21812 THE NEWSLETTER ABOUT REFORMING ECONOMIES ~~~~r 1r TRANSITIoN m NEWSLETT"ERPINEmsOFM &S - Vol. 11, No. 6 Nov-Dec. 2000/Jan. 2001 Contents World Bank's Ukraine Team on We are pleased to announce that the Local U nch artered Territories- Government and Public Service Reform Ini- tiative (LGI/OSI), a member of the Soros/ Learning from Past Mistakes Open Society network of ibundations, isjoin- ing our team of contrbutors and sponsors. Interview with Country Director Luca Barbone Wih their helpwewill be able to expandour coverage on such important issues as de- Preparation of the World Bank's new CountryAssistance Strategy (CAS) for Ukraine broke centralization and public administration re- form in the transition economies. newgroundlastyear, when forthe first time a draft CAS was put on the Intemetto generate countrywide discussions The CAS outlines the Bank's planned policy and lending pro- NGOs about the Ukraine CAS 4 gram for 2001-03. This initiative enjoyed the support of Ukraine's reform-oriented govem- The Ukraine CAS in a Nutshell 6 ment, which was elected to office lastyear. In addition to posting the CAS drafton the Intemet, Electicity Markets in Tranon Eoconomies 8 the Bank's Ukraine team organized roundtable discussions across the country, gauging California and Texas: Diverge on Deregulation 11 the public's reactions to various aspects of the new strategy including poverty reduction, environmental protection, energy sector reform, and the fight against corruption. At these China's Infrastructure Needs Overhaul 12 meetings, more than 200 NGOs, business groups, professional associations, think tanks, Howthe Private Sector is Doing in China 13 and media representatives were able to criticize and praise the Bank's '"hree-year plans" Kosovo's Albanian Diaspora 16 andput forward new suggestions. Transition editor Richard Hirschlerasked Country Direc- TransitionArchives: 1992 18 tor Luca Barbone, in charge of the Bank's operations in Ukraine and Belanus, how the Bank The William Davidson Institute benefited from this free-spirited dialogue with Ukraine's civil society. Enterprise Break-Ups and Performance 23 Occupational Mobility in Russia 24 Q. What have been the major lessons the international community's approach to Czech Privatization: Theory and learned from the mistakes of the Bank's the former Soviet Union has been an evolv- Sequencing 27 ConferenceAnnouncements 28 earlier assistance strategy in Ukraine? ing concept. We didn't really fully grasp the Recent Working Papers 30 NGO comments criticized the lack of deep legacy of the Soviet Union. We didn't LGVIOSI transparency but focused primarily on quite understand how deeply the ideology Introduction 31 the ineffectiveness of World Bank and the organization of the old system af- Decentralization: Experimentand Reform 32 loans. Was the Bank ready to make the fected society, even after the break-up of the EU Enlargement and Open Society 33 necessary adjustments when the new Soviet Union. At their forming, the new inde- LocalGovernment Info Network (LOGIN) 34 strategy was finalized? pendent states were still basically left with a Anti-Corruptin Workshop in Riga 35 power structure and an organizational and SITE A. Complaints about past lack of transpar- institutional structure that reflected 70 years Interest Groups in Russia Federation 36 . . . CEFIR Research 37 ency were Justified because durng the of"socialism"and authoritarianism, notthe Baltic Economic Trends 37 preparation of the first assistance strategy previousfew years of reforms. I thinkthatthis we weren't holding consultations in Ukraine. underestimation is the main reason we and But there was a more fundamental issue, therestoftheintemationalcommunityfailed BOFIT Winners and Losers in Latvia 40 which became clearer during the implemen- in many ways in pushing reforms. We used Conference Diary 42 tation of the strategy between 1997 and the lessons gained from Poland and the other New Books and Working Papers 44 2000. We really learned a lot. The way 1, and countries in Central Europe, without realiz- Bibliography of SelectedArticles 51 many others, see it is that the Bank's and ing thata huge institutional gapexisted. Development Research Group The World Bank 1 The William Davidson Institute SITE Based on these reflections, which I am just ity tariffs, you have to face the furor of ness. On a day-to-day basis, we have caricaturing here, we adopted a number of the poor, who might be evicted from formed a contact group repre.enting hypotheses. First, we have to plan forthe long their homes if they cannot pay the bills. Ukraine's civil society. With their help, we run-and formulate our strategy-by accept- have identified projects in which NGOs will ing ups and downs in the transition process, A. The issue of cash collections was, of have a crucial role to play, partiipating and this should also define our lending policy. course, discussed with NGOs both in project preparation More important, we must deemphasize poli- and stakeholders. But their and implementation. We re- cies and emphasize institutions. Institutions perspective was a lot different ceive continuous feedback in the sense in which Douglass North inter- from what we expected. They from NGOs. preted them: ideas, ideologies, prejudices, made the point that those re- rules of behavior, not organizations or other sponsible for the situation are In addition, we are heloing the physical entities. To transform these kinds the state-owned enterprises, government formulate new of institutions, the culture must be changed. which have accumulated huge laws on civil code ard taxa- This involves much more than simply priva- arrears and are withholding tion that will ease the present tizing state-owned enterprises or passing payment to their employees financial squeeze on the laws. It involves changing the attitudes of pub- and suppliers. Your specific ex- NGO sector. Right now by law lic officials, even the attitude of the private ample was not on the agenda, NGOs are not permnitted to sector. probably because social safety sell services. They cannot ac- net mechanisms in some degree ease the cept reimbursement, even for such service Second, we realized that the govern- pain of higher energy prices. as treating AIDS patients. As a result, they ment cannot just create and legitimize depend too much on foreign contributions. new institutions and behavioral norms Q. How many of the recommendations We cannot hire local groups that care and parachute them from the top to the of civil society have been integrated about the poor, because the lec islative public through laws and policy actions. into the new CAS? framework is so inadequate. We Eire also Civil society should feel the need for sponsors of the People's Voice xroject, change. Therefore we have to be in a A. Some of the recommendations were modeled afterthe famed initiative in Ban- position to help both the public and the not feasible. There were, for example, a galore, which is helping change the rela- government-both sides of this transfor- lot of requests for changing Ukraine's gov- tionship between citizenry and local mation. That is why we decided early on ernment policy. But in many cases we re- officials in a few cities. that the draft of the country assistance ceived extremely useful suggestions and strategy would be the subject of substan- reacted positively. We found the environ- The Ukraine team has developed a se- tive discussion with civil society, which mental concerns of many NGOs legiti- ries of initiatives aimed at increasing in- had initially been weak and fragmented, mate. We recognize that the government formation flows. One project will inance as in other former communist countries. needs to strengthen its operations to installation of the Internet in Ukraine's li- The Bank had been targeting partner- monitor emissions in a meaningful way, brary network. We are also working both ship with NGOs for a couple of years; it fine polluters, and finance environmen- with the government and with civil soci- was talking a lot. But from an operational tally friendly projects from a national en- ety organizations to help them provide, point of view, it had done relatively little. vironment fund, which could pool these gain access to, and benefit from more in- So for our team it was a year of inten- fines and fees. We have put back this formation by using the Internet. Another sive learning. We set up new activities, issue in our work program, will review it, project will develop tools and methodolo- often changed our way of doing busi- and, in agreement with the government, gies to increase the accountability of pub- ness, scrutinized our actions in the light use our Programmatic Adjustment Loan lic officials. In this sense the civil society of whether they would help civil society, to support capacity building of the gov- strategy has become an integral part of whether they would advance legitimacy ernment to deal with environmental is- our actions. We travel uncharted waters, of new institutions. sues. learning by doing. Q. Through this dialogue with civil so- Q. How have you organized your in- Q. The country strategy was approved ciety, the Bank has to communicate teractions with the third sector at a last September. Can it still be ad- sometimes delicate policy issues that practical level? justed? might hurt those whom these NGOs represent. For example, in pressing for A. We have changed-and are still in the A. The CAS is a living document. Prob- the collection of market-oriented util- process of changing-the way we do busi- ably in a year or a year and a half, we will * TRANsi-noN, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 review what has been achieved. We will ProgrammaticAdjustmentLoan (PAL) Q. So they have to achieve something collect more feedback and more sugges- first and then they get the money? But tions. There is also a CAS interim docu- The PAL supports medium-term govem- won't these programs be costly initially? ment. Depending on how the economic ment programs that involve continuous, in- situation evolves in Ukraine, we might even cremental policy reforms and institution- A. The point we are making is that if they increase our assistance. building over several years, mostly in the do the right thing, they are not going to public sector. These programs aim at need our money. I never really believed in Q. According to Oxford An a lytica, strengthening budget management and im- the concept of prepayment of the costs of Ukraine's GDP should grow 4-4.5 per- proving governance, resource allocation, reforms. cent this year, industrial production and public service delivery. A senes of one- 7-8 percent, almost as good as last yearloans are made overthreeto fiveyears, Q. How would you respond to the year. each building on the preceding loan. Trace- concern that the disbursed money able indicators (targets, benchmarks) are will disappear into the budget, mak- A. I agree, this year should be another suc- built into each loan, and disbursements are ing monitoring impossible? cessful year in Ukraine. Last year was the camedoutexpost, as the reform progresses, first year of growth since independence; in proportion to targets reached. A. We have put a lot of effort into trying to GDP increased 6 percent, industrial pro- improve the way in which the govemment duction was about 10-11 percent higher Q. Why is the Programmatic Adjustment handelsitsmoney, notjusttheWorld Bank's than in 1999. Exports have grown substan- Loan a major feature of the CAS? money.Adjustmentloansarebudgetarysup- tially, faster than imports. But what is es- port, so the issue is not what happens to the pecially heartening is that this positive A. Because the concept of these loans bet- relatively small amount of money the Bank outcome does not reflect merely the effect ter match the way we want to support the would put in the budget but howwell the bud- of external circumstances, growth in Rus- government's reform program. We have getisexecuted.Thatiswhy,forinstance, bud- sia, for example. made tremendous progress in preparing the get reform and improvements in budget first ProgrammaticAdjustment Loan (PAL). management are very high on the agenda There is some evidence that domestic In our CAS we agreed on a three-year pro- in our PAL. That is the way we need to go. reforms are producing positive effects. gram. The program is the government's pro- The issue of monitoring individual tranches Take the progress in energy payment. gram. They used to negotiate, bargain is a bit irrelevant, because we know the ar- Not too many people realize that the in- over conditions. This time when they said gument of fungibility. The question is the in- crease in cash payments in the energy they could not reach the targets, we asked tegrity of the whole program. sector has been due to a hardening of them, "O.K., howfarcan you go?" Theytold budget constraints of unheard of pro- ustheycouldgohalfway. Weagreed. On Q. How much impact can the Bank portions. The authorities disconnected the government's side theywere genuinley have in Ukraine in the nextthreeyears? 23,000 enterprises and entities that surprised. were not paying their electricity bills, A. It's not the Bank that is going to have an something that is without precedent. The point is, we try to ensure their maxi- impact, it is the government that should Reduction in nonpayments results in a mum ownership. Keeping the institutional solve fundamental problems. In the end, it better-oiled economic system, enter- focus of the CAS, we concentrated not so is their program; our success is measured prises that can respond to changes in much on policies and laws but on trying to by their success. We have good relations demand, workers that have cash to buy define benchmarks of outcomes, clear not only with the new government but also what they want. changes in behaviors, and rules of the with the presidential administration and the game that we think are associated with parliament. Another benchmark we have It's not all roses, of course. When you faster growth and a more inclusive soci- chosen for ourselves is to see to what ex- start enforcing payment discipline it ety. We have been working with the Ukrai- tent we can succeed with the civil society means many enterprises that were niansbasedonthisnewconceptforayear leg of our strategy. This will imply asking used to getting free gas or electricity now. The Ukrainian government achieved much more often what Ukraine thinks of start to pay for it. Many of these enter- a sufficiently critical mass of results and us. We ran a detailed client survey across prises are owned by oligarchs and have we can provide the loan, once the Bank's Ukraine with focus groups to determine very strong political connections and Board of Directors approves it. And we will how Ukrainians perceive our activities. We strong connections in the judiciary. go ahead every time with these one- will repeat it year after year to check These are not pain-free reforms we are tranche operations if we feel confident that whether we are sending the rght message pushing. there is a critical mass of change. and if it is understood. © 2000 The World BanklThe William Davidson Institute TRANSITlON, Nov.-Dec. 2000/Jan. 2001 f Voices of the People: Comments on the Bank's Country Assistance Strategy for Ukraine The views presented here have been posted on the Intemet or gathered during surveys conducted by the World Bank's team in Ukraine. About the First Country Assis- perts and government officials were not only in parallel with the strengthening of tance Strategy (1997-2000) presented to the public. World Bank loans civil society. If civil society is weak while failed to improve the well-being of most many bureaucrats are motivated sole0y to National Ecological Center of Ukraine, citizens. Significant groups in the society enrich themselves, foreign loans (and do- Kyiv became disenchanted with the Bank. An mestic budgetary resources) intended for appraisal of the 1997-2000 CAS accom- the public sector could be squandere'd by Although the World Bank provided more plishments, including information on the officials. than $2 billion to the Ukrainian government implementation of concrete projects within during this period, economic reform was the CAS framework, should be published The majority of the public is not feeling the not implemented and Ukraine's economy and widely circulated. positive impact of the loans. The CAS i , not could not expand. One reason was that the linking the well-being of the population t D the Bank's Country Assistance Strategy About the Second CountryAssis- preservation and revitalization of the envi- (CAS) was not discussed with represen- tance Strategy (2001-03) ronment. Environmental preservation re- tatives of the public, giving the public no mains an appendage to economic groAth. chance to participate in supervising the Alter-Eco, Ecological Coalition of strategy's implementation. No mecha- Ukraine National Ecological Center of Ukraine nisms were introduced to keep the public informed about the implementation of Bank The main weakness of the CAS is the dis- The World Bank should encourage the projects. This lack of information enabled parity between the Bank's intention to sup- government to involve NGOs in preparing some local bureaucrats to arbitrarily ma- port civil society and the absence of and monitoring investment projects and nipulate disbursed funds, which hurt the concrete mechanisms for providing funds restructuring programs. The Bank should World Bank's image in Ukraine. for developing such a society. The World advocate transparency of government in- Bank envisages only economic studies to stitutions, in particular by helping set up While poverty increased in Ukraine-about be conducted in this area. During prepara- public information departments at nrinis- 30 percent of the country's population is tion of each project the World Bank should tries and other government organizations. currently living at or below the poverty use public hearings to inform representa- The World Bank should promote creation level-the ratio of state debt to GDP in- tives of civil society about the implementa- of a favorable legislative environmenl for creased from 22.1 percent in 1997 to 40.8 tion of projects. The Bank should recognize NGO activity. percent in 1999. The share of state debt the specifics of Ukraine and take advan- owed to the World Bank rose from 11.6 tage of the experience of local specialists The Bank should prevent possible n?ga- percent in 1997 to 40.8 percent in 1999. during project implementation. tive consequences of using Programriatic The increase in poverty and state debt Adjustment Loans (PAL) as key elenrents should be discussed at public hearings. As long as civil society is weak, reducing of financing. Injecting these funds into the the state's watchdog role in environmen- state budget makes it impossible fo- the Alter-Eco, Ecological Coalition of tal issues would violate citizens'rights, in- public to trace their whereabouts. Siper- Ukraine, Sevastopol cluding their ecological rights. There is a vising the use of funds should therefole be great risk that hazardous waste will con- strengthened. The World Bank should in- The CAS for 1997-2000 did not pay tinuetobedumpednearresidentialareas, clude NGO representatives in working enough attention to the specifics of the that unsafe labor practices will be main- groups thatwill participate in preparinc and country, and the public was not well ac- tained, and that public information will be implementing PALs. quainted with the World Bank's strategy concealed, contributing to the continued or with concrete World Bank projects. degradation of the environment in Ukraine. Environmental issues are granted a rather Documents prepared by World Bank ex- Thus state influence should be reduced modest place in the strategy. The main a TrANSITIoN, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 emphasis is on the GEF Biodiversity Con- Ukrainian Environmental Association, Olena Volodymyrivna, Financial Direc- servation Project for the Azov-Black Sea and Co-Chairman of Coalition for En- tor of MPP Studio Ecological Corridor. The CAS does not ergy Safety, Citizen Awareness, and clarify what part of the World Bank's total Rights, Kyiv Drastic administrative reform has to be loan portfolio, including the PAL, will be implemented. State interference in the used for conservation. The World Bank To improve awareness of reform by the activities of a commercial enterprise had should help finance ecological education in population and ensure its participation in the not been reduced. Deregulation should be Ukraine's secondary schools and universi- discussion of draft laws, it is critical to pro- carried out, not merely legislated. ties. A National Ecological Fund should be vide email facilities in all 778 administrative established to pool all ecological fees, and areas of Ukraine. To ensure public access, lvantsova Lyudmyla Romanivna, Di- these and other funds should be used for personal computers and modems have to rector, PP Iva environmental protection (currently, only 10 be installed in all regional libraries. To en- percent of collected ecological fees and sure the introduction of an effective land All government officials should read the fines are spent on ecological activity). code that would also achieve environmental CAS. objectives, including equitable land distribu- I. Malakhov, International Charitable tion and incentives for ownership reform, Andriy lgnatov, graduate student, Iowa Fund Research Center for Social public hearings should be organized across State University Policy, Kyiv the country. To prevent corruption and ensure transparency and awareness of citizens, the The World Bank's operations are not suf- The CAS ignores judicial system reform World Bank, together with other donors and ficiently transparent to the Ukrainian pub- in Ukraine. The structure of judicial bod- the government of Ukraine, should see that lic, although the government is using the ies was established in 1939, at the height all foreign loans and grants are deposited money of Ukrainian taxpayers, who have of the Stalinist terror, and has not changed underthe relevant central and local budget the right to know the details. Some gen- since then. It may well be that World Bank headings, so that the public can monitor use eral information about the Bank's projects resources will be lost because of lack of of these funds. The World Bank should not is available on the Bank's Web site, but it civilized justice. One can create as many provide any money to the government un- is not detailed enough. It should be ex- laws as possible and allocate funds in sup- less the government specifies how the pub- panded to include progress reports about port of the most progressive projects, but lic can be involved in project evaluation. specific projects, details of related loan the laws will never be executed and funds conditions, identification of beneficiaries will get into someone else's pocket. To T. Semyhyna, Social Policy and Social and those responsible for implementation, overcome corruption, a well-operating civi- Work Magazine and assessments of completed projects. lized judicial power must be established. In addition, the CAS lacks programs that A more detailed description of priorities The greatest value-added of the World support national science and culture, vital in restructuring social infrastructure would Bank in Ukraine would be assistance in elements of civil society. be advisable. Involvement of civil society striking a balance between the government in the social sector reform is not articu- and the private sector. Eight years after in- Semion Gluzman, President, Interna- lated, and World Bank support in this area dependence, the balance between these tional Charitable Fund Research Cen- is not specified. It is important to include sectors has not been established. There ter for Social Policy, Kyiv public education on key social policy is- is still too much government presence in sues in the list of priorities. the private sector. Areas in which the pri- This document destroys the myth- vate sector could succeed are dominated established long ago by professional Malyi Yuriy Ivanovych, Director, Tov bygovernmentagencies. demagogues of the modem Ukrainian po- Finkombudservis litical establishment-that the cruel "world A second problem is government salaries. plunderer' (the World Bank) brutally de- The CAS should be more specific about How can the government be efficient if a vours the naive Ukrainian lamb. This docu- improving the delivery of social services cabinet minister earns 1,000 hryvnias (less ment should be published and circulated in (social assistance, pension benefits, than $200) a month, a prosecutor general all regions throughout Ukraine. It should be health and education services). Nonethe- is paid close to 500 hryvnias (less than printed in the Ukrainian mass media. less, it is extremely useful that the World $100), and a professional in public service Bank is aware of the need to address hasamonthlysalaryof100hryvnias(less S. Fedorinchik, Head of Information these problems and is trying to help than $50)? With such low pay it is no won- Center, Zeleny Svit (Green World), Ukraine. der that civil servants seek rents. © 2000 The World Bank/The William Davidson Institute TRANSmON, Nov.-Dec. 2000/Jan. 2001 * Ukraine's New Country Assistance Strategy in A Nutshell The second Country Assistance Strategy document of the World Bank Group for Ukraine comes at a crucial time. The appointment of a pro-reform administration, supported by a newly established parliamentary majority, at the beginning, of 2000 opened a window of opportunity for Ukraine to reverse the weak performance of the past. But difficult challencges remain in the short term, beginning with the still uncertain picture for extemal financing. Moreover, it has become increas- ingly clear that the problems faced by Ukraine are of a long-term nature, linked to the historic lack of institutions that c an support socially and environmentally sustainable economic growth. Given these problems, to achieve sustained growth and reduce poverty, Ukraine must ensure good governance, transparency, and accountability in the public sector rid develop inclusive, market-oriented institutions. Weak Performance and Institutional Problems in Ukraine proved to be a major shortcoming. Stand-alone operations had difficulty addressing cross-sectoral institutional and gov- The period since independence has been one of great disap- ernance issues. As a result, reforms were reversed or stal ed pointment in terms of economic and social development in in some areas while Bank resources were being disbursecl in Ukraine. Growth was achieved for the first time only in 2000, and others. Weak institutional capacity in key government agen- recorded output is still 60 percent below its 1991 value. Poverty cies further hampered implementation. has increased (27 percent of Ukrainians consume 75 percent or less of median consumption) and other social indicators have The Bank's New Country Assistance Strategy also deteriorated. The Country Assistance Strategy for Ukraine for the 2001-03 These weak economic and social outcomes are due to the lack aims to help the government and civil society implement a broad- of pro-development institutions and to the still limited voice that based poverty-reduction strategy and create jobs and sustain- civil society has in influencing its own destiny. The institutional able economic growth. To do so, the strategy directly address es framework is in transition, with old (Soviet) and new rules oper- the institution-building challenges faced by Ukraine from both Ihe ating side by side. The result has been poor governance in the demand side (civil society) and the supply side (government). public and private sectors. Transaction costs are excessive be- The strategy seeks to foster environmentally sustainable devel- cause of anti-competitive practices and corruption. Property rights opment by moving Ukraine closer to European Union standarids. are not adequately defined or protected. While government stra- tegic thinking and management have improved, weaknesses The strategy will be implemented in two key phases (see table remain. In this environment, the logical choice, for those who can, on next page). In the first phase, the low-case lending scenario, is rent-seeking, which hurts private investment. IBRD loans and nonlending activities, including IFC technical as- sistance program, of up to $461 million are extended. The loans Ukraine's own recent history, as well as international experience, have to meet two crucial tests, which the government supports. strongly suggest that in the absence of an increased voice by civil First, they must demonstrably help civil society increase its voice society and pressure for greater accountability of public officials, for better government and social service provision or provide true institutional change is unlikely to be sustained for long. Greater tangible benefits in globally sensitive areas. Second, they must involvement of civil societywill have to emerge from within, but the be sufficiently shielded from possible paralysis at the center of international community can have an important role in both sup- government so as to stand a good chance of success even Lin- porting reform efforts at the top and facilitating the emergence of der less than favorable conditions. stronger demand for good government from the bottom. Once these triggers (benchmarks) are achieved, the second phase The World Bank's strategy-as envisaged under the Country of World Bank assistance begins. Under the base-case scenario, Assistance Strategy (CAS) approved in 1996 for 1997- an additional $1.4 billion is provided in a mixture of nonlending 2000-did not materialize as expected, for several reasons. activities and adjustment lending through performance-based P -o- True government ownership was lacking, and the government grammaticAdjustment Loans (PALs) and institution-building cp- was unable to deliver-symptoms of institutional weakness erations. Moving to such a scenario requires establishment of a and political paralysis. The design of the adjustment assis- sustainable macroeconomic framework and achievement of tance, based on separate sector adjustment operations, agreed-upon benchmarks in five cross-cutting areas: financial T TANsinooN, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 discipline in the public and private sectors, an improved regula- * Improved social sustainability, through a review of special privi- tory framework for business, transparent definition and protection leges currently extending surrogate social protection and of property rights, public sector accountability and effectiveness, progress in preparing the pension reform. and mitigation of the social costs of transition and improvements in the delivery of social services. Two subsequent PAL operations would be presented to the Board (probably at one-year intervals) if the agreed-upon benchmarks The first one-tranche PALoan will be presented to the Execu- for each tranche were met and the overall pace of implementa- tive Board for approval once the benchmarks have been tion of reforms was satisfactory. achieved: The Bank's strategy envisions a major expansion of assistance * Improvement in financial discipline through elimination of to reforms in the social sectors and a withdrawal of investment in nontransparent budget offsets and a major reduction in budget areas (such as infrastructure and power) in which investment op- arrears and energy payment debts. erations have proven unable to achieve for systemic results or demonstration effects. Appropriate nonlending vehicles will be * Easier business entry and operation, confirmed through inde- substituted to conduct policy dialogue. pendent surveys. To date, the World Bank has approved 16 loans and 6 envi- * Enhanced property rights in agriculture through abolition of ronmental grants for Ukraine, amounting to more than $3 bil- kolkhozes, transparent privatization of large industrial enter- lion. The latest loan, $18.29 million for the Kyiv Public prises, and legislation enabling privatization of at least 25 per- Building Energy Efficiency Project, was approved in Janu- cent of the state telecommunications company. ary 2000. o Improved public sector accountability, through a transparent Based on the CountryAssistance Strategy Executive Summary, budget process, including a formula-based transfer system; ad- available on the Intemet, at: hftp:llwbInOO18.worldbank.org/ equate progress in public administration reform; and significant ECA/ECCII/UkraineCAS/AR/DocLib.nsf/Table+Of+Con reduction in tax exemptions. tents+Web?OpenView IBRD Tentative Lending Program-FY2001/03 (US$ million) FY01 Low Case Lending FY02 FY03 TB/AIDS 40 Private Sector Development 40 Social Sector TA 50 Coal Restructuring 100 Social Investment Fund 30 (Education/Health) Wetlands (GEF) [81 Title Registration and Distribution 100 Environmental Pollution 20 LvivWater 24 EnvironmentalTA(GEF) [15] StatisticsModernization 30 Sevastopol Heat 17 Methane Safety LIL 5 Municipal Development Loan LIL* 5 Subtotal 181 Subtotal 175 Subtotal 100 Base Case Lending Low Case lending 181 Low Case Lending 175 Low Case Lending 100 plus plus plus Programmatic Adjustment Programmatic Adjustment Programmatic Adjustment Loan (1 st loan) 250 Loan (2nd loan) 250 Loan (3rd loan) 250 TaxAdministration PublicAdministration Incentives Reform 60 Social SectorAdjustmentVAPL 100 Modernization 100 Pre-Export Guarantee Facility 100 Rural Finance/Farm Restructuring 100 [Municipal DevelopmentAPL]* [150] Total 531 Total 735 Total 550 *If base case proceeds Municipal Development Loan will become Adoptable Program Loan (APL). TA: Technical Assistance. LIL: Learning and Innovation Loan. © 2000 The World Bank/The William Davidson Institute TRANsmnoN, Nov.