalled IMF
in the first five months of this year.  comel has plummeted 40 percent since  aid (Russia has so far received $5.8 bil-
* Foreign investors are fleeing. The  the Soviet Union collapsed in 1991. A  lion of the existing $9.2 billion loan),
Russian stock market has lost 60 percent  quarter of all Russians are living below   many fear that without a speedy infu-
of its value this year. Heavy selling of gov-  the subsistence level. Nearly one-third live  sion of funds the government will not be
ernment treasury bonds continues. It had  below the poverty level. Three-quarters  able to restore balance to its markets.
prompted the central bank by end-June  barely survive on an average income of  As long as the ruble remains at around
to raise key interest rates sharply to 80  $100 per month. The Red Cross calls con-  6.1 to the dollar, external debt-servicing
percent from 60 percent. The govemment  ditions in Russia "a silent disaster," report-  costs will be around 1.3 percent of GDP
has to redeem $5 billion in Treasury bills  ing "We saw babies who were being fed  this year (assuming a GDP of 2900-2950
(GKOs) every month; over a third of the  powdered animal fodder because of lack  billion rubles). Interest rates on Russian
budget now goes on servicing debt. The  of baby food." The average life expect-  external debt are around 10 percent. Re-
central bank said gross reserves fell by  ancy for men has declined by seven  cent downgrading  of sovereign-
$1 billion in the third week of June and  years, to 59, since 1990. One-quarter of  dollar-denominated debt by credit ratings
stood at $14.7 billion on June 19. The  Russia's labor force receives its wages  agencies may increase foreign borrowing
bank said reserves were depleted by for-  late, in kind, or not at all. The current mid-  costs somewhat, but the external debt is
eign debt service and support for the  level salary (after tax) at the Academy of  not the immediate problem.
ruble. In late June Russia floated a $2.5  Sciences Institutes is 330 rubles/month
billion Eurobond at an interest rate of  or 11 rubles a day (less than $2). A loaf of  The major concern is the "domestic" ruble
12.75 percent, more than seven percent-  bread costs 3 rubles and a liter of milk  debt, around 25 percent of which has
age points above a comparable bond sold  between 3.7 and 6 rubles. The current  been held recently by non-residents and
by the United States Russia has issued  minimum pension (used for the calcula-  which has grown rapidly. The end-year
four Eurobonds during the past four  tion of all other social benefits) as well as  stock of treasury bills and state loan obli-
months, the latest was a five-year, $1.25  the minimum wage (used as the base for  gations-which make up most of the do-
billion Eurobond.                    all other public sector salaries and wages)  mestic debt and are overwhelmingly
* The budget situation is worsening.  are below the subsistence minimum-  short-term-was equivalentto 4.5 percent
* TRANSITION,JUne 1998                                                                    ( 1998 The World Bank



What Are the Twenty-Six Measures?
* Reduce interest rates to 25-30 percent by the fall, then to  * Raise land tax and payment for unproductive use of land.
20-25 percent from the current level of 60 percent.   0 Cut number of employees and agencies funded from bud-
* Adopt new tax and budget legislation (The government wants  get (The number of civil servants would be reduced by a fifth).
to cut spending by 42 billion rubles-$6.8 billion-that is 8%   0 Cut subsidies from federal budget (Social support, as a
of the budget-and increase revenues by 20 billion rubles,  universal right would be eliminated. The plan includes freez-
mainly through increasing the authorities'powers against tax  ing the indexation of pensions as well as social and child-
dodgers. There will be lawsuits against tax evaders, bank-  welfare payments).
ruptcies, and property seizures. Tax liabilities of legal entities  * Lower transport tariffs for oil and coal (the pipeline tariff for
in the first quarter of the current year rose by 16 percent, and  oil exporters decreased to $.50 per ton as of July 1. The rate
on April 1, 1998, constituted about 110 billion rubles. There  had already been reduced from $3/ton to $1.50/ton on April 1.
will be a shift of taxes away from producers and on to con-  Russian oil producers are currently claiming $70/ton produc-
sumers. Sales taxes are easier to collect than taxes on indus-  tion cost against an export price of $68).
trial enterprises, which often conduct much of their business  * Lower wholesale prices for gas and electricity provided pay-
in barter transactions rather than cash. Critics warn against  ments are made in cash. (Those who pay forpublic seniices-
increasing taxes on consumption).                     electricity, gas and so on-in cash will be offered a discount)
* Introduce more uniform income tax scale, with lower rates  * Cut hard currency part of crude oil transport tariffs.
for all forms of income, including credits and insurance po-  0 Cut import tariffs on equipment and spare parts not pro-
lices (Russia has a moderately progressive income tax that  duced in Russia.
starts at 10 percent and climbs to 35 percent on incomes of  0 Move to international accounting standards.
$8,000).                                              * Strengthen independent auditing and state financial con-
* Move toward value-added taxes (VAT) and excise taxes as  trols.
means of extracting revenues from sales at time of delivery.   0 Guarantee the rights of minority shareholders.
* Introduce a single VAT rate of 20 percent, abolishing the  0 Develop institutional base for private ownership of land and
lower rate currently levied on a range of goods.      property.
* Eliminate exemptions from VAT and from profit tax.  0 Reduce salary and pension arrears. (Wage arrears in 10
* Introduce tax on barter deals.                      major economic sectors rose 6.7 percent in Mlay and now to-
* Introduce tax on promissory note issues (0.8 percerntofnomi-  tal 66.89 billion rubles ($10.8 billion); moneyowed.bythe state
nal value).                                           accounted for 16.5 percent of the wage debts.)
* Give regions the right to introduce 5-10 percent sales tax.  * Introduce faster, streamlined bankruptcy procedures.
(The govemment wants 40 percent of income tax re/enues-  * Increase revenues from privatization.
which now go entirely to regional authorities-to go to the fed-  0 Institute more effective use of state property.
eral budget, and the sales tax could help regional and local  * Develop mortgage market in Russia.
govemments compensate for lost income tax revenues. The  0 Develop precious metals market in Russia.
Duma rejected this proposal.)                          * Improve production-sharing legislation.
* Tighten state control over the alcohol market, introducing  * Raise import tariffs.
stiffer penalties for illegal output and trade.
of 1995 GDP, 10.8 percent of 1996 GDP,  cent. GKOs have to be rolled over  trol over the money supply would be re-
and 14.8 percent of 1997 GDP. The  throughout this year. At ruble yields of 25  laxed, inflation would rise and a forced
end-April stock was around 18 percent of  percent over the year, and with no forced  devaluation would be likely.
GDP (based on annual first-quarter fig-  devaluation, this would have cost around
ures).                               $14 billion in interest, or about 3 percent  Winners and Losers
of GDP.
The wide spread between yields on this                                    A forced devaluation, to a rate below the
ruble-denominated debt and on Russian  Some market operators take the view that  floor of the present exchange rate band
sovereign foreign paper points to the  yieldsof 50percentwouldalreadyputthe  (7.015 to the dollar) would benefit Russian
market's main fear: a forced devaluation.  budget under such strain that current  exporters and make ruble-denominated
GKO yields in early July rose to 100 per-  debt-financing methods would fail, con-  assets cheaperforforeign investors. How-
(C 1998 The World Bank                                                                  TRANSITION, June 1998  a



ever, it would refuel inflation-imports D n Devalue the Ruble
make up perhaps one-quarter of the re-    °
tail value of food and other consumer  By Anders Aslund
goods purchased. Moreover, a devalua-
tion in itself would do little to resolve the  evaluation is not necessary be-  because the SRF is supposed to last a
crisis in public finances, while the politi-   cause the ruble is not overval-  maximum of three years and Russia
cal consequences of a new inflationary       ued. Last year Russia had a  needs medium-term financing. Moreover,
surge could be severe,               huge trade surplus of $20 billion, and it  the IMF is short of funds.
has had similar trade surpluses for years.
There would be big corporate losers in  Falling oil and commodity prices have di-  A more realistic and sensible package
any ruble devaluation, most notably the  minished the trade surplus, but it is still  would consist of a mixed strategy. First,
country's 1700 banks. They have thrived  large. Russia's position is excellent in  the IMF could extend its current extended
on  speculative profits in the currency,  comparison with othertransition countries.  fund facility (EFF) up to $5 billion. Sec-
debt, and equity markets-which have all  Virtually all have large trade and current  ond, the World Bank could provide an
turned viciously against them since the  account deficits, and a few have current  additional $5 billion in so-called adjust-
first wave of the Asia crisis struck Russia  account deficits exceeding 20 percent of  ment loans that are paid to the govern-
last December. They have also accumu-  GDP.                                ment on condition that they implement
lated substantial foreign borrowing over                         :         certain structural reforms. Finally, Russia
the past year and have collectively  Russia's most immediate problem is that  could raise a few billion dollars in Euro-
amassed a huge exposure to the forward  it has too large a short-term govemment  bonds..
dollar market, while keeping almost all  debt in comparison with international re-
their assets in rubles. According to bank-  serves. The critical issue is that about $25  Such a package would be sufficient to
ing analysts, Russian banks amassed out- 0 billion of treasury bills are held by Rus-  reinforce Russia's international reserves
standing forward contracts of $355 billion  sian commercial banks and foreign inves-  and salvage the ruble exchange rate. It is
by  the  beginning  of 1 as8-more than  tors, while the international reserves hover  entirely possible to conclude such an
three times the combined assets of the  at around $15 billion,             agreement and even make a first IMF dis-
entire banking system. There is a danger                                   bursement within a month. With such a
that a 50 percent devaluation would wipe  First, the government needed to stop all  package in place, and after the immedi-
out almost every bank in Russia apart  new borrowing through treasury bills, and  ate financial crisis is over, Russia could
from Sberbank, the state savings bank.  it has been doing so since the beginning  raise a lot of private investments within
of 1998. Next, the government had to get  the next six months. The current crisis is
Russian companies inthe extractive indus-  the budget deficit under control, and it has  a good reason to speed up remaining
tries, could be big winners from amruble de-  done so as well. The budget deficit was 8  privatization projects-quite a few have
valuation, particularly those that eam much  percent of GDP last year, but it will be less  been prepared.
of their income in dollars but incur most of than 5 percent of GDP this year. This is
their costs in rubles. But many of these big-  exactly what the International Monetary  A large number of foreign investments
ger companies have already taken on sub-  Fund (IMF) requires. For next year the IMF  could be forthcoming in booming indus-
stantial hard currency borrowing. Gazprom,  and the Russian government seem to  tries such as food processing and car
the giant gas monopoly, has $9 billion of for-  agree that a budget deficit of 2.5 percent  manufacturing. Russia received foreign
eign debts, which would prove much more  of GDP should be alright. After having  direct investments of $6 billion in 1997,
expensive to service in the event of a de-  stopped the fiscal bleeding, the Russian  and that was only the beginning.
valuationiAsor many of Russia's banks and  government now needs to refinance its
oil companies are reshed in sprawling fi  short-term debt, reducing those interest  At present, Russian stock prices have
nancial-industrial groups. While Russia s  rates to 20-25 percent a year.  fallen by 75 percent from their peak last
business barons appear to agree that it is in                              October. On the one hand, it shows how
their collectve interest to support the gov-  There are three possible sources of fi-  deep the crisis is. On the other, it indi-
emmient and the ruble during the latest f   nancing for the next month: the IMF, the  cates that Russia possesses very attrac-
nancial crisis,they may well favor agradual  World Bank, and Eurobonds. The release  tive assets that are available on a
and orderly depreciation thereafter.    C    of proposed supplementary reserve fa-  functioning market. In a recovery Russia's
Based on RFE\RL correspondents' and  cility (SRF), of $10 billion-$15 billion from   equity market could easily attract $20 bil-
newswire reports.                    the IMF does not look very likely. This is  lion within a year.
E  TRANSITION, June 1998                                                                    © 1998 The World Bank



In order to get any kind of significant for-  One difference from Russia is that Bul-  devalue, facing the same economic dev-
eign investment, however, Russia must  garia was ruled by old communists. In  astation, followed by changes in political
undertake a number of fundamental re-  Russia thie reformers in government  regimes.
forms:                              would probably be blamed, and the spec-
tre of populism and nationalism could rise  Anders Aslund is a senior associate at
* First, a tax reform leading to a compre-  up. Whoever rules during a devaluation  the Carnegie Endowment for Interna-
hensible tax system and reasonable and  is bound to lose power. And the crisis  tional Peace. He contributed this com-
stable tax rates must be adopted. Tax re-  would not stop in Russia. Ukraine and  ment to The Moscow Times on July 7,
form is needed to impede capital flight and  Kazakhstan, at least, would be forced to  1998.
promote enterprise restructuring.
* Second, property rights must be se-  An  Opposing  View..
cured. In particular, the aggressive theft            . 
of the property of minority owners, which Whc Believes the Ruble W'ill Not
has become the norm in both large and
small Russian enterprises, must be  Be  Elevalued?
stopped and the culpable parties must be
penalized.                         by Evan Scott
3 Third, the government must show that      owv that everybody says that the  ruble wourld be minimal if the govern-
it favors a level playing field by doing   ruble should not be devalued,  ment did not give in to demands for com-
away with all privileges for the biggest   and international experts have  *pensatory wage increases. If Russia
companies. This means permanently  equated the strength of the ruble with the  moved to a flexible exchange rate policy
abolishing tax offsets and forcing large  survival of Russian reform, stability, and  and indeed it turned out that the ruble
enterprises, such as Gazprom, to pay  ultimately peace with the nuclear super-  has not been overvalued, then any initial
their taxes.                        power, who really believes it?      depreciation overshoot could be quickly
reversed.
What would the effects of devaluation be?  International financial institutions, the
Two years ago Bulgaria provided a strik-  governmenits of the U.S. and Russia, nu-  Compare this with the increasingly des-
ing parallel. Too large a budgetdeficit and  merous commentators, economists, fin-  perate measures to defend the current
too little international financing forced it anciers, sociologists, and other heavy  ruble exchange rate. The country's in-
to devalue. Panic struck. People sold their  thinkers, all seem to agree that the ruble  come has fallen and no one is predicting
leva for dollars. The exchange rate plum-  must be propped up. But the fact is that  an increase in oil-exports income any-
meted by around 98 percent within a year.  Russian oil export declined by a third  time soon. The exports surplus, until now,
Similarly, a Russian devaluation would un-  since last y(ear. The world price of oil has  has been used in effect to pay for failure
dermine what little remaining confidence  fallen. Thus there are two choices: allow  to collect taxes and the resulting explo-
there was in the ruble, and the exchange  the ruble to devalue, in line with the re-  sion of government debts. Trying to main-
rate would drop by 80 to 90 percent.  duced oil income of Russia, or continue  tain an artificially high exchange rate will
to declare that Russia will fall apart if the only deplete the country's remaining for-
The leva devaluation made the foreign  ruble is devalued, and make the currency  eign reserves, use up its lines of credit
debt service more expensive, and the ve-  an even rnore juicy target for foreign  to international financial institutions, and
locity of money rose, causing Bulgarian  speculators.                  force it to stifle recovery with an exorbi-
inflation to skyrocket to 600 percent.                                 tant interest rate, which has now reached
Most banks went bankrupt, and the  How many times have we seen this mis-  80 to 100 percent.
money economy was devastated. GDP  take made in the past? Why have officials
fell by around 10 percent in 1997, and  of international institutions and govern-  This a folly on an immense scale. Who
the impoverished people took to the  mentwestearngovernmentstiedthefuture  dares say that the emperor has no
streets in the tens of thousands, forcing  of reform in Russia to an overvalued ex-  clothes?
early elections, which ousted the ruling  change rate? Russia is a large country
party.                             that produces most of its own goods. The  The author is intemational economist,
inflationary impact of an adjustment of the  based in Washington, D. C.
© 1998 The World Bank                                                               TRANSITION, June 1998  m



