|olume ., .nmber 11-12, .,vember-J)ecember 199' Transition Economics Division * PolicyResearchDepartment * TheWorldBank Education and Information are Fundamental to Success World Bank President James D. Wolfensohn Visits Russia and Eastern Europe The World Bank's newly appointed system. In the Donetsk region of lete machinery, in constant danger of president, James Wolfensohn, seek- Ukraine, 450,000 jobs depend on coal methane gas explosions. These mniners' ing firsthand knowledge of the Bank's mining. Miners work under dismal con- life expectancy is thirteen years shorter member nations and of the specific ditions straightoutofthenineteenthcen- than the Ukrainian average, which is problems in their regions, visited Af- tury: in lanes less than a meter wide, sixty-nine years, already shorter than rica, the Middle East, Latin America running at a 30-degree angle, with obso- the world average. Some have proposed and most recently five transition economies: Russia, Hungary, Alba- What's inside ... ReformofChina'sState-OwnedEnter- nia, Uzbekistan, and Ukraine. After FrPlantoM arket:PattermsofTran prises-OxfordAnalyticaProgress Re- his latest trip a "town hall meeting" sromlantoMarket: d port. Most of China's state enterprises was orgnized ith Word BankStaff ion. Martha deMelo, CevdetDenizer, and will face bankruptcy, merger, divestiture, was rgaizedwit Word Bnk Saff AlanGelboftheWorldBankanalyzeeco- or management buyout. (page 16) of the Europe and Central Asia Re- nomicliberalization, comparing28transi- gion. Here follows a shortened ver- tion economies over the period 1989-94. Bureaucrats inBusiness-World Bank sion of his remarks during that meet- (page4) Study On Reforming State-Owned En- ing. Russia Fights Crime and Corruption. terprises. (page 16) Michael Gray urges the Russian legisla- BookoftheMonth-MarieLavigne: The Dealing with the social issues of transi- ture to adopt an effective system of com- Economicsof Transition: From Socialist tion is of tremendous importance. A mercial and criminal laws. (page7) EconomytoMarketEconomy. (page2O) terrible anxiety has developed as the Quotation of the Month: "Criminal Fi- LetterstotheEditor. CommentsofRus- econornic underpinnings of these coun- ncilDansratclyInesd sian Economiist StanislavMenshikov and tries' social policies have become un- Russia." Russian editor Aleksandr World BansLev Freinkman. (page 22) Zhilin reveals mafia connections of Rus- certain, or even disappeared. These sian banks. (page 9) Milestones of Transition (page 24) nations-in contrast to those in Africa, Old MythsaboutPoland'sRefoms Die WorldBank/IMFAgenda(page28) Latin America, and the Middle East, Hard. Harvard scholar Jeffrey Sachs re- Reconstruction in Bosnia (page 30) which I had visited earlier-maintained sponds to comments by professors Kabaj full employment, as well as a social and Kowalik on shock therapy. (page 11) Conference Diary (page 32) safety net that includes health care, TheHiddenCharacterofEastEuropean New Books and WorkingPapers education, and retirement benefits. Capitalism: Recombinant Ownership. (page33) Maybe it was inefficient, maybe it was Post-socialist economies cannot be ad- unsustainable, but it was there. Other equately represented in a two-sector BibliographyofSelectedArticles regions never had that social support unmodel, points out David Stark of Cornell (page39) regios neer ha tha socil suport University. (page 13) The World Bank/PRDTE closirig twenty of the mines. Clearly an exceller* pilot projectg, but the systemic has -made, although with large fiscal and economic and humanitarian case can be extension is what it really has to strive external deficits it still has a long way to made for that, but what of the mines' for-finding solutions to social issues, go. The 1996 budget will be critical. employees? At. least now they have a togetherwiththehostgovernments. This Prime Minister Gyula Horn backs the job, evenifitis notagoodjob. Atpresent will certainly require a level of involve- tough stabilization program devised by the World Bank is working on a pilot ment by the government that goes be- Finance Minister Lajos Bokros and program of $10 million to close three yond the simple funding of projects. NationalBankPresidentGyorgySuranyi, mines and retrain the redundant work- despite the apparent social tensions. The ers. It will mean moving from a socially In Moscow World Bank loan disburse- World Bank is being called upon to fi- secure, but economically inviable activ- ments were a major focus of discus- nance transition costs related to social ity into a market-oriented activity with sions with Prime Minister Victor sector, public sector, and financial sec- fewer social guarantees. Many govern- Chernomirdin and his first deputies, Mr. tor reforms. This request will