-Dec. 2000/Jan. 2001 * Reform Electricity Market in Transition Economies How to Avoid Traps of Deregulation by Martin Siner and Jon Stern Before 1990 infrastructure industries in the communist countries of Central and Eastem Europe and the Soviet Union operated as state-owned monopolies, and their activities (and management) were dominated by govemment policy. Since 1990 fisca I and commercial imperatives together with the need to promote economic efficiency have resulted in the structural reform of many of these industries. This restructuring has typically involved commercialization (separating govemment policy from the corimer- cial management of companies, often culminating in privatization); legal and regulatory reforms (separating govemment r;olicy and company management from economic regulation); and liberalization (unbundling of potentially competitive activities, such as the generation of electricity and its supply to customers). In this process, these countries have followed trends in Western Europe. However, the pace of implementation of these reforms has been much slower than expected. Following the collapse of communist re- Major Obstacles to Cost Recovery 1989 and 1998 total residential consump- gimes in the late 1980s, GDP in Central tion increased 8 percent in Polard, 20 and Eastern Europe and the Common- A striking feature of these electricity mar- percent in Slovenia, 56 percent in the Slo- wealth of Independent States (CIS) fell rap- kets over the past decade has been the vak Republic, and 84 percent in Romania. idly. In Central and Eastern Europe the change in the demand mix. The fall in in- economies were able to recover (or nearly dustrial output (particularly heavy industry) The changing demand mix has sign ficant recover): by 1999 real GDP in Poland was exceeded the fall in GDP. The decline re- implications for the industry and its reform. higher than it was in 1989; in Central and duced both the absolute and relative level The relative increase in residential demand Eastern Europe (including the Baltic of demand forelectricity by industry. In con- increases peak-load demand (during the States) GDP was more than 95 percent of trast, residential demand rose. Between evening and the winter, for examp e). In the 1989 level. In contrast, in the CIS the some countries (the Czech Republic, br ex- level of GDP in 1999 was only slightly more Table 1. Annual Growth of Electricity ample), winter peak demand is nows sig- than 50 percent of the 1989 level. Production, 1989-98 nificantly higher than it was before 1990. (percent) This changing demand profile for electric- Demand for Electricity and Economic 1989-93 1993-981989-98 ity creates problems. Most generating ca- Growth pacity in these countries has been des igned Central Europe to run continuously rather than to meet There is a close relation between changes Czech Rep. -2.5 1.9 -0. 1 peaks in demand. Running base-load in GDP and electricity demand. Between Hungary 2.7 2.5 2.6 plants to meet peak demand requirerments 1989 and 1993, when output was falling, Poland -2.1 1.0 -04 is very inefficient. Satisfying peak de nand electricity sales and production levels also Slovak Rep. -0.7 1.5 0.5 requires costly arrangements, such *3s im- fell, albeit by much less than GDP. The fall Slovenia -1.9 3.3 0.9 porting electricity or new investment ir peak in electricity output was largest in countries Southeastern Europe load plants. that experienced the largest declines in Bulgaria -4.3 2.2 -0.7 GDP (the Baltic states and the CIS). Romania -7.5 0.7 -3.8 The shift away from industrial toward resi- Baltic states dential demand also has significant inan- With the revival of economic growth in Cen- Estonia -15.2 -1.3 -7.7 cial implications. In most countries n the tral and Eastern Europe in the mid- to late Latvia -9.3 7.9 -0.1 region the average price paid by reE iden- 1990s, electricity production also in- Lithuania -16.6 4.0 -5.7 tial consumers is still below the average creased (table 1). Electricity production CIS price paid by industry; elsewhere it i! only grew at about 2 percent a year in Bulgaria, Russian Fed -2.9 -2.9 -2.9 slightly higher. In OECD countries, wiere the Czech Republic, and Hungary between Ukraine -6.1 5.5 -5.8 prices reflect the relative costs of supply, 1993 and 1997. In contrast, in the CIS, in Kazakhstan -3.6 -8.7 -6.5 average household electricity prices are which GDP continued to decline, there Source: IEA Energy Statistics of OECD about twice the level paid by industry. In- was a continuing-and in some cases Countries and Energy Statistics of Non- dustrial electricity consumers in Central sharp-decline in electricity production. OECD Countries. and Eastern Europe-and particularly the a TRANSmON, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute @ 2000 CIS-are thus effectively cross-subsidizing As electricity companies do not have good accession, including the 1996 EU Electric- residential consumers. prospects of recovering their costs and ity Directive, progress has not been rapid earning a reasonable rate of retum, new in- even there. Some impediments to reform The reduction in industrial demand will cre- vestment is an unattractive proposition, par- include the following: ate a financial shortfall unless residential ticularlyto private investors, whether local or a Regulators are not independently set- prices are increased to compensate for foreign. Overall, with significant excess ca- ting electricity prices. Urzad Regulacji the decline. In all transition economies pacity in both generation and transmission, Energetyki, the regulator in Poland, has household utility rates are low in absolute the lack of investment could become a prob- to approve prices proposed by electric- terms; in most of these countries the lem onlyinthemediumtolong run. Butsome ity companies. Although it has recently household price is 50 percent or less of areas require immediate investment. These exercised its power over retail tariffs by the OECD average (figure 1). As a con- include expanding generating capacity, es- rejecting the price proposals of 30 of the sequence, residential demand is higher peciallyforpeakconsumption; ensuring the 33 power distributors, questions remain than it would be if prices were higher, ex- safe and reliable operation of plants in Bul- over how independent it is of the govern- acerbating the revenue shortfall of the util- gara, Romania, and the CIS, where consid- ment. In Hungary the energy regulator is ity companies. erable investment is required to maintain formally independent of the government, plants in operation; and reducing detrimen- but it is not responsible for setting tariffs Nonpayment of bills represents another tal environmental impacts by reducing the and the government has continued to hold serious problem. In 1997 total collection use of coal-fired powerstations and upgrad- down prices, particularly retail prices. rates were just 50 percent in the Russian ing or decommissioning some major nuclear * Generation markets remain highly under- Federation and Kazakhstan, 80 percent plants, such as Chernobyl in Ukraine and developed. In July2000 Poland became the in Ukraine, and 85 percent in Bulgaria Koziodui in Bulgaria, forexample. first Eastern European countryto establish and Lithuania. In contrast, in the Czech a power exchange. (Gielda Energii currently Republic, Estonia, Latvia, Romania, the Impediments to Reform Remain operatesaday-aheadmarket,withplansfor Slovak Republic, and Slovenia overall an hour-ahead and futures markets). Al- collection rates were at least 95 percent. Not surprisingly, reform has proceeded most though this market has shown steady grovth, Noncollection is primarily an industrial rapidly in the more developed Central Euro- in September 2000 it accounted for only consumer problem, causing it to have a pean economies, particularly Hungary and 0.75 percent of the electricity consumed in disproportionately large impact on elec- Poland. But despite the importance to these Poland, with the vast majority of trade oc- tricity suppliers' revenues. countries of meeting requirements for EU curring through long-term power purchase agreements. In Hungary a regulated pricing system has been proposed to replace long- term power purchase agreements, but its Figure 1. Household Electricity Prices in Central and Eastern Europe and the structure has been strongly criticized by for- CIS, 1997 eign investors as strengthening the state- owned grid and generator company rather 12 OECD average household price than promoting competition. * Most industrial consumers are still unable 10_ to purchase electricityfrom sources otherthan 3: 8- the local distribution companies. Some 200 &_ large users (with annual consumption of more QL 6 S I Ithan 40 GWh) are able to choose their sup- pliers in Poland, but contract prices are regu- 4 lated. In none of the states that are candidates urc for EU membership can industrial customers 2 ~~~~~~~~~~~~~~~~~~~~~~~choose their electricity supplier, although both 0- ~~~~~~~~~~~~~~~~~~~Hungary and the Czech Republic are work- ing on new electricity laws that would allow 4 ~ ~ ~ ~ ~ ~ ~ ~~~~ ~~~consumer choice before 2005. C> ~~~~~~~~~~~~~~~~~~~~The limited progress in reform achieved so Source: EBRD Transition Report 2000. far is shown in the lack of competition, low levels of private sector investment and, in © 2000 The World Bank/The William Davidson Institute TRANSITION, Nov.-Dec. 2000/Jan. 2001 * some Central and Eastern European coun- readjustment would be that it would provide ample, finally passed its long-awaited energy tries, difficulties in privatization (at least at much strongerincentivesforenergyefFiciency, law in August 1999. This act anticipates acceptable sales prices). In contrast, in tele- which is very low in these countries. opening up the market in line with the EU communications, private companies have directive, unbundling the national p-wer made significant new investments, and Progress toward electricity industry reform monopoly's core activities, and eliminating privatization has proceeded relatively in the region has been affected by the cross-subsidies and raising tariffs to in- smoothly, at good sales prices. progress of general economic reform. Given crease to cover costs. In the Czech RE pub- the amount of legislation passed in the early lic residential prices are expected to nave The key difference is that consumer de- 1990s, it was difficult to find the time and exceeded industrial prices by 2002 'with mand for telecommunications services- resources to develop and adoptthe neces- proposed household price increases If 14 both for betterexisting services and for new sary laws in the power sector. Moreover, a percent in 2001, and 13 percent in 2002). services-has increased dramatically. Re- limited legacy of well-defined and credible Progress in these countries is being helped tail and particularly business consumers, political institutions created uncertainty, along byan increasingfamiliaritywith demo- among whom demand for high-value tele- which hindered regulatoryeffectiveness. This cratic institutions and procedures, which is communications services is growing rap- problem persists, particularly in the CIS. A reducing legal and commercial uncertainty. idly, are willi ,g to pay economic prices for related problem, particularly in the smaller In contrast, reform in the CIS is lagging be- telecommunications services. As a result, Central and Eastem European countries and hind. There has been little readjustmE nt of investors have the potential to earn an ad- the poorer CIS countries, is the lack of tariffs, collection rates remain low, and po- equate return on their investment. This con- people with the required skills to design, litical interference is prevalent. In Ukraine, for trasts sharply with electricity, where price implement, and run regulatory institutions. example, basic reforms to create a corr peti- structures fail to allow a reasonable rate of tive market were initiated, but the govern- return on capital. Prospects for Reform mentand Parliamentwantto maintain control of power generation and distribution. As in To set free the liberalization process, the A clear divide has emerged between the many other areas of reform in the transition simplesolutionwouldbetoreadjusttariffsby Central and Eastern European countries economies, much remains to be done to increasing prices to residential consumers (including the Baltic States) and the CIS- create well-functioning electricity markets. and removing cross-subsidies between in- a divide that could well grow. In Central and dustrial and residential consumers. However, Eastern Europe the prospect of joining the Martin Siner (martin.sinerenera.com) s an the political difficulties associated with read- EU has created new incentives to pursue analyst andJon Stem (jon.stem@nera.com) justing tariffs remain significant, impeding re- liberalization measures that comply with the a senior adviser at National Economic Re- form (see box).Apositive byproduct of price EU Electricity Directive. Bulgaria, for ex- search Associates, in London. People's Power-Energy to the Poor In countries with well-developed electricity distribution networks, household tariff in order to recoup the revenue lost on the life- a key issue is ensuring that the neediest (the elderly, the sick, line rate. the disabled) can afford a basic level of services. There are a number of ways this can be achieved: * Addressing energy povertythrough a cross-subsidyfrom indiuis- trial consumers (as is currently done) is grossly inefficient, with * The best solution is to price electricity services at commer- most of the benefit going to middle- and upper-income consum- cial rates and provide assistance to low-income groups through ers. This approach is also unsustainable if industry can choose its social assistance programs, such as pensions, benefits to low- supplier (as is required under the EU Electricity Directive 96192). income families with children, and so forth. However, such an approach requires sophisticated management and delivery The difficulty in Central and Eastern Europe and the CIS is that, systems for social benefits. for understandable reasons, governments have been unable or unwilling to raise household electricity prices. Policymakers * The next best solution is to introduce a "lifeline" rate by re- are reluctant to raise rates because real income levels have ducing the price of electricity for the first 50-100 kWh per remained low and have not grown as fast as was hoped in 199!0. month to all households. The lifeline rate would help cover most Moreover, similar relative price increases are needed for houis- essential electricity needs. If cross-subsidies are avoided (as ing, public transport, water and sewerage, health, and other they should be), subsequent units of electricity have to be basic goods, and it is not possible to sharply increase the prices priced slightly higher than the standard cost-based average of all of these services simultaneously. E TR4NsmoN, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 The Tale of Two US States: California and Texas Diverge on Electricity Deregulation California and Texas have approached electricity deregulation consumers or utilities. (Many of these wholesalers are out-of-state in very different ways. To allow consumers to choose among com- suppliers, rendering this threat idle). The governor has indicated peting providers rather than buy power from the regulated mo- that he wants to carve out a larger role for state government, re- nopoly utility serving their region, Texas is on course to deregulate versing years of state deference to federal energy policies. He its electric power industry beginning in mid-2001, just as Califor- proposes to create a state power authority to construct power nia did in 1998. The Texas design, however, bears no resem- plants and overhaul the bidding system used to set prices in the blance to the complex California plan, which broke down last state's energy auction, to be controlled jointly by the state and summer in the face of power shortages and soaring wholesale more than two dozen municipal utilities. He also proposes ex- electricity prices. panding the governor's emergency powers in the event of immi- nent power outages and giving the state attorney general $4 The two largest California utilities-Pacific Gas and Electric Co. million to investigate and prosecute cases of market manipula- (PG&E) and Southern California Edison Co., which together tion. He proposes making withholding electricity by generating serve about 25 million people-have been stung by a fivefold companies a criminal act punishable by a prison term. increase in wholesale prices since June. The two companies have spent an estimated $11 billion more on wholesale power Davis has also called for cutting the red tape that has kept new than they were allowed to charge customers under California's power plants from being built and for committing public lands to two-year-old deregulation plan. The Southern California Edison that purpose "on the condition that energy be distributed solely in (SoCal Edison) utility can charge customers only $64 per mega- Califomia." (Implementing such a condition would be difficult given watt hour for power delivered-far lower than the current spot- that the state's electric grid is interconnected with 10 other states, market price of $307. Canada, and Mexico. Interstate commerce law forbids the state from preventing companies from selling to other state markets. The utilities have tapped out their credit lines. In early January Indeed, without such a practice, California might be in even worse SoCal Edison announced 1,450 layoffs over the next several shape, since the state is a net importer of electricity.) months to conserve what is left of its cash. PG&E and SoCal Edison say they face insolvency if they cannot obtain more cash Davis has pledged to set aside $1 billion in the 2001-02 state soon. Two credit-rating agencies cut their ratings to one step budget to stabilize the supply and price of electricity and provide above noninvestment grade junk) status. The stock prices of the new power generation. The program would include providing low- two widely held companies have plummeted in recent weeks. interest loans for insulation and other weatherization efforts, dou- No new plants have been built in California in the past 12 years bling the state's $50 million effort to provide money to businesses (although five new power plants are under construction). Strin- that invest in equipment that allows them to decrease consump- gent environmental regulations make it too costly for private utili- tion when demand is high and energy even more expensive, re- ties to consider investment. vising the state's energy efficiency standards for appliances and buildings, and providing cash incentives for consumers. Under Texas's plan, electricity rates can go up twice a year to reflect higher costs for producing power, including higher gas costs. The Based on reports from the Washington Post and Wall Street state is awash in power plants, and more are being built. Twenty- Journal two new gas-fired generating plants have come on line since 1995, and 15 are under construction, with completion scheduled by the Darkness at Noon: Outcome of the Wrong Deregulation end of 2002. To speed plant construction, Texas cut away many of the regulations that had restricted plant location. If a plant meets state air-quality regulations-as modern gas-fired power plants do-it can be built. The new supply will ensure price competition. California's Governor Gray Davis has called the state's power system deregulation "a dangerous and colossal failure" and threatened to seize the generator plants of wholesalers who cheat Source: Transition Newsletter © 2000 The World Bank/The William Davidson Institute TRNrnsmoN, Nov.-Dec. 2000/Jan. 2001 m China's Infrastructure Needs Great Leap Forward by Chi Fulin If China is to maintain dynamic growth, the nonstate sector (including both private businesses and township and village e,iter- prises) will have to play a major role in the reform and development of the country's public utilities and infrastructure. As China opens up and allows foreign capital to invest in public utilities and infrastructure, more opportunities must be created for dotries- tic nonstate firms to enter the sector. Those enterprises will be ready to invest in the sector, however, only if the state abandon.s its administrative control and gives up its monopoly in this sector. Once the proper incentives are created, by private owners. The government's * Enterprises that cannot be transfor'ned domestic private enterprises could be- scope of activities, regulations, and as a whole should be broken into sepa- come the principal investors, major mar- functions should fundamentally change rate units and transformed into public com- ket players, and cooperating partners of from direct control and administration panies on a piecemeal basis. foreign companies in infra- to monitoring. structure, including public * National bonds should be issued to finance utilities, transportation, and Enterprise reform is im- shareholding-oriented reform in public ut libes telecommunications. These .= perative, especially in the and infrastructure. Individual savings in China incentives could include long- telecommunications, civil total about6 trillion renminbi (about$720 bil- term low-interest loans, tax aviation, railway, and power lion)inbanks-anenormousinvestmertpo- benefits, and permission to industries. Hainan Airlines tential, even if only part of this money is issue long-term construction provides compelling evi- reallocatedthroughthebanksandtheccpital bonds. dence for the need for this markettoinfrastructuredevelopment. change. In 1991, when the In Wenzhou, Taizhou, and some airline was founded, the Policy measures to promote the role of the other regions in Zhejiang prov- government invested a mere nonstate sector in the reform and devel- ince, private enterprises have been major 10 million renminbi in the company. After opment of public utilities and infrastructure players in modernizing infrastructure. its transformation into a joint-stock com- should include the breaking up of monopo- There and elsewhere, experience shows pany, the company's equity increased to lies to protect competition. In sectors in that as long as firms are fully owned by 200 million renminbi. Today its total as- which strong monopolies exists, F rice or dominated by the state, there is no set value is about 6 billion renminbi. The regulation should be strengthened to rriain- way to engage them in market competi- airline has undergone rapid development tain market order and protect the rights and tion, the driving force of development. and become an engine for economic interests of consumers. Principal investors thus should be enter- growth. prises, not the state. Ownership should A proactive fiscal policy should also pro- be separated from management. Once What should be the agenda for enterprise vide increasing support to private in% est- the relative weight of nonstate invest- reform in infrastructure? ment while reducing the government's ment increases, conditions for a level direct involvement in the developme it of playing field can be created. The state * In industries in which the profit outlook public utilities and infrastructure. should preserve its majority only in en- is favorable (transport, telecommunica- terprises of strategic importance. tions, energy), large- scale commercial- China's government is forging ahead with ization of enterprises (transformation institutional innovations and measures that Once public utility and infrastructure into joint-stock companies) should be remove barriers to market access ol the firms are transformed into joint-stock carried out. The transformation should nonstate economy. Legislation is needed companies, private enterprises will be be gradual, in accordance with market to provide legal protection for the nons tate able to invest in the sector. The govern- development. economy. ment should refrain from imposing un- necessary administrative interference * Enterprises thatcan be transformed into Chi Fulin is executive director of the or controlling the personnel, operations, standard shareholding companies should China Institute for Reform and Develop- and finance of companies officially owned go public as soon as possible. ment (CIRD) in Haikou, Hainan Province. M TRANsrnON, Nov.