How to Turn the Asian Crisis to China's Advantage
by Gao Shangquan
T      he extent, duration, and impact of  issue now facing China is to learn from   cial crisis will be a real possibility. To pre-
Asia's recent financial crisis  the losses of other countries in order to  vent that, both banks and enterprises
caught everyone by surprise. This  offset the negative consequences of the  should be free to choose each other,
crisis will inevitably negatively affect China  Asian crisis and effectively maintain its  based on their individual circumstances.
in many areas, including exports, foreign  economic development.
capital inflow, the cost of financing on the                               * Large enterprise groups should op-
international markets, and tourism. While  New Relationships              erate in accordance with the market
we should not underestimate this nega-                                     mechanism and not by administrative
tive impact, we will be able to turn some  0 In a government-dominated market  means. In some key industries, establish-
disadvantages into advantages if we learn  economy relationships between the  ing large enterprise groups can promote
our lessons and take appropriate mea-  government, banks, and enterprises  efficiency and competitiveness. (However,
sures. Therefore, this crisis is not only a  should be correctly handled. At the ini-  attention should also be paid to small and
severe challenge but also an opportunity                                   medium-size enterprises.) Three impor-
for implementing mnuch needed reforms                                      tant lessons can be learned from the Asian
in China.                                                                 financial crisis:
The Asian financial crisis erupted as glo-                                 1. Enterprises should be regarded as
balization and financial liberalization ac-                                main players in establishing and devel-
celerated and unrest on financial markets                                  oping enterprise groups.
intensified. It was triggered by interna-
tional speculation. The fundamental and                                    2. The transformation of existing enter-
deep-rooted causes were, however, the                                      prise groups to stockholding companies
pervasive defects in the economic foun-                                    should be accelerated, thereby substan-
dations and financial systems of the East                                  tially reducing government intervention in
Asia countries, including:                                                 operations and management.
* The untimely economic adjustment af-
ter overexpansion.                                                         3. The government should adopt less pa-
° Banks burdened with large amounts of                                    tronizing financial policies toward large
bad loans.                          tial stage of their economic development  enterprise groups. Those groups should
* The overdependence on foreign      countries like the Republic of Korea used  be encouraged to expand their financing
capital.                             administrative means to allocate re-  channels through the capital market.
* Condonation of the irrational structure  sources and promote rapid economic
of foreign investment and ineffective su-  growth. However, if the government  0 Bad credits that state-owned com-
pervision of capital inflow.         overzealously intervenes in enterprise  mercial banks accumulated over time
* The accumulation of large current ac-  operations, then these enterprises, con-  should be rapidly reduced and the ef-
count deficits and overdependence on  fident that the government and banks are  ficiency of the financial sector im-
capital influx to equalize the balance of  behind them, will blindly expand, neglect  proved. The enormous debt-credit chain
payments.                            cost and profitability, and fearlessly con-  between enterprises and banks was an
* The increasing difficulty to readjust ex-  tinue their loss-making operations. En-  important factor that led to the Asian fi-
change rates as currencies became over-  terprises and banks are bound together  nancial crisis. In China bad loans that had
valued.                              not by common interest but through gov-  accumulated over past years should be
ernment intervention. The result is soft  separated from the assets of state-owned
These miscalculations and policy failures,  budget constraints. Consequently, enter-  commercial banks. Freed from the heavy
combined, led to the current crisis.  prises have low efficiency and banks are  debt burden, state-owned enterprises and
overburdened with bad debts. Then once  banks could speed up the restructuring
For China, the financial crisis in Asia is a  the debt-credit chain between enter-  process. This is a key link in guarding
vivid, invaluable, and free lesson. The key  prises and banks deteriorates, a finan-  against financial risks.
M   TRANSITION,,June 1998                                                                  C 1998 The World Bank



* Structural readjustment should be  system and strengthen their surveillance  ment control and industrial monopoly and
accelerated to prevent a bubble  of derivative financial instruments and  improvereturnsoninvestmentinthepub-
economy. In the past few years some  overseas financial operations in order to  lic utilities sector.
banks in Southeast Asian countries  resist the impact of foreign investment
have relaxed their requirements for ob-  capital.                         * Reform of the housing system and
taining real estate loans. Consequently,                                  real estate development should be ac-
many of these loans became bad due  * Peoples' awareness of financial risks  celerated in order to add more dynamism
to the oversupply of real properties.  should be heightened in order to fos-  to economic growth.
Thailand and the Philippines thereafter  ter confidence. Not long ago Thailand's
decided to limit the proportion of real es-  vice premier admitted that, "When we  0 Market-oriented reform in the service
tate loans to 20 percent of the total  publicized some data, the public thought  sectors should be accelerated. This
banking business and also to restrict  that the real situation might have been  would entail improving service quality and
borrowing for real estate investments:  much worse." Lack of confidence and un-  satisfying consumer demand for various
the loan amount should not exceed 60  awareness of financial risks add fuel to  types of services, such as education, cul-
percent of total funding requirements.  the fire of the financial crisis. People  ture, electronic information, medical care,
China should consider these regula-  should be prepared for national crises and  and travel and hospitality.
tions. In drafting industrial policies,  their psychological capacity to bear risks
China should emphasize technological  should be strengthened.Atthe same time,  0 A consumer credit system should
advancement, the upgrading of the in-  the government should supply more in-  boost domestic consumption. Expand-
dustrial structure, and productivity im-  formation about developments on the fi-  ing consumption credit, extending the
provement so as to strengthen the  nancial market in order to maintain the  maturity of mortgage loans, and reducing
export-competitiveness of Chinese  general public's trust.               interest rates could stimulate consump-
products.                                                                tion.
Reviving Economic Growth
Controlling Capital Flow                                                  0 Various types of export-promoting
Right now exports and foreign invest-  financial instruments should be ap-
- A rational structure of foreign in-  ments, the main driving forces behind  plied, such as export credit, export credit
vestment should be pursued. In order  China's economic growth, show signs of  guarantees, and export credit insurance.
to achieve rapid economic growth, de-  weakening. Domestic demand also
veloping countries need foreign invest-  keeps slowing down. In order to return  0 To attract foreign investment, a va-
ment, but in a reasonable structure. In  to rapid economic growth in the coming  riety of methods should be adopted in
Thailand 70 percent of foreign capital is  years, a series of measures are neces-  order to exploit the comparative advan-
invested in securities.°ln Korea, out of a  sary to stimulate domestic demand (both  tages of China. Though international
total of $245 billion in foreign capital in-  consumption and investment), bolster  capital still takes a wait-and-see attitude
vestment, $180 billion is short-term capi-  exports, and attract foreign direct invest-  toward Asia, China is still an attractive
tal. This has aggravated the current  ment.                               destination. We can persuade investors
financial crisis. Therefore, within the to-                              to move in with a variety of methods,
tal capital inflow, the ratio of direct to  * Nonstate economic actors should  such as promoting foreign investment in
long- and medium-term investment  be able to invest in infrastructure, such  Chinese stocks, initiating Buy, Operate,
should be increased, while short-term   as power production, power network,  and Transfer arrangements, supporting
foreign capital and securities investment  large water conservation projects, irriga-  a listing of Chinese companies at over-
should be kept within reasonable limits.  tion, and highways. Demand will be ex-  seas stock exchanges, and utilizing the
tremely high in future years for  potential of Hong Kong as an interna-
* Financial supervision should be  investment in infrastructure. These in-  tional financial center.
strengthened and the financial system   vestmenis will become an increasingly
should be protected against possible  importan t driving force behind economic  The author is president of the China In-
financial speculation. During the Asian  growth.                          stitute for Reform and Development,
financial crisis countries like Singapore                                (CIRD) Haikou, Hainan, and professor at
didn't suffer too much because of their  * The transformation of public utilities  Beijing University.
policy of strictfinancial supervision. China  to sharelholding companies should be
should establish a financial supervisory  accelerated in order to eliminate govern-
(C 1998 The World Bank                                                                 TRANSITION, June 1998   a



Vietnam's Renovation-A Unique Growth Path
by David Dollar and Jennie Litvack
In the late 1990s Vietnam's economic  was rapid growth in agriculture, services,  In 1990-92 the government took addi-
status was very similar to that of  and construction, all areas in which the  tional steps to control the growth of credit
other low-income countries, many of  privatesectorwasabletorespond quickly  and hence inflation. By 1991 credit was
which have carried out macroeconomic  to strengthened incentives. On the other  no longer used to finance the budget.
policy reform supported by the IMF and  hand, industry, which remained largely  Loans to state enterprises were also con-
the World Bank, but without Vietnam's  under state control, showed negative  trolled more carefully and priced appro-
spectacular results.                growth for the year.                 priately. This tightening of the budget
constraint led to a major restructuring of
Vietnam's program of doi moi (renovation)  At the same time that the govemment was  the sector. Between 1988 and 1992 about
began in the agricultural sector. Collec-  introducing these structural reforms, it 800,000 workers-one-third of the 1988
tives were dismantled in 1988 and land  was trying to cope with serious macro-  state-enterprise labor force-left the sec-
was distributed among peasant house-                                     tor and the number of firms declined from
holds. Initially, the property rights to land  RES I NA L AND SECT OR A S U E S 12,000 to 7,000. These policies gradually
were left vague. But in 1993 a new land                                  brought the expansion of credit under
law clarified that peasants had the right      Household WVelfare        control. The restrained monetary policy
to use the land distributed to them for 20     a     ,d Vietnam's        succeeded in bringing inflation down to
years and that this right could be renewed.                              about 1 0 percent a year during 1993-95.
Further, peasants could sell or mortgage        Transition               The disinflation program required that
the right to use their land. Just as impor-                              discipline be imposed on state enterprises
tant as the reform of property rights was                                and on the budget.
the reform of prices introduced in early
1989. Controlled prices for most goods                                   Once stabilization was achieved, growth
and services were abolished. For several                                 accelerated, averaging 9 percent for
years the country was functioning with a                                 1992-95. Because of this high growth and
system of dual pricing, in which most out-                              initial reforms of the tax system, govern-
put (both agricultural and industrial) had  DAVIDC1A                     ment revenue increased rapidly after
to be sold to the state at official prices;                              1991, and the government was able to
the balance could be sold at market                                      restore the investment and social expen-
prices. The abolition of these controlled                                ditures that were cut during the austerity
prices and the system of state procure-                                  period. Thus government expenditures as
ment in 1989 strengthened the incentive                                  a share of GDP were higher in 1994 than
to produce.                         economic problems, including high infla-  in 1989, at the beginning of the fiscal ad-
tion and the impending cutoff of Soviet justment. Furthermore, because per
Reforms in agriculture were particularly  aid. The fundamental problem was that  capita GDP had increased substantially
important because it was the largest sec-  the government and state enterprises  during this period, real per capita govem-
tor of the economy, accounting for 40 per-  were spending too much and this excess  ment expenditures were nearly twice as
cent of GDP at market prices in 1989. But was being financed by Soviet aid and  high in 1994 as in 1989.
there were analogous reforms in other  central bank credit. Strong measures to
sectors as well. For years private produc-  deal with this situation were introduced  Three aspects of Vietnam's reform strat-
tion of goods and services had been  in 1989. Production and consumption  egy may help explain the country's out-
tightly restricted. Official policy changed  subsidies were eliminated from the bud-  standing results:
in the late 1 980s to increasingly tolerate  get. At the same time, interest rates on
and even encourage the private sector.  loans to state firms were raised above the  1. Large agricultural and private sec-
Price liberalization in 1989 gave major  level of inflation (that is, to 9 percent a  tors at the outset. Stabilization is nor-
impetus to this trend. In 1989 overall GDP  month in spring 1989, when inflation was  mally a shock to the economy because
growth accelerated to 8 percent. There  about 7 percent a month).       interest rates are raised, government sub-
*  TaANsITIoN,June 1998                                   ::     1998 The World Bank



sidies are cut, and devaluation makes  had trade totaling 32 percent of GNP.  vast majority of households were thus
imported inputs more expensive. Vietnam's  Vietnam's export surge was important not  able to benefit quickly from market re-
stabilization had the predictable effect on  only becaL se it spurred production but  forms and the opening of the economy to
the state sector of the economy, which  because it financed the economy's grow-  international trade.
showed negative growth in 1989. What  ing import demand.
distinguished Vietnam from most transi-                                   Looking to the future, one important is-
tion economies was that, alongside the  3. Proper timing of reform-supporting  sue is whether the reform program will
state sector, the agricultural as well as the  foreign assistance. Another key way in  continue to generate robust growth. The
private service and manufacturing sectors  which Vietnam differed from other low-in-  state sector is still large and significant
were producing a total of about 60 per-  come reformers was that it did not have  impediments to foreign trade and invest-
cent of GDP and employing 85 percent  access to official finance. Soviet aid de-  ment remain. It would be more difficult to
of the labor force. These producers were  clined rapidly after 1988 and was not re-  promote private investment or to reduce
receiving neither credit from the formal  placed by funding from other sources. The  protection of inefficient industries, if a
sector nor subsidies from the government.  collapse of funding did not require any  large number of state-owned enterprises
Thus, for them, 1989 was a year in which  cutbacks in imports, however, because  remained intact. Progress with structural
inflation fell and prices were liberalized,  Vietnam's export growth was sufficient to  reforms is thus one of thel factors that will
creating a good environment for expan-  ensure that imports could grow through-  influence the country's growth. Divesting
sion. The fact that interest rates were  out this adjustment period. The current  state enterprises, improving the environ-
much higher and subsidies were lower did  account delicit declined from more than  ment for private investment, and lower-
not matter to agricultural households and  10 percent cf GDP in 1988 to around zero  ing trade barriers are all structural reforms
small private firms, since they were not  in 1992.                       that will help sustain the growth of recent
getting any of the formal credit or budget                               years. It will be easier for the govemment
subsidies to begin with.             Investment increased sharply between  if it moves on all these policy fronts at
1988 and 1992, while foreign aid was dry-  once.
2. Thorough opening to international  ing up. In response to stabilization,
markets. Opening itself to international  strengthened property rights, and a  Excerpted from David Dollar, Paul
markets included the unification of the  greateropennesstoforeigntrade, domes-  Glewwe, and Jennie Litvack (editors),
country's multiple exchange rates in 1989.  tic savings increased by 20 percent of  Household Welfare and Vietnam's Tran-
At the same time the official rate was de-  GDP, from negative levels in the mid-  sition, WorldBankRegionalandSectoral
valued from 900 dong to the dollar to  1980s,to16percentofGDPin 1992. For-  Studies, 1998.
5,000 dong to the dollar, the prevailing  eign financial assistance was not offered
black market rate. The central bank has  to Vietnam until the country had an es-             DavidDollarisre-
subsequently kept the official rate very  tablished track record of successful mac-          search manager
close to the parallel rate. This bold de-  roeconomic and trade reform. Financing            of the Develop-
valuation in 1989 greatly strengthened  from the World Bank and the IMF re-                  ment Research
incentives to export. At the same time ad-  sumed in 1993. While the delay was    t          Group   (MG),
ministrative controls on exports and im-  largely political, it perhaps offers a useful      DEC,    World
ports were relaxed. As a result exports  lesson: too much financing in the early             Bank.
have been a leading growth sector  stages of reform may delay adjustment
throughout the reform period, with real  rather than support it. In Vietnam's case
export growth averaging more than 25  foreign aid came after good policies were
percent a year. (For rice, oil, rubber, cash-  in place.
ews, coffee, shoes, textiles, and tourism
services.)                           4. Quick benefit for a large number of    t             Jennie Litvack is
households The underlying distribution                  senior an econo-
By 1995 imports plus exports relative to  of assets in Vietnam was quite equitable.          mist at the Pub-
GNP had reached 79 percent in Vietnam,  Vietnam has very little capital stock, its           lic Sector Group,
a high figure for a populous country. The  main assets are land and human capital.           PRM,   World
comparable figure for Thailand-well  The distribution of land among house-                 a Bank.
known as an open economy-was 70  holds is relatively equitable and basic edu-
percent; Egypt, a large, closed economy,  cation and literacy are widespread. The    _
(3 1998 The World Bank                                                                 TRANsmoN,June 1998  U