pose a real ments are not prepared to borrow for Chubais and Mr. Soskovets. Commit- challenge for the Bank. I was happy to social purposes. And yet, without ad- ments to Russiahavetotaled $4.6 billion visit MATAV, the Hungarian telecom- equate social underpinnings, advances so far, but with the exception of about munications company, in which boththe on the economic front may seem of $1.2billioninfast-disbursing loans, dis- World Bank and the IFC have invested. dubious value to the average citizen and the risk ofpolitical tension may increase. InAbnath ol an a a great success: in three years 45 percent I was impressed by the high level of . of the portfolio, consisting of eighteen education and the tremendous desire . projects, has been disbursed. Traveling for information and knowledge in the | l around the country reaffirmed my faith region. Dissemination of ideas, infor- g in villages. We went to a mountain vil- mation, and education are fundamental . l lage to look at a microenterprise. The to the success of transition. Accord- villagers were concerned that our loans ingly, a substantial upgrading ofthetrain- were small-only up to $500-and they ing and education activities ofthe Bank's asked for $5,000. "Can you get this Econormic Development Institute (EDI) needs to be considered. The Bank also World Bank Lending to Russia, needs to communicate better with the ,~1993-October 1995 public both by examining its wide range (TUS$ million) of activity and by listening to sugges- Date Loan Amount tions. 1993 First rehabilitation loan 600 bursements have amounted to a mere Employment services 70 In Nizhni Novgorod I saw a farm that $200 million. The backlog is enormous. First oil-rehabilitation loan 610 the IFC is helping to privatize. This is a Something is not clicking, and agree- 1994 Road repair 300 wonderful experiment-but it is still an ment was reached with Mr. Chubais to Developmentoffinancial experiment. The Bank can take three review all the projects in six months. We institutions 200 coal mines and deal with their social will check whether there are problems Landreform 80 roblems Agricultural reform 240 problems. Or the Bank can go to an auto that can be fixed on our side or on theirs Enterprise restructuring 200 or a tractor plant, and with some money, to improve monitoring ofthe operations. Second oil-rehabilitation loan 500 demonstrate that the local government A six-month review, at a very high level, 1995 Environmental-mnanagementloan 110 can take over administration ofthe kin- was also agreed upon in both Hungary Financialandmanagerialtraining 40 dergarten or the housing projects that and Uzbekistan. Project portfolio loan 40 were the responsibilities of those eins. Housing project 400 wereh ether re spoibiateof to firms . A t h i Modernization of tax service 16.8 But whether it IS privatization Of farms A meeting with leading economists at Emergencyoilpollutioncleanup 99 or removal of social programs from in- the Budapest Institute for Advanced Gas transport network 106.5 efficient corporations-the question is, Studies, hosted by Professor Janos Urban transport 329 how can we broaden these good ex- Kornai, proved a very useful introduc- Second rehabilitation loan 600 amples so that they can become sys- tion to issues in Hungary. I was im- Total 4,641.5 temically effective? The Bank can fund pressed by the progress that Hungary Source: the World Bank Annual Report, 1995. 2 November-Decemnber 1995 Transition amount from another bank?"-I asked govemnments ofthe Aral Sea Basin, is to at the village level endure-it is impor- them. And they said, "No, we like you, stabilize the situation-so that degrada- tant for us to build on these strengths. we are very loyal to the World Bank." tion of the Aral Sea can be arrested- In many countries that I visited, the IFC They vehemently denied that it had any- and to do something for those villages office is at one end of town and the thing to do with rates. that have been left behind by the reced- World Bank office is at the other. This. is ing water. These people's traditional skill more than symbolic. In the realm of In Uzbekistan our trip to the Aral Sea is fishing and fish processing. The Bank ideas and operations, IFC and the Bank was perhaps one of the most moving has participated in creating wetlands often function as independent units. In- experiences. We went to a fishing vil- withfishcultivation. Inthisvillagewhere dependence is a good thing, but within lage, now some 40 kilometers away people had absolutely nothing, a child the World Bank Group, the relationship from the coastline because about 3,400 came up to me and gave me five sums, needs to be that of best friends working square kilometers of sea have dried up about ten cents, because the tradition is together. I