-Dec. 20001Jan.2001 The World Bank/The William Davidson Institute © 2000 Battered and Cherished: The Private Sector in China The private sector is playing an increasingly important role in China's economy emerging as a major source of employment and output growth and benefiting from increasing official recognition. Prior to 1979 the private sector was virtually nonexistent, re- stricted bypolicies that discouraged capitalist activities on ideological grounds. When the Communist Party seizedpowerin 1949, it initially tolerated free enterprise. However, in 1952 the party began a series of anti-capitalist campaigns to undermine entrepreneurs, many of whom were condemned as "countenrevolutionaries." By 1956 private firms were required to be jointly owned and run by the state; in practice, the state controlled and administered the businesses. The party next sought to exert control over China's 29 million full-time handicraft producers-in effect, self-employed entrepreneurs-by requiring them to form cooperatives. Similar policies during the late 1950s led to the collectivization of farming and the abolition of private plots. During the Cultural Revolution (1966-76), private enterprise became unacceptable. A n objective of former leader Deng The Nonstate and Private Sectors gross industrial output in 1978, this share Xiaoping in the initial stages of fell to 26.5 percent in 1998. The nonstate /A reform was to revive individual The nonstate sector in Chinese government sector overtook the state sector in indus- businesses as part of efforts to promote statistics consists of township and village trial output in 1995, accounting for 57.3 growth. While private enterprises reap- enterprises, urban collectives, foreign- percent of total industrial output, rising to peared during the early 1980s, thestigma funded enterprises, and privately owned 73.5 percent in 1998. The nonstate sector of capitalism discouraged many individu- Chinese firms and small-scale entrepre- is most involved in the consumer goods als from starting businesses. neurs. The private sector is generally clas- and export sectors, while the state sector sified as consisting of domestic private dominates heavy and extractive industries, Despite an improved political climate in enterprises and entrepreneurs (including such as iron and steel, coal, and petroleum the early to mid-1980s, the private self-employed individuals but excluding extractionandrefining,aswellasutilities, economy lacked a defined legal posi- farmers). However, other nonstate catego- banking, and transportation. tion. However, in April 1988 the National ries might be classified broadly as part People's Congress adopted a constitu- of the private economy. Many urban col- Private Sector Absorbs Unemployed tional amendment recognizing the legal- lectives and township and village enter- ity of individually owned economic prises, although they are usually owned According to official data, the private entities. It stated that they were a and controlled by local governments, sector's share of industrial output rose ..complement" to the socialist public could be deemed private enterprises: they from 1.9 percent in 1985 to 5.4 percent in economy and would operate according are generally run like private firms, oper- 1990 and about 16.0 percent in 1998. The to state guidance, supervision, and ad- ating according to market principles. For- number employed in the private sector (pri- ministrative regulation. eign-funded enterprises could also fall vate firms or self-employed) rose from 4.5 under the private sector category, since the million in 1985 to an estimated 81.3 mil- The growth of the private sector was fur- parent company usually is a private busi- lion in 1999. Most private enterprises are ther encouraged after Deng's southern ness. Finally, many private companies pre- small firms involved in production and ser- tour of China in 1992, in which he pro- fer to register as township and village vices that are related closely to daily liveli- claimed the government's commitment enterprises or state-owned enterprises hood, such as light industry, manual trades, to deepening reforms and opening up to simply to avoid harassment and interfer- transport, construction, commerce, food the outside world. In 1993 the Constitu- ence from government officials. services, and repair industries. While tion was amended to indicate that the some large private firms exist (there are government's goal was to establish a Several studies indicate that nonstate 40 private firms with capital of more than "socialist market economy" and that the firms are largely responsible for the rapid $12 million), the average enterprise in private sector was a complement to it. economic growth enjoyed since 1979, 1998 had a registered capital of about This represented official recognition that while the role of the state in industrial pro- $60,000 and employed 14 people. the market system was not incompatible duction has diminished markedly. It is with socialism. The Constitution was fur- largely because state-owned enterprises The growth of the private sector has to a ther amended in 1999 to state that the pri- are less efficient and competitive than their large extent arisen from the government's vate sector was an "important component nonstate counterparts. While state-owned efforts to reform and restructure state- of China's socialist market economy." enterprises accounted for 77.6 percent of owned enterprises. At the Communist © 2000 The World BanklThe William Davidson Institute TRsNSmON, Nov.-Dec. 2000/Jan. 2001 * Party's Fifteenth National Party Congress lead to short-term disruptions in many in- rights (the right to import and export in 1997, President Jiang Zemin stated that dustries. As a result, the government has goods), create guidelines to facilitate the government planned to end support to taken steps to promote the expansion of borrowing from state banks by private and privatizethe 307,000 state-owned en- the private sector to help deal with ex- firms, permit the establishment of four terprises and keep under state control, pected layoffs resuiting from increased private banks, and lower the minimum changing into globally competitive enter- foreign competition. capital needed to start a private busi- prises, about a 1,000 "flagship" enterprises. ness. In January 2000 the government Thegovernmentisawarethatitmustgive pledged to scrap all obstacles to the Employmentbystate-owned enterprises has domestic firms the same trade and in- development of the private sector, except fallen from a peak of 112.6 million in 1996 to vestment opportunities that are afforded in areas relating to national security and an estimated 81.2 million in 1999. Workers to foreign firms and investors under WTO certain state monopolies. who have been laid off from state-owned commitments; otherwise, Chinese firms enterprises have been encouraged by the will be at a distinct disadvantage. It has Excerpted form Oxford Analytica, the government to find jobs in the private sector therefore enacted laws and regulations Oxford-based international research andstartbusinesses.ln1999anaverageof that would give private firms trading group. 4,000 laid-off state-owned enterprise work- ers a day are estimated to have re-entered the workforce in the private sector. The Thinker To date, the government has adopted a largely pragmatic approach to the private I sector, although private firms are still barred from a variety of industries and ' services, unable to compete directly with state-owned enterprises. They often find it difficult to obtain bank loans, owing to policies that require state banks to give / preferential treatment to state-owned en- terprises (in 1996 state-owned enterprises absorbed 87 percent of total state bank loans). Entrepreneurs must seek financing elsewhere and at higher cost. Only a hand- J ci ful of private firms has been allowed to raise funds in the stock and bond markets. ___ - Legal vacuums in the areas of property K rights, legitimate business practices, and A other basic features of a market economy 0 have given officials huge discriminatory powers. Private firms must rely on connec- tions (guanxi) with government officials to obtain licenses, bank loans, and raw mate- rials. Even so, central and local govemment officials tend to give special treatment to enterprises they own or control and are of- . ten unwilling to establish business relations with private entrepreneurs. New Situation: WTO Membership Officials recognize that WTO membership __ will benefit China in the long run but could From the Hungarian Daily Magyar Hirlap C TRANSITION, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 Kosovo's Albanian Diaspora: Blessing or Curse on the Economy? By Barbara Balaj T he 1999 conflict in Yugoslavia Albanian community numbers 350,000- Asecond wave-mostly of better-educated badly hurt Kosovo's economy. 400,000. Some 740,000 people from the and skilled KosovarAlbanians from urban Much of Kosovo's housing stock, former Yugoslavia live in Germany, mak- areas, including young men seeking to agriculture, and infrastructure-most of it ing them the second largest foreign group avoid military service in the Yugoslav army in western Kosovo-was destroyed or afterthe Turkish community. In Switzerland during the Balkan wars-left Kosovo dur- severely damaged in the conflict. As a re- the 160,000 Kosovar Albanians are the ing the 1980s and early 1990s. If repatri- sult, industrial and agricultural output de- second largest foreign group after Italian ated, they would also bring new skills, clined precipitously. nationals. Repatriation of these emigrants knowledge of foreign languages, business will have a significant impact on Kosovo. practices, and investment capital. (In ad- Kosovo's economy was weak even be- dition, this group has a more modern men- fore the conflict, as a result of decades Waves of Emigration tality than the first group, oriented toward of economic backwardness, neglect, the "new economy.") Many of these people and misguided and exploitative eco- Three distinct migration waves of Kosovar would like to set up homes and businesses nomic investments and programs. Per Albanians moved to Germany and Swit- both in Kosovo and abroad. Theirchildren, capita GNP in 1995 was estimated at zerland. if they also return, would provide a new in- $400, long the lowest in Europe. En- fusion of well-educated and trained human demic and chronic unemployment has The first wave-mostly unskilled, poorly capital. been a serious problem. educated people from rural Kosovo-left Kosovo in the late 1960s and early 1970s. The third wave of asylum seekers and refu- During the hostilities 800,000 Kosovars If these emigrants returned to Kosovo, they gees fled Kosovo in dire circumstances (out of a total population of 2.2 million) fled could bring new skills, knowledge of for- during the 1998-99 conflict; many have no to other parts of Kosovo, neighboring eign languages, and investment capital homes or jobs to which to return. These countries, and Western Europe. They with which to establish businesses and emigrants may nevertheless have ac- added to the already large Kosovar create jobs. Some would split their time quired useful skills and training abroad, as diaspora, about 70 percent of which (some and resources between the host country well as financial and material resources 750,000-800,000 people) live in Germany and Kosovo by establishing homes and in- from government programs sponsored and Switzerland. In Germany the Kosovar vesting in businesses in both places. and financed by their European hosts. World Bank Assistance to Kosovo The World Bank created a special trustfund for Kosovo, towhich and recovery program, estimated at $2.3 billion for four to five it allocated more than $60 million in 1999-2001. Some of these years. Two donor conferences have produced $1.4 billion in funds went to the EconomicAssistance Grant for budgetary sup- pledges to date. port ($5 million), the Education and Health Project ($4.4 mil- lion), the Emergency Farm Reconstruction Project ($10.6 The Bank has worked closely with the IMF and the United million), the Urgent Road Project ($5 million), the Community Nations Mission in Kosovo (UNMIK) in providing economic DevelopmentFund($6millionintandemwithotherdonors)and policy advice in such areas as economic and fiscal man- recurrent cost support for the health and education sectors ($1 agement, banking, commerce, and private sector develop- million) (both through the Post-Conflict Trust Fund), Pilot Credit ment. Line for small and medium enterprises ($4.5 million), and the Water Supply Project ($4.6 million). In addition, a social assessment-including a chapter on the Kosovo Albanian diaspora, from which this article was drawn- The European Commission and the Bank are jointly leading has been conducted to identify key institutional and social is- the resource mobilization effort for the Kosovo reconstruction sues relevant to future development in Kosovo. © 2000 The World Bank/The William Davidson Institute TRANSIT1ON, Nov.-Dec. 2000/Jan. 2001 * Many of these emigrants were traumatized F the Trnsi wd by the conflict; received inadequate educa- From th T a ii on rchve tion; and suffered unemployment, separation . i from family members, discrimination, and Wandering the Past Part II: 1992 poor living conditions abroad. Some young men in this group have gotten involved in criminal activities. Repatriating young men We continue our recollection of the past decade. In 1992 the newly independent states from this group will present a special chal- (many of which had been independent long before the Soviet Union was born) were lenge that will require new programs. taking their first steps as sovereign nations. All but the Russian Federation said gc od- bye to the ruble and created theirown new currencies. But most transition economies Effect of Influx of Returning Emigrants sank into recession. Calls for a new Marshall Plan fell on deaf ears in the VW/est. Instead, the multilateral financial institutions offered some grants but mostly loans Host European governments have provided against promises of early reforms. The trinity of stabilization, liberalization, 9nd incentive programs for Kosovars to return privatization enjoyed wide support among policymakers, although debates flared over to Yugoslavia, with the highest incentives a variety of issues (big bang versus incrementalism, mass privatization versus iidi- paid to those who return home the soon- vidual sales to strategic investors). The public was still hoping-in vain-that the est. Germany required 60,000 KosovarAl- recession cycle would come to a swift end and that they would enjoy Western wages banians to return to Kosovo in March 2000; and Eastern social benefits. another 180,000 are expected to return in the near future. Some 18,500 Kosovars George Soros Urges Action in the Ex- Russian Revolution of 1917 provi les returned to Kosovo from Switzerland in USSR (January 1992) some indication: industrial productioi in 1999; another 65,000 were required to re- 1917 had already fallen to 25 percert of turn last year. These returnees are likely to We are now in the climatic stage of the its level in 1913, and by 1921 it had fallen put further strains on Kosovo's already tight revolution. In some ways it resembles the to 16 percent. housing and jobs markets as well as on climax in Eastern Europe in 1989. But educational, health, and other public ser- there is one major difference: in the case Whatcan the international communityco in vices. of Eastern Europe the climax marked the the face of this seemingly inexorable de- beginning of a new era. When the com- scent into chaos? The key is to help bring a Kosovar emigrants play a key role in the munist system was swept away, the foun- functioning monetary system into existence. economic, social, and political develop- dations of an alternative system were There can be no market economy without ment of Kosovo. Remittances from the already present. There were nations with money; money is primarily a question of diaspora have contributed to the very sur- long histories; there was a more or less credibility, and in today's conditions it is vival of people in Kosovo, almost 80 per- well-organized opposition and a general impossible to establish a monetary system cent of whom receive monthly remittances desire to become part of the modern world. that would enjoy the confidence of the between $250-$500. Together with donor people without Western involvement. In the assistance and domestic savings, these Not so in the Soviet Union. The founda- midstof decayand disintegration, there are remittances have played a major role in tions for an alternative system of organi- some forces at work on integration. They the recovery of Kosovo's economy. A re- zation are missing. We are at a loss even need to be reinforced. I realize that the pri- cent survey estimated that these remit- to describe the territory we are talking vatesectorcannotdomuchaboutmonetary tances provided 45 percent of Kosovo's about. It will take a long time and a great reform, butthe government can. annual domestic revenues-up from 25 deal of effort to transform the republics into percent before the war. Remittances from independent states with well-functioning Coupon Privatization in Czechoslc,va- both Germany and Switzerland are ex- administrations. The same applies to the kia (January 1992) pected to decline as more Kosovars are state-owned enterprises that make up the repatriated, with adverse consequences bulk of the economy. In these circum- Registration in Czechoslovakia for its for the social welfare of many families in stances, the collapse of the Soviet system voucher-based large-scale privatization Kosovo. is unlikely to give birth to a new system. It scheme was due to close on January 31, is more likely that one revolutionary climax but officials have extended the deadline. Barbara Balaj is a consultant to the Envi- will be followed by another until the very For the past two months, citizens have ronmentally and Socially Sustainable foundations of civilization will be de- been buying voucher booklets at 35 Development Sector Unit (ECSSD) of the stroyed. How far the process of destruc- crowns each, paying a registration fee of World Bank, ECA region. tion can go is anybody's guess. But the 1,000 crowns ($35), a little more than the [a TrANsmoN, Nov.-Dec. 20001Jan.2001 The World Bank/The William Davidson Institute © 2000 weekly average wage. Later the coupons est economic challenges in history. How- countries. Furthermore, the task of income can be exchanged for shares in state com- ever, it's different from most economic re- redistribution is particularly difficult, be- panies, representing about 40 percent of form challenges. The Soviet Union, a cause a great percentage of the poor live the economy. staggering economic underachiever, is not in rural areas that are hard to reach. This lacking in resources. That region is the argues for retaining simple and reason- So far 271 investment funds have been number one owner of natural resources. ably efficient support schemes that are al- registered. These funds will be able to bid Petroleum reserves rival those in the Per- ready in place (such as family allowances). for firms where direct voucher bids sian Gulf. It has terrific technological re- Targeting should be done by identifying the amount to less than the book value. The sources; it is third in the world's stock of needy by certain easily verifiable charac- funds may also solicit vouchers from citi- scientists and engineering. The USSR has teristics (for example, unwed mothers, chil- zens and invest them on citizens' behalf. devoted as many resources to research dren under a certain age, the aged); Several funds are aggressively advertis- and development as the United States or complicated means-testing programs ing to attract investors. For example, the Japan. What ultimately led to the current should be avoided. (Branko Milanovic) Harvard Capital and Consulting Fund is collapse-the fall of output to the present running advertisements guaranteeing in- level-was that incentives were spectacu- Public Enterprise Restructuring: The vestors a tenfold return on their 1,000 larly misaligned for such a long time. Achilles' Heel of the Reform Process crown voucher. (March 1992) The World of Welfare Socialism and After the Soviet Break-Up: Chaos with the Transition to Capitalism (March The presence of a large number of firms Signals of Hope-Lessons from a Col- 1992) that are nonviable under competitive con- loquium (February 1992) ditions, considerably complicates the re- We can expect poverty to increase in coun- form strategy, as full implementation of The present situation in the former Soviet tries in transition and to become quite per- liberalization and stabilization could gen- Union is marked by chaos and extremefra- vasive in the Balkan countries and the erate a level of enterprise bankruptcy and gility-in the words of George Soros, the former Soviet Union. Limited administra- unemployment that no government could situation is "not just grim but potentially cata- tive capacity could prove to be the most survive. The depressed level of demand clysmic." On the economic front, output is serious bottleneck, as meritocratic bu- could undermine even the healthier enter- falling rapidly across the region, with no im- reaucracy has little recent tradition in these prises and cut into fiscal revenues. A vi- mediate end in sight. Interrepublican trade is threatened with collapse, with potentially catastrophic effects on the economy of the region. On the political front, a variety of per- Cr sonalities-theformerCommunistParty,the FOR I muIW'% military, national minority groups-are f fRo M ES r emerging in Russia to challenge President Boris Yeltsin. Few would have predicted a decade ago that a peaceful dissolution of the Soviet empire was possible. This is the third great transformation of the 20th century. The first two (the two world wars) resulted in 60 _ _ million deaths, but the CIS is now provid- * I ing an institutional framework for a peace- ful third transformation-a critical role even . if the CIS eventually becomes "little more i i _ than a footnote in history," in Strobe Talbott's words. (Cheryl Gray) Observations of Larry Summer (then Chief Economist of the World Bank) F.om Izvestia Make no mistake, this is one of the great- © 2000 The World Bank/The William Davidson Institute TRANsi1ON, Nov.-Dec. 2000/Jan. 2001 m cious cycle of recession and inflation could was established to administer the pro- great, it is unlikely that such broadly based be the result. In addition, private investors, gram, which provided $13.3 billion in as- proposals can be implemented in the near whether domestic or foreign, will be less sistance to Europe from 1948 to 1952. In term. The most important advice that may interested in assuming ownership of ex- 1992 dollars this is equal to approxi- be given is that, as prices are rationalized, isting firms that are insolvent or require mately $100 billion. (National Planning protectionist policies should be eschewed costly restructuring and will opt instead to Association) as much as possible. (Josef C. Brada) start new ventures, free of the legacies of the past, including liability for environmen- Haunting Spirit of the CMEA: Dilemmas Cooperation instead of Rivalry with tal damage. of Economic Integration (April 1992) the World Bank: An Interview with the EBRD's Rolf B. Westling (April 19!32) Macroeconomic policy must take account It is widely believed that the collapse of of the potential conflict between the speed Council for Mutual Economic Assistance Q. During the Budapest meeting rumors of reforms and the rapidity with which it is (CMEA) trade in 1990 and a further de- surfaced about a certain rivalry between possible to liquidate nonviable firms. clineofintraregionaltradein 1991 (when the World Bank and the EBRD. -low These considerations suggest the need it dropped by 15-40 percent in real terms) would you characterize the EBRD's rela- for more careful coordination between the led to sharply reduced economic activity tionship with the "bigger brother"? implementation of reforms at the macro in Central and Eastern Europe and the level and that at the enterprise level. Given former USSR. According to this belief, a A. Without doubt the World Bank is a ven- the relative difficulty of the latter, a pace of decline in exports led to unused capacity erable institution that has gained massive reform that is restrained only by implemen- in export industries while raw material and experience in the past decades; we are still tation capacity will not necessarily be an energy shortages in Central and Eastern in the process of building up our operatons. optimal or very sustainable approach to Europe and the unavailability of manufac- But this should not lead to rivalry. On the the transition. (Sanjay Dhar) tured inputs in the USSR produced supply contrary, it makes a lot of sense to make bottlenecks that reduced aggregate out- the most of resources through coordination Call for New $100 Billion Marshall Plan put. Many observers conclude that a re- of our efforts, especially when it comes to to the Former Soviet Republics (March vival of intraregional trade, through a cofinancing opportunities in public seclors 1992) mechanism that could substitute for the of the member states, developing infra- defunct CMEA, is needed to stimulate structure, and, particularly, participating in It is in the United States' self-interest to economic recovery in the region. But if energy, transport, telephone, and env ron- have a strong and vibrant commercial intraregional trade was, in the past, mental projects of the postcommunist presence in the former Soviet republics. uneconomically high, then efforts to pre- economies. We should not be seen as Steps taken now to establish and ensure vent its decline may be either futile or coun- competitors in the market; that is certainly growing economies in the former Soviet terproductive. not very constructive. A coordinated ap- republics will create new buyers for U.S. proach would benefit us and recipient cDun- agricultural products, manufactured The deeper integration of Poland, Hun- tries as well. Providing conflicting tech lical goods, and services.... However, the gary, and Czechoslovakia into the Euro- assistance, for example, could lead to di- United States is currently playing a very pean Community poses a number of sastrous consequences. small role in aiding and assisting the former problems despite their association Soviet republics. Only about 6 percent of agreements. Will the European Commu- Wilfried Thalwitz on the Bank's Opera- the aid and assistance to the former So- nity be willing to admit more member tions in the Former USSR (April 1992) viet republics, or under $5 billion, is cur- countries with relatively low incomes, rently coming from the United States. The thus creating greater budgetary strains What can the World Bank do? The first United States is providing less aid and on the Community? What about econo- actions of the Bank will be geared toward assistance than Italy, which has an mies with large but relatively inefficient alleviating import constraints in a eas economy approximately one 10th the size agrarian sectors and with a large pro- where we can get the quickest and arg- of that of the United States. It is useful to portion of their industry in such sectors est payoff. We hope that during the rext remember some of the features and les- as steel-sectors in which current EC 12 months we will be able to cornmit sons of the original Marshall Plan. George members face painful restructuring prob- something like $2.5 billion, about half of C. Marshall presented the general outline lems of their own? which could go to Russia, in line with the of what became known as the Marshall relative size of that country. There will be a Plan on June 5, 1947. The independent Although the temptation to engineer gen- general import rehabilitation operation for Economic Cooperation Administration eral solutions to the region's problems is Russia; when the other republics are [3 TPANSITION, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute C 2000 ready, we're prepared to implement simi- in Czechoslovakia, 73 percent in Hungary, world prices, especially for Eastern lar programs. At this stage, negotiations and 77 percent in Poland. On the other Europe's manufactures, has imposed sub- about import alleviation loans are most hand, extensive maternity and childcare stantial terms of trade losses, averaging advanced with the Baltic countries, leaves, rights to return to employment af- 4 percent of GDP for Czechoslovakia, Kyrgyzstan, and Kazakhstan, and prepa- ter leave, and enterprises' provision of Hungary, and Poland. ration has started in Ukraine and Arme- creches and kindergartens have facilitated * Macroeconomic policies. The open nia. For fiscal year 1995, which begins in the employment of women with small chil- question is whether the "big bang" policies July 1994, we hope to be able to commit dren in most Eastern European countries. were overly restrictive-whether hyperin- about $4.5-$5 billion to the successor According to an estimate for Hungary, flation could have been avoided at a lower states of the Soviet Union. The first slew mothers of small children work on average cost to output. of operations is a general import rehabili- 50 percent of the standard working hours * Enterprise behavior. Important area for tation program. We would like then to because of legal entitlements and leave more research. (Mario Blejer and Alan quickly move to a second generation of taken for children's illnesses. Gelb) operations whose structural and policy el- ements are still to be agreed on. I refer in As unemployment hits Central and East- The Russia File: Phasing in Assistance- particular to oil and agriculture. ern Europe, women may be given lower An Interview with IMF Department Di- priority than men both because employers rector John Odling-Smee A Sociologist's Perspective: Can De- tend to view women as less productive sign Capitalism Work in Central and workers and because their first responsi- Q. Recent economic surveys indicate that Eastern Europe? (May 1992) bility is perceived to be in the home. a large part of Russian industry is head- Younger women are also likely to be af- ing toward bankruptcy. The Russian Min- Should far-reaching marketization of all fected by a decline in childcare services. ister of Economy predicts an 18 percent aspects of economic life be the policy (Monica Fong and Gillian Paul) decline of GDP this year. There are al- goal in Central and Eastern Europe? ready signs that monetary and fiscal re- Surely one goal of marketization has been Persistent Economic Decline in Cen- strictions are causing pervasive poverty. to modernize production processes and tral and Eastern Europe: WhatAre the In the first six months of this year the cost improve international competitiveness in Lessons? (July-August, 1992) of living increased 10 times "by a factor these damaged economies. Yet recent of 10", while the average monthly income currents of thinking contend that in cer- More than two years have gone by since in June reached only 4,100 rubles (less tain sectors of the modern capitalist the series of political changes in Central than $30 at end-July exchange rate). economy the most competitive forms of and Eastern Europe, and hopes fora rapid Don'tyouthinkthatoverlydrasticactions coordination are neither market nor stat- transition to prosperous market econo- could throw the country's economy into a ist but new forms that we are only begin- mies have all but faded. Startling changes deep recession? ning to understand (networks, alliances, were observed in most of these countries. interfirm agreements, and the like.) A But the initial euphoria has been replaced A. The monetary and fiscal measures we policy of all-encompassing marketization by a more sober assessment of the mag- are talking about are to ensure the macro- across all sectors would therefore pose nitude of and complications entailed in the economic stabilization of Russia, which is a new obstacle to international competi- task ahead-which in turn is dwarfed by a key to further progress in the economy. tiveness. Markets are but one of many the challenge facing the ex-Soviet states. Only if enterprises feel the heat from be- coexisting coordinating mechanism in ing overmanned or in a redundant line of modern capitalism. (David Stark) Four major causes of the declines in output: business will they be willing to make ad- * Statistical overstatement. Official sta- justments. We at the Fund think that the Women's Employment in Central and tistics may not adequately capture the government should not excessively subsi- Eastern Europe: The Gender Factor growing private sector, and they can face dize enterprises or provide them with (June 1992) daunting index number problems. In addi- cheap oreasy credit. Unemployment must tion, measurements do not account for ef- come at some stage; it will be the resu It of The gap between men's and women's ficiency gains resulting from the elimination the need to close or scale back the old wages in Central and Eastern Europe is of shortages and lines. plants before new employment opportuni- not so very different from Western wage * Trade shock. CMEA trade has fallen ties have had a chance to develop. The differentials, despite the socialist ideology since 1989, mainly because of the disap- most important thing is to ensure that the of gender equality. The average compen- pearance of 85-90 percent of trade with government has an adequate social safety sation of women is 67 percent that of men the former USSR. In addition, the shift to net in place. I do not think, however, that © 2000 The World Bank/The William Davidson Institute TRANsmoN, Nov.