Vietnam: Economic Rethinking Amid Slowdown
P      rime Minister Phan Van Khai told  and the deregulation of economic activi-  goods exports-shoes and textiles and
international donors during a one-  ties in rural areas. Donors also acknowl-  garments-have been worst hit, as de-
day conference on June 15 that  edged that Vietnam faces a dilemma over  mand from Japan and the Republic of Ko-
Vietnam was struggling to overcome its  economic reform, particularly the social  rea has fallen sharply. Imports grew by
lack of competitiveness and efficiency in  costs of embarking on initiatives such as  just 1.8 percent in the first five months of
the face of the regional economic crisis.  restructuring state-owned firms.  this year.
The weakness of the economy itself is the
biggest bottleneck, the prime minister  Donors felt that fiscal transparency, spe-  0 Foreign investment has fallen 15.3
pointed out, adding, "growth during the  cifically the publication of the state bud-  percent year-on-year in the first five
first five months of the year had slowed  get and other data, was critical to a  months of 1998, and more and more for-
to 6.8 percent (from 8.8 percent growth  continued high level of foreign assistance  eign investors have scaled back or closed
recorded in the same period last year).  and importantfor Vietnamese citizens and  down altogetheroverfrustration with ram-
Vietnam's financial and monetary systems  the private sector. With technical assis-  pant corruption, excessive bureaucracy,
have many shortcomings, the govern-  tance available from the IMF and the  and opaque laws. For East Asian inves-
ment's management apparatus has not  World Bank, donors expressed hope that  tors, who account for 64 percent of for-
improved and is engaged in corrupt ac-  the budget will be published before the  eign direct investment inflows recorded
tivities. Useful lessons must be drawn  next meeting, which will be held in Paris,  to date, the cost of investing has in-
from the regional crisis. These include the  December 7-8, 1998.          creased as business transactions are in-
need to create a level playing field and                                  creasingly conducted in U.S. dollars. EU
the encouragement of the entrepreneur-  Macro Worries                     and U.S. investors are also adopting a
ial spirit and the promotion of competitive                               more cautious approach, despite the fact
Vietnamese goods."                   The impact of the East Asia crisis on the  that this is a market of 75 million people,
economy is reflected in the slower growth  nearly 50 percent of whom are under the
Donors' Alert                       of industrial output, exports, as well as  age of 25.
declining investment.
The meeting in the central Vietnamese                                     0 Both domestic and foreign companies
city of Hue was the first of its kind that  * Industrial output rose by 12.6 percent  are laying off workers in growing num-
brought together Vietnam-based repre-  for the first six months of the year to $5.55  bers. Before the Asia crisis nearly 5 mil-
sentativesofthemembersoftheConsul-  billion, down from 13.6 percent in the  lion people were jobless and the
tative Group on Vietnam, which meets  same period last year, according to pre-  unemployment rate was estimated at 12.3
annually to coordinate the international  liminary official statistics released on June  percent. It is estimated that up to 30 per-
community's aid pledges. The major do-  25. State-owned enterprises, which ac-  cent of state-owned enterprises (SOE)
nors include the World Bank, the Interna-  counted for 47 percent of industrial out-  employees, or 600,000 people, are ex-
tional Monetary Fund (IMF), the Asian  put, saw a rise in production of just 9  cess labor.
Development Bank, the United Nations  percent. Foreign-invested enterprises ac-
Development Program, Australia, France,  counted for 31 percent of industrial out-  * The agricultural sector has been hit
Japan, and Sweden. The group's last  put and registered a 21.8 percent increase  by drought and serious damage has been
meeting in Tokyo resulted in aid pledges  in output. (More than 80 percent of for-  done to key crops. In the first five months
of $2.4 billion for 1998. The mid-year  eign-invested projects are done in coilabo-  of this year agriculture-which accounts
meeting reflected the donors' concern  ration with state-owned enterprises.)    for 28 percent of annual GDP-grew by
both over the pace of reform and over the                                just 2 percent, while annual agricultural
impact of the regional economic crisis.  0 Exports grew by only 10 percent dur-  growth rates overthe pastfew years came
They reiterated support for accelerated  ing the first six months, its lowest figure  to an average of 4.5 percent.
reforms in the financial sector, rational-  in many years, and less than half the 25
ization of state-owned enterprises, trade  percent growth for all of last year, reflect-  In mid-February the Central Bank of Viet-
liberalization, and the reinvigoration of  ing slower EastAsian demand and a loss  nam lowered the interbank foreign cur-
rural development. Rural development  of price competitiveness owing to the rela-  rency rate by 5.3 percent to 11,800 dong
assumes both transferable land tenure  tive strength of the dong. Consumer  to the dollar, but many foreign bankers
E  TRANSITON,JUne 1998                                                                    C 1998 The World Bank



and economists say the dong is still over-  are plans to equitize 150 firms by the end  * Clear legislation is not yet in place, and
valued. They predict increased pressure  of the year, followed by a further 250 in  the responsibilities of various arms of the
against the dong because of the consid-  1999, ard 600 in 2000. IfanySOEs have  administration are overlapping. Compa-
erable decline in new foreign investment,  been loss-makers for several years, bank-  nies seeking to complete equitization pro-
a slump in export growth, and general  ruptcy proceedings are to take effect.    cedures face inspections from a variety
concern about the deterioration of the                                     of different organizations.
Vietnamese economy. The competitive-  Strategic companies in such sectors as
ness of shoes and garments-Vietnam's  energy, telecommunications, and aviation,  Banks Need a Face Lift
chief manufacturing exports, which ac-  however, are  excluded  from  the
count for about 25 percent of export earn-  equitization process. Firms that are highly  "Sound banking is critical for restoring
ings-is especially vulnerable since the  profitable, or the sale of which would in-  Vietnam's rapid growth. The main tasks
main competitors, Indonesia and Thai-  volve large redundancies, will not be  of banking sector reform are to develop a
land, have seen their currencies depreci-  equitized either. Shares in equitized firms  strong legal framework, strengthen bank-
ate between 50 and 70 percent. But  have hitherto been sold to companies'  ing supervision, improve credit quality,
Vietnam has been reluctant to undertake  existing management and workforce.  and improve the soundness of banking
another major currency adjustment, it is  Outside investors are scrutinized closely  systems for economic growth-Le Duc
concerned about the instability that a  to ensure their suitability. Foreign inves-  Thuy, First deputy governor of the State
major devaluation might cause. Instead,  tors are currently limited to holding 30  Bank of Vietnam, pointed out during a
it is offering new incentives to investing  percent of a company's equity. The pace  June 29-30 international seminar in Viet-
foreign companies and exporters. These  of the equitization process is likely to be  nam, organized in collaboration with the
include further tax reductions and lower  constrained by several other factors, in-  World Bank to share international best
land rents.                          cluding lhe following:                practices in establishing sound banking
- Job losses have become increasingly  systems.
New Slogan: Equitize!                politically sensitive. Firms are unlikely to
receive government approval for laying off  Present problems include:
In mid-June Communist Party General-  large numbers of workers.            0 Large amounts of capital are held out-
Secretary Le Kha Phieu called on SOEs  * Due 1:o concerns about rising layoffs  side the formal financial system in U.S.
to press ahead with the government's pro-  and the loss of privileges that accrue to  dollars and gold. The government has
gram of partial "equitization" (privatization)  SOE managers, companies have been  recently ordered exporters to sell surplus
of state-owned enterprises. Establishing  slow to volunteer for inclusion in the  hard currency to banks. Nevertheless,
vibrant, "equitized" companies is seen as  equitizal:ion process. Some firms are also  individuals deposit money in banks usu-
a good way to create employment.  concerned that evidence of mismanage-  ally on a short-term basis. In several
Equitization is also regarded as neces-  ment or corruption will come to light.  high-profile banking scandals bankers
sary if plans to launch a stock market  * Several banks are refusing to lend to  have been found guilty of embezzling
within one to two years are to be realized.  newly equitized companies on the  state assets.
As a first step the government plans to  grounds that their profitability is not yet  * Due to deficiencies in the legislation
establish a Stock Exchange Centre,  assured.                               on collateral and foreclosure and restric-
scheduled to be in place by September  0 SOEs enjoy relative autonomy in terms  tions on the interest rates that banks can
this year. The original program was  of day-tc-daydecisionmaking. Within each  charge, lending entails significant risks for
launched in 1992, and its revitalization has  firm there is a complex set of relationships  the banks. A good indicator is the high
taken on new momentum since Prime  involvinc the controlling institution (usually  level of their indebtedness. The four
Minister Phan Van Khai came to office last  a ministry or local govemment), the com-  state-owned commercial banks are esti-
year.                                 pany director and the board of manage-  mated to have bad debts of some $300
ment, as well as the Communist Party and  million. Questionable lending policies and
The government has indicated its inten-  labor units. Thevariousinterestsofthese  propertyspeculation--now banned under
tion to equitize 60 percent of the country's  groups will have to be reconciled if  the new legislation-have resulted in the
6,000 SOEs. To date, 26 small, mostly  equitizalion is to proceed.         accumulation of debt by shareholding
local SOEs have been equitized and a  0 Before an enterprise can equitize, it  banks.
further 200 have registered for partial  must be audited and its assets valued, a  0 Credit for small and medium-size busi-
privatization. Of these, around 100 firms  process that has proven to be extremely  nesses remains thin. Previously, these
are believed to be financiallysound. There  complicated.                   groups have been dependent on loans
C 1998 The World Bank                                                                    TRANSITION, June 1998  E



from family members or private money-  the Bank is hoping to add 5 to 10 more  concessional loan and grant assistance
lenders who charge very high rates of in-  local economists to its staff of 25 people  already pledged. Since 1994 the World
terest.                              and release another $600 million in  Bank has disbursed about $475 million
loans, in addition to the $1.6 billion  to Vietnam.
Various initiatives are currently underway
to strengthen the banking system.Anum-
ber of local banks have broadened their Milestones of Transition
loan portfolios to include private, small,
and medium-size enterprises, and even
small market traders. A program of bank  The European Bank for Reconstruction  Leaders and laggards in the CIS econo-
mergers has been designed to strengthen  and Development (EBRD) forecasts 2.5  mies. Official data for the 11 CIS econo-
the sector.                          percent growth for Eastern Europe and  mies in the first quarter of the year show
the countries of the former Soviet  some successes, but most of the econo-
The World Bank's New Strategy        Union in 1998. The EBRD released its  mies have still not shaken off their eco-
forecast at its annual meeting held May  nomic depression. (CIS Goskomstat
The World Bank will announce later this  11-12 in Kiev. GDP growth of 3.9 percent  bulletin, May 21). The Kyrgyz Republic
year a shift in its Vietnam strategy away  is seen for Eastern Europe and the Baltics  and Georgia led the pack with reported
from big infrastructure projects and toward  this year. The Commonwealth of Indepen-  GDP growth of 11 percent, followed by
poverty eradication and rural develop-  dent States (CIS) region should have GDP  Azerbaijan with 8 percent. Armenia re-
ment, Country Director Andrew Steer an-  growth of 1.5 percent. Of individual coun-  ported 6 percent growth, Belarus 13 per-
nounced recently. World Bank economists  tries, Estonia should experience GDP  cent, Tajikistan 1 percent, and Uzbekistan
are now working with the Vietnamese au-  growth of 5.5 percent (the 1997 estimate  3 percent growth rate. In the first quarter
thorities on a Rural Development Strat-  was 10 percent), Latvia 6.0 percent (6.5  Moldova and Russia registered zero GDP
egy Report, which will be published in  percent in 1997), Lithuania 5.5 percent  growth, while Ukraine and Turkmenistan
August and will serve as the basis for dis-  (5.7 percent in 1997) and Russia 1.5 per-  experienced a drop. Even though indus-
cussion by Vietnam's major donors dur-  cent (0.4 percent in 1997). The mounting  trial output has stabilized in countries such
ing their forthcoming December meetings,  current account deficits require fiscal  as Kazakhstan and Moldova, agricultural
where they will decide on their 1999 aid  policy measures. As a lesson from the  output continues to fall there: meat out-
packages.                           Asian crisis financial sector reform is  put was 40-50 percent down from the
needed. Last year the EBRD provided  1997 level in those countries. This was
ThenewemphasisisinlinewiththeWorld  $2.6 billion in financing for 108 new   alsothecasein Ukraine and Russia.
Bank's policies around the world and is  projects. The EBRD presently has out-
also a response to conditions in Vietnam.  standing disbursements of more than $5  EU Expands University Exchange to
Atstakeisthefutureofthecountry'speas-  billion, about $1.5 billion more than in  Central and Eastern Europe. The Euro-
ants, who make up nearly 80 percent of  1996. The largest debtors are Hungary,  pean Union for the first time is extending
Vietnam's population. Agricultural produc-  Poland, Romania, and Russia.  its university exchange program, Erasmus,
tivity has risen, but jobs off the farm are                              to five countries in Central and Eastem
not being created fast enough, the World  Foreign direct investment (FDI) in tran-  Europe. This year's budget is more than
Bank believes.                      sition economies was up a third in  $125 million. On May 25 the EU Commis-
1997. A recent Financial Times survey  sion approved the participation of 149 Cen-
The latest project of the Bank already  found that FDI in transition economies  tral and Eastem European institutions of
reflects this new approach. A $67 mil-  rose from $13 billion in 1996 to $17 bil-  higherlearninginthe1998/1999academic
lion IDA credit, approved on June 25,  lion in 1997. The growth in FDI from 1996  year. Morethan 8,000 students and teach-
will helpsmallfarmersdiversifytheirag-  wasnearly20percentinCentralandEast-  ers from the Czech Republic, Hungary,
ricultural production into rubber, live-  ern Europe and 54 percent in CIS coun-  Poland, Romania, and Slovakia will be
stock, and crops in order to reduce rural  tries. FDI to Russia in 1997 was $3.9  spending study periods of up to one year
poverty and maintain growth in rural in-  billion (up 90 percent), Estonia $131 mil-  at universities in EU countries. Their stud-
comes.A $70 million annual rubber out-  lion (up 18 percent), Latvia $415 million  ies will cover languages, science, social
put would create 25,000 full-time jobs  (up 10 percent) and Lithuania $327 mil-  studies, economics, and other areas. By
and increase farm income for some  lion (up 115 percent).                 the next academic year the Baltic repub-
100,000 families. For the next two years                                             Continued on page 22
m  TRANSITION,JUne 1998                                                                   © 1998 The World Bank