do not propose to merge since 1960. In the Soviet era, irrigation to give travellers some money for the either IFC or MIGA; but there is a need systems, fed by rivers that flow to the rest of their trip. It was a moving mo- for better coordination within the World Aral deprived the sea of water. The ment that revealed that the strength of Bank Group especially dealing with the challenge for us, together with the five spirit and the values of the local people, private sector. East of Eden "... You may stay, if you buy it ..." From the Hungarian Economy Volume 6, Number 11-12 3 The World Bank/PRDTE From Plan to Market: Patterns of Transition by Martha de Melo, Cevdet Denizer, and Alan Gelb Formerly communistcountries are mov- sured GDP), inflation (average annual and Viet Nam. Statistical analysis ofthe ingalongthetransitionfromaplannedto changes in the consumer price index), CEE and FSU countries indicates that a market economy with different speed. and liberalization, the authors construct cumulative liberalization has a positive This article compares the progress made an annual liberalization index (LI) for effect on output changes withinthe over- by individual postcommunist countries each country over the 1989-94 period. all context of a "transitional recession." in liberalizing their economies. It con- This index-ranging from 0 to 1-clas- Moreover, output recovery appears to cludes that economic liberalization, the sifies countries into different reform require inflationto fall to more moderate cornerstone of early reforms, interacts groups (advanced, intermediate, slow, levels-at least to less than 100 percent strongly with growth and inflation. The and affected by war and embargoes). a year. Both advanced and high inter- higher a country's liberalization index, China and Viet Nam make up a sepa- mediate reformers had stabilized or re- the better chance it has to speed up rate, Asian country group. The index turned to positive real GDP growth by growth and check the inflation rate. The measures the progress of these twenty- 1993-94, but slower reformers contin- close relationship betweeneconomic lib- eight economies in three areas: uedto experience major output declines. eralization and political freedomhelps to An important reason for the association explain why some countries moved *Liberalizing internal markets (freeing between liberalization and recovery is quickly on reforms and others did not. domestic prices, abolishing statetrading that capital and labor are able to flow monopolies). from industry toward services, and eco- Liberalization leads to stabilization in a nomic growth can be fed by the expan- way that is not self-evident to those *Liberalizing external markets (easing siOI of previously repressed service policymakers who are accustomed to the foreign trade regime, including the sectors. socialistpricingand output conventions. elimination of export controls and taxes; For example, the attempt to maintain currency convertibility). Analysis also supports the view that employment and output by fiscal and liberalization has been a crucial element quasi-fiscal transfers to enterprises re- *Facilitating private sector entry of stabilization policy, even though its sults in larger output declines than a (privatizing enterprises, reforming the initial impact entails a spurt in prices, policy of hard budget constraints intro- banking sector). and even though it is by no means a duced along with economic liberaliza- sufficient condition for regaining stabil- tion. Also, liberalization ofprices results To indicatethe duration andthe intensity ity. CEE and FSU countries that failed in lower inflation than do continued price of reforms from 1989 onward, and fac- to liberalize experienced far higher in- controls. tor in the institutional and other changes flation over the 1991-94 period than stimulated by prior policy reforms, a those that did liberalize. An important Twenty-six countries of Central and Cumulative Liberalization Index (CLI) explanation is that liberalization makes Eastern Europe (CEE) and the former has been developed,, adding up the an- the introduction of hard budget con- Soviet Union (FSU), as well as nual liberalizationindexes ofeach coun- straints-andhence fiscal and monetary Mongolia, are analyzed in this article. try over the six year period. (It is inter- restraint-more feasible by providing China and VietNam-although distinct esting to note that the 1993/94 appropriate signaling of the costs and in many respects-are also included in liberalization indexes of China and Viet benefits of specific restructuring mea- the analysis for comparative purposes. Nam are lower than those of the ad- sures. Theperiodcoveredis l989through 1994. vanced reformers, but their CLIs are Thestartingpointis 