-Dec. 2000WJan. 2001 X there is a magic solution to avoiding the labeled by the press as shock therapy, shock therapy in dealing with basic insti- pain of transition. Of course, the costs of and your name was closely associated tutional reforms (particularly privatization), adjustment should be minimized as much with it. Would you apply the same drastic which requires overhauling the legal and as possible. A key way to minimize them policy if you were given the chance to start organizational frameworks, retrair i ng is to move quickly in reforming enterprises all over again? former administrators, and recruiting new and enforcing the hard budget constraint. staff. These measures take a long time 3nd A. Yes, because we didn't have any better cause lots of uncertainty. Leszek Balcerowicz Defends the altemativesatthattime.Butlwouldbecare- Shock Therapy: An Interview with the fulaboutusingthetermr"shocktherapy'and Currency Reform in Slovenia: 1The Man behind the Polish Stabilization would distinguish between different phases Tolar Standing Tall (September 19,32) Program (September 1992) of the transition process. Each phase en- compasses different policy instruments. In spring 1991 the Slovenian governrmient Q. The Balcerowicz plan, a model for all designed an economic program to achieve subsequent postsocialist shock thera- Macroeconomic stabilization could be economic sovereignty. The main object ves pies, began in Poland on January 1, accomplished fast. Shock treatment-in of the program were to avoid the re,ur- 1990. To achieve maximum impact, dras- other words, fundamental shifts in macro- gence of hyperinflation that plagued the rest tic economic measures were introduced economic policy using such instruments as of the former Yugoslavia. On October 7, in a matter of days: a wide array of prices the exchange rate, interests rate, and bud- 1991, the parliament declared the tolar the were set free, the zloty was devalued and getary measures-could bring quick re- sole legal tender in Slovenia. During thesub- made convertible, foreign trade was lib- suits. Liberalization is not a technically sequent monetary conversion the comrier- eralized, anda tax was introduced to pre- complicated process and could also be cial banks were closed for three days. vent wage hikes. The package was accomplished rapidly. I never suggested Borders were closed to prevent illegal in- flows of Yugoslav dinars. The conversic n of dinar into tolar banknotes was largely accom- plished in the first 36 hours. All contracts and bank accounts were converted to the tolar D1 _4 0 on a one-to-one basis. Dinar cash notes An , ,1J O were converted to tolar notes, with a lirriit of $500 per person. i n > f a The Slovenian experience shows that: * It is possible to move quickly on ma-ro- economic stabilization with the help of well- conceived monetary reform. * Convertibility (at least for trade tran<;ac- tions) should be introduced at the begin- ning of monetary reform. * Technical work on conversion carn be done quickly (confirmed also by Estcnia, which benefited from a careful examina- tion of Slovenia's experience). * Trade will reorient itself to new mar(ets as soon as the economy opens sufficiently. (Boris Pleskovic and Jeffrey Sachs) - [4 = , :< The Case of National Currencies in the Former Soviet Union: Crowning the "I'm sorry to disturb you for the second time today, but I have to keep Estonian Kroon (October 1992) pace with inflation." Estonia adopted a specific monetary From the Budapest magazine The Hungarian Economy. mechanism-a currency board-designed to make the kroon a stable and convert- EX TRAsrnON, Nov.-Dec. 20001Jan.2001 The World Bank/The William Davidson Institute © 2000 ible currency from the start. The IMF tried IMF staff continued to work closely with the Q. Without doubt, Gerashenko, [head of at first to delay introduction of Estonia's Bankof Estoniathroughoutthespring and Russia's Central Bank], representsasolid currency, arguing thatthecountrywas not summer, providing assistance both in the block of economic opinion in Russia, yet ready and that the currency should be general policy area and, in particular, on which claims that even flagship indus- introduced late in 1992 or in 1993. As it all aspects of the currency reform right up tries could be crushed if they have to re- turned out, Estonian authorities decided to the date the kroon was introduced. structure production and management to proceed on their own, in view of the ur- (John Odling-Smee) and redirect sales while being exposed gency of the situation and with confidence to indiscriminate taxes, spiraling costs that the monetary reform could be carried Leading Economic Adviser to Russia due to hyperinflation, and a centrally or- out quickly and successfully. On the eve of Urges Stronger Western Involvement: chestrated credit crunch. Why not give the monetary conversion, the IMF provided An Interview with Anders Aslund (No- them at least a little breathing space some last-minute technical support and vember 1992) through carefully managed policies? followed up with negotiations for a stand- by loan after the monetary reform had Q. Let me quote from your latest paper: A. There is a legitimate case for cutting taken place. "If Russia becomes really successful, it taxes in Russia, where people complain might come to resemble the United about the excessive tax burden. Public The kroon was to be introduced at a fixed States near the end of the 19th century, expenditures amount to only one-third of exchange rate vis-a-vis the Deutsche mark that is, a Wild West economy with few GNP, which indicates the country has al- and with full backing of gold and foreign regulations but therefore limited corrup- ready moved far in the right direction. exchange reserves. The monetary conver- tion." You suggest thatprivate businesses sion was undertaken June 20-22, at a should lead Russia out of the present Q. As a foreign adviser, you take a sur- conversion rate of 10 rubles per kroon for mess. Can you really trust rent-seeking prisingly fierce attitude in defending the bank balances, wages, prices, and other businesspeople to sort out distribution economic reforms of the government. A contracts. The postconversion monetary problems and get the country moving few weeks ago at the Financial Times con- policy guarantees the convertibility of again? Will market forces be sufficient to ference in Moscow, you were rebuking kroons into Deutsche marks at the fixed reach socially optimal levels of output in Arkadi Volski, head of the Union of Indus- rate of 8:1 for all current account transac- the present Russian situation? trialists and Entrepreneurs, who felt com- tions. The Estonian monetary reform pelled to defend himself publicly against clearly points the wayforthe new states of A. I'm convinced that in Russia more your charges. the former Soviet Union. Most, or all, will government regulations lead to more mo- have their own national currencies. (Ardo nopolization, more excessive profits, and A. What Volski really suggests is that we Hansson and Jeffrey Sachs) more conspicuous consumption. The mar- learn from the Japanese and the Chinese ket is a far better equalizing force than models. But this is unrealistic. Those coun- Letter to the Editor: IMF Comment on any kind of regulation, given a very cor- tries pursued prudent monetary and fiscal Hansson and Sachs'Recent Article on rupt state administration in Russia. Ac- policies. Most had far better civil services the Estonian Kroon (November 1992) cording to opinion polls, 1 percent of and state administration than Russia has Russians are extremely rich, and I have today. I would like to comment on the references no doubt that extreme income differences to the IMF in the article "Crowning the Es- could be socially dangerous. But the way Q. As an adviser to the Russian govern- tonian Kroon" by Messrs. Sachs and to mitigate social tension and prevent ment, you have been spending one week Hansson in your October1992 issue. Spe- rent-seeking is to go ahead with liberal- a month in Moscow since November cifically, I believe that this article seriously ization and privatization and create a 1991. How do you fulfill your role as an misrepresents the role played by the IMF large middle class. My worry is that liber- adviser, and who isfundingyouractivity? in the run-up to the introduction of the kroon alization is not going far enough, while the on June 20, 1992. policymaking apparatus is disintegrating. A. I try to keep up with major current policy Therefore, I support the introduction of issues and provide advice on a general The facts are that Fund staff began seri- constitutional changes, the call for new level, while others give more technical ad- ous discussions with the Bank of Estonia parliamentary elections, and as a result, vice on specific issues. I work with a team on currency reform in January 1992 and a gathering of a new democratic assem- of 10 senior people, among them Jeffrey initiated negotiations on a stand-by ar- bly. In the meantime, the government Sachs, Davis Lipton, andAndrei Schleifer. rangement in early April. The Bank was should tighten up the macroeconomic I'm funded primarily by the Ford Founda- already keen in January on an early reform. policy as far as possible. tion and the Swedish government, and we © 2000 The World Bank/The William Davidson Institute TRNsrnoN, Nov.-Dec. 2000/Jan. 2001 s have some other sources of funding. Ba- siders" will dominate in the foreseeable fu- demand for domestic and foreign goods sically,thisisaformoftechnicalassistance ture. (Alan Gelb andl. J. Singh) and services without causing a drain on for the Russian government. foreign reserves. It could check runaway A Case for Direct Hard Currency inflation and stabilize the ruble, thus en- How to Contain Economic Inertia in the Transfers to Russia's Needy: Com- abling unimpeded domestic financing of Transition Economies (December ment on George Soros' Recent Pro- investment from private sources throLgh 1992-January 1993) posal (December 1992-January 1993) the 1,500 commercial banks already in operation and through other credit inst tu- In transition economies managers of state Recently, Mr. George Soros, an 6migre tions. enterprises are gradually liberated from from Hungary who is a businessman and central control. In these new conditions humanitarian, came up with an innovative In combination with George Soros' sug- state managers are still not motivated to idea for Western assistance to the former gestions of creating a social safety net and maximize profits. This situation will change Soviet Union. Soros proposes a massive setting up a hard currency zone within :he only if managers are subjected to effec- injection of hard currency-$10 billion a CIS, the establishment of effective priv3te tive control by financial markets through the year-to be paid out directly to the needy credit institutions could provide the basis exercise of shareholders' voting rights and in Russia and other successor states of for the economic growth of a free economy the associated threat of hostile takeovers. the defunct Soviet Union. This externally in the former Soviet Union. (Abdul G. Neither the dispersion of shares among a financed social safety net could generate Khan) large number of uninformed private share- holders nor the concentration of shares in investment funds is likely to achieve such effective control; diffused share ownership tIVU NCP will leave managers still quite comfortable l^A Slio0 / to exercise their discretionary powers. ?OM//)'/T (Domenico Mario Nuti) TO I MARWIT ECONOM% lof(v Fact-Finding Tour of Russia's Indus- f & / trial Firms: Eyewitness Report vTE -N (December 1992-January 1993) _ _ `/ Our visits suggest that reforms in Russia have left firms in an environment of enor- mous uncertainty and high perceived risks. Many firms are starting to adapt, in the face of sudden inflation and large rela- tive price shocks. Price liberalization has had some salutary effects on behavior. At the same time, local monopolies, vertical integration, and problems in the payments system slow the growth of competition. Improving the payments system is a top priority, although regularizing the settle- ment process could cause a further real decline in money holdings. There are strong forces urging integration of the enterprise and banking sectors- an understandable response in the short term but one that in the longer term could make the economy structurally vulnerable in a crisis. Ownership and control are evolving rapidly, and it looks as though "in- From the Soviet daily Pravda and the World Press Review ED TRANSITION, Nov.-Dec. 2000/Jan.2001 The World BanklThe William Davidson Institute © 2000 THE WILLIAM DAVIDSON INSTITUTE AT THE UNIVERSITY OF MICHIGAN BUSINESS SCHOOL Latest from the Davidson Institute's Publication Profiles Enterprise Break-Ups and Performance During the Transition from Plan to Market by Lubomir Lizal, Miroslav Singer, and Jan Svejnar Forthcoming in Review of Economics and Statistics, February 2001, 83 (1). An earlier version of this article appeared as WDI Working Paper 13. As countries embarked on the transition from planned to market economies in the early 1990s, the restructuring of state-owned enterprises became a major policy issue. One of the most important forms of restructuring was the massive breakup of state- owned enterprises in Czechoslovakia and to a lesser extent Hungary in the early 1990s. In Czechoslovakia many subsidiaries of state-owned enterprises applied to their supervisory ministries forpermission to break away from their "master enterprises" in the 1990-91 period. The ensuing negotiations among government officials, top managers of the state-owned enterprises, and divi- sional managers resulted in a wave of spin-offs that created a large numberof new firms led by new seniormanagement. In 1990 Czechoslovakia had about 700 industrial enterprises employing more than 25 workers; by mid-1992 the number had almost tripled, to about 2,000. This restructuring preceded other major reforms: prices were still understate control in 1990, and even in 199 1, when prices were by and large free, the state still owned the firms. Did the break-up of large state-owned enterprises improve or * Hypothesis 3: Large state-owned enterprises suffered from worsen the performance of the spun-off subsidiaries, the re- diseconomies of scale. Break-ups resulted in superior perfor- maining master enterprises, or both? The economics literature mance of both the spun-off units and the remaining master enter- on the desirability of takeovers, mergers, and break-ups of firms prises. in market economies focuses on the tradeoff between transac- * Hypothesis 4: Managers of subsidiaries benefited from becom- tions costs in markets and the internal inefficiencies within or- ing senior managers of firms, even if the performance of their unit ganizations. In the context of transition, the conceptually more and the master enterprise worsened as a result of the break-up. relevant studies focus on the bargaining among the key decisionmakers (managers, government officials, workers, new The hypotheses can be tested by examining the effects of the private owners). break-up on the master enterprise and the subsidiary (table 1). In Czechoslovakia break-ups and spin-offs were initiated by the man- Analysis and Results agement teams of master enterprises or subsidiaries. Four hypoth- eses can be posited to explain why these break-ups took place: Our empirical analysis is based on quarterly and annual data re- * Hypothesis 1: Top managers of the state-owned enterprises ported by firms to Czechoslovakia's Federal Statistical Office and spun off poorly performing divisions in order to improve the the Ministry of Finance during the 1990-92 period. The data cover performance of the (remaining) master enterprises. all industrial enterprises employing more than 25 employees. * Hypothesis 2: Managers of the di- visions (subsidiar- Table 1. Effect of Break-Up on Master Enterprise and Subsidiary ies) of state-owned Positive effect on subsidiar Negative effect on subsidiary enterprises spun Positive effect on master Hypothesis 3 Hypothesis 1 more efficient units enterprise off from the master Negative effect on master Hypothesis 2 Hypothesis 4 enterprises. enterprise © 2000 The World Bank/The William Davidson Institute TRANSITION, Nov.-Dec. 2000/Jan. 2001 3 Our econometric estimates suggest that the major wave of break- negative one for sizable break-ups. We conclude that the lack of ups of state-owned enterprises that took place in Czechoslovakia significance is likely caused by two factors: the increased com- in the early 1990s had an immediate significant effect on the effi- petition brought about by the break-ups of the large firms into ciency and profitability of industrial firms. The effect was positive competing units and the 1992 elimination of the 20 percent im- for small, medium-size, and slightly above average-size spin-offs; port surcharge (the main trade protection measure) and the dis- itwasnegativeforverylargeones.Wecannotrejectthehypoth- sipation of profit by management as central controls were esis that the estimated effect of spin-offs on performance was iden- gradually eroded. Dissipation of profits reflects hypothesis 4 and tical for the spun-off subsidiaries and the master enterprises that is consistent with recent reports of siphoning off of profits and experienced the spin-offs. Taken together, the positive short-term asset stripping ("tunneling") by managers in the Czech Reputilic, effectsonperformanceofboththemasterfirmsandthespun-off Slovakia, the Russian Federation, and other transition econo- units are consistentwith hypothesis 3 (that the large state-owned mies with weak ownership structures. enterprises suffered from inefficiencies that were rapidly overcome by the break-up into smaller units). The finding that the short-term Lubomir Lizal is professor of economics at CERGE-EI, Prague performance effect was negative forverylarge spin-offs isconsis- and a research fellow at the William Davidson Institute. tent with the notion that sizable break-ups involve large adjustment Miroslav Singer is an economist at CERGE-EI, Prague and costs and thus have a negative short-term effect on performance. Expandia Holding. Jan Svejnar is Executive Director of the William Davidson Institute and C. Everett Berg Professor of We find that most 1992 estimates are similar to those for 1991 Business Economics at the University of Michigan Busina'ss but that many yield statistically insignificant effects, including the School. The Great Human Capital Reallocation: A Study of Occupational Mobility in Transitional Russia by Klara Z. Sabirianova Summary of WDi Working Paper 309 This study represents the first attempt to understand the magnitude, determinants, and consequences of occupational mobility in Russia between 1985 and 1998. The restructuring environment in general, and Russia in particular, represents a good basis to study occupational mobility as an individual behavioral response to structural economic shocks in the labor market. rhe conclusions are relevant for other emerging and transition markets in which structural and technological changes cause sub- stantial reallocation of human capital. The study answers five important questions about the effect of tural changes make occupational mobility more complex, in I hat economic transition on occupational movements and the costs changes in occupation, firm, and industry are occurring simL l a- of such movement for individual workers. First, does the restruc- neously. The data confirm this hypothesis, showing that the share turing process lead to a higher rate of occupational reallocation? of people who change occupation when changing firm or inc us- Both gross and adjusted measures show an unambiguous in- try increased in 1991-98 compared with 1985-91 (with a de- crease in occupational transitions after 1991, when reforms be- cline in 1996-98). gan. The number of people moving to another occupation was considerably higher during the first four years of reform (1991- A large increase in the magnitude of flows to service-provicling 95) than during the preceding six years (1985-91). During seven occupations also occurred. Flows to these activities were almrost years of transition (1991-98), 42 percent of employed respon- three times higher in 1991-98 than during the pre-reform pe- dents changed their occupation-nearly twice as many as did riod. Comparing occupational structures in 1985 and 1998, we so during the six pre-reform years. Occupational flows were most observe an increase in the share of managers, entreprene irs, intense during the first five years of reforms; after 1996 the rate specialists in business and law, customer service clerks, people, of occupational mobility began to fall. This decline could be par- and other service-providing workers (table 1). (Interestingly, the tially due to the diminishing rate of structural change and the rela- number of protective services workers rose by more than 200 tive stabilization of occupational composition. percent for the same period). At the same time, there was a strong decline in the number of engineers and skilled laborers, Second, does the restructuring process change the structure and possibly reflecting a shift away from goods-producing industries direction of occupational mobility? We hypothesize that struc- toward service-providing industries. * TRANSITION, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute C 2000 Third, what explains the increase in occupational mobility in tran- crease in the local job destruction rate in the industrial sector re- sitional Russia? Are people involuntarily forced to change their sulted in more occupational changes than a 10 percent increase occupation because previously accumulated skills become ob- in the local share of employment in newly created firms. Again this solete and unusable? Or does increased occupational mobility result implies that a relatively large part of occupational mobility in reflect the creation of new opportunities? the transition period is driven by destructive forces. To answer these questions, the study examines whether oc- Among other local characteristics, the industrial employment con- cupational change is caused by a decline in returns to a pre- centration index is found to be negatively related to occupational vious occupation or by an increase in returns to alternative mobility. This finding suggests that poor outside alternatives re- options. The analysis shows that the probability of occupa- duce the opportunities for occupational mobility. tional switching increases with returns to alternative occupa- Table 1. Changes in Occupational Composition in the Russian Federation, 1985-98 tions before and after the mo- (percent) bility decision. In other words, Percent people respond to new oppor- One- and two-digit occupational 1985 1991 1998 change 1985- tunities and alternative op- categories 98 tions. People also respond to Officials and managers perceived future changes in Officials 0.20 0.09 0.14 -30.0 payments, or returns, to their Corporate managers 0.62 0.77 1.53 146.8 current occupation. However, Small firm managers 0.66 0.91 1.98 200.0 a 10 percent decrease in re- Entrepreneurs and independent farmers 0.00 0.21 1.79 n.a. turns to the current occupation Professionals Physicists, mathematicians, and 6.47 5.87 3.59 -44.5 brings about more occupa- engineers tional mobility than a 10 per- Life science and health professionals 1.92 2.04 2.31 20.3 cent increase in returns to Teaching professionals 3.56 3.61 4.39 23.3 alternative occupations, sug- Business and law professionals 1.70 1.72 2.05 20.6 gesting that people are often Other professionals 0.86 0.74 0.80 -7.0 forced to move to another oc- Associate professionals cupation because their current Technicians 3.62 3.44 3.82 5.5 occupation is losing its market Life science and health associates 2.96 3.10 3.94 33.1 value. ~~~~Teaching associates 2.34 2.74 2.55 9.0 value. Finance and business associates 1.48 1.64 1.77 19.6 Others 4.84 4.85 4.70 -2.9 Fourth, what impact does the lo- Clerks cal economic environment have Office clerks 5.85 5.65 5.03 -14.0 on occupational mobility? Are Customer service clerks 1.37 1.68 1.91 39.4 the magnitude and direction of Service workers occupational mobility different Personal services workers 2.43 2.36 2.88 18.5 Catering services workers 1.97 2.08 0.99 -49.7 across Russian regions? We hy- Protective services workers 1.02 1.45 3.42 235.3 pothesize that local labor mar- Salespersons 2.72 2.78 4.56 67.6 ket conditions-which reflect an Craft workers uneven speed of structural change Extraction and building trades workers 4.09 3.66 3.90 -4.6 and unequal outside opportunities Metal and machinery workers 12.79 12.76 9.47 -26.0 across regions-are critical deter- Other craft workers 2.72 3.27 2.95 8.5 minants of occupational shifts. Operators and assemblers Stationary-plant operators 3.25 3.51 3.40 4.6 Result of empil aMachine operators and assemblers 3.09 2.51 2.12 -31.4 Results of empiical analysis Drivers and mobile-plant operators 14.03 13.88 11.47 -18.2 show that people change occu- Other pations more often in regions Elementary occupations 11.95 10.88 11.21 -6.2 with a higher local job destruc- Military specialists 1.50 1.79 1.30 -13.3 tion rate and a higher employ- Sample size 4,527 4,704 4,236 ment share in newly created n.a. not applicable. firms. However, a 10 percent in- Source: Author's estimates from the Russian Longitudinal Monitoring Survey. © 2000 The World Bank/The William Davidson Institute TRmsmoN, Nov.-Dec. 2000/Jan. 2001 * Fifth, to what extent does occupational reallocation increase Table 2 shows ranking indices and ranks of 28 occupational cat- the discrepancy between previously accumulated human capi- egories according to level of schooling and level of earnings in 1998. tal and the market demand for skills? Intuitively, we would ex- Although the correlation between the two ranking indices is 1 igh, pect the connection between previously acquired education and some discrepancies are apparent. Entrepreneurs and farmers rank occupation in the new market economy to weaken as a result 1 st in terms of earnings but 15th in terms of education. Physicists, of a transitional shock. Changes in the demand for occupation- mathematicians, and engineers rank fourth in terms of schooling specific skills and overall changes in wage distributions across but ninth in terms of earnings. Movement up the schooling ladder is occupations may induce people to end their old careers regard- thus not necessarily associated with upward earning mobility. less of how successful they were under the previous system and to begin a new career in a completely different field with Movement to occupations that on average require fewer years lower skill requirements. of schooling (a switch from engineer or technician to sales Der- son or guard, for example) appears common during transilion. In fact, the data show that a significant number of people choose The data show that downward occupational mobility is forced by new occupations that do not correspond to their education. In negative demand shocks and poor firm performance. 