Can Ukraine Avert a Financial Meltdown?
C   ash-strapped Ukraine had drifted  the government's obligation increased to  of 1998 it showed a 0.1 percent growth,
to the brink of an economic cri-  $5.6 billion and in April 1998, to $6.5 bil-  compared to the same period last year.
sis by mid-June. While the bud-  lion. The government has to redeem about  The GDP now stands at 35.7 billion
get deficit swelled, the wage and pension  $4.5 billion hryvnias worth of bonds within  hryvnias. While 12 percent of industrial
arrears further accumulated, provoking  nine monl:hs; and $500 million worth of T-  units were officially recognized as unprof-
angry strike action from miners. The  bills matLired in June. Also, the interest  itable in 1995, the figure rose to 30 per-
country's payment obligation to foreign  rate is high and yields on treasury bills of  cent in 1996 and 45 percent in 1997. In
investors surged to a dangerous level.  various maturities are currently at 60 per-  January-May 1998 the number of loss-
The legislative process has been para-  cent.                              making companies grew to 51 percent of
lyzed for months following the March elec-                                 the total.
tion, as the parliament (Verkhovna Rada),  Foreign investors-who held half of
dominated by leftists and centrist opposi-  Ukraine's treasury bills last year-are in-  * At the end of last year bad loans were
tion,wasunabletoelectthespeakerwho   creasingly selling their holdings. They  estimated to account for 21 percent of
is extremely powerful politically in  have been purchasing only 10 to 25 per-  the total assets of Ukraine's 30 largest
Ukraine. Finally, in early July a prominent  cent of the securities in recent months.  banks, even using Ukrainian accounting
figure of the opposition, Oleksandr  Their excdus from the T-bill market has  standards. Bad debts at the three larg-
Tkachenko received the necessary votes.  already forced the National Bank to spend  est banks were even more significant,
That makes him a likely candidate to con-  $1 billion to prevent the hryvnia from fall-  forming about one-third of the loans is-
test the presidential elections in the sum-  ing. The money comes from borrowing on  sued by Ukraina Bank and Oschadbank
mer of 1999.                         the overseas capital markets. After bor-  and 19 percent of Ukrsotsbank's portfo-
rowing more than $1 billion recently, the  lio. Ukraina Bank has been the primary
Some major highlights of the present eco-  government is now planning to raise an-  cash conduit for Ukraine's large collec-
nomic situation are as follows:      other $2.5 billion to pay off mature T-bills  tive farms and agribusinesses. The
and foreign debt in the next three months.  bank's shaky finances reflect the continu-
0 The government's already large debt  Ukraine's foreign debt has reached $12  ous decline of the agricultural sector
is expanding as a consequence of siz-  billion, compared to $450 million in 1994.  since 1990.
able budget deficits. In the first four
months of 1998 budgetary revenues  0 The government's huge financing  * The omnipresence of corruption has
amounted to 4.1 billion hryvnias (against  needs crowd out the "real economy's"  been criticized recently by Professor
a full-year target of 21.1 billion hryvnias),  capital needs. There is an acute short-  James Mace, consultant to the Kyiv-
while debt-servicing and repayment  age of credit. In 1997 commercial banks  based Deni (Day) newspaper. "Lawmak-
costs were 4.7 billion hryvnias. The rev-  provided less long-term loans to enter-  ers openly sell their votes. The Interior
enue-collection shortfall so far this year  prises than in 1994, when inflation was  Ministry has not solved a single big case
as a result of tax evasion and delayed  still rampant. (At least inflation has been  like a political or big-business murder.
privatization initiatives is estimated at  constrained; in 1998 it lingers below 10  Humanitarian aid is openly sold in almost
more than 5 billion hryvnias. Prime Min-  percent.) The maturity of most long-term   every bazaar. The secret police agent
isterValery Pustovoitenko acknowledged  loans is limited to one year and the loan  spying on you can actually come up, in-
that privatization receipts from January  recipients are usually forced to put up  troduce himself, and complain about how
to May were 214 million hryvnias, against  collateral worth 20 percent more than  poorly he is paid. And nothing whatsoever
a full-year target of more than 1 billion  what they borrow. About 30 percent of  can be done about it given the poverty
hryvnias.                             bank profits come from nonlending activi-  that breeds corruption,' he lamented. Ac-
ties-mostlytrading-and the rest mostly  cording to an IFC survey small business
0 The short-term obligations of the gov-  come from short-term loans to favored  owners receive a visit from a Ukraine gov-
emment are fast increasing. The budget  customers.                          ernment inspector once every four days.
deficit has been financed primarily                                        Given that the loss of any of the 36 li-
through the selling of treasury bills (T-  0 In 199:7 Ukraine's GDP fell by 3.2 per-  censes and permits needed to run a busi-
bills). In 1996 investors held T-bills with a  cent-the GDP has fallen by 60 percent  ness would spell closure, most Ukrainians
total value of about $1.9 billion. In 1997  since 1991. Finally, in the first five months  take these official "courtesy calls" very
© 1998 The World Bank                                                                    TRANSITION, June 1998   e



seriously. The state-sponsored meddling  percent of the workforce. The government  ting expenditures, and stimulating produc-
could be one reason why most of  recently provided some funds to coal-pro-  tion. He warned the country's parliament,
Ukraine's economy is run off the books  ducing regions and promised to give an  which was too paralyzed to act while
and out of sight.                    additional 600 million hryvna allocated by  heavy international borrowing was near-
parliament to help the miners.       ing a critical mark, that a crisis could un-
0 The shadow economy has reached 60                                       dermine the stability of the hryvnia.
percent of GDP, Ukraine's tax chief ac-  At the beginning of June pension arrears
knowledged in mid-June. Mykola Azarov,  stood at 1.6 billion hryvnias ($800 million).  The Presidential Decrees include:
head of the State Tax Service, estimated  Elderly people in eastern Ukraine who
the size of the shadow economy at be-  have not received pension payments for  0 Halving the obligatory payments by em-
tween $13 billion and $15 billion, with the  five months have been offered free cof-  ployers (of their workers' salaries) to 5
vast majority of commerce conducted in  fins as an alternative, Facti reported.  percent to go to a special government
dollars. Only $3 billion of the total is kept                             fund dealing with the consequences of the
in hryvnia." The withdrawal of money from   Presidential Measures          1986 Chernobyl nuclear disaster.
the legal economy into the shadow                                          0 Unifying the agricultural production tax
economy is continuing," Azarov told the  On June 19 Ukrainian President Leonid  (10 such taxes existed previously).
daily Facti. The existence of the shadow   Kuchma signed 15 emergency economic  * Allocating some 1.25 billion hryvnia
economy has hampered tax collection and  decrees aimed at raising revenues, cut-  ($625 million) in state funds to pay wages,
has deepened the federal budget deficit.
Tax arrears for the five months of 1998
stood at 25 percent for value-added tax,    Career in  post-socialism
15 percent for excises, and 87 percent
for rental payments for oil and gas extrac-  t         IX
tion and transit pumping of natural gas.
More than 40 percent of all transactions
in the economy are made through barter.
* Wage and pension payments arrears
remain high. Wage arrears continue to
grow and are estimated at $2 billion.
Strikes by some 12,500 miners nationwide
halted around one-third of the country's                                      U V
coal mines, cutting national coal produc-
tion by some 35 percent since the begin-
ning of the year. Miner organizers
estimate total wage arrears to miners
across the country at 2.21 billion hryvnias |
($1.1 billion). The miners are owed on av-          .
erage eight months in back wages, ac-    =
cording to the Coal Industry Ministry.
According to World Bank calculations, the   .              ?-
average production cost of Ukrainian coal
is about $50 a ton, compared with a world      3                        -
market price of $35. The industry is also    __________
caught in a web of inter-enterprise debt.
OnlyfourofUkraine's250-oddminesare ,
profitable at present. At most, 50 of the     -             ..    ,      . (
bigger ones have a future if they shape  "Oh, what a big boy you've become. Soon you can leave the
up. But making the mines profitable would                           country!"
cause social tensions. In the eastern prov-
ince of Donetsk, coal mining supports 13  From the Hungarian magazine H6cipo
*  TRANSITIONJune 1998                                                                     (3 1998 The WVorld Bank



pensions, and social benefits;
* Allowing the government to introduce Newz EU Norms To Ease Customs
new excise and import tariffs.
* Restructuring or canceling debts by ag- Logjam  in Eastern  Europe
ricultural enterprises.
* Setting up "special economic zones" in  by Peter Davies        As
the coal-producing Donetsk region.                                      W       4
* Lowering the current 20 percent value-                    WZILOWDE EXPfRESIS
added tax and simplifying tax procedures  DHL recently commissioned a report that  sides dealing with its customers directly
for small businesses.
looked inlo customs delays in Central and  -will open up communication channels
The president's latest decrees wilI be sub-  Eastern Europe. It revealed that major  with other air express carriers as well as
investors in the region were being stifled  national chambers of commerce).
mitted as draft laws to parliament and will  b    rdtp  uti"o  xesv  u
add to the stack of 42 draft bills languish-  b    rdtp  uti"o  xesv   u
ing in the parliam t   binbx (Theuis-  reaucracy and a lack of understanding of  The blueprints stress the need for cus-
ing in thie parliament's in-box. (The Ukrai-
nian Constitution forbids the president  their needs (Transition, December 1997,  toms authorities to develop an efficient
from issuing decrees that contradict leg-  p. 14). The company, being well aware  information technology system that en-
islation. Many of Kuchma's economic  that customs delays hurt not only its cli-  sures that shipments are cleared to the
decrees, including the latest ones, can be  ents- international businesses-but also  highest level of efficiency. Only systems
chalenge othe counl:ries themselves, commissioned  that meet the needs of governments and
the report to open a debate involving gov-  businesses and that are compatible with
The new measures were announced  ernments, international organizations and  EU standards should be installed. Obvi-
soon after the latest mission from the IMF  businesses, and to jointly find a solution  ously, with only a year and half to go be-
started its consultations in Kyiv on June  to these problems.             fore the next millennium, these systems
15. In July 1997 the Fund refused to                                      should be "year 2000 compliant."
Recently the European Commission
grant a three-year, Extended Fund Fa-        "
cility (EFF) loan worth $2.5-3 billion, in-  completed its proposals about reforms  The EU suggestion that customs regula-
stead awarding the one-year standby  that customs authorities in 10 Central and  tions should reflect the concept of pro-
facility. But even that standby's disburse-  Eastern European countries-identified  portionality is highly welcome. A lot of
for evenl:ual European Union (EU) mem-  customs difficulties are caused by over-
m-ent was suspended after Kiev ran a
budget deficit of almost 6.0 percent of  bership--should adopt before accession.  zealous application ol the rules. Not that
The recommendations go a long way to-  customs officials in Central and Eastern
GDP In the first quarter of 1998. The tar-
get set in the 1998 budget is 2.3 percent  ward addressing many concerns about  Europe should stop being vigilant-far
of GDP. The IMF has repeatedly faulted  customs in the region. If implemented by  from it. However, in some cases ship-
customs authorities, businesses will no-  ments worth a few dollars are levied du-
fukraiefornotic  implefrmeinting mwean-  tice a real change for the better at border  ties of 30 or 40 times that amount.
ful economic reforms, including sweep-
ing privatization and structural economic  crossings and airports. In May the Com-
changes.                             mission passed a copy of their blueprints  Another EU suggestion is also directly
on to DHL. It is worth highlighting a num-  applicable: Governments should develop
ber of the recommendations, even if cus-  a stable, comprehensive, and modern le-
"rine its dcoingm and bette jo l  fofmang   toms rules change fairly frequently in  gal framework to ensure EU customs leg-
ingumptitsonom and fomighenteualifyonal Central and Eastern Europe, where the  islation.
economies are still in a state of transition.
Monetary Fund," First Deputy Managing                                      Emphasizing partnerships between cus-
Director Stanley Fischer was quoted as  The blueprints deal extensively with com-  toms authorities and businesses is per-
saying on June 21. Negotiations were fo-  munication. Customs authorities in the  haps the most encouraging aspect of the
cusing on a $2 billion EFF loan and the  accession countries are asked to provide  European Commission's blueprints. The
resumption of a $542 million standby  as muclh information as possible about  issue of "trade facilitation" warranted a
credit. Fischer said that there are still  customs procedures and legislation  section of its own. Throughout the docu-
some technical problems and that the fi-  through brochures, seminars, free tele-  ment one major leitmotif is how customs
nal decision on the EFF loan will be made  phone lines, or internet sites. (To keep  authorities can meet the needs of busi-
in late July.                        business clients up-to-date, DHL-be-  nesses, trade bodies, and air express op-
© 1998 The World Bank                                                                   TRANSITION,JUne 1998   e



erators. In particular, customs authorities  included. Meanwhile Russia and Ukraine  tant step in the right direction, reducing
are asked to:                        ranked last and next to last. (The com-  some of the bureaucratic gridlock that is
petitive index is built on the average of  slowing down trade into and out of the
0 Sign "memorandums of understanding"  eight factors: openness, government, fi-  region.
with majortrade and transport bodies, pro-  nance, infrastructure, technology, man-
vide electronic data interchange (EDI)  agement, labor, and institutions.)  The author is DHL's regional director
links to the trade, and consult regularly                                for Central, Eastern, and Southern Eu-
with organizations such as chambers of  What goes on at customs points is of key  rope.
commerce. (DHL has signed such agree-  importance to DHL and the businesses
ments with customs authorities around the  it serves, being the largest company han-  DHL would like to hear other organiza-
world.)                              dling the largest number of imports into  tions' views on customs in Central and
Central and Eastem Europe and a ma-  Eastern Europe. Please contact Dirk
* Set up a Customs Consultative Com-  joremployerin the region. The European  SingerorRichardKanareck. Tel. 44-171-
mittee "comprising representatives of  Commission's blueprints should be  465-7700; email: dirks@redconsultancy.
national trade organizations and repre-  broadly welcomed. It could be an impor-  com.
sentative groups" that should meet on
a regular basis.
* Keep the needs of businesses in mind Milestones of Transition
when new legislation is introduced.
Continued from page 18
' Establish good relations with busi-
nesses as an integral part of the man-  lic republics and Slovenia are also ex-  But Hungarians could not afford to pay
agement plan, and to make sure it is  pected to join about 200,000 people who  the road tolls and when Austria joined
communicated to all customs officials.   participate in this year's program. Partici-  the EU and six-hour queues built up on
pating students and teachers will obtain  the Austro-Hungarian border, foreign
X Establish clear roles and responsibili-  financial support. Erasmus aims at im-  drivers using the motorway turned to
ties for customs officials, and ensure that  proving the quality of education across  other routes. Public-Private Partnerships
businesses know about them.          Europe and enhancing European Integra-  (PPPs), which include state involvement
tion. (RFE/RL's Breffni O'Rourke).   and private sector risk, hold the key to
' Commit to clearing shipments with the                                   highway investment. (Ben Partridge of
minimum of delay, and regularly monitor  Trans-European Motorway Projects  RFE/RL describing Peter Bennett's ar-
and reduce waiting times.            Stall in Central Europe. The EU's am-  ticle, The Long and Winding Road, pub-
bitious hopes of building a modern trans-  lished in Central European, a banking
The blueprints do not specify time limits  European road network stretching to the  and finance monthly).
and would not say what will happen if east have stalled because of the high cost
countries do not conform. It is, however,  of building new motorways and highways  Poland. First-quarter growth was 6.5 per-
understood that in each country a gap  in Central Europe. Central and Eastern  cent year-on-year, the Central Stabstical Of-
analysis will be made of the situation by  European governments lack the re-  fice reported recently. This is unchanged
the end of 1998. This will then form the  sources to fund new road schemes on  fromthelastquarterof 1997, confirmingthe
basis of future EU support for improving  their own, foreign banks are demanding  continued strength of the economy. Indus-
the situation.                       a good return on their capital, and private  trial production was up 10.4 percent and
investors are deterred by a lack of reli-  investment 17.0 percent. The 1997 trade
A brief glance at the World Economic  able traffic forecasts. Hungary's MI  deficitwas$16.5billion,up30percentover
Forum's latest Global Competitiveness  motorway project was a cautionary ex-  1996, according to the Central Statstical Of-
Report should be enough to instill a  ample to investors of what can go wrong.  fice. Imports rose 13.9 percent to $42.3 bil-
sense of urgency. Even the three most  A French-led consortium  built the  lionwhileexportsrose5.4percentto$25.7
successful Central European transition  motorway using 95 percent private fund-  billion. The growth in imports was led by
economies were laggards: the Czech Re-  ing and 5 percent government funding. It  investment goods. Togetherwith strong in-
public was 35th, Hungary, 43rd, and Po-  then levied private tolls on car and truck  flows of foreign investment, this moderates
land, 49th-out of the 53 countries  drivers to recover the construction costs.  concern about the external imbalances.
M   TRANSITION, June 1998                                                                 © 1998 The World Bank