1989,apivotalyear rather high, reflecting the early intro- Democracy Nurtures Liberalization in the transition from communism to a duction of important reforms.) market economy. What then determines the pace of liber- Liberalization-Stabilization- alization? Bymatching country rankings Measuring Liberalization Recovery ofthe cumulative liberalization index to a comparative index of political rights In order to explore the broad cross- The table on page five shows four coun- and civil liberties (Comparative Survey country relationships between growth try reform groups based on the CLI, of Freedom for 1994, compiled by the (annual changes in real, officially mea- plus countries affected by war and China Freedom House, New York), it is found 4 November-December 1995 Transition that economic liberalization is typically liberalization, Gnwth, and Inflation, 1989-94 associated with a similar degree of po- litical change. Thedirection of causality C:lI liber1l94zation Itat* roeth 9 GDP * GDPe89Ye1l is actually two-way, since econrim llib- C3 ovqia 4116 0.82 26 3.0 84 81 oeralization is an essential step in break- Poand 4.14 0.84 34 4.2 88 82 ing the power of established structures, hiazy 4.11 0.84 21 Q0 81 80 especiallylineministriesthatpreviously C(chR 3.61 0.90 16 0.8 81 80 controlled industry and trade. Savalda 3.53 0.86 19 0.4 79 77 Avw-r 3.91 .85 23 7 S3 80 In CEE/FSU countries where former Bgaria 296 0.68 81 -1.4 73 73 Etuia 293 0.85 69 0.9 69 67 communistpartyleadershaveheldpower Lilania 262 0.79 231 -7.3 44 44 continuously (Kazakhstan, Turkmeni- Latvia 239 0.71 73 4.4 60 59 stan, Ukraine, and Uzbekistan), reforms 2 Rounia 235 0.66 194 22 69 67 have been slow and driven largely by Albania 230 0.70 57 9.5 74 65 ma-roeconomic pressures arising from mmAolia 227 0.64 164 0.6 84 83 the breakup of the Soviet Union and ........ Ay ara 2-55 ...&2 124 0.0. 68 65 RiA v 5 Q72 1.92 0.63 58 -3.5 57 52 attempts to maintain the status quo. Rlliss 1.92 0.63 558 -13.5 57 52 KWgyzstat 1.81 0.68 744 -13.2 61 57 Those countries that made a clear break 3 Midova 1.62 0.53 558 -17.0 53 46 with the previous regime (the Czech Kazkdutm 1.31 0.37 1,870 -18.5 57 49 Republic, Hungary, Poland, Estonia, Av-aa 1.67 .55 933 -156 57 51 Latvia, and Lithuania) have radically UzJidAmi 1.11 0.37 640 -25 89 88 liberalized. The process has continued Betla 1.07 0.35 1,694 -16.6 73 64 eventhough several postcommunistpar- 4 UI=e 0.80 0.20 Z789 -18.6 56 48 Tuirkmilma 0.63 0.19 Z751 -15.0 69 62 ties won in the last parliamentary elec- Avwae Q90 0.27 1,968 -13.2 72 66 tions (in Hungary, Poland, Estonia, and Croatia 4.02 0.83 807 *0.7 69 68 Lithuania). To date no attempts have FYRIccdonia 3.92 0.78 157 -10.7 57 55 been made to backtrack on liberaliza- Amnzia 1.44 0.42 4,595 -7.4 38 38 tionpolicy. 5 C-gia 1.32 0.35 10,563 -24.6 24 23 A-atijan 1.03 0.33 1,167 -17.7 50 44 Tajildst- 0.95 0.28 1,324 -26.3 35 30 Developments in China and Viet Nam Averie 2.11 .50 3,102 -14S 45 34 appear to contradict the link between VidNan 3.72 078 7 7.6 145 100 political andeconomicreform. The coun- 6 China 3.29 0.64 13 11.7 157 100 tries have liberalized economicallywhile Avenue 3.51 0.71 10 9.6 151 100 retaining strictcontrols onpolitical rights * Avaa cf 1993 ard 1994c ozrad and civil liberties. But in China political Source: lia aucns.poica power was decentralized to provincial Cumulative Liberalization-Cross-Country Indexes and local govemments, and this has played an important role in economic Countries ofCentral and Eastern Europe, than 2, but greater than 1.3) Russia, liberalization since the start of agricul- Mongolia, as well as those of the former Kyrgyzstan, Moldova, Kazakhstan. tural reforms in 1978. In Viet Narn the Soviet Union, are listed and grouped into 4. Slowreformers(CLllessthan1.3)Uzbeki- 1989 "renovation" reforms were fol- four categories according to the magni- stan, Belarus, Ukraine, Turkmenistan. tude oftheir cumulative liberalization in- 5. CLIsvaryinafifthcategoryofcountries lowed by implicit decentralization of dex(CLI): affected by war: the former Yugoslav and economic decisionraking through em- Soviet republics that have experienced phasis on initiative at the local level. In 1. Advanced reformers (CLI greaterthan major and persistent internal conflicts both cases the East Asia model of 3): Slovenia, Poland, Hungary, Czech Re- during 1989-94 or, in the case of Armenia gradual, decentralized economic transi- public, Slovakia. andFYRMacedonia, havebeen subject to t a t 2. High intermediate reformers (CLI less conflict-relatedblockades. tion appears to have a poltical counter- than 3, butgreater than 2): Bulgaria, Esto- 6. A sixth category comprises East Asia's part, even ifit is not political freedomper nia, Lithuania Latvia, Romania, Albania, two socialist