1998 only 38.9 percent of engineering graduates held jobs as professionals. Some had become managers or entrepreneurs, Finally, was the change of occupation beneficial for individual but some had accepted jobs as laborers or service workers with workers? What are the returns to occupational mobility in terms lower skill requirements. of earnings and subsequent wage growth? Table 2. Rankings of Occupations in the Russian Federation by Level of Schooling and Earnings, 1998 Schoolingz Earninges Ranking Rank Ranking Rank Two-digit occupational category index index Life science and health professionals 0.813 1 0.944 Teaching professionals 0.753 2 0.943 6 Business and law professionals 0.722 3 0.991 Physicists, mathematicians, and engineers 0.718 4 0.805 c Officials 0.682 5 0.976 Other professionals 0.642 6 0.872 Corporate managers 0.641 7 0.969 Small-firm managers 0.583 8 0.804 10 Military specialists 0.5 17 9 0.867 Finance and business associate professionals 0.508 10 0.621 1, Teaching associate professionals 0.445 11 0.606 1! Technicians 0.444 12 0.700 11 Life science and health associate professionals 0.410 13 0.5 13 1, Other associate professionals 0.403 14 0.668 1 Entrepreneurs and farmers 0.399 15 1.328 I Protective services workers 0.397 16 0.617 14 Office clerks 0.363 17 0.421 23 Customer service clerks 0.351 18 0.330 2z1 Metal and machinery workers 0.308 19 0.500 18 Stationary-plant operators 0.308 20 0.469 22 Salespersons 0.307 21 0.323 2 i Catering services workers 0.290 22 0.149 20 Extraction and building trades workers 0.286 23 0.524 16 Other craft workers 0.278 24 0.487 2(0 Elementary occupations 0.264 25 0.093 2.7 Machine operators and assemblers 0.256 26 0.496 19 Personal services workers 0.256 27 0.000 2 8 Drivers and mobile-plant operators 0.255 28 0.476 2 Source: Author's estimates from the Russian Longitudinal Monitoring Survey E3 TRANSIMON, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 We test two conflicting hypotheses on the returns to occupa- We test these hypotheses by estimating the returns to occupa- tional mobility. The "destructive" theory of occupational mobility tional mobility in terms of subsequent wage growth. The data show suggests that people who are forced to move may lose ben- that occupational mobility reduces wage growth, thus supporting efits they had in their previous occupation. They may, for ex- the "destructive" theory of occupational mobility during transition. ample, agree to lower wages than they had before their career change. In contrast, the "creative" theory of occupational mobil- Klara Sabirianova is Assistant Professor at the William ity suggests that voluntary occupational switches in response Davidson Institute. Before obtaining her Ph.D. in economics at to positive demand shifts and new opportunities bring addi- the University of Kentucky, she was Professor of Economics at tional benefits to individuals. Ural State University in the Russian Federation. Priorities and Sequencing in Privatization: Theory and Evidence from the Czech Republic by Nandini Gupta, John C. Ham, and Jan Svejnar Summary of WDI Working Paper 323 Privatization of state-owned enterprises has been one of the most important aspects of economic transition. But no transition economy has privatized all of its state-owned enterprises simultaneously. Even in the Czech Republic, Estonia, the Russian Federation, and Ukraine, which strove to privatize their state-owned enterprises rapidly, some firms were privatized earlier than others. What determines the order in which firms are privatized? Do in terms of demand and cost shocks. Privatizing more profitable governments strategically sequence privatization?An answer to firms may also reduce the political cost associated with layoffs, this question is important for understanding the behavior of gov- as our model shows that such firms are likely to have fewer lay- ernments and firms in transition economies and for determining offs than less profitable firms. whether empirical studies of the effects of privatization need to take into account the potential selection bias brought about by The Czech government carried out one of the most extensive strategic sequencing. This issue is also relevant for countries mass privatization programs. To determine which objectives the such as China, India, and Mexico, which have large state sec- government was pursuing, we examined firm-level data. Those tors and are currently pursuing privatization. data provide strong evidence that the Czech government priva- tized more profitable firms first. This outcome is consistent with This is the first study that examines both theoretically and empiri- the hypotheses that the government sought to maximize cally how competing government objectives may give rise to dif- privatization revenues and public goodwill and minimize the po- ferent privatization outcomes. To obtain testable predictions about litical costs of unemployment. The fact that labor market condi- which factors affect the sequencing of privatization, we develop tions were not an important determinant of privatization allows new-and adapt existing-theoretical models of sequencing us to rule out the hypothesis that reducing the political costs of strategies for the following government objectives: maximizing unemployment was an important priority for the Czech govern- sales revenue and public goodwill, increasing economic effi- ment (not a surprising result in view of the low unemployment ciency; and reducing the political costs associated with layoffs. rate). We also find that the privatization process was consistent with the hypothesis that firms likely to be more responsive to Regarding the maximization of privatization revenues, we show changes in demand conditions were privatized first. However, that it is a reasonable strategy for a government pursuing this inefficient firms are not being privatized first, suggesting that the objective to privatize more profitable firms first. The same out- government did not pursue the objective of productive efficiency. come will arise if the government objective is to generate public These conclusions provide insight into privatization strategies good will from free or subsidized transfers of firms to citizens. that may be adopted when different, sometimes competing, ob- Regarding efficiency, one strategy is to privatize inefficient firms jectives are pursued by the government. first, so as to induce major restructuring and improvement in en- terprise performance. Assuming that private firms are more effi- Our results have important implications for studies evaluating the cient in responding to information, the government may also want effect of privatization on firm performance. Several such studies to privatize firms in industries that face the greatest uncertainty measure gains from privatization by comparing the performance © 2000 The World Bank/The William Davidson Institute TRANSITION, Nov.-Dec. 2000/Jan 2001 m of privatized firms to firms remaining in the public sector. How- able may be correlated with the length of time the firm has been ever, such comparisons are valid only if firms are randomly cho- privatized. sen for privatization. If the government selectively privatizes more profitable firms (as our results suggest), it should not be surpris- Nandini Gupta is visiting assistant professor at the William ing to see these firms perform better than firms that remain pub- Davidson Institute and the University of Michigan Business lic, even if privatization has no effect on firm performance. A similar School. John C. Ham is professor of economics at Ohio Sthte statistical problem arises in studies examining the effect on firm University and a WDI Research Fellow. Jan Svejnar is Exe:.u- performance of the length of time since privatization. Our result tive Director of the William Davidson Institute and C. Everett that more profitable firms are likely to be privatized early implies Berg Professor of Business Economics at the University of that unobserved firm characteristics that make firms more profit- Michigan Business School. Davidson Institute Conference Announcements and Calls for Papers The William Davidson Institute and the so preference will be given to those who lular phones) allow foreign banks to pen- Centre for Economic Policy Research plan to stay for the entire meeting. Deci- etrate emerging markets without a bri ::k- Annual International Conference on sions about conference participation will and-mortar presence? Transition Economics be made by March 1, 2001. Portoroz, Slovenia, June 23-26, 2001 * Bank regulation. What regulatory stric- 2001 William Davidson Institute/ ture is desirable? To what extent should Deadline: January 31, 2001 Journal of Financial Intermediation regulation be entrusted to national regula- Symposium-Banking in Emerging tors? How should bank regulation in This conference seeks to create a forum Markets emerging markets differfrom that in indis- in which leading transition economists University of Michigan, AnnArbor, Ml, June trial countries? What are the key risk m 3n- from differentcountriesmeet,presentnew 15-17, 2001 agement challenges for regulators in research, and develop long-term collabo- emerging markets? What are optimal re- rative relationships. The conference will Deadline: January 10, 2001 capitalization policies? bring together key policymakers in the re- gion with researchers, facilitating discus- The William Davidson Institute at the Uni- * Venture capital. How do the form arid sion and the exchange of ideas. versity of Michigan and the Journal of Fi- evolution of financial intermediation affect nancial Intermediation are pleased to which technologies get funded? Why is The organizers of the conference are Jan cosponsor a symposium on banking in venture capital booming in some countries Svejnar (William Davidson Institute; emerging markets. Papers are invited on (such as Israel) and not others (such as CERGE-EI, Prague; and CEPR) and various aspects of this topic, including the China)? Gerard Roland (Research Center of the following: Faculty of Economics, University of *Capital markets and banks. What is :he Ljubljana; CEPR; and the William * Ownership structure of banks. What are interaction between the developmenl: of Davidson Institute). Janez Prasnikar the determinants and effects of foreign capital markets and that of banks? How (Research Center of the Faculty of Eco- ownership of banks in emerging markets? does the integration of international capi- nomics, University of Ljubljana; CEPR; (Both theoretical and empirical papersare tal markets affect banking in emerging and the William Davidson Institute) is welcome.) markets? In particular, howdoestheopen the local organizer. versus closed nature of capital mobilitv in * Impact of technology on the banking an emerging market affect the fragility of To apply to present a paper at the confer- sector How is technology shaping the evo- the banking sector? How do exchange rate ence, please send a copy of your paper to lution of banking in emerging markets? crises affect banking? Deborah Jahn (djahn@umich.edu) by Howwillecommerceaffectand be affected January 31. 2001. It is anticipated that by the evolution of banking? Will the intro- * Impact of the legal environment How demand will exceed the space available, duction of new technologies (such as cel- does the legal environment-debtor- versus E TRANSITION, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 creditor-friendly laws, the nature of contract seven grant awards of $10,000-$50,000 search Administrator for the Will iam enforcement, andsoforth-affectthede- will be awarded for research on the Davidson Institute, atdjahn@umich.edu,or velopment of banking and capital markets Balkans. One to five grant awards of go to the Davidson Institute's Web site, at in emerging countries? How are soft bud- $10,000-$50,000 will be awarded for re- www.wdi.bus.umich.edu. get constraint problems addressed? search on CentralAsia and the Caucasus. Grants will be awarded for up to two years. CEPR Transition Economics Work- Patrick Bolton, of Princeton University, Prioritywill be given to projectsthatwill be shop for Young Academics is the program chairperson for the sym- cofunded. Grant recipients may be asked Portoroz, Slovenia, June 27-July 5, posium and will be selecting the papers. to present their findings at Davidson Insti- 2001 He is also the guest editor for a special tute and U.S. Department of State policy issue of the Journal of Financial Inter- forums. Deadline: February 28, 2001 mediation that will be dedicated to pa- pers submitted to the symposium that Applicants must have completed a Ph.D. CEPR is pleased to announce its third are also accepted for publication in the and demonstrate commitment to the study Transition Economics Workshop for Journal of Financial Intermediation. of transition economies in Central and Young Academics, organized by Mark Submitted papers will go through the Eastern Europe, the Russian Federation, Schaffer (Centre for Economic Reform same reviewing process as papers or Eurasia. Collaborative projects are eli- and Transformation, Heriot-Watt Univer- published in regular issues of the Jour- gible, but non-U.S. collaborators must be sity, Edinburgh; the William Davidson In- nal of Financial Intermediation. The funded from other sources. Grant funds stitute; and the IZA Institute for the Study submission fee will be waived, however. may be used for travel, summer support, of Labour, Bonn); Janez Prasnikar (Re- Submitting a paper to the Journal of Fi- salary replacement, research assistants, search Center of the Faculty of Econom- nancial Intermediation is not a prereq- and data acquisition. The research papers ics, University of Ljubljana; CEPR; and uisite for submitting a paper to the resultingfromthegrantswillbeaddedto the William Davidson Institute); and symposium. theDavidsonInstituteWorkingPaperSe- Gerard Roland (ECARES, Universite ries, and data accumulated underthe grant Libre de Bruxelles; CEPR; and the Will- Please send five copies of your paper will be deposited at the Davidson Institute iam Davidson Institute). by January 10, 2001 to: ProfessorAnjan Data Center and made available to other V. Thakor, University of Michigan Busi- researche.s within a negotiated time Research in transition economics is ness School, 701 Tappan, Rm. D6214, frame. evolving rapidly, but many people in the Ann Arbor, Michigan 48109-1234, field conduct their research in relative United States. For appiication guidelines and proce- isolation. The problem is particularly pro- dures, please contact Deborah Jahn, Re- nounced for young academics. This WILLIAM DAVIDSON INSTITUTE RESEARCH COMPETITION Let the Good Times Roll Public Policy and Business Develop- ment in the Balkans, Central Asia, and the Caucasus Deadline: January 31,2001 The William Davidson Institute is sup- porting postdoctoral research by U.S. scholars on business development and performance and public policies that af- fect the development of markets. Re- search should focus on, but need not exclusively address, the Balkans, Cen- tral Asia, and the Caucasus. "Nothing to worry about, recently the selling price of this car was 530 times Through funding provided by the U.S. De- that of the minimum wage, but today it only costs 400 times as much." partment of State under Title Vil, two to From the Hungarian Economic Daily Vi/aggazdasag © 2000 The World Bank/The William Davidson Institute TRANSITION, Nov.-Dec. 2000/Jan. 2001 m workshop will promote the research activi- Program: About 20 young academics Funding: Accommodations, transporta- ties of Ph.D. students and recent Ph.D.s from EU and Phare countries will partici- tion (to and from EU and Phare countries from the European Union and the Phare pate, along with senior faculty (including only), and a small per diem allowaice countries of Central and Eastern Europe Professors Schaffer, Prasnikar, and will be covered by CEPR. Young eca- (Albania, Bosnia and Herzegovina, Bul- Roland). The program will be based on demics will also receive an honorar um garia, the Czech Republic, Estonia, the presentation of papers by the young aca- of E1,000. FormerYugoslavRepublicofMacedonia, demics, with time for discussion and Hungary, Latvia, Lithuania, Poland, Roma- comment by all participants. Several af- Application: Workshop participants will nia, Slovakia, and Slovenia). Young aca- ternoon or evening sessions will be de- be selected on a competitive basis. All ap- demics will receive feedback on theirwork voted to guest speakers (established plicants must submit an official application in progress from established academics academics or practitioners). form, a description of their current re- in the field and from one another. search in the economics of transition, a Eligibility: Applications will be accepted short summary of the paper they intend to The workshop will also enable participants from students working in the economics present at the workshop, and one or two to learn about recent developments in the of transition who are permanent resi- supporting letters of reference. Application field and to establish contacts with other dents or citizens of EU or Phare coun- forms, available on CEPR's Web site researchers that will continue beyond the tries and from junior academics working (http:H/www.cepr.org), should be sent to summer. A selection of the papers pre- in the economics of transition who re- Alice Warr, at CEPR, 90-98 Goswell sented by the young academics will be ceived their Ph.D.s after January 1, Road, London EClV 7RR, United Kig- published in CEPR's Discussion Paper 1996, and who are based in EU or Phare dom. Fax: 44 207 878 2999, email: series. countries. awarr@cepr.org. Recent Working Papers of the William Davidson Institute www. wdi.bus. umich.edu Schaffer, Mark E., and Gerard Turley. Ef- Bevan, Alan A., and Saul Estrin. The De- Campos, Nauro F., and Jeffrey B. Nugent. fective versus Statutory Taxation: terminants of Foreign Direct Invest- Investment and Instability. No. 337, M,ay Measuring Effective Tax Administra- ment in Transition Economies. No. 342, 2000. tion in Transition Economies. No. 347, October 2000. November 2000. Pye, Robert B.K. The Evolution of the Weber, Klaus, and Gerald F. Davis. The Insurance Sector in Central and East- Pissarides, Francesca, Miroslav Singer, Global Spread of Stock Exchanges, ern Europe and the Former Soviet and Jan Svejnar. Objectives and Con- 1980-1998. No. 341, October2000. Union. No. 336, August 2000. straints of Entrepreneurs: Evidence from Small and Medium-Size Enter- Nuti, D. Mario. The Costs and Benefits Kogut, Bruce, and Andrew Spicer. In- prises in Russia and Bulgaria. No. 346, of Euro-isation in Central-Eastern Eu- stitutional Technology and i he October2000. rope Before or Instead of EMU Mem- Chains of Trust: Capital Markets bership. No. 340, October2000. and Privatization in Russia and the Lizal, Lubomir and Evzen Koeenda. Cor- Czech Republic. No. 335, AugL st ruption and Anticorruption in the Gurev, Sergei, Igor Makarov, and Mathilde 2000. Czech Republic. No. 345, October 2000. Maurel. Debt Overhang and Barter in Russia. No. 339, September 2000. Berkowitz, Daniel, and David N. DeJcng. Konings, Jozef. The Effects of Direct The Evolution of Market Integration in Foreign Investment on Domestic Walsh, Patrick Paul, and Ciara Whela. Russia. No. 334, August 2000. Firms. No. 344, October 2000. Firm Performance and the Political Economy of Corporate Governance: Halpern, Laszl6, and Gabor Kbrosi. Effi- Puhani, Patrick A. On the Identification Survey Evidence for Bulgaria, Hun- ciency and Market Share in Hungar- of Relative Wage Rigidity Dynamics. gary, Slovakia, and Slovenia. No. 338, ian Corporate Sector. No. 333, Quly No. 343, October 2000. July 2000. 2000. E TRANSITION, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 O/-} Local Government and Public Service Open So Institute Reform Initiative The Local Government and Public Service Reform Initiative T he Local Government and Public Service Reform Inititive * Local economic and regional development, urban develop- (LGI) is an international development and grant-giving or ment. ganization within the Soros/Open Society network of foun- dations. Its mission is to promote democratic and effective gov- LGI works closely with other international organizations, includ- ernment in Central and Eastern Europe and the former Soviet ing the Council of Europe, the Department for International De- Union by supporting research and operational activities in the velopment, USAID, UNDP, and the World Bank. Under these fields of decentralization, public policy formation, and the reform cooperation agreements, LGI co-funds larger regional initiatives of public administration systems. aimed at supporting reforms at the subnational level. The Local Government Information Network (LOGIN) and Fiscal Decentrali- LGI seeks to fulfill its mission by developing sustainable regional zation Initiatives (FDI) are two examples of this cooperation. networks of institutions and professionals, supporting compara- tive and regionally applicable policy studies tackling local govern- We hope that LGI's contribution to Transition will support the ment issues, and delivering technical assistance to implementing policy dialogue on decentralization and public administration agencies. It also provides assistance to Soros foundations in coun- reform in transition economies. tries throughout the region, develops curricula and organization of training programs, and publishes books, studies, and discussion For additional information, please contact us at the following papers on decentralization, public administration, and good gov- address: Local Government and Public Service Reform Initia- ernance. LGI has also begun to support policy centers and think tive, PO. Box 519, H-1397 Budapest, Hungary. Tel: 36-1 327- tanks in the region. Since 1999 LGI has focused more of its efforts 3104; fax: 36-1 327-3105; email: lgprog@osi.hu; Http:// on in-house policy analysis and research projects, with the inten- www.osihu/lgi. tion of becoming a full-fledged think tank in the nextfewyears. LGI Web site with the Latest Messages LGI develops and funds in-depth policy stud- ies, particularly those that are regional and com- parative in scope. Activities in this field fall into I, ub Lc ServEce Reform lniative ._ 9' >,t cid k,tic,cca ;lU ckln :sour.f .c.rv,As 2:,ICI, several policy areas: Urban and City Management Course, jointly * Public administration and legislative re- p do/ Lc ,d p/ cAd-cctc,to- Refo-r organized by the World Bank Institute (WBI) and the ii, n ~cLoe ond Efstem Europe Fnd Local Government and Public Administration Initiative form. thf for r of the Open Society Institute... detailed info * Government and govemance issues of eth- Become a contributor of the Best Practice Datab,ase! nic and multicultural policies; corruption, trans- Managing Multiethnic Communities Project calls for case-files regarding innovative practices in the fleld of parency, and ethics in public administration; About LOI community relations hI multiethnic environment and Maior Initiatives local initiatives for ethnic conflict resolution. public participation in government; and devel- Act!ivitiS utytasfra nentoa oprtv opment of civil society. FoublidationF d re.ser project In the CEE: Buidgeting in Local Government: * Municipal fiscal issues assisting transition LGI Interti- Call for proposals economies carrying out reform of intergovern- St r.ho e . Find local xpe,rt: LGI is building a register of mental fiscal relations; improved financial good Your Feedbh-k experts in public policy and public administration working in CEE/NIS willing to assist the policy govemance and increased financial autonomy process in the region. Submit Your CV to LG1. Of subnational governmental units. Callor lf'rPoptsal: LGI seeks contributions for a of subnational governmental units. vv~~~~~~~~~~~~~~~~orking paper on the feasibility and likely * Public service management in urban ser- benefits of creathg CEE Associations of Policy Centers vices and social policy. Lctest 19ie 29--ec mOer2000 © 2000 The World Bank/The William Davidson Institute TRANSITION, Nov.-Dec. 2000/Jan. 2001 , Decentralization: Experiments and Reforms in Central and Eastern Europe by Tamas M. Horvath and Gabor Peeri During the first decade of transition various models of local government were designed. Political mechanisms, economic sys- tems, institutions, and management practices were restructured. During the long learning process of establishing new local govemments, several shifts in objectives and modifications took place. These modifications have left different governmmnt structures in place in the eight countries of Central and Eastern Europe. Structural Changes Further development of local governments in these countries is proceeding in four major directions: As an important first step of transition, a new democratic and pluralistic model was introduced at the local level. The European * Reforming public administration. After 10 years of almost con- Charter of Local Self-Government summarized the minimum tinuous changes, public administration reform is still on the po- structural and legal requirements for preparing and establishing litical agenda in most of Central and Eastern Europe. Mejor local institutions. Administrative reforms and models vary both targets include the further decentralization of local government across countries and over time. Due to the fluid and sensitive structures (in Slovakia) and decisionmaking powers (in Sloven a). political balance that exists in Central Europe, reform concepts The relation between the functions of existing central public ad- about local government undergo relatively frequent changes. ministration and the new municipal administrations are also sub- ject to change. For countries involved in the EU preaccess on Reform of Poland's local government, for example, reached a process (the Czech Republic, Hungary, and Poland), the role of dead end in the mid-1 990s, breeding disillusionment. Then, in the intermediary level of government is a crucial issue. 1999, limits on local jurisdictions were suddenly changed, with far-reaching political-administrative implications. In Lithuania cru- * Improving service provision. Estonia and Latvia are focusing cial reform revisions were initiated in 1995, replacing the two- on creating more efficient local government services, improving tier system of local government with a single tier. In the Czech management techniques, and developing new rules of modern Republic the institutions and mechanisms of local democracy administrative ethics. They are also trying to increase the pro- have been radically reformed and municipalities have taken over fessionalism of local government staff and municipal service Dr- all self-governing functions-but debates on the establishment ganizations in order to improve service provision. of an intermediate government tier dragged on for a decade. * Reforming local govemment finance. Earlier in the reform Organizational Models process, the focus was on intergovernmental fiscal relations, os- pecially the system of transfers. Today the principal objective is In the first wave of constitutional changes, legislation on local gov- to increase independent revenues as the basis of extending lo- ernment and free local elections was codified. In the second cal autonomy. Suggested methods are more sophisticated and wave, legislation established the scope of local government, include notonly local taxation butalso personal incometax sh3r- approved civil servant and public employee acts, specified the ing schemes, which are being developed in Estonia and Poland. scope and duties of public administration at each level, and regu- lated property transformation. * Introducing local governance and management methodis. Greater public participation, more transparent operation of mu- Attitudes and the operation of local governments were changed nicipalities, and establishment of direct contacts with citizens are as a consequence of the introduction of market agents and pub- high priority goals of reform in Lithuania and the Slovak Repub ic. lic participation. The influence of the private and nongovernmen- tal sectors increased in public services. Financial cutbacks forced Tamas M. Horvath is Research Director, HIPA (Hungarian In- customers to contribute to the costs of these services. While the stitute of Public Administration). Gabor Peteri is Research Di- withdrawal of government from public services was more drastic rector, OSI-LGI. This article is based on an article that appeared in Central and Eastern Europe than in the West, policy responses in Local Governments in Central and Eastern Europe, edited by to these challenges were more mooted. TM.Horvath (Budapest: LGI Books, OSIILGI, 2000). E TRANsrrioN, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 European Union Enlargement and the Open Society Agenda Local governments and NGOs should take a more active and effective part in the EU enlargement process. This article exam- ines some issues related to EU enlargement from the point of view of local govemance and administration, identifying ways in which donor organizations, including the Open Society Institute Local Government Initiative, can play a role. EU accession will affect four broad areas of local governance should not be forgotten that in many areas the European Com- and public administration: mission has the exclusive authority to initiate policies affecting * Regionalization and regional development As both eco- local authorities. If local authorities wish to influence draft legisla- nomic and political entities, regions are important in the acces- tion that ultimately will affect them, they must focus on the activity sion countries. They are basic units of funding for regional of the Commission. Reform efforts should also aim at develop- development and play a significant role in decentralizing ing stable and workable financial and legal frameworks govern- decisionmaking. These functions made them increasingly impor- ing local-central relations, as well as creating institutionalized tant in political terms as well. consultation mechanisms. Crucial components of intergovern- * Sectoral issues and local public services. Environmental mental relations are the clear division of labor between central services, such as water and waste management, are often pro- government and self-governments, separation of county and mu- vided by local governments and regulated by local laws, direc- nicipal property from state property, and definition of the rela- tives, and EU policies. Employment guidelines are generally built tions between local stategovernments and local self-governments. into legislation, but local governments can play a role in support- ing workers' adaptability and equal opportunities. Attention should also be paid to developing local-local relations * Procedures and regulatory frameworks. Procedures and among municipalities. Policy coordination and joint planning regulatory frameworks affect public procurement, consumer pro- mechanisms are especially important if local governments want tection, and local finances (through their effect on the size of the to create regions on a "problem" basis in order to attract EU public deficit and subsidies to local service organizations, for funds. Developing strong partnership ties with local NGOs and example). Local governments are affected by EU legislation in citizen groups should also be a top priority in order to guarantee many areas (public utility services, competition in the energy smooth communication and understanding among local institu- sector). tions and their constituents. Contracting out practices at the lo- * Government efficiency and effectiveness. Local govern- cal level have to be fostered in order to make local public service ments should be involved in policy development, if only to defend delivery more effective and efficient. the interests of their districts or regions and benefit from regional development or structural funds. The experience of current mem- The main preconditions for effective assistance are adequate ber states shows that participation in the EU policy process in- absorption capacities, a proactive attitude on the part of benefi- creases competition among local authorities, forcing them to ciaries, flexibility of programs, and well-designed packages of improve administrative quality. measures. In order to cover institutional gaps, various institution- building measures have to be applied in Central and Eastern The need to develop local administrative capacity is becoming Europe, including support for developing staffing strategies and more acute as central administrations shed more functions. There functional reviews, reassigning certain functions. is a need to improve local staff's managerial competence and its awareness of European integration-related issues, as well To help candidate countries cope with the challenges of the acces- as to streamline local government organization itself. sion process, donors should support policy institutes that develop second opinions on EU positions. They should also provide assis- The importance of developing staff qualifications and capacities tance for building institutions that can support strategic planning and of local government-in order to take advantage of the few tools policy analysis. Donor involvement is beneficial at the central level available to influence the EU policy process-has often been to help assess the impact of draft legislation, particularly its effect underestimated at the local level. Improving the central oneconomicsectorsandvulnerablegroupsinsociety. government's administrative capacity should go hand in hand with upgrading local structures and organizational systems. It The article is based on report published by LGI in March 2000. © 2000 The World Bank/The William Davidson Institute TRANSITION, Nov.