World Bank/IMF Agenda
World Bank Approves Funding Up to  The World Bank's optimistic scenario for  Caio Koch-Weser: CEE Entrants Need
$700 Million to Bulgaria             Bulgaria consists of several triggers,  More Transparency
which include continued macroeconomic
The World Bank had approved a three-  stability zind sustained accords with the  With the forthcoming accession of Cen-
year funding strategy for Bulgaria, which  IMF. The pessimistic scenario with the  tral European countries to the European
envisages lending between $300 million  lower figLure covers projects that are less  Union (EU), transparency remains a key
and $700 million, depending on the  dependeniton macroeconomicand struc-  challenge. Greateropennesstotradeand
country's needs and reform performance.  tural reform as well as loans to reduce  capital flows demands much better
"The actual level and composition of new   poverty with community participation.  macro-management and financial sys-
lending will depend on the government's  Since Bulgaria joined the Bank in 1990,  tems, World Bank Managing Director Caio
progress in achieving specific bench-  the Bank has committed loans totaling  Koch-Weser said in Salzburg during the
marks outlined in the country assistance  more than $1.2 billion for 15 projects  Central and East European Economic
strategy," the Bank said in a statement.                                  Summit in June. "Incestuous connections
Declining Income-World ]Bank Works on Solution
It has been more than a year since World Bank President  * Charging a 1 percent front-end fee in addition to the 0.75
James Wolfensohn firstwarned finance and development min-  percent commitment fee.
isters at their spring meetings in Washington that the Bank  0 Eliminating the 25 basis points interest rate waiver to coun-
was facing a long-term decline in its income. Income is being  tries that service their debts on time on earlier loans for the
squeezed from two directions:                         next two fiscal years.
* The Bank's standard lending is no longer profitaible at the  0 Deferring cash payments to IDA and to the trust fund for
margin, as income from its loan spread covers a declining  debt relief, thus reducing the sums needed to be kept in re-
share of costs. It implies that there is a growing level of sub-  serves.
sidy to the borrowing members of the Bank. "If no action is
taken, the subsidy would grow and the potential for using net  Nevertheless a group of 10 executive directors representing
income for other purposes would decline," warned the man-  the middle-income borrowing countries asked for more work
agement in its recent report.                        towards a more balanced solution than the one proposed. They
* Demand is increasing on the Bank's net income, including  suggested that the problem was one of increasing demands
the debt-relief initiative for the heavily indebted poor countries  on income, not that borrowers were being subsidized. The
(HIPC). As a consequence, net income from $1.3 billion in  directorsthereforerecommendedthatfurtherdemandsonthe
fiscal 1997 is likely to fall to about $1 billion in fiscal 1998,  Bank's income should be postponed, with the exception of
which ended on June 30, and may drop to $700 million next post-conflict assistance, African capacity building, soft loans
year and rise to $1 billion in subsequent years.      and debt relief for poor countries. They urged the Bank to re-
duce administrative costs.
U.S. Treasury Secretary Robert Rubin, during the IMF/World
Bank, spring meetings warned that middle-income countries  In April, during the IMF/World Bank meetings, Chinese Fi-
would have to pay more to borrow from the Bank, as loan charges  nance Minister Xiang Huaicheng said that China is highly con-
should cover administrative costs at a minimum. There is now a  cerned about the idea of increased borrowing charges. China
wide consensus that the Bank needs new measures to raise its  cannot agree to the proposal of changing the pricing policy for
income. On June 11 the Bank's management team--backed by  conventional lending services.
President Wolfensohn and led by Managing Direclor Jessica
Einhom,Acting Vice presidents Deborah Dankerand John Wilton,  Despite the conflicting interests of the Bank's power blocs, an
as well as Principal Financial Policy Analyst Nirmal Paul, pro-  agreement is expected before the September annual meetings.
posed a series of measures to shore up income by:
0 Increasing the cost of loans in the new financial year by 30  (Based on articles by Robert Chote of the Financial Times,
basis points to 80 basis points above the Bank's funding costs.  and Kevin Rafferty of Bank's World.)
©D 1998 The World Bank                                                                 TRANSITION, June 1998   e



between the enterprise and banking sec-  In the final four weeks of fiscal 1998 more  * $200 million to improve urban trans-
tors undermine the financial health of the  than $1.7 billion worth of loans and cred-  port in Guangzhou City (approved on May
banking sector and reduce competitive  its were approved for China as follows:   29)
pressure on enterprises," he warned. Ad-  * $300 million to promote food security,  * $123 million to upgrade inland water-
equate banking and financial sector regu-  irrigation reform, and environmental pro-  ways in Guangdong and Jiangsu prov-
lations and accelerated                                                              inces (approved on May
privatization of the bank-  World Bank Lending to China in FY98 (Milions of dollars)  29)
ing sector were key is-                                                              * $28.4 million to provide
sues to be tackled. With                                   IBRD    IDA    Total    earthquake reconstruction
the Czech Republic, Po-  Infrastructure                                              assistance in Heibei (ap-
land, Hungary, Estonia,  East China (Jiangsu) transmission  250       -     250      proved on May 29)
andSloveniaslatedtojoin  Energyconservation                  63       -       63     * $250 million to further
the EU and others work-  Inland waterways                   123       -      123     develop the National High-
ing to meet the EU's  Guangzhou City transport              200       -     200      way project in Hubei (ap-
Maastricht criteria, the  National Highway III              250       -     250      proved on May 29)
Bank's programs in the re-  Hunan power development         300       -     300      0 $200 million to develop
gion envisage help to en-  Tri-provincial highway           230       -      230     forest resources in poor ar-
sure long-term  fiscal Agriculture                                                   eas of central and western
sustainability, reforms of  State farms commercialization   150       -      150     China (approved on May
pension systems, better  Sustainable coastal resources dev.  100      -      100     26)
tax administration, infra-  Forestry development in poor areas  100    100   200     0 $85 million to improve
structure implementation,  Tarim Basin II                    90      60      150     the management of health
and agriculture and envi-  Irrigated agriculture intensification 11  300  -  300     resources, upgrade rural
ronmental projects. The  Social Sectors                                              health facilities, and in-
Bank is also advising on  Basic health services               -      85       85     crease the affordability of
adapting legislation to EU   Environment                                             services in 97 counties
standards.             Shandong environment                  95       -       95     with a total population of
Guangxi urban environment             72     20       92      48 million people (ap-
China: World Bank's  Others                                                          proved on May 23)
Largest Borrower       Hebei earthquake reconstruction        -      28.4    28.4    * 100 million to develop
Total                              2,323    293.4  2,676.4   ocean farming techniques
China continues to be the                                                            by establishing coastal
largest borrowerof investmentfunds from  tection  in  5  provinces  in  the  zone managementsystems. (approved on
the World Bank. In fiscal 1998, which  Huang-Huai-Hai plain (approved on June  May 19).
ended June 30, 1998, it received $2.6  18)
billion, accounting for about 9 percent of  * $300 million to alleviate power short-  Joseph Stiglitz: Aid Conditions Only
overall World Bank commitments. Fiscal  ages in Hunan province, providing funds  Conditionally Effective
1998 lending to China brings total cumu-  for building two new thermal power plants
lative lending up to about $30.4 billion, of  and reinforcing the transmission infra-  Conditionalities imposed upon recipient
which $20.6 billion is from the Interna-  structure (approved on June 18)  countries of development aid do not al-
tional Bank for Reconstruction and De-  * $150 million to improve irrigation and  ways have a significant effect on policy.
velopment (IBRD) and US$9.8 billion,  water management and increase agricul-  Countries should be at the center of form-
from the International Development As-  tural production in economically de-  ing development strategy and, besides
sociation (IDA), for a total of 200 projects  pressed Tarim Basin in southern Xinjiang.  their government, broader segments of
financed. Infrastructure lending (transport,  The incomes of about 200,000 poor  society should also participate in the de-
energy, industry, ancl urban development)  households will rise. About 40 percent of  sign and implementation of the project,
accounts for more than half of the total  households directly benefiting from the  World Bank Senior Vice President and
portfolio, with agriculture, the social sec-  project are below the poverty line and  Chief Economist Joseph Stiglitz told a
tors (health and education), the environ-  have an annual net income of less than  symposium on development cooperation
ment, and water supply and sanitation  530 yuan (about $64) per capita (ap-  in Tokyo on June 23. Research shows that
comprising the remainder.           proved on June 10)                   aid does not necessarily contribute to
i   TRANSiTION, june 1998                                                                © 1998 The World Bank



growth, but the connection becomes  and to see miners' wage rises lagging  Monetary Fund (IMF), at a 0.5 percent
stronger if aid is coupled with sound eco-  behind pnrductivity increases. The World  interest rate with five-and-a-half-year
nomic policies. One implication is that  Bank loans would finance about half the  grace period.
donors can achieve greater returns for  costs of lhe restructuring program and
their resources by shifting money from  would help cover redundancy payments ....... Support Tajikistan's Economic
countries with unsound policies to coun-  job creation, retraining programs, and  Plan
tries with sound policies. "This is donor  environmental cleanup costs.
selectivity of countries." But recentWorld                               The IMF will provide Tajikistan with a
Bankfindings also imply thatdonors need  IMF Will Resume Moldova's Support,  three-year, $128 million loan to support
to be more selective in choosing projects,  If...                        the government's 1998-2001 economic
although they have only a limited ability                                 plan, announced on June 25. The first
to break the link between unsound poli-  The IMF is ready to resume lending to  installment of $24 million will be available
cies and aid effectiveness. If donors, for  Moldova in October if that country imple-  immediately. A statement from the Fund
example, took over the funding of a rural  ments an austerity program agreed on by  said that the medium-term government
health project in a recipient country, this  the two sides, said Oleh Havrylyshyn, IMF  plan was based on a 4 percent export-led
would free up resources for that govem-  deputy director responsible for operations  growth. Inflation should drop to eight per-
ment to use elsewhere, either as addi-  in the countries of the former Soviet Union  cent, and the fiscal deficit to 0.3 percent
tional spending or tax reduction. "But  on June 17. The agreement stipulates that  from the present 3.3 percent. Earlier, in-
donors, especially when they focused ex-  the austerity program will be implemented  ternational donors, including the World
clusively on projects, had little control over  in the coming months. As a result, eco-  Bank and the IMF, pledged $280 million
this additional spending," Stiglitz said.    nomic growth should reach 3 percent in  to Tajikistan at a meeting at the World
1998, inflation should be slashed to 7  Bank's Paris office.
$1 Billion Loan for Saving Poland's  percent, and the budget deficit to 2.9 per-
Coal Industry?                      cent of GDP, enabling the IMF to release  World Bank loan for Kazakhstan's Pen.
a $28 million tranche in October from a  sion Reform and Private Farmers....
Polish Deputy Prime Minister Leszek  three year Extended Fund Facility (EFF).
Balcerowicz has said Poland may bor-  The disbursement was suspended in July  Kazakhstan will receive $300 million from
row some $1 billion from the World Bank  1997. The successful implementation of  the World Bank for pension reform mak-
over several years to finance the restruc-  the program would also make it possible  ing "transition from the Soviet-era retire-
turing of the country's coal mining sec-  for the World Bank to resume financing  ment system to a model using individual
tor, whose debts total almost $4 billion.  and the IliMF to release another $100 mil-  savings accounts" possible. The loan that
That statementfollowed atwo-week visit  lion in 1999. Prime Minister Ion Ciubuc  was approved on June 25 will assist the
by a World Bank delegation to Poland.  pointed out that 1998 and 1999 will be  transition to a fully-funded pension sys-
Basil Kavalsky, World Bank country di-  peak years for repaying external debts:  tem byfinancing partof the estimated 1.7
-rector for Poland and the Baltic states,  $215 million hastoberepaidthisyearand  percent of GDP fiscal deficit brought about
cautioned that the loans would be forth-  $235 million next year.         by pension reform. The new system is
coming only if satisfactory implementa-                                   based on funded savings accounts that
tion arrangements were included in the  IMF Loan to Shore up Kyrgyz Repub-  will accrue assets through individual con-
program. The plans have yet to gain cabi-  lic Currency, and....         tributions equal to 10 percent of eamings.
net approval and will not be debated in                                  On June 2 a $15 million loan was pro-
parliament until fall. As they stand, the  The board of the IMF approved an eco-  vided for Kazakhstan to support the de-
plans envisage a cut in coal output from   nomic structural adjustment facility  velopment of newly privatized farms and
last year's 137 million tons to 112 million  (ESAF) loan for the Kyrgyz Republic. The  agro-enterprises and to improve rural pro-
tons in 2002. The present employment  Kyrgyz Republic will receive between $20  ductivity and incomes. A series of small
level of 232,000 would be cut to 138,000  million and $36 million annually for the  loans will finance information services to
in that year. The loss-making industry  next three years. Finance Minister  farm shareholderswhoatpresentare not
would return to a profit in 2001, with pro-  Talaibek. Koichumanov said that the  Well aware of their rights and opportuni-
ductivity per miner growing by some 41  moneywill be used to supportthe national  ties. Also, local advisory centers will be
percent over the next five years. The  currency. The Enhanced Structural Adjust-  set up to give farmers technical and com-
Bank wants to tie incomes of coal man-  ment Facility loan (ESAF) is available to  mercial advice and training. Since
agement to improvements in profitability  the poorest members of the International  Kazakhstan joined the Bank in 1992, Bank
( 1998 The World Bank                                                                  TRANSITION, June 1998   e



commitments to the country have totaled  ...Public Finances in Bosnia...  privatized companies, is under prepa-
$1.65 billion for 16 projects.                                           ration.
A $63 million IDA credit for Bosnia and
...Improved Heating System in Bishkek,  Herzegovina will help the country reform   The IMF approved a $24 million loan on
Kyrgyz Republic...                 its public finances and manage its for-  June 24. The IMF projected real annual
eign debts. The new credit was given a  GDP growth of 5 percent for 1998
The Kyrgyz Republic recently received  green light on June 6, following the  through 2000, up from 1.5 percent in
$15 million in IDA credits for improving  IMF's approval of Bosnia's 1998-99  1997. Inflation in Macedonia would be 3
the heating and energy systems in the  macroeconomic program and a $81 mil-  percent a year for 1998 through 2000,
capital of Bisekh. The new credit will  lion standby loan. "The credit represents  up from 2.7 percent in 1997, according
supplement a credit of $30 million pro-  a move from reconstruction to consoli-  to Fund projections.
vided for the same project. Since the  dating institutions and policy reform,"
Kyrgyz Republic joined the World Bank  Country Director Christiaan Poortman  IFC Invests in FYR Macedonia's
and IDA in 1992, credits to the country  pointed out.                    Telecom
have totaled $436 million for 16 projects.
During their May meetings in Paris do-  On May 26 the World Bank announced  The IFC has agreed to buy a stake in
nors approved $600 million in aid to the  a $7 million loan to Bosnia and  Makedonski Telekomunkacii (MakTel),
Kyrgyz Republic for the next 18 months.  Herzegovina to relaunch the country's  FYR Macedonia's state-owned telecom-
It is largely to support the country's pub-  forestry industry. On May 19 a $25 mil-  munications utility. It has subscribed to
lic investment program.             lion credit was granted to continue reha-  $25 million of convertible bonds in
bilitation of Bosnia's electric power  MakTel in a preliminary move aimed at
... Privatization in Uzbekistan...  system, and a $5 million credit was  paving the way for the flagship
granted to help local banks provide fund-  privatization of the telephone operator
A $28 million World Bank loan to  ing for private enterprises in Republika  later this year, and has also undertaken
Uzbekistan, approved on June 26, will  Srpska. Since the war ended the IFC  to invest a further $25 million more of
help in the privatization of large govern-  has put $25 million into Bosnia and  bonds for the account of participating in-
ment enterprises. The loan will also con-  Herzegovina to stimulate growth in the  stitutions. The government is hoping that
tribute to establishing consulting services  private sector, particularly small and  the IFC investment will increase interest
to private companies and developing  medium-size enterprises.            from Western telecom groups in the sale
capital markets. In May the World Bank                                   of a strategic holding in MakTel this sum-
gave $24 million for restoring Tashkent's  ... and Reform  Program  in FYR  mer. A successful privatization of MakTel
solid waste management system. Since  Macedonia                         is crucial to government plans for reform-
Uzbekistan joined the Bank in 1992, the                                 ing the economy.
Bank's commitments have totaled $379  The World Bank is prepared to extend a
million for seven projects.         $200 million loan to FYR Macedonia to  China Needs Pension Reform
back a three -year reform program in that
...WaterSupplyinYerevan,Armenia...  country. The loans will focus on boost-  China's existing pension system is
ing private sector investment and growth,  underfunded and lacks clearly defined
A $30 million credit to Armenia, approved  reforming public sector administration,  benefit plans. It will fail to fulfill require-
on June 11, will make emergency im-  and alleviating poverty; as well as on in-  ments or provide sufficient social secu-
provements in the drinking water supply  vestments in water supplies, transport,  rity for the elderly in the next century
toYerevan, particularly to the poorer, most  and agriculture.            unless it is replaced or supplemented
affected population. It will also improve                                with a personal savings insurance sys-
the management and delivery of water  A World Bank delegation in Skopje  tem. Speaking at the International Sym-
and wastewater services for the Yerevan  signed a $35 million loan aimed at the  posium on China's Social Security on
area and lay the groundwork for the in-  rehabilitation of Macedonia's six largest  June 26, World Bank Researcher
volvement of the private sector in these  hydropower plants, which represent 91  Estelle James predicted that the elderly
services. Since Armenia joined the World  percent of the country's hydropower ca-  problem will reach a peak around 2030,
Bankin 1992and DA in1993, IDAcom-  pacity.Another$29million insocialsec-  when more than one-fourth of the
mitments to that country have totaled  tor adjustment credits that should help  world's elderly population will live in
$344.5 million for 14 projects.     employees who have been laid off from   China.
*  TRANSITION, JUne 1998                                                                 C 1998 The World Bank



Multilateral Investment Guarantee
Agency Guarantees Investment Fund  Corkference Diar
Forthefirsttime, the Multilateral Investment  For the Ftecord            Organizer: Institutfur Finanzwissenschaft,
Guarantee Agency (MIGA) has issued a                                     Humboldt-Universitatzu Berlin.
guarantee to cover an equity investment  14th Colloquium: Stretching the  Information: Professor Bengt-Arne
fund, the Kyiv-based Ukraine Investments  Boundaries of Organization Studies  Wickstroem, Institut fur Finanzwissen-
Limited. Also for the first time, MIGA will  into the INext Millennium   schaft, Humboldt Universitat zu Berlin,
coverlocal downstream investments made  July 9-11, 1998, Maastricht, The Nether-  Spandauer Strasse 1, D-1017 Berlin,
by this fund. The Ukrainian fund will invest  lands                      Germany, Email: esem98@wiwi. hu-
in projects that focus on the agribusiness,                              berlin.de, Internet: http://www.wiwi.hu-
construction, and infrastructuresectors, and  Organizer: Maastricht University.  berlin.de/ESEM98
that meet MIGA's criteria for developmen-  Information: EGOS Colloquium Secre-
tal benefits and environmental soundness.  tariat, Faculty of Economics, Maastricht  Congress of the European Economic
MIGA, formed in 1988, supports foreign di-  University, P.O. Box 616, 6200 MD  Association
rect investment to developing and transi-  MaastricJnt, The Netherlands, te/. 31-43-  September 2-5, 1998, Berlin, Germany
tion countries. It provides political risk  388-3656, fax 31-43-325-8495, Email:
insurance against such risks as transfer re-  egos@mw unimaas.nl         Organizer: Institut fur Finanzwissenschaft,
insurance against such risks as transfer re-Humboldt-Universitat zu Berlin.
striction, expropriation, breach of contract,HubltUiesatzBrin
and war and civil disturbance and offers in-  European Integration Towards 2000    Information: Professor Bengt-Ame Wick-
vestment marketing services.        July 11-13, 1998, Lodz, Poland       stroem, Institut fur Finanzwissenschaft,
Humboldt-Universitat zu Berlin, Spandauer
Global Environment Facility Grants:  Organizer: Foundation for European Stud-  Strasse 1, D-1017 Berlin, Germany, Email:
Protecting Aral Sea, and...         ies, European Institute.             esem98@wiwi.hu-berlin.de, Intemet:http:/
Information: Dr. Maria Karasinska-  /wwwwiwihu-berlin.de/ESEM98
The World Bank on June 11 approved a  Fendler, GeneralDirector, Foundation for
GEF grantof $12.2 million fortheAral Sea  European Studies, European Institute,  The Sixth Annual International Con-
Basin Program (Kazakhstan, the Kyrgyz  262/264 Piotrkowska str., Poland, tel. 48-  ference: Business and Economic De-
Republic, Tajikistan, Turkmenistan, and  42-37-5047/5048, fax 48-42-37-0586,  velopment in Central and Eastern
Uzbekistan). This project will address the  Email: obeul@plnlo5l.bitnet  Europe-Implications for Economic
root causes of the overuse and degrada-                                  Integration into Wider Europe
tion of the international waters of the Aral  Upcominig                  September 2-3, 1998, Bmo, Czech
Sea Basin, reduce water consumption for                                   Republic
irrigation by at least 15 percent by the end  International Workshop: Transition and
of 2002, and lay the groundwork for  Enterprise Restructuring in Eastern  Organizer: Technical UJniversity of Brno,
greater investment in the area.      Europe                              Czech Republic; Nottingham Trent Uni-
August20-22, 1998, Copenhagen, Den-  versity, United Kingdom; Nicholas
... Saving Lake Ohrid                mark                                Copernicus University, Poland; and the
University of Wisconsin-Whitewater,
A $4.1 million GEF grant to Albania and  Organizer: Center for East European  United States.
the FYR Macedonia will help to conserve  Studies.                         Information: Prof. George Tesar, College
and protect the natural resources and  Informatrion: Center for East European  of Business and Economics, University
biodiversity of Lake Ohrd, shared by both  Studies, Copenhagen Business School,  of Wisconsin-Whitewater, Wisconsin
countriesi The lake is 2-3smillionhyears  Dalgas have 15, DK-2000 Frederiksberg,  53190, United States, tel. 1-414-472-
c,ounties ofthe lakgest biso2 micall ysearvs  Denmark, tel. 45-3815-3030, fax 45-3815-  4951, fax 1-414-472-4863, Email: tesarg
old, one of the largest biologicalreserves3037, Ernail: cp.cees@cbs.dk  @uwwvax. uww.edu, orDeanKarelRais,
in Europe, possessing unique flora and                                   Faculty of Business and Management,
fauna that are extinct elsewhere. The  Europeain Meeting of the Econometric  Technical University of Brno, Technicka
grant will be used to try to contain pollu-  Society                     2, CZ-616 69 Brno, Czech Republic, tel.
tion in the lake, caused primarily by ero-  August 29-September 2, 1998, Berlin,  42-5-4114-2685, fax 42-5-1421-1410,
sion, agricultural run-off, and high  Germany                             Email: rais@fbm.vutbrcz
concentrations of phosphorus.
© 1998 The World Bank                                                                  TRANSITION, June 1998  t



5th Conference of the European Asso-  Competitiveness of Agricultural Enter-  Organizers: The International Council of
ciation for Comparative Economic  prise and Farm Activities in Transition  Central and East European Studies, Finn-
Studies: Economies in Transition and  Countries                          ish Association for Russian and East Eu-
the Varieties of Capitalism: Features,  November 22-24, 1998, Halle/Saale,    ropean Studies (FAREES), Finnish
Changes, Convergence                Germany                              Institute for Russian and East European
September 10-12,1998, Varna, Bulgaria                                    Studies (FIREES) and the University of
Information: Dr. Frauke Pirscher, Institute  Tampere.
Organizers: ROSES-University of Paris,  ofAgricultural Development in Central and  Call for Papers: Proposals for panels and
Institute of Economics-Sofia, Bulgaria    Eastem Europe (IAMO), MagdeburgerStr.  roundtables are invited, presenting the
Topics: Distinctive general features of the  1, 06112 Halle/Saale, Germany, tel. 49-  results of new research on Central and
varieties of capitalism, "From Capitalism   345-5008138, fax 49-345-5170611,  Eastern Europe and the former Soviet
to Capitalism" - the change of different  Email: pirscher@iamo.uni-halle.de  Union. For more information on making
models/types of capitalism; "From Tran-                                  proposals, see the website: http:/l
sitional Economies to Capitalism" - the  Marketing Strategies for Central and  www.rusin.fi.iccees. Deadline is January
change of economic systems, coopera-  Eastern Europe                     1,1999.
tion, and integration of capitalism and  December 2-4, 1998, Vienna, Austria    Information: Sixth ICCEES World Con-
economies.                                                               gress Secretariat, Finnish Institute for
Information: Professor WladimirAndreff,  Organizers: Kellstadt Center for Mar-  Russian and East European Studies,
ROSES, University of Paris I, 106-112  keting Analysis and Planning, DePaul  Annankatu 44, FIN-00100 Helsinki, Fin-
Boulevard de l'Hopital F-75013 Paris,  University, Chicago; Department of In-  land, tel. 358-9-2285 4434, fax 358-9-
France, fax 33-1-45847889, orProfessor  ternational Business Administration of  2285 4431, Email: iccees@rusin.fi,
Mitko Dimitrov, Institute of Economics,  the University of Economics and Busi-  Intemet: http://wwwrusin.fi/iccees
BAS 3, Aksakov Street, BG-1040 Sofia,  ness Administration, Vienna.
Bulgaria, fax 359-2882108.          Call for Papers: Abstracts due August Addresses of the Program Committee
31.                                 members responsible for Economics: Dr.
The Problems of Economic Integration  Information: Dr. Reiner Springer,  Franz-Lothar Altmann, Suedost-Institut,
of Ukraine into the European Union:  Wirtschaftsuniversitaet Wien, Althanstr.  Guellstr. 7, Muenchen, Germany, tel. 49-
Regional and Socio-Economic Issues  51, 1090 Wien, Austria, tel. 431-313-  89-74613320, fax 49-89-74613333, or
September 14-16,1998, Yalta, Ukraine   36/4371, fax 431-313-36/751, Email:, ProfessorUrpoKivikari, Institute forEast-
springerWisis. wuwien. ac. at, or Dr. Petr  West Trade, Turku School of Economics
Organizer: Ternopil Academy of National  Chadraba, Kellstadt, Center for Market-  and Business Administration, Box 110,
Economy.                            ing Analysis and Planning, DePaul Uni-  FIN-20521 Turku, Finland, tel. 358-2-
Information: Johann-Wolfgang Goethe  versity, I East Jackson Boulevard,  383570, fax 358-2-3383268, Email:
University, Frankfurt on Main, Germany.  Chicago, Illinois, 60604, United States,  urpo.kivikari@,tukk.fi, or Academician
Temopil Academy of National Economy,  tel. 312-362-6200, fax 312-362-5647,  Nikolai Shmelev, Institute of Europe, Rus-
Lvivska st. 11, Temopil, 282000, Ukraine,  Email: pchadrab@wppost.depaul.edu   sian Academy of Sciences, Mohovaja ul.
tel. 352-334-773, fax 352-334-773.                                       8, dom 3., RU-103873 Moscow, Russia,
Third International Conference on En-  tel. 7-095-2037237, fax 7-095-2004298.
Management of Organizations: Re-  terprises in Transition
gional Factors in the Process of Euro-  May 27-29, 1999, Split, Croatia  We appreciate the contributions of the
pean Integration                                                         Cooperation Bureau for Economic Re-
September 24-26, 1998, Kaunas,  Organizer: Faculty of Economics, Univer-  search on Eastern Europe, Koenigin-
Lithuania                           sity of Split.                       Luise-Str. 5, D 14195, Berlin, Germany,
Information: Faculty of Economics Split,  tel. 4930-897708-68,. fax 4930-897708-
Organizer: School of Business and Man-  Radovanova 13, Hr 21000 Split, Croatia,  99, Email: tribakova@diw-berlin.de, or
agement, Vytautas Magnus University.   tel. 385-21-366033 or 362465, fax 385-  dbowen@diw-berlin.de.
Information: Edita Slamaite, School ofBusi-  21-366026.
ness and Management, Vytautas Magnus
University, Daukanto 28, Kaunas 3000,  Sixth ICCEES World Congress
Lithuania, teL. 370-7-228197, fax 370-7-  July 29-- August 3, 2000, Tampere,
203858, Email: Edita-Slamaite @fc.vdu.it  Finland
d  TRANSITION,June 1998                                                                  © 1998 The World Bank



New Books and Wor]king Papers
The Macroeconomics and Growth Group regrets that it is unable to provide the publications listed.
World Bank Publications             achievements-in general didn't improve  To order: Margaret Murray, Room MC-4-
productivity in China's state-owned enter-  333, Tel. 202-473-6095, fax 202-522-
To receive ordering and price information  prises. And if incentives were weak and  1157, Email: mmurray@ world bank.org.
for World Bank publications, write:. World  information asymmetrical performance  Author: dellerman@world bank.org
Bank, P.O. Box 7247-8619, Philadelphia,  contracts may even have reduced produc-
PA 19170, United States, tel. 202-473-  tivity . But if managerial bonds and profit  Fareed M. A. Hassan, Revenue-Produc-
1155, fax 202-676-0581; orvisitthe World  incentives have been strong, wage-elas-  tive Income Tax Structures and Tax
Bank bookstores, in the United States,  ticity high, and overhead costs low, pro-  Reforms in Emerging Market Econo-
701 18th Street, N. W, Washington, D.C.,  ductivity could take off significantly.  mies: Evidence from Bulgaria, WPS
or in France, 66 avenue d'lena, 75116  To order: Paulina Sintim-Aboagye, Room   1927, June 1998, 25 p.
Paris, Email: books@worldbank.org,  MC-3-422, tel. 202-473-8526, fax 202-
Intemet: http://wwwworldbank.org.   522-1155. Email: psintimaboagye@    A simpler, broader tax base and lower
worldbank.org. Authors: mshirley@ world  rates facilitate tax administration, increase
Working Papers                      bank.org and Ixu@worldbankorg       revenues, and reduce opportunities and
incentives for tax evasion. The 1997 tax
James H. Anderson, The Size, Origins,  Peter R. Moock, HarryAnthony Patrinos,  reform program in Bulgaria was a step in
and Character of Mongolia's Informal  and Meera Venkataraman, Education  the right direction: tax notes for the top
Sector during the Transition, WPS  and Earnings in a Transition Economy  income brackets were reduced, the num-
1916, May 1998, 66 p.               (Vietnarm), WPS 1920, May 1998, 26 p.  ber of tax brackets were halved, and the
To order: Miriam Christian, Room G-8-  tax burden on the poor was relieved by
Mongolia's informal entrepreneurial activ-  058, tel. 202-473-6736, fax 202-522-  an increase in the exemption level.
ity has spectacularly expanded since the  3233, Email: mchristian@worldbank.org.  To order: Alison Panton, Room H-11-033,
1990s, when a large number of workers  Authors: pmock@worldbank.org and  tel. 202-458-5433, fax 202-477-0816,
lost their regular jobs and migration from   hpatrinos,worldbankorg.     Email: apanton(woridbank.org. Author:
rural areas to the cities accelerated. De-                               fhassan@worldbank.org
mand for earlier neglected services, such  David Ellerman, Voucher Privatization
as distribution and transportation, surged  with Investment Funds: An Institutional  Ilker Domac and Carlos Elbirt, The Main
buttheformallabormarketswereunable  Analysis,WPS 1924, May 1994,12 p.   Determinants of Inflation in Albania,
to absorb the surplus labor.                                             WPS 1930, June 1998, 39 p.
To order: Paulina Sintim-Aboagye, Room   Voucher investment funds should have
MC3-422, tel. 202-473-7656, fax 202-522-  providec the right corporate governance  Fighting inflation and keeping exports
1155, Email: psintimaboagyeWworld  that was needed to restructure mass-  competitive requires cuts in the budget
bank.org. Author: janderson2© world  privatized enterprises. Instead, invest-  deficit and a reduction in government bor-
bank.org                            ment fund managers collude with the  rowing. As growth reduces inflation, in-
enterprise managers in several countries  frastructure development and structural
Mary Shirley and Lixin Colin Xu, The  to exploit the post-socialist version of the  reforms should be part of a stabilization
Empirical Effects of Performance Con-  separation of ownership and control. They  program.
tracts: Evidence from China, WPS  grabbed whatthey could byawardingfat  To order: Fran Lewis, Room MC-8-168,
1919,1998,38 p.                     salariesandbonusestoeachotherorfix-  tel.202-458-2979, fax 202-522-1784,
ing shady deals. [In the Czech Republic  Email: flewis@worldbank.org. Authors:
Performance contracts-written agree-  funds have been "tunneled" out of the  idomacWworldbank.org and celbirt
ments between the manager of a state  enterprises to the pockets of the fund and  @worldbank.brg.
enterprise, who promises to achieve spe-  enterprise managers. The editor.] The re-
cial goals in a certain time frame, and  sult has been stagnation and decapital-  Constantine Michalopoulos,WTOAcces-
government, which promises to award  ization of the privatized industrial sector.  sion for Countries in Transition, WPS
( 1998 The World Bank                                                                 TRANSITION, June 1998  M