-Dec. 2000/Jan. 2001 3 Project Summary: Local Government Information Network (LOGIN) T he Local Government Information Network (LOGIN) is a (http:/1www.frdl.org.pl and local government information clearinghouse designed to http://www.wspolnota.org.pllmuni cipium.html). promote the professional development of local govern- * Slovakia: Association of Towns and Municipalities (ZMO',) ment officials and their staffs and to strengthen the capabilities of (http:llwww.zmos. sk). organizations that support the reform of public administration at the local level. Sponsors include USAID, the Council of Europe, These partners offer country-specific information and news, legis- the Open Society Institute/Local Government and Public Service lative updates, calendars of country-specific and regional events Reform Initiative, U NDP, and the World Bank. of interest to local governments, and an online library. Partner Web sites also provide formation about the roles and responsibilities With limited budgets, local governments in emerging democra- of various European institutions and their components, especkilly cies in Central and Eastern Europe and the former Soviet Union the European Union and the Council of Europe. Sponsoring part- are working to provide services, promote economic develop- ners also make available information on funding opportunities For ment, communicate effectively with citizens, and operate more local government initiatives in the region and training events for efficiently. The autonomy of these local governments depends local government practitioners in the region. largely on their ability to find solutions to local problems without seeing increased central government funding as the only option. The LOGIN database includes the following categories: * Citizen participation. Municipal associations, foundations, and corporations have * Culture. emerged throughout the region to assist local governments. Now * Economic development and investments. LOGIN offers these organizations and local government officials * Education. a new way to share information, develop networks, and improve * Environmental issues/urbanization. the services they provide to municipalities. * European integration. * Healthcare. Hailed by former U.S. Secretary of State Madeline Albright for its * Information systems. innovativeness, LOGIN facilitates the exchange of information through * Land use planning. the Internet. It also uses traditional dissemination methods, including * Legislation. workshops, publications, conferences, and training. The Intemet com- * Local government finance, budgeting, municipal credit. ponent of LOGIN is more than a Web site. It is a Web-based, data- * Management methods and tools. base-driven tool for storing and exchanging information worldwide. It * Municipal property management/privatization. allows individuals from different countries and speaking different lan- * Procurement. guages to collect, store, manipulate, and exchange information. * Public works and utilities. * Service provision. The LOGIN network is made up of organizations that are com- * Social services. mitted to serving local government (associations of local authori- * Taxes. ties, NGOs, for-profit companies). The network is completely open * Transportation. and can be accessed by anyone. Partners in the network include: * Youth activities. * Bulgaria: Foundation for Local Government Reform (http:llwww.figr.bg). The LOGIN Web site (http://logincee.org) provides information * Hungary: Kozigkonzult Co./Telecottage Public Benefit Co. on project development and access to the English language por- (http://onkormanyzati.penguinpower ed.com). tion of the library. The LOGIN network database can be accessed * Latvia: Union of Local and Regional Govemments of Latvia through the Bulgaria country site, at http://www.flgr.bg. All partrer (http://www. Ips.lv/). organizations' Web sites will be integrated with the LOGIN ser- * Lithuania: Municipal Training Center of Kaunas University vices by the end of the first quarter of 2001. (http:/lwww.smc. ktu.ltl). * Poland: Foundation in Support of Local Democracy! Forfurtherinformation, please contactKristof Varga, LGI Project Municipium Manager at kzvarga@osi.hu. 3 TRMNSITION, Nov-Dec. 2000/Jan.2001 The World BanklThe William Davidson Institute © 2000 Making Local Government Transparent in Eastern Europe: Anti-Corruption Workshop in Riga C orruption has become a formidable impediment to the is equally crucial in maintaining high business standards, creat- transformation and improvement of living standards in ing ethical business associations, and training businesses on Central and Eastern Europe and the former Soviet how to deal properly with government representatives. Union. The international anti-corruption movement has focused * An active, independent media can serve as a watchdog and on corruption at the international and national levels. But as can report on reform successes. For this to happen, appropriate subnational levels of government have gained power and respon- standards must exist for investigative journalism, and freedom sibilities, local-level corruption has come to have a growing im- of information acts and a system of legal protection for journal- pact on the lives of citizens in transition economies. ists must be established. * Fighting corruption in the civil service through civil service Municipal government-and the integrity or lack of integrity of reform can be facilitated by writing and enforcing codes of con- that government-has an important effect on people's every- duct and conflict of interest guidelines, establishing performance day lives. Ideally, local governments should be more respon- measures, setting higher selection standards, providing better sive to the needs, requests, and demands of individuals or training, making salaries public, forcing disclosure of assets, and groups than the central government. The local level is thus the focusing on the quality rather than the number of civil service ideal environment for civil society to mobilize to help improve members. government services and increase integrity in government; as * To enforce anti-corruption measures, local governments need the smaller size of communities can yield greater cooperation a clean, professional judiciary; laws permitting the prosecution among principal actors. of bribe givers as well as bribe takers; an Office of the Ombuds- man; accessible legal advice; telephone hotlines for the expres- During a two-day workshop sponsored by the Open Society sion of ideas; and effective institutions and adequate funding to Institute and Transparency International in early November, par- investigate and prosecute cases of corruption. ticipants from Estonia, Latvia, Lithuania, the Russian Federa- * Transparent financial institutions and oversight organizations tion, and Ukraine met with professionals from well-known are critical. Key tools include independent auditing institutions, international organizations to focus on how to combat corrup- independent audits by internationally recognized organizations, tion at the municipal level in Eastern Europe. The workshop transparent public procurement, budgets, privatization processes, represented an "East-East" exchange of ideas, information, public hearings, public participation in decisionmaking, and the and approaches toward fighting corruption. Workshop partici- guaranteed financial autonomy of local governments with respect pants came out with the joint Riga Declaration, laying out the to higher tiers of government. major criteria of local government transparency in Eastern * Viable, self-sufficient local govemment units in the countries Europe. involved in the workshop require administrative-territorial reform. Key steps that need to be taken in the areas of legislative and The principal aim of the Riga workshop and the subsequent dec- regulatory reform include contracting service provision to private laration was to develop a model for a local integrity system akin businesses and NGOs, privatizing publicly owned businesses, to the National Integrity System developed by Transparency In- giving a strong role to independent lawyers in providing advice ternational. To that end, participants agreed to the following pil- and drafting legislation, informing citizens of their rights, closing lars of integrity: legal loopholes, and lifting some of the immunity afforded depu- * Political will for change is a necessary component of any com- ties, government officials, and judges. prehensive integrity system. It is necessary to build coalitions of well-respected, reform-minded, exemplary top managers and The participants at the Riga workshop believed that this mayors and use them to introduce and publicize innovative anti- model offers a better guide to reforming local institutions in corruption practices. their countries than Transparency International's national * Participation by civil society is vital to any anti-corruption model, as it is slightly more descriptive. Although it remains program. The importance of civil society groups working directly to be seen whether this model can serve as an effective with local authorities-helping to write codes of conduct, for subnational model, its simple nature lends itself to use in example-cannot be overestimated. The business community various contexts. © 2000 The World Bank/The William Davidson Institute TRANSITION, Nov.-Dec. 2000/Jan. 2001 E SITE ~ Stockholm Institute of Transition Economics STOCKHOLM SCHOOL OF ECONOMICS Power Shift between Interest Groups: The Political Economy of Transition in the Russian Federation EERC-CEFIR Conference in Moscow The transition changed the structure and relative power of interest groups in Russian society dramatically altering the ivay interests translate into policy. Over the course of the transition, the shape of the institutions that frame the political decisionmaking process has itself become a matter of political bargaining. These were some of the conclusions Tabellini ("Political Institutions and Policy investment climate depends not only on drawn at the Fourth Annual Conference of Outcomes: WhatAre the Stylized Facts?") the government's decisions but alsc on the Economic Education Research Con- investigate the effects of electoral rules the number of investors. Thus a shock ihat sortium (EERC), sponsored jointly by the and political regimes on the size and com- increases the need for external invest- Center for Economic and Financial Re- positionofgovernmentspendingandgov- ment might lead to higher investments search (CEFIR). The conference, "The ernmentdeficit. and better enforced rule of law. Political Economy of Russia's Transition," was held December 17, 2000, in Moscow. * In "The Political Economy of LatinAmeri- * Ekatherina Zhuravskaya (CEFIR, Mos- The organizing committee included Erik can Growth," Francisco Rodriguez (Uni- cow; CEPR) presented two papers on tax Berglof (SITE, CEFIR, and CEPR), Eric versity of Maryland) discusses how such arrears and subsidies, "Determinants of Livny (EERC), and Gerard Roland (Re- factors as political instability, inequality in Government Subsidies to Industrial Firms: search Center of the Faculty of Econom- the distribution of political and economic Firm-Level Evidence," written with Zhenia ics, University of Ljubljana; CEPR; and the power, corruption, rent-seeking by national Orlov (NWU and Lena Paltseva (CEFIR and William Davidson Institute). The confer- governments, and a combination of popu- SITE), and "Federal TaxArrears: Liquidity ence program combined cutting-edge po- list policies and policies benefiting pow- Problems, Federal Subsidies, or Regional litical economy theory with the practical erful vested interests can account for the Protection," written with Maria Ponomareva experience of economic reforms in transi- region's poor growth performance. (Northwestern University). She and her co- tion and developing economies through- authors claim that common explanatiors of out the world, including China and Latin * Gerard Roland (ECARES, Universit6 Libre federal tax arrears-such as the lack of li- America. de Bruxelles; CEPR) synthesizes the main quidity in enterprises and the federal lessons from 10 years of transition. He com- government's willingness to implicitly s ub- All of the papers presented at the conference pares various political and economic aspects sidize firms by tolerating arrears-arE in- can be downloaded at http:l/www.eerc.rul of two approaches to reform: the Washing- consistent with the data. The evide lce activ/confOO/PapersCollection.htm. tonconsensus(theshock-therapyview)and suggests that in the second half of the Summaries of the papers are presented theevolutionary-institutionalistperspective (the 1990s, regional governments' politica re- here: gradualist view). He analyzes the impact of sistance to federal tax collectors caused the transition research on economics in general, accumulation of federal tax arrears. * Torsten Persson (IIES, Stockholm Uni- emphasizing the role ofthe institutionalist per- versity); Guido Tabellini (Bocconi Univer- spective in modem economic research. * In "Models of Transition and Multi-St3ge sity, Milan); and Francesco Trebbi report Reform,"Allan Drazen (University of Mary- that corruption is inherently related to elec- * In "Political Economy of Scale and En- land) summarizes some of the main con- toral rules. In "Electoral RulesandCorrup- dogenousRuleofLaw,"Leonid Polishchuk clusions from his recent textbook on tion," they argue that largervoting districts (IRIS; University of Maryland) argues that political economy. and individual, as opposed to party, lists ifthe rule oflaw is not a matter of indisput- of candidates are associated with less cor- able legal and political tradition but rather For more information, please visit ruption. Torsten Persson and Guido a policyvariableforthegovernment, the www.eerc.ruorwww.cefir.org. M TRANSITION, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 Recent CEFIR Research Natalya Volchkova, CEFIR, Does Financial-Industrial Group Membership Affect Fixed Investment? Evidence from Russia This study estimates an accelerator model of fixed investment trol over managerial actions. This efficiently reduces managerial using a Russian industrial enterprise data set. The data set con- discretion over retained earnings, which results in the implemen- tains individual firms' accounting data for 1996 and 1997. The tation of a larger number of investment projects among these sample of firms was divided into two subsamples, based on firms than among independent firms of the same size and with ownership structure. It compares sensitivities of investment to the same investment opportunities. changes in net worth for unregistered financial-industrial groups and independent firms. Based on the empirical results, it con- These results indicate that the role played by banks in Russian cludes that the model works well when applied to Russian firms' financial-industrial groups differs from that played by banks in investment behavior in 1996-97. Russia's financial system pro- Japanese and Korean groups. Banks in Russian groups do not vided external finance primarily to the largest enterprises; most reduce the information asymmetry problem for group firms, but firms received no outside financing. they could help solve the problem of contract enforcement in firms participating in those groups. In an economy with ineffi- Given the same investment opportunities and size class, me- cient banking and financial systems, this would increase the dium and large firms from unregistered Russian financial- volume of investment implemented by group firms relative to industrial groups invested a larger proportion of their retained independent firms facing the same investment opportunities. earningsthandidindependentfirms.Thisresultisconsistentwith Such integrated structures thus play an important role in an the hypothesis that banks in such groups-which are able to economy in which both insufficient investment and weak cor- monitor financial flows of firms in the groups more easily than porate governance are substantial impediments to structural they can monitor independent firms-exercise systematic con- and political reforms. Introducing Baltic Economic Trends In November SITE launched a new quarterly publication, Baltic are accessible and of good quality. BET aims to complement Economic Trends (BET). The new journal is edited by Alf existing analytical and statistical sources with in-depth compara- Vanags, of the University of Latvia and the University of Lon- tive analysis. It will also provide analysis of developments in the don (alf@eurofaculty.lanet.lv), and Peter Westin, of SITE Baltic Rim, their impact on the Baltic economies, and the pro- (Peter.Westin@hhs.se). It is part of the Baltic International Cen- cess of EU enlargement. tre for Economic Policy Studies (BICEPS) project to build an economics research and policy center in Riga, Latvia. The new The introductory issue of BET includes three feature articles: journal represents a new, innovative channel for communicat- "Trade Policy in the Baltics: Whither the Baltic Free TradeAgree- ing the results of the latest research on the Baltic economies. ment?" byAlf Vanags, "Are the Baltic Currencies Overvalued?" by likka Korhonen, and "Risk and Return in Central and Eastern Since the start of the transition, the three Baltic states have made Europe," by Anete Pajuste and Peter Hogfeldt. It also contains tremendous progress in reforming their economies. They have economic updates on Estonia, Latvia, and Lithuania and tables become market economies and have reintegrated successfully of key economic indicators. into the world economy. Their achievements have fostered a rap- idly growing interest in the Baltic states that has generated sig- The introductory issue of BET is available free of charge at nificant per capita levels of foreign investment. www.hhs.se/site. To subscribe to BET write to SITE@hhs.se or fax +468 31 64 22. Please include your name, address, email, BETs approach is to study and interpret economic development and affiliation. One-year subscription rates for 2001 are $65 in the Baltic economies in the framework of their integration into (650 SEK) for individuals, $180 (1,800 SEK) for academic in- the world community and the European Union. The economic stitutions, and $300 (3,000 SEK) for corporate institutions. Sub- statistics produced by official sources in the three Baltic states scriptions paid in SEK include VAT © 2000 The World Bank/The William Davidson Institute TRANsrnON, Nov.-Dec. 2000/Jan. 2001 D New Web Site on Business and Finance in the Baltic Economies In cooperation with the Stockholm-based Baltic Financial Network, and international visits; and other relevant information. SITE is building an Internet information resource on business- and * Descriptions of recent and planned economic events. finance-related developments in the Baltic region. This new Web * Statistics and databases on the Baltic economies from SITE pAb- site will provide information, contacts, and links. The target group lications and other sources. of users are decisionmakers in the private sector, but the site will * Links to related sites. also have appeal as a resource for the policy community, univer- * Information on research grants and funds. sity students, and research institutions. The site will include: * Acalendar of upcoming events of interest; key statistics and busi- If you would like to be notified by email when gatewaybaltics.com be- ness information; information on business meetings, conferences, comes active (in early2001), please sendyouraddress to site@hhs. se. World Bank/IMF Agenda Social Inequality in Moldova Is Com- form detailed analyses of banking systems, to form joint ventures with local companies, parable to That in Latin America a broad array of other financial institutions according to a recent World Bank study. and markets, and financial infrastructure. In fact, it may be as important to foreign Social inequality in the former Soviet repub- investors as variations in labor cosis or lic of Moldova is comparable to that in Latin The program, begun partly in response to corporate tax rates. By placing a prenmium Amerca, and poverty is still on the rise, notes the international financial crises of 1997 on local knowledge and the ability tc by- Ruslan Yemtsov, Senior Economist at the and 1998, and partly to facilitate closer col- pass local bureaucracy, it may discour-age Poverty Reduction and Economic Manage- laboration between the World Bank and the high-technology companies from investing ment Sector Unit of the World Bank. The Gini IMF in their financial sector monitoring and overseas, since businesses with more coefficient, a measure of income inequality, analysis. Overtime, the program will include complex outputs tend to want to retain full rose by a factor of 1.7 between 1990 and virtually all industrial economies and emerg- control over production processes. 1999, reaching44.1 percentin 1999. In 1999 ing markets. Twelve countries, including Es- the revenues of the richest quartile of the tonia, Hungary, and Kazakhstan, were The study, "Corruption and Composition population were 11 times those of the poor- covered in the pilot phase; assessment of of Foreign Direct Investment: Firm-Level est.Thatfigurefellto10duringthefirstquar- another 24 countries is underway or Evidence," was written by the World ter of 2000. The poor account for just 4.5 planned forthe currentfiscal year. Bank's Beata K. Smarzynska and the percent of total revenues, while the rich ac- Brookings Institution's Shang-Jin Wei countfor49.Opercent.AmongtheformerSo- Corruption Deters Foreign Investors, (NBER Working Papers 7969, Web site: viet republics the gap between rich and poor Warns World Bank-Brookings Study http://ideas.uqam.ca/ideas/data/Parers/ is largest in Armenia, Kyrgyzstan, Moldova, nbrnberwo7969.html). The researchers and the Russian Federation. Corruption acts as a strong deterrent to for- compared foreign direct investment i i 22 eign direct investment and forces investors Eastern European and former Soviet bloc World Bank, IMF Report Progress on Financial Study Disappointment Assessments of the vulnerabilities and de- velopment needs of the financial sectors of the 36 countries targeted in the initial phases of a joint World Bank and IMF pro- gram are likely to be completed by the middle of 2001, according to Gerard Caprio, director of the Bank's Financial Sector Strategy and Policy Group. As part / i - % 'I t X.X of the Financial Sector Assessment Pro- gram, teams of financial sector specialists "Mr. Attorney, don't be so greafful, this is not your bribe, but the bait in our from the World Bank, the IMF, and cooper- fight against corruption." ating national and international bodies per- From the Hungarian magazine H6cipo E3 TRANsrncN, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 countries during the 1990s with various ture is an investment databank that pro- pation fell more than 30 percent in Hun- indices of corruption developed by private files more than 100 state-owed firms gary and 25 percent in Latvia-a much sector researchers and the World Bank. slated for privatization. sharper decrease than among men. En- trepreneurship may help improve women's New Russian Privatization Web Site Women Shoulder Most of the Social access to top managerial positions, higher Cost of Transition incomes, and traditionally male-dominated A new Web site, http://russia.privatiza areas of activity. tionlink.com, designed to cast light on the The social costs of transition and the re- often shady world of Russian privatization, structuring of economies in the Europe and The conference was sponsored jointly by was launched in October at the fourth an- Central Asia region have affected women the World Bank, the United Nations Eco- nual U.S.-Russian Investment Symposium more severely than men, concluded an in- nomic Commission for Europe (UN in Boston. The site-designed by the Mul- ternational conference held in Warsaw in ECE) and the United Nations Develop- tilateral Investment Guarantee Agency January. Women bear more of the brunt ment Fund for Women (UNIFEM). Aca- (MIGA), partof theWorld BankGroup, with from reduced social expenditure, espe- demics, NGOs, government officials, the cooperation of the Russian Property cially from the closing of day care centers and private sector representatives from Relations Ministry and the Canadian Inter- and maternity clinics. Declining school at- the Baltic states, Kazakhstan, the Rus- national DevelopmentAgency-was cre- tendance of girls in many Central Asian sian Federation, Ukraine, Uzbekistan, ated to encourage new investment in the countries may erode prospects for eco- and other CIS countries attended the Russian Federation. The site's main fea- nomic growth. Female labor force partici- conference. EBRD, IMF Approve Membership of FR Yugoslavia; the World Bank Is Getting Ready On December 20 the Executive Board of the IMF determined Shortly thereafter a Donor Pledging Conference could be orga- that the "Federal Republic of Yugoslavia has fulfilled the neces- nized (following up on a Coordination Meeting in December at sary conditions to succeed to the membership of the former which donors commited over $500 million for urgent needs). Socialist Federal Republic of Yugoslavia in the IMF." (Yugosla- via was suspended from the IMF in 1992.) Its quota in the IMF Detailed membership discussions are now underway. Once will be SDR 467.7 million (about $604 million). With the acces- FRY's arrears are settled, the Bank will be able to provide new sion of the Federal Republic of Yugoslavia, IMF membership loans to help the country achieve a lasting economic recovery now totals 183 countries. Under the IMF's policy on emergency after more than a decade of turmoil. postconflict assistance, the Board also approved a loan of about $151 million in support of a program to stabilize the Yugoslav Yugoslavia's output, which has only partly recovered from the economy and help rebuild administrative capacities. About economic devastation caused by the Kosovo war, stands at $130 million of the loan will be used to repay the bridge loans about 40 percent of its 1989 level. About half of the workforce Yugoslavia received to eliminate its arrears with the IMF. is unemployed, and the country's infrastructure is in disre- pair, following years of inadequate investment and the dam- With membership in the IMF established, the Federal Republic of age inflicted during the Kosovo war. About 900,000 refugees Yugoslavia (FRY) is nowa step closerto membership in the World and internally displaced persons live in Yugoslavia under dif- Bank. The nexttask is to resolve the $1.7 billion in IBRD debtthat ficult conditions. The macroeconomic situation is very frag- have accumulated since 1993, when the membership of the former ile, with the ratio of external debt to GDP having risen to about Socialist Federal Republic of Yugoslavia was suspended. 140 percent in the absence of debt servicing. Even before FRY's membership, however, the Bank has embarked The European Bank for Reconstruction and Development on a program of analytical and advisory services, which it hopes (EBRD) became the first international financial institution that to expand through trust funds. Key is the Bank's effort (in partner- approved FR Yugoslavia's membership last December. The ship with the European Union) to developwith theYugoslavgov- EBRD expects to assistYugoslavia by supporting local, credit- ernment a medium-term Economic Recovery and Transition worthy banks; providing funding to micro-, small, and medium- Program Report. Tothis end, expertteams are in FRYthis month size enterprises; funding export-oriented companies to assess economic and structural reform priorities and invest- undergoing privatization; and making infrastructure invest- ment and capacity building needs. The Economic Recovery and ments in the public sector. Yugoslavia will be the 27th country Transition Proqram Report is expected to be readv in April 2001. to benefit from EBRD investment. © 2000 The World Bank/The William Davidson Institute TRANsrnoN, Nov.