1934, June 1998, 30 p. (See Transition,  strates that allowing firms to remain in  Environmental Action Program for
May-June 1997).                     public hands permits insiders to  Central and Eastern Europe: Setting
To order: Lili Tabada, Room MC-3-333,  decapitalize firms and plunder public re-  Priorities, 1998, 144 p.
tel. 202-473-6896, fax 202-522-1159,  sources. Several questions need further
Email: itabada(worldbank.org        attention: Will the insider influence in  The Environmental Action Program pro-
privatized firms wane as the growth of the  vides a framework and guide for identify-
Branco Milanovic, Explaining the In-  new private sector accelerates? Why do  ing the highest priority issues and for
crease of Inequality during Transition,  private employers prefer to hire workers  developing realistic, efficient, and cost-ef-
WPS 1935, June 1998, 47 p.          from other companies and not from the  fective solutions. Annexes provide sum-
ranks of the unemployed? What are the  manies on human health problems and
Since the transition process started, in-  chances of gaining active labor market  pollution 'hot-spots," the impact of eco-
equality has increased in all post-social-  policies, including employment subsidies  nomic reform and industrial restructuring,
ist economies. That was the result of:    and retraining?                and priorities for environmental expendi-
* Employees moving from a relatively                                    ture. Boxes discuss nitrates in drinking
egalitarian state sector to a less equal  Csaba Csaki and Zvi Lerman, Land Re-  water in Romania, short-term threats to
private sector                      form in Ukraine: The First Five Years  the environment in Russia, and debt-for-
* The growing number of self-employed  (Russian translation), World Bank Discus-  environment swaps in Poland.
and property owners who are holding a  sion Paper 371R, 126 p.
rising share of income                                                   MarkAmbler and John Marrow, Priorities
* The declining income of unemployed  Based on a farm-level survey conducted  for Environmental Expenditures in In-
state employees.                    in Ukraine's 11 provinces between Janu-  dustry: Eastern Europe and the Former
ary and March 1996 on the first five years  Soviet Union, 1998, 266 p.
Increased inequality is accompanied by  (1991-96) of agrarian reforms, the study
the thinning out of the earlier middle class  argues that the growth of private farming  Cost-effective environmental investments
(largely former state employees). Unfo-  has slowed down after a vigorous start.  that address high-priority environmental
cused social transfers failed to dampen  There are now around 33,000 independent  problems are studied in seven industrial
the increase in inequality.         family farms. The distribution of land and  sectors: power and heat, oil refining and
To order Grace Evans, Room MC-3-568,  asset shares has been completed in  petrochemicals, organic chemicals, inor-
tel: 202-448-5734, fax 202-522-1153,  roughly half thefarms surveyed. Ukrainian  ganic chemicals, iron and steel, nonfer-
Email: gevans@worldbank.org. Author:  agriculture remains dominated by large col-  rous metals, and, pulp and paper.
bmilanovic(worldbank.org            lective structures, and the failure of large
farms to adapt to new economic conditions  L6szl6 Somly6dy and Peter Shanahan,
Other World Bank Publications       has resulted in a significant deterioration  Municipal Wastewater Treatment in
in their financial performance. The survey  Central and Eastern Europe: Present
Simon Commander (editor), Enterprise  suggests that land reform in Ukraine is in  Situation and Cost-Effective Develop-
Restructuring and Unemployment in  danger of stagnation and the government  ment [in Bulgaria, the Czech Republic,
Models of Transition, EDI Development  must create the necessary institutional and  Hungary, Poland, and Slovakia], 1998,
Studies, 1998, 231 p.               market conditions to invigorate reforms.   162 p
In the early years of transition both state  Lithuania: An Opportunity for Eco-  Csaba Csaki and John Nash, The Agrar-
and private firms began to adjust wages  nomic Success, World Bank Country  ian Economies of Central and Eastern
and employment in response to the hard-  Study, 1998, 440 p.             Europe and the Commonwealth of In-
ening budget constraint and the prospect                                 dependent States: Situation and Per-
of institutional changes. Insider (manager-  In Lithuania a banking crisis erupted in  spectives 1997, World Bank Discussion
worker-owned firms), were ready to trade  January 1996, driven by a combination of  Paper 387, 1998, 150 p.
off wages for employment stability. These  ineffective bank supervision, poor bank
firms react defensively to changes, which  practices, and deep-rooted sectoral imbal-  IMF Publications
slows down restructuring. More and faster  ances. With the World Bank's financial
restructuring was carried out by firms that  support, Lithuanian authorities embarked  To order: IMF Publication Services, 700
were bought mainly by outside, foreign  on a program to solve operational prob-  19th Street, NW, Washington, D.C.
investors. Bulgaria's example demon-  lems of the undercapitalized banks.  20431, United States, tel. 202-623-7430,
*  TRANsTIoN,June 1998                                                                   C) 1998 The World Bank



fax 202-623-7201, Email: publications  Oleh Havrylyshyn and Hassan Al-  Since the monetary union with West Ger-
@imf.org, Intemet:http://wwwimf.org  Atrash, COpening Up and Geographic  many on July 1,1990 the monthly wages
Diversification of Trade in Transition  of East German females have risen by
Working Papers                       Economies, IMF WP 98/22, February  10 percent relative to male wages, but fe-
1998, 27 p.                         male employment has fallen 5 percent
Marta de Castello Branco, Pension Re-                                    more than male employment. In 1990-94
form in the Baltics, Russia, and other  Centre for Economic Policy Research  low earners were more likely to leave em-
Countries of the Former Soviet Union  (CEPR) Plublications               ployment, and they were disproportion-
(BRO), IMF WP 98/11, February 1998,                                      ately female. This withdrawal from
40 p.                                To order: Centre for Economic Policy  employment by low earners can account
Research (CEPR), 90-98 Goswell Road,  for 80 percent of the relative rise in fe-
So far, the typical short-term responses  London EC1V7DB, United Kingdom, tel.  male wages. There is no evidence that
of the BRO countries to the increasing fi-  (44171) 878-2900, fax (44171) 878-2999,  reduction in child care availability is a
nancial stresses on pension funds have  Email: cejpr@cepr.org            major factor in reducing female employ-
been to compress benefits, increase con-                                 ment rates.
tribution rates, and accumulate pension  ChoniraAturupane, Simeon Djankov, and
arrears. (The present pension systems in  Bernard Hoekman, Determinants of In-  Lubomir Lizal and Jan Svejnar, Enter-
the BRO countries are run on a pay-as-  tra-Industry Trade Between East and  prise Investment During the Transition:
you-go (PAYG) basis, with pension ben-  West Europe, Discussion Paper 1721,  Evidence from Czech Panel Data, Dis-
efits of current pensioners financed by  November 1997, 32 p.            cussion Paper 1835, March 1998, 37 p.
current payroll contributions.) The piece-
meal approach to pension reform is to  The shars of intraindustry trade (lIT) in  Transition economies need to invest
reduce expenditures and increase rev-  total trade between Central and Eastern  heavily in order to modernize their obso-
enues without changing the basic struc-  European nations and the EU is among  lete capital stock and become competi-
ture of the PAYG system. The systemic  the highest of all the EU bilateral trade  tive in world markets. Overall 1992-95
reform approach is to introduce a multi-  flows. Vertical IIT (exchange of similar  estimates support the hypothesis that an
pillar system that includes privately man-  goods of different quality) accounts for  imperfectly functioning legal system in
aged, funded pension plans. Kazakhstan  80-90 percent of total I IT and is positively  transition economies encourages firms to
and Latvia opted for the system reform  associated with product differentiation,  ignore commitments to their partners (this
approach. By strengthening the contribu-  labor intensity of production, economies  is a form of soft budget constraint) a phe-
tion-benefit link and increasing compli-  of scale, and foreign direct investment  nomenon that affects investment.
ance and coverage within the PAYG   (FDI). Controlling for country-specific ef-
system, Latvia will gradually provide a bal-  fects, a statistically significant positive  Jozef Konings and Alexander Repkin,
anced mix between PAYG and funded  association is found between horizontal  How Efficient Are Firms in Transition
systems (similar to the Swiss model),  lIT (the exchange of close substitutes of  Countries? Firm-Level Evidence from
while Kazakhstan aims to replicate the  similar quality) and FDI, product differen-  Bulgaria and Romania, Discussion Pa-
pure Chilean model, dominated by man-  tiation, and industry concentration; a sig-  per 1839, March 1998, 26 p.
datory, privately managed pension  nificant negative relationship is found for
schemes.                             scale and labor intensity.           Rural Development Institute Publica-
tions
Christian Jochum and Laura Kodres,  Lawrence J. Lau, Yingyi Qian, and Gerard
Does the Introduction of Futures on  Roland, Reform Without Losers: An In-  To order: Rural Development Institute
Emerging Market Currencies Destabi-  terpretation of China's Dual-track Ap-  (RDI), 4746 11th Avenue, NE, #504, Se-
lize the Underlying Currencies? IMF  proach to Transition, Discussion Paper  attle, Washington 98105, United States,
WP 98/13, February 1998, 39 p.       798, February 1998, 39 p.           tel. 206-528-5880, fax 206-528-5881,
Email: rdi@u.washington.edu, Internet:
Despite strong connections between the  Jennifer Hunt, The Transition in East  http://www.law.washington.edu/rdi.
spot and futures markets, volatility on the  Germany: When is a Ten Point Fall in
futures market does not explain spot mar-  the Gender Wage Gap Bad News?  Renee Giovarelli, Land Reform and
ket volatility. Introducing futures market  Discussion Paper 1805, February 1998,  Farm Reorganization in the Kyrgyz
will not increase spot rates volatility.  24 p.                           Republic, RDI Reports on Foreign Aid
(© 1998 The World Bank                                                                 TRANSITION, June 1998  *



and Development 96, January 1998,  The William Davidson Institute,       and Forced Saving in the Soviet Union,
39 p.                               Working Papers                       WP 67/1997, 25 p.
While the Constitution of the Kyrgyz Re-  To order: The Davidson Institute, 701  David P. Coady and Limin Wang, Incen-
public does not allow private ownership  Tappan Street,Ann Arbor, Michigan 48109-  tives, Allocation and Labor-Market Re-
of land, use rights of up to 99 years are  1234, United States, tel. 734-763-5020, fax  forms During Transition.: The Case of
permitted for agricultural land. These  734-763-5850, Email: wdi@umich.edu,  Urban China, 1986-1990, WP 68/1998,
rights can be sold, mortgaged, be-  lntemet:http://www.wdi.bus.umich.edu    30 p.
queathed, gifted, or leased out. Members
of collectives or state farms are common  Margaret Mau rer-Fazio, Thomas G.  David P. Coady and Limin Wang, Explain-
share owners of the land and property and  Rawski, and Wei Zhang, Gender Wage  ing the Rise in Earnings Inequality in
can withdraw from such farms and receive  Gaps in China's Labor Market: Size,  China: The Case of Liaoning Province,
land and property in kind. Nevertheless,  Structure, Trends, WP 88, 1997, 43 p.   1986-90, WP 69/1998,33 p.
registered land transactions are few. Fed-
eral laws on registration and mortgage are  Annette N. Brown, The Economic Deter-  Saul Estrin, Adam Rosevear, and Paul
needed as well as regulations for pur-  minants of Internal Migration Flows in  Hare, Company Restructuring and
chase and sale of land use rights. A pub-  Russia During Transition, WP 89,1997,  Privatization in Ukraine, WP 70,1998.
lic information program is necessary to  33 p.
inform land share and land plot owners                                   An enterprise survey of 150 Ukrainian
about their rights.                 Thomas G. Rawski, China's State Enter-  firms taken between March and July 1997
prise Reform-An Overseas Perspec-  reveals that the Ukrainian privatization
Tim Hanstad, Are Smaller Farms Appro-  tive, WP 90,1997,12 p.            process has favored insiders (managers
priate for Former Soviet Republics?                                      workers). Insiders owned 53 percent of
RDI Reports on Foreign Aid and Devel-  Thomas G. Rawski, China and the Idea of  shares, outsiders 31 percent, and the
opment 97, February 1998, 11 p.     Economic Reform, WP 91, 1997, 23 p.   state had a residual holding of 17 percent.
Insiders holdings are concentrated in
There is very little empirical evidence to  Xiao-Yuan Dong and Louis Putterman,  smaller firms and the state holdings in
support the cost benefits of large-scale  China's State-Owned Enterprises in  larger ones. The sample confirmed that
farming. Rental machinery markets, the  the First Reform Decade: An Analysis  since 1991 the output and employment
hiring of managerial and technical skills,  of a Declining Monopsony, WP 93,  of Ukrainian firms has dropped precipi-
and publicly financed extension services  1997, 55 p.                   tously. The performance of most firms
can offset the extra cost of cultivating                                 deteriorated but insider-owned firms have
smaller farms. At-large farms that are  Xiao-Yuan Dong and Louis Putterman, Pre-  been performing relatively better than the
monitoring the quality and amount of ef-  Reform Industry and the State Monop-  state-or outsider-owned ones. Restructur-
fort expended by workers are also par-  sony in China, WP 94,1997, 54 p.  ing is slow, especially financial restruc-
ticularly costly, while family-operated                                 turing and change of product mix. As
farms tend to minimize labor-monitoring  Cynthia Koch (editor), Conference on  expected, outsiders were more willing to
costs. In a market economy farm size is  Strategic Alliances in Transitional  downsize their enterprises than were
determined by market signals. Granting  Economies, WP 99, 1997, 52 p.    insiders-the state or manager-owners.
subsidies or preferential access to credit
to larger farms, can negate the natural ad-  Leuven Institute for CEE Studies Work-  Other Publications
vantages enjoyed by small farms.    ing Papers
Martina Dalic, Price Effects of VAT In-
In the former Soviet republics policymakers  To order: Leuven Institute for Central and  troduction in Croatia, Institute of Pub-
should strive to eliminate such market im-  East European Studies, Ch. Deberiotstraat  lic Finance, Occasional Paper No. 4,
perfections and encourage farms to reor-  34, 3000 Leuven, teL. 3216-326-598, fax  December 1997, 20 p.
ganize into smaller units. A legal and policy  3216-326-599.
framework, including an open land mar-                                   A uniform, 22 percent value-added tax
ket, should enable farmers to adjust farm   Nick van der Lijn and Marno Verbeek,  (VAT) with few exemptions was intro-
size in response to market signals.  Excess Demand, Repressed Inflation,  duced in Croatia this year. It replaced the
*  TRANsTIoN,June 1998                                                                   © 1998 The World Bank



earlier consumer sales tax on goods and  Large current account deficits are serious  percent. Bulgaria and Romania suffered
services. The new tax could lift the 1998  problems in other CEE economies as well.  huge output declines following macroeco-
consumer price index by 3.27 percent (op-  (In most of these countries current ac-  nomic mismanagement in 1996. The long-
timistic scenario) or 5.2 percent (pessi-  count deficits can reach 6 percent or more  standing fall in Russia's GDP has come
mistic scenario).                    of GDP, and even more in the Baltic  to a halt, but Ukraine's GDP is still falling
To order: Institute of Public Finance,  states.) It is difficult to see a significant  though not as much as in earlier years.
Katanciceva 5, 10000 Zagreb, Croatia, tel.  strengthening of the recovery in Russia if  Investment performance in Russia and
385 1 433-006, fax 385 1 277-089, Email:  monetary policy remains as tight as it now   Ukraine was still rather dismal.
ured@iif.hr                          is for any length of time. Moreover an im-
portant constraint on medium-term growth  Moderate inflation in the faster growing
Saul Estrin and Peter Holmes, Competi-  in Russia is the effect of a large, 10-year  countries of Central and Eastern Europe
tion and Economic Integration in Eu-  decline of fixed investment on productive  turned out to be difficult to suppress fur-
rope, Edward Elgar Publishing Inc., April  capacities.                    ther. Under the currency board arrange-
1998, 176 p.                         To order: Economic Analysis Division,  ment inflation fell precipitously in Bulgaria
To order: Katy Wight, Edward Elgar Pub-  United Nations Economic Commission for  and was far from safe levels in Romania.
lishing Inc., 6 Market Street, Northampton,  Europe (UJN/ECE), Palais des Nations,  Russia and Ukraine succeeded in reduc-
Massachusetts 01060, United States, tel.  CH-1211 Geneva 10, Switzerland.  ing inflation to moderate levels. In all Cen-
413-584-5551, fax 413-584-9933, Email:                                    tral and Eastern European countries,
kwight@e-elgar.com                   L. Pokaminer and others, Transition  except Poland and Croatia, trade deficits
Countries: 1997 External Deficits  were lower than in 1996.
Facts and Figures Hungary '98, 1998,  Lower Than Feared, Stability Again a
500 p.                               Priority, WIIW Research Report No. 243,  Lower trade deficits contributed to
To order: Greger-Delacroix Kiado, Sales  1998, 61 p.                      healthier current account balances in
Department, 1066 Budapest, Terez krt.                                      most Central and Eastern European coun-
28, Hungary, H-1066.                 The crisis in Southeast Asia has added  tries. External imbalances increased fur-
impetus for improved capital market regu-  ther in Croatia and Poland. The current
Improved Economic Situation in the  lations. The supply of government secu-  account deficit was still rather low in rela-
UNIECE Region-Major Uncertainties  rities offering high yields is likely to be  tion to the GDP in Poland, but rather too
for the Future: 1997-1998, Economic  restricted. With more cautious policies,  high in the Croatia, Czech Republic, Ro-
Survey of Europe, 1998,11 p.         growth in 1998 and 1999 is likely to slow   mania, and Slovakia.
down in FPoland and Slovakia. Hungary is  To order: Vienna Institute for Interna-
The economic situation improved signifi-  unlikely to get carried away by its recent  tional Economic Studies (WIIW) A-1010
cantly in much of Eastern and Central  success. Slovenia and the Czech Repub-  Vienna, Oppolzergasse 6, Tel. 431-533-
Europe in 1997. It was the first time since  lic will aim for stability and moderate rates  66-1011, Fax 431-533- 66-1050, Email:
1989 that these economies showed an av-  of growth,while Bulgaria may well achieve  straka@wsr.ac.at
erage growth in GNP (1.7 percent). This  stability. There are still questions sur-
improved performance was largely due to  rounding Romania and, in particular, Rus-  Thomas Lang and Geoffrey Pugh, The
events in the economies of Albania, Bul-  sia, but long overdue stabilization in  Economics of German Unification,
garia, and Romania, where a return to  Ukraine may now be in sight.        March 1998, 240 p.
growth at least stopped the downturn.
In 1997 Hungary overcame the effects of  This volume analyzes the economic pro-
In the faster-growing economies (Croatia,  its 1995 stabilization policy, recording a  cess of assimilating eastern Germany into
Poland and Slovakia) policymakers should  quite high export-driven growth of 4 per-  the institutions and performance levels of
probably try to slow down the pace in or-  cent. Strong improvements in industrial  western Germany. Topics include: The
der to halt their worsening current account  production and labor productivity re-  relative backwardness of East Germany's
deficits. Even so, these three economies  mained steady in Poland and Hungary.  economy, the prospects for eastern Ger-
are expected to expand by at least 5 per-  The Czech economy, until recently a para-  many catching-up economically with west-
cent this year. High growth rates (between  gon of successful transformation, was hit  em Germany and the repercussions for
5 and 7 percent) are also expected in the  by a crisis arising from sustained appre-  German competitiveness nationally and
Baltic states, despite a slow down in Es-  ciation under expanding current account  within the wider European context.
tonia in order to avoid inflation.   deficits zand grew by slightly more than 1  To order: Katy Wight, Edward Elgar Pub-
(C) 1998 The World Bank                                                                 TRANSirlON, JUne 1998  U



lishing Inc., 6 Market Street, Northampton,  ation is expected at least until fall 1998.  To order: Central European Banker, Hun-
Massachusetts 01060, United States, tel.  The current account deficit was down to  garian Foreign Trade Bank, Ltd., H-1052
413-584-5551, fax 413-584-9933, Email:  7.2 percent of GDP in 1997 and is ex-  Budapest, Apaczai Csere Janos utca 7,
kwight@e-elgar.com                   pected to decrease to around 5.7 percent  tel. 361-268-8019, fax 361-268-8293.
of GDP in 1998. Slovakia's per capita for-
Moscow in the New Millennium: Op-  eign debt exceeds $2,000. The unemploy-  Economic Reform Today, published by
portunities and Skills for the New Mil-  ment rate will probably reach 13.2  the Centerfor International Private Enter-
lennium, United States Information  percent.                              prise (CIPE). The number 4, 1997 issue
Agency, Russia, September 19-20,1997,  To order: Tatra Banka Research,  includes: "Democracy and Economic De-
71 p.                                Vajanskeho nabrezie 5, P.O. Box 50, 810  velopment," Challenges for Policymakers
To order: Geonomics, Institute at  11 Bratislava 111, Slovak Republic, tel.  in new Democracies,' and MakingTrans-
Middlebury College, 14 Hillcrest Av-  4217-4316-519, fax 4217-362-894, Email:  parency and Asian Value."
enue, Middlebury, Vermont 05753,  toth@tatrabanka.sk                      To order: CIPE, 1155 15th Street, NW,
United States, tel. 802-443-2300, fax                                     Suite 700, Washington, D.C. 20005,
802-443-2050, Email: geonomic@midd-  Asia Pacific Consensus Forecasts: A   United States, tel. 202-721-9200, fax 202-
unix.middlebury.edu                  Digest of Economic Forecasts, Febru-  721-9250, Email: cipe@cipe.org
ary 1998, 32 p.
Peter S. Rashish, (ed.), Transatlantic  Consensus Economics surveys more  Journal of Transforming Economies
and Global Economic Integration: The  than 130 prominentAsia-Pacific financial  and Societies, published for the Univer-
Role of Investment, Report of the Eu-  and economic forecasters. Monthly  sity Council for Economic Management
ropean Institute 7th Transatlantic Semi-  forcasters are asked to share their esti-  Education Transfer by the Cracow Uni-
nar on Trade and Investment, November  mates of a range of variables, including  versity of Economics. The autumn 1997
17-18, 1997, 63 p.                  future growth, inflation, foreign trade, and  issue (Vol. 4, no. 4), includes: "Steriliza-
To order: The European Institute, 5225 Wis-  exchange rates.             bon of Capital Inflows in Transition Econo-
consin Avenue, N.W, Suite 200, Washing-  To order. Consensus Economics Inc., 53  mies: The Contrast Between the Czech
ton, D.C. 20015-2014, tel. 202-895-1670,  Upper Brook Street, London WIY 2LT,  and Polish Cases," "Monetary Policy Ob-
Email: infoXeuropeaninstitute.org, Intemet:  United Kingdom, tel. 44171-491-3211, fax  jectives in its Regulatory Environment in
http.//www.europeaninstitute.org     44171-409-2331.                      Poland in 1995-97," and "On Equilibrium
Exchange Rates in the Visegrad Four:
Peter Walkenhorst, Restructuring the  CARD Report, a periodical of policy re-  Theory and Evidence."
Sugar Industry in Poland: Transition  search from the Center for Agricultural  Toorder: Cracow University of Economics,
from State Socialism to the Common  and Rural Development. The spring 1998  Rakowicka 27, 31-510 Krakow, Poland, tel.
Agricultural Policy, 1998,140 p.    issue (Vol. 11, no. 1), includes: "Hungar-  4812421-0536, fax 4812-421-2182, Email:
To order: Verlag Dr. Albert Bartens KG   ian Credit Foundation," "Russian Water  hausnerj@ae.krakow.pI
PO.Box 38 02 50, D-14112 Berlin, Ger-  Quality Project Update," and "Lithuanian
many, tel./fax 49-30-803-2049.       Dairy Representatives Visit the United  Pacific Russia Oil and Gas Report, a
States."                             quarterly publication from the Russian Far
Special Publications                 To order: CARD Report, Terrance Hurley,  East Update (impact of oil and gas
Iowa State University of Science and Tech-  projects on businesses).
Slovak Strategy Quarterly: Analysis  nology, tel. 515-294-7519, fax 515-294-  To order: Pacific Russia Oil and Gas Re-
and Outlook, March 1998, 22 p.       6336, Intemet: http://www.ag.iastate.edu/  port, Russian Far East Update, PRO. Box
card                                 22126, Seattle, Washington 98122 United
Real GDP growth in 1997 slowed to 6.5                                     States, tel. 206-447-2668, fax 206-628-
percent and is expected to fall to 4.8 per-  Central European Banker, published by  0979, Email: update@russianfareastcom
cent in 1998. The national bank has main-  the Institute for EastWest Studies,
tained a tight monetary policy and held  Budapest Centre and the Hungarian For-  Quarterly Prediction-Ukranian Eco-
consumer inflation at 6.4 percent. Infla-  eign Trade Bank, Ltd. The March 1998  nomic Survey, published by the Interna-
tion this year can accelerate to 7.2 per-  issue includes: "Safeguarding Financial  tional Centre for Policy Studies, Kyiv.
cent. Interest rates can remain volatile and  Stability in a Changing World: Trends in  To order: ICPS, 8/5 VoloskaSt.,254070Kyiv,
stay in the 20 to 25 percent range. The  Regulatory Approaches," and "Global  Ukraine tel/fax: 38044-462-4937-38-58, tel
Slovak crown held steady and no devalu-  Bank Supervisory Principles."    38044-416-5342 email: qp@carnier.kiev.ua
*  TRANSITION,June 1998                                                                   ( 1998 The World Bank



Bibliography of Selected Articles
Postsocialist Economies             Rao, V. V. B. East Asian Economies:  CIS
The Crisis of 199-98. Economic and Po-
Bloem,A. M. NationalAccounts inTran-  litical Weekly (India) 33:1397-1416, June  Alexander, J. Uncertain Conditions in
sition Countries: Balancing The Bi-  6-12,1998.                         the Russian Transition: The Popular
ases? Review of Income and Wealth                                        Drive Towards Stability in a "Stateless"
(United States) 44:1-24, March 1998.    Su, D. Risk, Return and Regulation In  Environment. Europe-Asia Studies
Chinese'Stock Markets. Joumal of Eco-  (United Kingdom) 50(3):415-43, May
Environment and Health. EastVWestLet-  nomics and Business (United States)  1998.
ter(United States) 2(6):1-12, November-  50:239-513, May-June 1998.
December 1997.                                                           Analysis: Russian Golid Market Emerg-
Central and Eastern Europe          ing. Russian Far East Update (United
Hanke, S. H. and S. J. K. Walters. Eco-                                  States) 8(5):6, May 1998.
nomic Freedom, Prosperity, and Equal-  Boeijen-Ostaszewska, A van. Transfer
ity: A Survey. CATO Journal (United  Pricing Reform in Poland. Intemational Azerbaijan: Financial Times Survey. Fi-
States), 17(2): 117-146,1997.       Transfer Pricing Joumal (Netherlands)  nancia/Times(UnitedKingdom),p:11-13,
5:165-68, May-June 1998.            March 3,1998.
Komkov, N. I. Program-Goal Control:
Possibilities and Prospects forAdjust-  Country Reports: Balkans and Region.  Balzer, H. Russia's I\iddle Classes.
ment to the Conditions of a Transition  Warreport (United Kingdom) 58:42-64,  Post-Soviet Affairs (United States)
Economy. Studies on Russian Economic  February--March 1998.              14:165-86, April-June 1998.
Development (Russia) 9:270-79, May-
June 1998.                          Hungary: New Multi-Pillar Pension  Coulloudon, V. Privatization in Russia:
System. Trends in Social Security (Swit-  Catalyst For The Elite. Fletcher Forum
Milonas, N. T. The Choice of Corporate  zerland), No.2/1998:16-17,1998.  of WorldAffairs (United States) 22:43-56,
Governance and Capital Infusion in                                       Summer/Fall 1998.
Transition Economies. International Re-  Kazakhsitan: Financial Times Survey.
view of Economics and Business (Italy)  Financial Times (United Kingdom), June  Gladyshevskii, A. l. The Investment Cri-
45:27-45, March 1998.               17,1998, pp.1-4.                     sis and Trends in Production Appara-
tus Development in Russia. Studies on
Song, F.M. Hysteresis in Unemployment:  Konopielko, L. A Note on Polish Bank  Russian Economic Development (Russia)
Evidence From OECD Countries. Quar-  Consolidation. Joumal of Comparative  9:226-34, May-June 1998.
terly Review of Economics and Finance  Economics (United States) 25:441-47,
(United States) 38:181-92,1998.     1997.                                Revich, B. A. Mortality Due To Air Pol-
lution in Russian cities: Risk Assess-
Asia                                Rupnik, J. Enlarging Europe: Risks and  ment. Studies on Russian Economic
Responsibilities. Transitions (United  Development (Russia) 9:308-18, May-
AsiaTremblesAgain. Economist (United  Kingdom) 5(4):18-20, April 1998.   June 1998.
Kingdom) 347:81-82, June 20-26, 1998.
Titma, M. Winners and Losers In The  Rozman, G. Sino-Russian Relations In
Biers, D. Economies: Resuscitating  Postcommunist Transition: New Evi-  The 1990s: A Balance Sheet. Post-So-
Asia. Far Eastern Economic Review  dence From Estonia. Post-SovietAffairs  viet Affairs (United States) 14:93-113,
(Hong Kong) 161:10-15, June 18,1998.  (United States) 14:114-36, April-June  April-June 1998.
1998.
Nelson, S. Tax Incentives for Local                                      Wendlandt, A. Pacifying Russia: Inter-
Manufacturing in the People's Repub-  Watkins, M. Power in Poland: Shack-  national Aid and NAQTO Expansion.
lic of China. Intertax (Netherlands)  ledToThe Old Regime. ProjectFinance  Fletcher Forum of World Affairs (United
26:162-68, May 1998.                (United Kingdom) 7:45-46, May 1998.    States) 22:131-48, 1998.
( 1998 The World Bank                                                                 TRANSITION, June 1998



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