-Dec. 2000/Jan. 2001 E XiI"Bank of Finland Institute for Economies in Transition Winners and Losers in Latvia During the Transition by Franziska Gassmann A decade ago the world was con- better off than those with income from from transition. The perception of the past fronted with the phenomenon of employment in agriculture or from social and the changes that occurred du-ing the collapsing communist system transfers. transition depends on where one stbod in the Soviet Union and other Central and before the transition. In general, those that Eastern European countries. Now, 10 On average, households that believe that had much to lose believe they lost rr ore years later, the question arises: What they consume more today are larger and than those who did not have as mucn to happened to people during the transi- have more children, more prime-age lose. Pensioners, for example, tend to be tion? Who are the winners, and who are adults, and fewer elderly. These results pessimistic in their assessment of ti an- the losers? differ from results of other surveys. Other sition. People who held well-paying jabs poverty assessments in Latvia-as well in 1991 also tend to assess the traIsi- Poverty has been studied extensively in as surveys in other countries-have found tion negatively. Individuals' initial position economies in transition since the begin- thathouseholdswithchildrenareworseoff clearlyinfluencesurveyresults, because ning of the 1990s, but the dynamics of liv- than other households. Households with their responses reflect their percepti ons ing standards have received scant members over 60 years of age are not of reality. attention. A 1998 survey of 3,200 house- among the losers in transition in most other holds in Latvia sheds some light on the countries, and the elderly do not belong to Younger generations and families with perceptions of households about the ef- the most vulnerable groups in Latvia. children-identified as highly vulneraible fects of transition. The majority of respon- groups, both in the poverty profile for dents (62 percent) reported consuming Interestingly, thegenderofthebreadwin- Latvia and in the literature on othertra si- much less in 1998 than in 1991. Another ner is a significant determinant of house- tion economies in the region-tend tc be 14 percent reported consuming some- hold perception of well-being. Households more positive. These people are more what less, 12 percent reported consum- headed by men have a more positive view likelyfocused on thefutureand expecttieir ing about the same level, and only 9 of their possibilities than households situationtoimprove.Theirassessmertof percent reported consuming more in headed by women. Ethnicity is also impor- their current situation could be an expres- 1998 than in 1991 .While these figures tant: Russian and other non-Latvian house- sion of their hopes that current low liN ing reflect respondent opinions, not actual holds have more negative perceptions standards are only transitory. consumption, correlation between house- than do Latvian households. holds' welfare level and their perception A main conclusion from the survey is that indicates that most respondents have a Respondents tend to be more pessimis- life in Latvia has become more difficult and fairly accurate understanding of their eco- tic when asked about improvements in insecure and that the future is uncertain. nomic situation. general than when asked whether things The fact that most Latvians feel they have improved (or at least did not get worse) lost in the transition and are worse off to- One important result of the survey is that with respect to specific items (food, cloth- day than they were 10 years ago shc uld both improvement and deterioration are ing, equipment). However, the vast ma- cause concern. People in Latvia did not closely related to employment and employ- jority of people believe that life in Latvia just get poorer, they became more pessi- ment possibilities. People who are em- has become more difficult: gains in terms mistic. This political reality cannot be ig- ployed tend to live in households that report of consumption possibilities are the privi- nored, even with economic growth rates consuming as much as or more than in lege of the upper-income minority. For that appear to have recovered. 1991. In contrast, among the unemployed, most people, consumption possibilities 80 percent live in households that report have declined. Franziska Gassmann is an economist at consuming far less today than in 1991. BOFIT An earlier version of this article Households with a main income earner More than 75 percent of the population appeared in Baltic Economies: The Quiar- with a nonagricultural job are generally believe that they are among the losers ter in Review (April, 2000). CM TRMjsmoN, Nov.-Dec. 2000IJan.2001 The World Bank/The William Davidson Institute © 2000 BOFIT's Latest Discussion Papers Laura Solanko and Merja Tekoniemi, A Sandra Dvorsky, Measuring Central actual CBI. The paper concludes that the Tale of Two City-States: Novgorod Bank Independence in Selected Tran- overall degree of legal CBI is comparatively and Pskov in the 1990s, DP 14/2000. sition Countries and the Disinflation high in all countriesexamined. Process, DP 13/2000. Despite common histories, geography, Vadims Sarajevs, Money Shocks in a and natural resources, the Russian cities This study measuresthedegree of legal and Small Open Economy with Dollar- of Novgorod and Pskov chose different actual central bank independence (CBI) in ization, Factor Price Rigidities, and paths during transition. Novgorod commit- five Central and Eastern European transi- Nontradeables, DP 12/2000. ted early on to policies that would attract tion economies striving for EU accession foreign investments in production; Pskov (the Czech Republic, Hungary, Poland, Tuomas Komulainen and Jukka Pirttila, adopted protectionist policies until it was Slovakia, and Slovenia). Itfinds thatthatthe Fiscal Explanations for Inflation: Any clear that efforts to increase domestic and level of legal central bank independence is Evidence from Transition Economies? foreign investment levels were needed. high in all five countries and that the level of DP 11/2000. The differences between the two cities actual central bank independence, mea- show that policies at the regional level sured by the turnover rate of central bank R. E. Ericson and B. W. Ickes, A Model of matter. governors, is used as a proxy to measure Russia's "Virtual Economy," DP 10/2000. Oil Price Dependency of the Russian Economy The ruble's crash shrank the Russian economy drastically in also rose, which in turn has boosted the larger monetary ag- dollar terms. As world oil prices climbed, the share of export gregates. The year-on-year changes in M2 have been at least earnings in GDP increased from 20-25 percent in 1994-97 to 50 percent since June 1999. 50 percent in 2000. The share of fuel exports (oil and gas) rose from 9-10 percent in 1994-98 to almost 25 percent of GDP In contrast with the past, rapid money growth has not been re- (although the fuel industry employs only about 1 percent of the flected in consumer prices. However, increases in producer workforce). prices are clearly higher (by about 50 percent). The main rea- son for the discrepancy between money growth and inflation is At the 1999-2000 exchange rate, the Russian GDP changes the rapid decrease in the velocity of money. about 0.5 percent for every dollar-a-barrel change in the oil world market price. In the first half of last year the increase in What can the Russian authorities do to keep inflation at rea- Russia's oil and gas export income alone accounted for 50 sonable levels? If large current account surpluses persist, percent of the rise in the GDP. A dollar-per-barrel change in the increased liquidity in the economy must be sterilized or the oil price causes a 4 percent change in the economy's the monetary aggregates will grow. Sterilization of large capi- ruble money supply, M2 (cash in circulation and deposits), tal flows is costly and cannot be a long-term strategy of a or about a 1.5 percent change in the broader money supply, central bank. Moreover, the Central Bank of Russia currently M2XX (ruble money plus foreign currency deposits plus es- lacks the tools to control money growth. To attain further mon- timated foreign cash in Russia). The current shift of lower oil etization of the economy, a properly functioning financial sec- prices and growing imports may help monetary policy in tor is imperative-and reforms of the Russian banking sector checking liquidity and can also help exchange rate policy have barely begun. keep the ruble stable-unless, of course, this shift contin- ues. Excerpted from Vesa Korhonen, "Swings over Russian Eco- nomic Transition" (Russian Economy: The Month in Review De- In the first half of 2000, Russia produced a current account sur- cember 2000) and Tuomas Komulainen and likka Korhonen, plus of $23 billion, or 22 percent of GDP. Gold and foreign cur- "The Dilemmas of Russian Monetary Policy" (Russian rency reserves rose from $12 billion at the end of 1998 to $27 Economy: The Month in Review November2000). The authors billion in November 2000. Correspondingly, the monetary base are economists at BOFIT. © 2000 The World Bank/The William Davidson Institute TRANsrnoN, Nov.-Dec. 2000/Jan. 2001 = Conference Diary For the Record atmosphere and to develop long-term col- come through policy or institutional des gn. laborative relationships. The conference This workshop will look at the environn-ent 2000 Asian Venture Forum also aims to provide young researchers facing firms-particularly product markets November 8-10, 2000, Hong Kong J.W. with the opportunity to meet and discuss and financial markets-to achieve a better Marriott Hotel their work with senior economists. understanding of the relations betweer in- Information: Monique Muldoon, Meetings novation and institutions. Papers will fo;us Sponsors: Prudential Asset Management Manager, tel.: 4420-7878-2907, fax: 4420- on four themes: innovation and the struc- Asia Ltd.; GE Equity; Newbridge Capital Ltd.; 7878-2999, Email: mmuldoon@ceprorg, ture of product markets, innovation and tle Clifford Chance; Baker& McKenzie; Baring Web site: http.//rwww. cepr org/home ie.asp. structure of financial markets, innoval ion Private Equity Partners Asia; Bain & Com- and the policy environment, and measur- pany; Crimson Ventures Ltd.; Coller Capital World Bank's Thirteenth Annual Bank ing the impact of institutions on innoval ion Ltd.; Walden Intemational Investment Group. Conference On Development Eco- and productivity growth. nomics (ABCDE) Information: Monique Muldoon, Meetings Global sponsors: H&Q Asia Pacific; Ven- May 1-2, 2001, Washington, D.C., United Manager, tel.: 4420-7878-2907, fax: 4420- ture Quest: KLM Capital Group; AsiaTech States 7878-2999, Email: mmuldoon@cepr.org, Web site Group. Web site: http.//www ceprorg/home_ie.F sp. Inforrnation: Tel.: 852 2838-9626, fax: 852 Opening Address by World Bank Presi- 2891-9659 (Hong Kong), or tel.: 650-232- dent, James D. Wolfensohn, KeynoteAd- The Second International Conference 2709, fax: 650 -75-0181 (United States), dress by World Bank Senior Vice President on PR's Contribution to Transition in Email: Conference@asiaventure.com, Web and Chief Economist Nicholas H. Stern. Central and Eastern Europe site: www:asiaventure.com/conference.html. Session One: Globalization and Inequal- Research and Practice ity (Kevin O'Rourke, Daniel Cohen, Rich- June 8-9, 2001, Poznan, Poland Forthcoming ard N. Cooper, and Anthony Venables). Session Two: Health and Development Poland and the other countries of Central European Bank for Reconstruction (representing Medecins sans Frontieres- and Eastern Europe, as well as thosE of and Development Annual Meeting Doctors Without Borders: Jean 0. Lanjouw, the former Soviet Union are going throLigh April 22-24,2001, Hilton London Metropole Anne Case, and Tomas J. Philipson). Four this unique historical process of transitiDn. Hotel and Conference Centre, London parallel workshop sessions will be held It is difficult and for some social groups each afternoon. Participation by non-Bank proves to be also painful. The key factor for The 2001 Annual Meeting of the Board of and non-IMF staff by invitation only. its success are changes in social con- Governors of the European Bank for Re- Information: Boris Pleskovic (e-mail: sciousness. Public relations have already construction and Development (EBRD) bpleskovic@worldbank.org), ResearchAd- in many cases proved to be a new-in Ihis and the associated Business Forum will ministrator, Development Economics Vice unique environment-and usefull instrument mark the 10th anniversary of the start of Presidency, World Bank, 1818 H Street, for achieving such desirable changes in the the EBRD's operations. N.W, Room MC 4-402, Washington DC former "socialist" thinking, and helping in in- Registration: http://www.ebrd.com/english/ 20433, tel. 202-473-1062, fax 202-522- troducing the principles of market economy meet/index.htm. 0304., Web site: http://www worldbank.org/re- and of democratic political system. search/abcde/ European Summer Symposium in The aims of the conference are to: Labour Economics Product Markets, Financial Markets, * Identify the main areas of "transition April 24, 2001, Ammersee, Germany and the Pace of Innovation in Europe PR" activities such as: PR of state enter- May 25, 2001, Brussels, Belgium prises, with primary goal to gain the ac- This symposium is designed to bring to- ceptance for possible privatisation; PR gether labor economists from across Eu- Considerable progress has been made in in privately-owned businesses, to gain rope and key researchers from outside the the past 10 years, but researchers and theacceptanceforprivate property; PR region. It provides the opportunity for re- policymakers have still notfully identified the of the "new" market economy instituticins searchers from different universities and main sources of and obstacles to innova- such as the stock exchange, investment countries to discuss theirwork in a relaxed tion or how those obstacles can be over- and pension funds etc, to encourage the E TRANSITION, Nov.-Dec. 2000/Jan.2001 TheWorld Bank/The William Davidson Institute©2000 public to use their services; PR in foreign Information: SITconference@yahoo. Location of Economic Activity, Re- companies-to remove the predjudicies com, fax: 1-818-677-2059. gional Development, and the Global toward foreign capital and foreign owner- Economy: The European and East ship. Competition Policy in the Transition: Asian Experiences * Help the western practitioners to un- Theory, Implementation, and Challenges September 26-27, 2001, University of Le derstand, that their strategies and instru- July 9-27, 2001, Budapest, Hungary Havre, France ments, to be successful in the new enviroment, have to be properly adjusted. This three-week course is intended to This conference, organized jointly by the Deadlines: March 1, 2001-for registra- equip participants with the economic tools the University of Le Havre and Inha Uni- tion and submission of abstracts. needed to assess the welfare effects of versity (Republic of Korea), aims to bring Information: Dr. Jacek Trbecki, email: competition, competition legislation, and together theoretical and applied research jacak@nl.pl. alternative competition policy decisions. It work on the importance of spatial factors aims to support those who contribute to in addressing regional economic devel- Sexualities in Transition: International the growing political debate, legal dis- opment. Papers are invited on the follow- Social Science Conference putes, and administrative decisionmaking ing topics: June 12-16, 2001, Dubrovnik, Croatia processes on competition policy in transi- * Intemational trade and location of eco- tion. Particularly welcome are Ph.D. stu- nomic activities. Despite the profusion of research on the po- dents with teaching experience, junior * Spatial factors in the strategy of economic litical, economic, and sociocultural aspects of faculty, and competition analysts in NGOs, actors. the postcommunist transition in Central and business, and government. * Logistics and transportation issues. Eastem Europe, little has been written about * Regional development and urban the effect of rapid economic and social The course, directed by Todor Gradev, in- economics. transformation on sexuality. This conference cludes six modules. After a brief review of the aims to fill this gap by addressing the im- basic concepts of oligopoly theory, the first Empirical papers should draw on evi- portant question of whether in addition to modulewill setupthesubsequentdiscussion dence from Europe or East Asia. Case reflecting the new societal reality, sexuality byaddressing competition and efficiency. The studies comparing East Asia and Eu- can also generate the social tolerance and nextfour modules will address the theoretical rope and papers drawing on the recent social capital necessary for a well-rooted concepts and inferences for public policy de- rediscovery of economic geography are democracy. A book consisting of selected sign of controversial competition-related is- particularly welcome. conference proceedings, to be published sues, including the permissible levels of following the conference, will provide the first market power and market concentration, Papers will be selected and the final pro- theoretical and empirical body of work that the role of the market as a selection gram drawn up by May 15, 2001. Final explores various aspects of human sexual- mechanism, the evolution of market struc- versions of selected papers should be ity in posttransition economies. ture, and the controversies over interna- submitted by September 1, 2001. The tional trade and domestic competition. proceedings of the conference will be The conference also hopes to establish a One module will be devoted to the Euro- published. Travel, hotel, and meal ex- wider sexuality research network by bring- pean Union. The last module, a simulated penses will be covered for all conference ing together experts from Central and East- competition adjudication, will make partici- participants. ern Europe, the European Union, and the pants explore the practical applicability of Submission: To submit a paper, send a United States. Topics to be addressed at the theory of competition. one- to two-page proposal to either of the the conference include Postcommunist conference organizers by March 31, 2001. Sexual Politics; Sexuality Research in Tran- Fully funded places are available for 28 Prof. P B. Ruffini, University of Le Havre, sitional Countries: Tradition and New participants from Central and Eastern Eu- Faculte des Affaires Internationales, 25, Winds; Gender Roles and Sex Norms in rope, the former Soviet Union, and other rue Philippe Lebon, BP 420-76057 Le Transition; Sexual Representations in the new democracies. Applicants must apply Havre CEDEX-FRANCE. Tel. 332-3274- Postcommunist Media; Aporiae of Sex by January 15, 2001. 4054, fax: 332-3521-4959, E-mail: pierre- Education: New Solutions for New Health Information and downloadable application bruno.ruffini@univ-lehavre.fr; Prof. S.G. Risks?; Sexual Minorities: New Social forms: http://vvww.ceu.hu/sun/sunindx.html. Lee, Inha University, Division of Intema- Movements and the Old Homophobia; To- Inquiries: CEU Summer University Office, tional Trade, 253 Yonghyun-Dong, Nam- ward New Sexual Lifestyles: Patterns of 1051 Budapest, Nador u 9 Hungary; tel: Ku, Inchom, 402 751, Republic of Korea, Adult Sexual Behavior; and Commercial 36-1 327-3811, fax: 36-1 327-3124, Email Tel.: 8232-860-7778, fax: 8232-868-5373, Sex in Transitional Countries. sunreq@ceu.hu. Email: sanglee@inha.ac.kr. © 2000 The World Bank/The William Davidson Institute TRANSITION, Nov.-Dec. 2000/Jan. 2001 3 New Books and Working Papers The Macroeconomics and Growth Group regrets that it is unable to provide the publications listed. World Bank Publications becontactedatccavalcanti@wodidbank.org Jo Ritzen, William Easterly, and Michael orzli@worldbankorg. Woolcock, On "Good" Politicians and 7O receive ordering and price informa- "Bad" Policies: Social Cohesion, Insti.. tion for World Bank publications, con- Michael Lokshin and Martin Ravallion, tutions, and Growth, WPS 2448, 2000 tact the World Bank, P 0. Box 960, Short-Lived Shocks with Long-Lived 35 pp. Hlerndon, VA 20172, United States, tel.: Impacts? Household Income Dynam- 703-661-1580, fax: 703-661-1501, ics in a Transition Economy, WPS 2459, Bold, civic-minded, well-informed politicianE. E'mail: books@worldbank.org, Web site: 2000, 26 pp. (or interest groups) can face severe con- http.//www. worldbank.org/publications, or straints in bringing about policy reform tha: visit the World Bank InfoShop in the Persistent poverty has emerged in many force them to enact bad policies. These con- (,nited States, at 701 18th Street, NW, transition economies, as vulnerable straints are shaped by the degree of socia V/ashington, DC (tel.: 202-458-5454). households have been unable to recover cohesion in a country (that is, the inclusive- from large shocks to their income. In Hun- ness of a country's communities) and the Carlos B. Cavalcanti and Zhicheng Li, gary householdswere ableto bounce back quality of its institutions. Social cohesion iE Reforming Tax Expenditure Programs from transient shocks. essential for generating the trust needed tc in Poland, WPS 2465, 2000, 23 pp. implement reforms. Citizens must believe thai To order: Patricia Sader, Room MC3-556, short-term losses will be more than offset bs T3x expenditures are reductions in tax li- tel.: 202-473-3902, fax: 202-522-1153, long-term gains. In countries in which institu- abilities that result from preferential provi- Email: psader~worldbank.org. The au- tions are weak and that are divided along s ons, such as deductions, exemptions, thors may be contacted at mlokshin class and ethniclines, cohesion isweak. c-edits, deferrals, preferential tax rates, @worldbank.org or mravallion@world aid exclusions from taxation. They are an bank.org. Joel S. Hellman, Geraint Jones, and eFfective form of government spending Daniel Kaufmann, "Seize the State, cianneled through the tax system, usually Uwe Deichmann and Vernon Henderson, Seize the Day": State Capture, Corrup- as a substitute for direct government Urban and Regional Dynamics in Po- tion, and Influence in Transition, WPS sIDending to achieve fiscal and political land, WPS 2457, 2000, 40 pp. 2444, 2000, 44 pp. o ojectives. Poland's continuing housing shortage re- To order: Diane Billups, Room J3-131, Poland introduced tax expenditure programs duces labor mobility, which reduces poten- tel.: 202-473-5818, fax: 202-334-8350, ir 1992 to compensate lower-income tax- tial growth. Urbanization remains low in Email: governancewbi@worldbank.org. payersforthewithdrawal of subsidies. But Poland. Intemal migration decreased signifi- Foran electronic version of this paperano the tax system is difficult for the average cantly in the 1 990s, with rural-to-urban mi- related research papers and governance teixpayer to understand, it reduced the tax gration declining dramatically. Housing data, visit www.worldbank/wbi/govemance. base, and most of the programs, which are construction, which was already low, fell by The authors may be contacted atjhellman eXtremely regressive, benefit higher-in- half in the 1990s and has only recently be- @worldbank.org or dkaufmann@worlo come taxpayers more than the taxpayers gun to recover.Asignificant numberof mostly bankorg. tley were originally designed to help. Cur- young and educated temporary migrants rently, these programs are not subject to leave Poland annually, many to find employ- Richard H. Adams, Jr., The Politics of svstematic review. To limit their expansion, ment abroad. Economic Policy Reform in Develop- tWeir administration should be strength- ing Countries, WPS 2443, 2000, 44 pp. ened, "sunset dates" established, and their To order: Roula Yazigi, Room MC2-533, economic effectiveness reviewed. tel.: 202-473-7176, fax: 202-522-0056, To order: Moira Coleridge-Taylor, Room Email: ryazigi@worldbank.org. The au- MC4-554, tel.: 202-473-3704, fax: 202- To order: Anita Correa, Room H4-318, tel.: thors may be contacted at udeichmann 522-3283, Email: mcoleridgetaylor 202-473-8949, fax: 202-522-2755, Email: @worldbank.org or vemon_henderson@ @worldbank.org. The authormaybe con- a,.orrea@worldbank.org. The authors may brown.edu. tacted at radams.worldbank.org. C9 TRANSITION, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 Patrick Honohan and Daniela Klingebiel, Global Economic Prospects and De- M. Kojima, R.W. Bacon, M. Lovei, and M. ControllingtheFiscalCostsofBank- veloping Countries 2001, December Fodor, Cleaner Transport Fuels for ing Crises, WPS 2441, 2000, 35 pp. 2000, 180 pp. Cleaner Air in Central Asia and the Caucasus, 2000, 40 pp. Crisis management strategies such as Average GDP in Eastern Europe and unlimited deposit guarantees, open- CentralAsia reached 5.2 percent in 2000, Urban air pollution is a matter of increas- ended liquidity support, repeated recapi- significantly above the 1 percent advance ing concern in many of the newly indepen- talization, debtor bail-outs, and regulatory of 1999. For the first time since the break- dent states. Traffic is burgeoning in cities, forbearance appear to add greatly to fis- up of the Soviet Union, almost all countries but vehicle registration, inspection, and cal costs. The authors argue for a strict in the region recorded positive growth. maintenance are inadequate to support rather than an accommodating approach Exports picked up, in large part due to ris- efforts to improve air quality. Poor fuel to crisis resolution. ing import demand from the Euro Area. quality exacerbates emissions problems. The World Bank expects relatively strong Although certain emissions, such as To order: Agnes Yaptenco, Room MC3- growth for the region through 2002. GDP greenhouse gases, are of global concern, 446, tel.: 202-473-8526, fax: 202-522- for the region is projected to expand 4.1 the greatest costs of air pollution at the lo- 1155, Email: ayaptenco@worldbank.org. percent a year through 201 0-up from a cal level are to human health. The authors may be contacted at phono decline of 1.9 percent during the 1990s. han@worldbank.org or dklingebiel@ The principal weakness is the low level of Technical Papers worldbank.org. investment. The expected rapid growth in electronic commerce could impair the Tim Schwarz and David Satola, Telecom- Shang-Jin Wei, Corruption, Composi- competitive position of countries that lack munications Legislation in Transi- tion of Capital Flows, and Currency the technical skills and infrastructure nec- tional and Developing Economies, TP Crises, WPS 2429 2000, 26 pp. essary to participate effectively. 489, 2000, 86 pp. To order: Hedy Sladovich, Room MC2- David Lindeman, Michal Rutkowski, and Nina B. Bubnova, Governance Impact 609, tel.: 202-473-7698, fax: 202-522- Oleksiy Sluchynsky, Dilemmas and Emerg- on Private Investment: Evidence from 1154, Email: hsladovich@worldbank.org. ing Best Practices-The Evolution of the International Patterns of Infrastruc- The author may be contacted at swei Pension Systems in Eastem Europeand ture Bond Risk Pricing, TP 488, 2000, @worldbank.org. Central Asia: Opportunities, Constraints, 96 pp. Practices, 2000, 56 pp. Dominique van de Walle, Are Returns Capital markets have become the main fund- to Investment Lower for the Poor? Since the early 1990s the transition econo- ing source for infrastructure projects world- Human and Physical Capital Interac- mies of Eastem Europe and Central Asia wide, including in developing and transition tions in Rural Vietnam, WPS 2425, have had to adapt their pension systems. economies, where infrastructurestillfallscon- 2000, 28 pp. Some changes relate to the fact that contri- siderably short of meeting needs. Infrastruc- bution bases are shrnking and govemments ture bonds served as the most popular To order: Hedy Sladovich, Room MC2- are unable tofinance priorcommitments and method of oil, gas, electricity, telecommuni- 609, tel.: 202-473-7698, fax. 202-522- protect pensioners from poverty. Others re- cations, and transport project financing in 1154, Email: hsladovich@worldbank.org. flect the need to make pension systems more these countres throughout 1990-99, substi- The author may be contacted at dvan sustainable in light of forthcoming demo- tutingforgovemmentfunding.Thisstudyiden- dewalle@worldbank. org. graphic changes. Reform entails a move away tifles the political and regulatory risks that most from a single-pillar pay-as-you-go defined- concem investors. It provides a comparative Other World Bank Publications benefit system toward a muHtipillarsystem that analysis of developed and emerging infra- includes a funded defined-contribution com- structure bond markets and identifies factors Ch ristof Ru h I and Daniel Daian u, Eco- ponent and makes the remaining pay-as-you- that drive infrastructure finance in each group nomic Transition in Romania: Past, go components more self-sustaining and of countries. Present, and Future (Proceedings transparent. This studyexamines various as- of the Conference "Romania 2000: pects of moving to a new pension system, Mrak Mojmir, Communal Infrastructure Ten Years of Transition" (October including organization, administration, guar- in Slovenia: Survey of Investment 1999), The World Bank/Romanian antees, transition arrangements, participation Needs and Policies Aimed at Encour- Center for Economic Policies, 2000, requirements, the role ofthegovemment, and aging Private Sector Participation, TP 608 pp. annuitization. 483, 2001, 80 pp. © 2000 The World Bank/The William Davidson Institute TrANsrnoN, Nov.-Dec. 2000/Jan. 2001 M This study provides an overview of the in- formance. The root cause for the poor per- Vivek B. Arora and Martin Cerisola, How stitutional, legal, and regulatory environment formance stems from weak internal and Does U.S. Monetary Policy Influence for communal infrastructure development; external mechanisms of corporate gov- Economic Conditions in Emerging provides a detailed analysis of communal ernance. This report aims to assist the Markets? WP/00/148, 2000. infrastructure investment; and discusses Czech authorities in their ongoing efforts policy measures for increasing the volume to improve the overall institutional and le- Paulo Drummond, Former Yugoslav of communal infrastructure investment. It gal framework for restructuring distressed Republic of Macedonia Bankirig provides information for those seeking enterprises and for providing new lend- Soundness and Recent Lessons, sources of financing other than the govern- ing as well. WP/00/1 45, 2000. ment budget to support and expand the communal infrastructure essential to World Bank Atlas 2000, 32nd edition, George T. Abed and Hamid Davoodi. Slovenia's economic development. 2000. Corruption, Structural Reforms, arid Economic Performance in the Transi- Peter Havlik, Trade and Cost Competi- The World Bank Atlas 2000 provides tion Economies, WP/00/132, 2000. tiveness in the Czech Republic, Hun- easy-to-read maps, tables, and graphs gary, Poland, and Slovenia, TP 482, highlighting key social, economic, and Other IMF Publications 2000, 80 pp. environment data for 206 economies. The 32nd edition has been updated and im- Romania: Selected Issues and Statis- Although the four countries considered in proved with new material taken from the tical Appendix, Country Report No. O0/ this study are the most developed transi- World Development Indicators 2000. It 16, 2001, 223 pp. tion countries in Europe, their average includes six sections, including sections wages are only a fraction of those in West- on global links and world view drawn from Estonia: Second Review Under the ern Europe. Theoretically, low labor costs the corresponding sections in the World Stand-By Arrangement: Staff Report, should give the Central and Eastern Euro- Development Indicators. Also included News Brief by the Deputy Managirig pean countries an advantage, but capital are new estimates of purchasing power Director, and Statement by Authorities shortages and the lack of skills required parities and data on relative prices for of Estonia, Country Report No. 01/1 1, by a market economy prevent them from countries that participated in the most re- 2001, 42 pp. doing so. This report-prepared under the cent round of the International Comparison auspices of the World Bank by Peter Program. Data on GNP, the shares of ex- Andrea Schaechter, Mark R. Stone, arid Havlik, Deputy Director of the Vienna In- ports and agriculture and investment in Mark Zelmer, Adopting Inflation Target- stitute for International Economic Studies GDP, private investment, energy con- ing: Practical Issues for Emerging (WI IW)-reviews wage and labor produc- sumption, and population growth are also Market Countries, Occasional Paper N D. tivity developments and examines the evo- included. 202, December, 2000, 62 pp. lution of export competitiveness. It also summarizes the main findings from the Opportunities and Risks in Central The experience of the industrial coun- ongoing research by WIIW on the impact European Finances: European Union tries suggests that the foundations for of foreign direct investment on restructur- Accession, 2000, 380 pp. successful, full-fledged inflation targetirg ing and provides some policy recommen- are a strong fiscal position and en- dations. IMF Publications trenched macroeconomic stability, a well-developed financial system, central Other World Bank Publications To order: IMF Publication Services, 700 bank independence and a mandate lo 19th Street, NW, Washington, DC 20431, achieve price stability, a reasonably wel - Czech Republic: Completing the United States, tel.: 202-623-7430, fax: 202- understood transmission mechanism Transformation of Banks and Enter- 623-7201, E-mail: publications@imf.org, between monetary policy actions and prises, Country Studies, 2000, 88 pp. Web site: http.//wvww.imf org. inflation, a sound methodology for con- structing inflation forecasts, and trans The Czech Republic reached the end of Working Papers parency of monetary policy to build the 1990s with an unfinished transforma- accountability and credibility. Experience ion agenda. Especially apparent were the Simon Commander, Irina Dolinskaya, and in Chile, Israel, and Poland suggests that lingering problems in the major banks and Christian Mumssen, Determinants of a gradual shift from a crawling exchange in large segments of the corporate sector, Barter in Russia: An Empirical Analy- rate regime to an inflation targeting which led to unsatisfactory economic per- sis, WP/00/1 55, 2000. framework is feasible. 0 TRNANSITION, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 George Kopits, How Can Fiscal Policy P. Kovatchevska, The Banking and Cur- Klaus Uhlenbruck, Klaus Meyer, and Help Avert Currency Crises? WP/00/ rency Crises in Bulgaria: 1996-1997, Michael A. Hitt, Organizational Transfor- 185, November, 2000. No. 204, 2000, 31 pp. mation in Transitional Economies: Resource-Based and Organizational CASE Publications The banking crisis in Bulgaria was caused Learning Perspectives, No. 35, 2000. by slow structural reforms, inefficient pru- To order: CASE, Sienkiewicza 12, 00- dential regulation, and prolonged unsound Many former state-owned firms in the tran- 944 Warsaw, Poland, tel.: 4822-622- lending practices. Excessive credit, a large sition economies of Central and Eastern 6627, fax: 4822-828-6069, Email: case interest rate spread, and an overvalued Europe failed because they pursued pri- @case.com.pl, Web site: http://www. exchange rate exacerbated the banks' li- marily defensive downsizing rather than case.com.pl. quidity position. The currency crisis was a forward-looking strategic restructuring. consequence of expansionary monetary A. Radziwill, Poland's Accession to the policy, which led to irreversible depletion Klaus Meyer, Institutions, Transaction EMU, No. 212, 2000, 23 pp. of Bulgaria's international reserves and Costs, and Entry Mode Choice in East- caused the eventual collapse of the ex- ern Europe, No. 34, 2000. R. Antczak, Theoretical Aspects of Cur- change rate. At the same time, the balance rency Crises, No. 211, 2000, 34 pp. of payments deteriorated. The causal link Klaus Meyer, International Business between the two crises is explained Research on Transition Economies, E. Jarocinska, Labour Developments in through expansionary monetary policy that No. 32,2000. Moldova, No. 210, 2000, 26 pp. came in response to the banking crisis. The central bank was unable to sustain the This working paper reviews the literature M. Blaszkiewicz, What Factors Led to exchange rate when it faced a run on its on business in the transition economies the Asian Financial Crisis: Were or reserves. of Eastern Europe. Were Not Asian Economics Sound? No. 209, 2000, 57 pp. A. Kudina, An Approach to Forecasting Kenneth Husted and Snejina Michailova, Ukrainian GDP from the Supply Side, Knowledge Sharing in Russian Com- M. Tomczynska, Early Indicators of Cur- No. 196,2000,20 pp. panies with Foreign Participation, No. rency Crises: Review of Some Litera- 31, January 2000. ture, No. 208, 2000. J. Cukrowski and M.M. Fischer, Euro- pean Integration: Strategic Market Centre for Economic Policy Y. Kuzmyn, Ukraine's Foreign Trade De- Research and Industry Structures, Research (CEPR) Publications velopments and Forecasts, No. 207, CASE-CEU Working Papers Series, No. 2000. 36, 2000, 24 pp. To order: CEPR, 90-98 Goswell Road, London EC IV 7RR, United Kingdom, R.Antczak, S. Bogdankiewich, P. Daneiko, Center for East European Stud- tel.: 4420-7878-2900, fax: 4420-7878- K. Polomski, and V. Usowski, Impact of ies (CEES) Publications 2999, Web site: http://1wwwcepr.org. the Russian Crisis on the Belarussian Economy, No. 206, 2000, 40 pp. To order: CEES, Howitzvej 60, DK-2000, Paul C. De Grauwe, Exchange Rates in Frederiksberg, Denmark, tel.: 45-3815- Search of Fundamentals: The Case of The Russian financial crisis of August 3030, fax: 45-3815-3037, Email: me. the Euro-Dollar Rate, DP 2575, October 1998 seriously damaged President cees@cbs.dk, Web site:http.//vwwwecon. 2000. Lukashenko's domestic and foreign cbs.dklinstitutes/cees. policy. But the crisis in Belarus-caused by Dalia Marin, Trust versus Illusion: What maintenance of a command economy- Klaus E. Meyer, Ane Tind, and Mar K. Is Driving Demonetization in Russia? began in the first quarter of 1998. The Rus- Jacobsen, National Internationalization DP 2570, 2000. sian crisis merely aggravated the economic Processes: SME on the Way to East- situation. ern Europe, No. 37, 2000. European Bank for Reconstruction and Development (EBRD) Publica- M. Jarocinski, Moldova in 1995-1999: Enese E. Lieb-Doczy and Klaus E. Meyer, tions Macroeconomic and Monetary Conse- Context Sensitivity of Post-Acquisi- quences of Fiscal Imbalances, No. 205, tion Restructuring: An Evolutionary To order: EBRD, One Exchange Square, 2000. Perspective, No. 36, 2000. London EC2A 2JN, United Kingdom, tel.: © 2000 The World Bank/The William Davidson Institute TRANsrriON, Nov.-Dec. 2000/Jan. 2001 M 4420-7338-6227, fax: 4420-7338-6110, Panel Data in Emerging Economies, This study, based on panel data from 198 E-mail: sanfeyp@ebrd.com, Web site: DP 2586, October 2000. industrial enterprises in the Sverdlovsk http.//>www. ebrd. com. Oblast during 1992-96, provides empiri- Do foreign firms perform better than their cal evidence on the impact of privatization Working Paper domestic counterparts? Do foreign firms on the performance of medium, large!. and generate spillovers to domestic firms? extra-large industrial enterprises. Both full Daniel Gros and Marc Suhrcke, Ten Years Using a firm-level panel data set that in- privatization and majority state owne rship After: What Is Special about Transition cludes detailed information on foreign are preferable to the state retaining a mi- Countries?, WP 56, August 2000, 21 pp. ownership at the firm level, the author nority share. The state should retain ma- finds that only in Poland do foreign firms jority control over privatized enterprises or Discussion Papers perform better than firms that do not in- reduce its stake to less than 5 percent in volve foreign participation. No evidence order to avoid the drop in performance Saul Estrin and Alan Bevan, The Deter- of net positive spillovers to domestic caused by the absence of a monitoring minants of Foreign Direct Investment firms was found in any of the three coun- shareholder. in Transition Economies, DP 2638, tries. In contrast, net negative spillovers December 2000. to domestic firms were found in Bulgaria Constantin Sonin, Inequality, Property and Romania. No net spillovers to do- Rights, and Economic Growth in 1ran- Using a panel data set on foreign direct mestic firms were found in Poland. The sition Economies: Theory and Rus- investment (FDI) flows from market to tran- results suggests a negative competition sian Evidence, No. 2K/02E, 2000. sition economies, this study finds that effect that dominates a positive technol- country risk, unit labor costs, host market ogy effect. Evgeny Dorofeev, Economic Factors' size, and gravity factors determine FDI Influence on the Russian Capital Mar- flows into Central and Eastern Europe. Gerard Roland and Thierry Verdier, Law ket, No. 2K103E, 2000. Country risk is influenced by private sec- Enforcement and Transition, DP 2501, tor development, industrial development, July 2000. This study analyzes the price dynamics of the government balance, reserves, and shares listed on the Russian Trading Sys- corruption. Progress toward EU acces- Law enforcement implies coordination prob- tem (RTS). Preferences for specul3tive sion has the potential to induce virtuous lems and multiple equilibria due to a law versus strategic investments in the Rus- cycles for frontrunners but may have seri- abidance and a fiscal externality. This study sian capital market are studied by clivid- ous consequences for laggards. analyzes two institutional mechanisms for ing the risk associated with each share into solving the coordination problem. The first a general component, which depencs on Francesco Giavazzi, Richard Baldwin, mechanism, called "dualism," follows the sce- economic fundamentals, and an indiv dual Erik Berglof, and Mika Widgr6n, EU Re- nario of transition in China, where the gov- (speculative) component, which is asso- forms for Tomorrow's Europe, DP emmentretainsdirectcontrolovereconomic ciated with holding a particularasset. 2623, November 2000. resources and a liberalized nonstate sector follows market rules. The second mechanism Evgenia Kolomak, Sub-Federal Tax Ex- Damien J. Neven and Petros C. Mavroidis, is accession to the European Union. emptions in Russia: Less Taxes, More Antitrust Practice in Poland, Hungary, Investment, No. 2K/07E, 2000. and the Czech Republic, DP 2601, No- Economic Education and vember2000. Research Program (EERC) Sergey Levendorsky and Svetlana Publications Boyarchenko, Money Substitutes in Anti-trust agencies in all Poland, Hungary, the Russian Virtual Economy: Why and the Czech Republic have advocated To order: EERC, 3 Kochnovsky proezd They Appear and What Is Their Im- for competition in the formulation of trade Suite 418, 125319 Moscow, Russian Fed- pact on the Economy? No. 2KI08E, policy. The Polish agency has become eration, tel/fax: 7095-152-0121, Email: 2000. less independent over time, whereas the eerc@eerc.ru, Web site: http:/Avwwweerc.ru. Hungarian agency has probably become Edward Edgar Publishing more independent. Yuri Perevalov, llya Gimadi, and Vladimir Dobrodey, The Impact of Privatisation To order: EE Publishing Limited, Glensanda Jozef Konings, The Effects of Direct on the Performance of Medium and House, Montpellier Parade, Cheltenham, Foreign Investment on Domestic Large Industrial Enterprises, K/01E, GlosGL50IUA, United Kingdom, tel.. 44- Firms: Evidence from Firm-Level 2000. 1242-226-934, fax: 44-1242-262-111, M TRANSITION, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute © 2000 Email: info@e-elgar.co.uk, Web site: ing Paper No. 1001, KielInstituteofWorld more important than economic output for http:/hvww.e-elgar.co.uk/. Economics, 2000. generating support for the new system. In explaining support for postcommunist re- Ole Norgaard, Economic Institutions Eastern enlargement of the European gimes, other aspects, such as social se- and Democratic Reform: A Compara- Union is likely to boost trade and capital curity, social justice, and public safety, tive Analysis of Post-Communist flows. But empirical evidence on the pos- should also be taken into account. Countries, 2000, 272 pp. sible magnitudes remains scant. This study uses four different data sets to esti- To order: Social Science Research Cen- This book systematically explores the politi- mate the determinants of international as- ter Berlin (WZB), Presse- und Information cal effects and consequences of economic set holdings and trade flows. sreferat, Reichpietschufer 50, 10785 Ber- reform in more than 20 postcommunist coun- lin, Germany, Email: delhey@medea.wz- tries, using primary quantitative data and To order: Daniel Piazolo, Kiel Institute of berlin.de, Web site: http.:/h/ww.wz-bedin.de/ stringent statistical analysis. The author ar- World Economics, Duestembrooker Weg sb/pub/pub.de.htm#2000. guesthatthere is no universally applicable 120, 24105 Kiel, Germany, fax: (49)-431- economicreformstrategyandthatpopular 8814-500, Email: dpiazolo@ifw.uni- Jean-Jacques Dethier (editor), Gover- democracy isa more stablefoundation of a kielde, Web site: http://wwwuni-kiel.de/ nance, Decentralization, and Reform successful economythan a powerful execu- IfW/pub/kap/2000/kap1001.htm. in China, India, and Russia, KluwerAca- tive or president. The book also shows that demic Publishers, 2000 generalized models are not useful in study- Robert W. Compton, East Asian Democ- ing the complexity of postcommunist trans- ratization: Impact of Globalization, Distorted economic and political incentive formation. Culture, and Economy, Praeger Pub- structures, capture of the state by powerful lishers, 2000, 224 pp. elites, and inoperative legal systems have Tomasz Zylicz, Costing Nature in a Tran- greatly complicated the political economy sition Economy, Case Studies in Poland, To order http./linfo.greenwoodcom/cgibin/ of reform in China, India, and the Russian 2000, 200 pp. eupdget.pl?S=RV&I=0275964469. Federation, all countries with heteroge- neous populations. This volume studies Other Publications David Cox, Close Protection: The Politics three aspects of reform: fiscal federalism; of Guarding Russia's Rulers, Praeger decentralization and provision of local pub- Roy W. Bahl, Jr., Fiscal Policy in China: Publishers, October 2000, 184 pp. lic goods; and legal reforms. Taxation and Intergovernmental Fiscal Relations, University of Michigan Press, This book examines the "close protection" Part I examines the role of incentives in 1999, 224 pp. units that guard Russia's leaders, includ- fiscal federalism. It analyzes the effects of (To order: http://www.press.umich.edu/Or- ing elite from outside the government and different revenue-sharing mechanisms dering/Orderlnfo.html) outside the Russian Federation. between different levels of government, studying in particular the effects on re- China's 1994 tax reform is noteworthy be- To order: http.//info.greenwood.com/cgi- gional growth and inequality and the incen- cause itwas the most systematic and com- bin/eupdget.pl?S=RV&1=0275966887. tives that local politicians may have to prehensive restructuring of China's revenue provide public goods depending on the fis- system since the start of economic reform Jan Delhey and Verena Tobsch, Under- cal arrangements with the central govern- in 1979. Inadditiontoadaptingthetaxstruc- standing Regime Support in New De- ment.All three countries have been striving ture and tax administration to the needs of mocracies: Does Politics Really Matter for increased decentralization. But the a rapidly rising market economy, the major More Than Economics? DP FS Ilf 00- theoretical literature suggests that, in a thrust of the reform was to redefine inter- 403, Social Science Research Center decentralized setting, second-best solu- governmental fiscal relations. Although the Berlin, 2000, 31 pp. tions must prevail: it is not possible to en- reform clearly propelled the nation's fiscal sure incentive compatibility simultaneously system toward centralization, it put in place Using the 1991-98 New Democracies Ba- with optimal allocation of resources and a the structure necessary to pursue true fis- rometer, the 1999 Hungarian Euromodule, balanced budget in providing public goods. cal decentralization in the future. and the 1998 German Welfare Survey, this study examines citizen satisfaction with de- Part II discusses taxation and public ex- Claudia M. Buch and Daniel Piazolo, mocracy in 12 economies. The results do penditure management, both as a politi- Capital and Trade Flows in Europe and not support the common view that in all cal and as a budgetary process. Two the Impact of Enlargement, Kiel Work- postcommunist societies political output is questions are addressed: Does participa- © 2000 The World Bank/The William Davidson Institute TRANsrnoN, Nov.-Dec. 2000/Jan. 2001 M tion of stakeholders and accountability of Depression, continuing in several coun- Florence, Italy, Switchboard: 39 055 2033 public authorities improve economic and tries over the entire decade of the 1990s. 0, direct line: 39 055 2033 345, fax: 39 055 social outcomes? Does bettergovernance The effects have been most severe in the 244817, Email: rnsuhrcke@uniceforg, in the provision of basic goods, such as two countries with the largest economies- Web site: www.unicef-icdc.org. health care and education, improve equity? the Russian Federation and Ukraine. This While decentralization is often seen as a study examines the underlying roots of Peter H. Solomon and Todd S.Foglesong, way to improve the quality of public services, these processes, especially from the view- Courts and Transition in Russia: The rule-based governance is viewed as a safe- point of policy options for the future and Challenge of Judicial Reform, Westview guard against the arbitrariness of public their political and technical constraints. Press, 2000. officials and weakness in law enforcement. Russell R. Miller, Doing Business in This book analyzes the state and operation Part IlIl focuses on the rule of law, the role Newly Privatized Markets: Global Op- of the courts in the Russian Federatic n, pay- of the judicial system in establishing a rule- portunities and Challenges Quorum ing particular attention to the struggle s of re- based economy, and the effectiveness of Books, 2000, 344 pp. formers to develop judicial independence legal institutions during the transition from and extend the jurisdiction of the ccurts to socialism to a market economy. It also dis- During the past decade thousands of state- include constitutional and administrative dis- cusses various conceptual approaches to controlled companies in more than 100 dif- putes as well as supervision of pre:rial in- addressing legal reform issues. ferent countries have entered the private vestigations. It outlines what can and should sector. These firms range in size and com- be done to make courts in Russia autono- Kristin J. Forbes, The Asian Flu and mercial significance from small family- mous, powerful, reliable, efficient, 3cces- Russian Virus: Firm-Level Evidence owned kiosks in the Russian Federation to sible, and fair. The book draws on extensive on How Crises Are Transmitted Inter- some of the largest, most influential corpo- field research in Russia, including the results nationally, MIT-Sloan School of Manage- rations in Western and Central Europe, Latin of a lengthy questionnaire distributed to dis- ment and NBER, 2000, 58 pp. America, and Asia. This book provides a trict courtjudges throughoutthe coun:ry. To order: kjforbes@mit.edu. comprehensive, business-oriented per- To order: Westview Press, 5500 Central spective on the origin and geographic ex- Avenue, Boulder, CO 80301, tel. 800- Bartolomiej Kaminski, NATO and Europe pansion of the privatization movement and 386-5656, fax: 303-449-3356, E mail: in the Twenty-First Century: New describes the methods thatgovemments use westview.orders@perseusbooks com, Roles for a Changing Partnership, and the objectives they hope to achieve in Web site: http:/h/ww.westviewpress conm. Conference Proceedings, Woodrow Wil- divesting state assets. It identifies the for- son Center, 2000. mative influences on these new companies, Janusz M. Szyrmer (editor), The Barter To order: http://wwics.si.edu/ees/special/ as well as the operating needs created by Economy: Non-Monetary Transac- 2000/aprOO.htm the privatization process. The book also dis- tions in Ukraine's Budget Sefctor, cusses alternate methods of expanding Harvard University Ukraine Project, Kyiv, Grzegorz W. Kolodko, Post-Communist markets, such as reaching newly privatized 2000, 207 pp. Transition: The Thorny Road, University of firms through a strategic marketing program Rochester Press, Rochester Studies in by creating strategicalliances, restructuring Janusz M. Szyrmer and Khvaja M.Sultan, Central Europe, 2000, 200 pp. enterprise, expanding technical relation- Ukraine through Transition, 'hal- ships, and developing export markets. lenges, and Strategies, Harvard Uni- This volume examines the transformation To order: Greenwood Publishing Group, versity Ukraine Project, CASE, Kyiv, of state-controlled economies into free 88 Post Road West, Westport, CT 2000, 205 pp. marketeconomies,anongoingtransition 06881, tel.: 203 226-3571, Email: that is an indispensable part of globaliza- webmasterigreenwood.com, Web site: Special Publication tion. The recession created by the transi- http./Anfo.greenwood.con/books/1567202/ tion has lasted much longer than expected, 1567202608.html. Public Management Forum (a bimDnthly contraction was deeper than expected, newsletter for public administration practitio- and the recovery was not-and in some Marc Suhrcke, Are Reforms from a Cen- nersinCentralandEastem Europe),putlished cases still is not-as smooth as envisaged trally Planned to a Market System Bad by SIGMA (Support for Improvement in Gov- by both governments and international or- for Health? HWWA Discussion Paper ernance and Management in Centril and ganizations. Instead of recovery and ro- 105, 2000, 38 pp. Eastem European Countries), ajoint initiative bust growth, the lasting recession has To order: UNICEF Innocenti Research of the OECD and the European Union Web turned out to be the Great Transitional Centre, Piazza SS. Annunziata, 12, 50122 site: http:/fwww.oecd.org/puma/sigmaweb/. M TRANSITION, Nov.-Dec. 2000/Jan.2001 The World Bank/The William Davidson Institute C 2000 Bibliography of Selected Articles Postsocialist Economies bership. Finance and Development (a Weber, R., and G. Taube. Estonia quarterly publication of the Intemational Moves toward EU Accession. Fi- Lerrick, A. A Better Way to Lend A Hand: Monetary Fund) (International) 37(3): 25- nance and Development (a quarterly The World Bank Should Convert Its 27, September 2000. publication of the International Mon- Lending Program for the Poorest etary Fund) (international) 37(3): 28-31, Countries to Outright Grants. The /n- Hungary: Financial Times Survey. Fi- September 2000. ternationalEconomy(United States) 14(6): nancial Times (United Kingdom) Suppl.: 36-39, November-December 2000. i-iv, November 22, 2000. CIS Winiecki, J. Solving Foreign Trade Macek, J. Banking Legislation of the Cochrane J., V. Gidirim, T. Carty, and Z. Puzzles in Post-Communist Transition. Czech Republic. Joumal of Intemational Dobritskaya. The Russian Tax System: Post-Communist Economies (United Banking Law (United Kingdom) 15(10): Achievements in 2000 and the Pos- States) 12(3): 261-278, September 2000. 257-259, October 2000. sible Agenda for 2001. Russian Eco- nomic Trends (United States) 9(3): 17-21, Asia Nord, R. Central and Eastern Europe September 2000. and the New Financial Architecture. Fi- Banking in Asia: Delusions of Ad- nance and Development (a quarterly pub- Dudarev G, and H. Hernesniemi. Competi- equacy-Far Eastern Economic Re- lication of the International Monetary tive Edge of the Russian Economy. view Focus. Far Eastern Economic Fund) (International) 37(3): 32-35, Sep- Russian Economic Trends (United States) Review (Hong Kong) 163(39): 59-76, tember 2000. 9(3): 6-16, September2000. September 28, 2000. O'Rourke, P.J. The Godfather Decade: Gurgen, E. Central Asia: Achieve- China An Encounter with Post-Soviet Cor- ments and Prospects. Finance and ruption. Foreign Policy (United States), Development (a quarterly publication Chen, W. Village Elections in China: pp. 74-81, November-December 2000. of the International Monetary Fund) (In- Cooperation between the State and the ternational) 37(3): 40-43, September Peasantry. Journal of Chinese Political Bush, J. Poland-Running Out of 2000. Science (United States) 5(2): 63-81,1999. Steam. Business Central Europe (United Kingdom) pp. 16-19, December 2000- Hillion, C. Institutional Aspects of the Sachs, J., X. Yang, and D. Zhang. Global- January 2001. Partnership between the European ization, Dual Economy, and Economic Union and the Newly Independent Development.China Economic Review Repse, E. Latvia: Focus on Country States of the Former Soviet Union: (United States) 11(2): 189-209, 2000. Development. Finance and Develop- CaseStudiesofRussiaand Ukraine. ment (a quarterly publication of the Inter- Common Market Law Review (Nether- Xu, L. C., and H. Zou. Explaining the national Monetary Fund) (International) lands) 37(5): 1211-1235, October Changes of Income Distribution in 37(3):17-19, September2000. 2000. China. China Economic Review (United States) 11(2): 149-170, December 2000. State-Building in South-East Europe- Kazakhstan: Financial Times Survey. Survey. Public Management Forum Financial Times(United Kingdom) Suppl.: Yu, Q., and A. K. Tsui. Monetary Services (France) 6(3): 3-13, 2000. i-iv, December 11, 2000. and Money Demand in China. China Economic Review (United States) 11 (2): Tucker, A. Reproducing Incompe-tence: Perevalov Y., l. Gimadii, and V.Dobrodei. 134-148, December 2000. The Constitution of Czech Higher Edu- Does Privatisation Improve Perfor- cation. East European Constitutional Re- mance of Industrial Enterprises? Central and Eastern Europe view (United States) 9(3): 94-104,2000. Empirical Evidence from Russia. Post- Communist Economies (United Feldman, R., and M. C. Watson. Central UNCTAD: Hungary in the Lead. The States) 12(3): 337-364, September Europe, from Transition to EU Mem- Hungarian Economy 29(4): 3-4, 2000. 2000. © 2000 The World Bank/The William Davidson Institute TRANSITION, Nov.-Dec. 2000/Jan. 2001 * Subscribe to TRANSITION We appreciate the continuing (ENGLISH VERSION) support of: I RANSITION If yurncuelooBank of Finland Senior Editor: Richard Hirschler If you are not currently on ouir sub- V? 12 s na Institte for Econorries in Transition Room MC3-374 scription list, beginning In calendar weTelephone: 202-473-6982 year 1999 you may receive TRANSITION Fax: 202-522-1152 on a complimentary basis by writing P.O. Box 160, FIN-0010 Helsinki Email: rhirschier@worldbank.org to: tel: 3589-183-2268, fax: 3589-183-2294 Production Manager: email: bofit@bof.fi Jennifer Prochnow Jennifer Prochnow Internet: http://www.bof.fi/bofit Telephone: 202-473-7466 The World Bank, Fax: 202-522-1152 1818 H Street, N.W. Email:jprochnow@worldbank.org Room MC3-374 L7 SITE Washington, D.C. 20433, USA , OCKHOLMSCHOOLOFECONOMICS telephone: 202-473-7466 The World Bank fax: 202-522-1152 1818 H Street, N.W. Box 6501, SE-113 83 Stockholm, Washington D.C. 20433 Sweden, Sveavagen 65, 9th floor Telephone: 202477-1234 Email: jprochnow@worldbank.org tel: 468-736-9670, fax: 468-316-422 Fax: 202-477-6391 email: SITE@hhs.se World Wide Web: Or if you would like to receive the Tran- Internet: http://www.hhs.se/site http://www.worldbank.orgl sition Newsletter electronically, please notify Jennifer Prochnow at the above email address. Local Government TNH WILLIAM ISN INSTITUTE and Public Service Open S Institute AT THE UNIVIESYOF MICHIGAN BUNESS SCHOOL Reform Initiative W 724 East University PO. Box 519Wyly Hall lst floor TRO URDOPMARH P.O. Box 519 ~~~~~~~Ann Arbor, MI 48109-1234, U.S.A. H-1397 Budapest, Hungary tel. 734-763-5020 For a free subscription to the Russian Phone: (36-1) 327-3104 fax 734-763-5850 language version of TRqANsmON, write to: Fax: (36-1) 327-3105 http:Ilhwwwdi.bus.umich.edu E-mail: Igprog@osilhu International Centre for Policy Website: http://www.osi.hu/lgi Editor: Anna Meyendorff Studies Email:Ameyen@umich.edu 815, Voloska St. Associate Editor: Deborah Jahn Kyiv, Ukraine 254070 We look forward to establishing similar Email: Djahn@umichoedu telephone: +380 44 4636337 agreements with other sponsors-whether TRANsrioN is a publication of the World fax: +380 44 462 4937, 38 individuals or companies. Please contact the Bank, in collaboration with the William Email: marketing@icps.kiev.ua editorfor more details. Davidson Institute, and is produced by Website: http://wwwicps.kiev.ua the Development Research Group. The opinions expressed are those of the au- __________________ For Distribution Use On ly thors andshould not be attibuted in any mannerto the World Bank, to its Board of Executive Directors, or to the countries they represent 02001 The International Bank for If you would like to receive the Reconstruction and Development/ Chinese version of the Transition The World Bank Newsletter please write to: All rights reserved, Manufactured in Center for International Reform and the United States of America Development (CIRD), Volume 11, Number 6 57 Renmin Rd., Haikou City, Nov.-Dec. 2000IJan. 2001 Hainan, China Printed on recycled paper