economies, China and Viet se. Mongolia. Nan 3. Low intermediate reformers (CLI less Volume 6, Number 11-12 5 The World BankWPRDTE ,'( S*S>5 4 Political Freedom and Economic Liberalization in CEE/FSU, delayed. With the shift of structural de- 1994 mand and large changes in relative prices, many state enter- A5 prises have become loss- .?.u~m Cb j~j~ F R *makers,withoutanytaxable 4 0 . * v Hurauy profit anyway. On balance, ShnW& even if there are reasons- 3.5 . Viet Nam* - ,CZ=6 . iet . Nsm* cultural, institutional, or China* structural-why the fiscal position is stronger im ad- 2.5, l1_r *x vanced reformers, there is iJ _/ * Y no convincing evidence that 2* a slower pace of reform has 115 @den strengthened the fiscal po- uzw Armma. u g sition of intermediate and 1 ,Ukmi slow reformers. * Anchor: money supply or exchange rate? Either a d0. 1 * a 4 5 t 7 moneysupplyanchor oran Index of Political Freedom exchange rate anchor have been used in stabilization programs, often in combi- * Shown for comparison only. nation with restrictions on public sector Source: Freedom Review, January 1995, Authors wages. Either approach can be effec- tive, although the choice is likely to depend on the volatility of money de- Policy Implications ity; thus, stabilizationbecomes a priority mand, the adequacy of foreign reserves, for the resumption of growth. Without and the effectiveness of the anchor in The above conclusions have several liberalization, subsidies andbudgetdefi- establishingcredibility. The implications implications for recent policy debates: cits cannot be eliminated, which in turn of the findings here are that any stabili- * Rapid reforms are preferable. The means continued lax fiscal and mon- zation effort-whether exchange rate- close relationship between economic lib- etary policies. No country was able to based or money supply based-should eralization and political freedom more retumtopositivegrowthwithoutliberal- be preceded by wide-ranging liberaliza- or less deternines the reform policy of izing first. tion schemes, given their favorable im- a given regime. To the extent that re- pact on efficiency and credibility. gimes do have options, however, rapid * Fiscal constraint is required The reform is preferable to slow reform, transition recession and lags associated Martha de Melo is Acting Division given the breakdown in the central plan- with the introduction of a new tax sys- Chief, Cevdet Denizer is Economist ning apparatus. The status quo was not tem typically lead to declining revenues of the Transition Economics Divi- a viable option for CEE and FSU coun- intransition economies, while social ex- sion, Alan Gelb is Staff Director, tries. Recorded inflation and output penditures are expected to increase. World Development Report, 1996. losses in countries that have managed to Nevertheless, in economies of advanced postpone adjustment are now far larger reformers, fiscal revenues and expendi- This article is based on the authors' than in the more advanced reformers. tures have tended to remain high rela- identically titled forthcoming pa- tive to GDP, while fiscal deficits have per to be published in the Policy * Stabilization is a priority. There are been noticeably smaller than in those Research Working Paper Series. To strong interactions between liberaliza- countries that delay reforrns. order: the World Bank, PRDTE, tion, stabilization, and growth. Neither Christopher Rollison, room N-9054, the effective functioning of markets nor However, this does not mean that priva- tel. (202) 458-4768. renewed investment is possible with tization of state enterprises which make severe macroeconomic price instabil- up the traditional tax base, should be 6 November-December 1995 Transition Russia Fights Crime and Corruption By Michael Gray A Ithough a strong entrepreneur- tion including a draft code on criminal crimes, some legitimate business trans- ial spirit continues to flourish procedure, will now depend on the atti- actions may actually be inhibited out of A among legitimate business tude of the new parliament elected on fear of risking criminal sanctions. It is people in Russia, organized crime and December 17th. important to note, however, that a com- public corruption are menacing busi- mentary which typically accompanies nesses throughout the country. An in- The current draft penal code outlaws laws may alleviate many of the prob- creasing number of legitimate busi- securities fraud and money laundering lenis associated with the lack of clear nesses-in practically every part of the andforbids "false" and "fraudulent"bank- definition ofwhatconstitutes illegal con- Russian economy-are being black- ruptcies. The drafters, however, are duct. fiailed, forcedoutofbusiness, or simply obviously having difficulty deciding takenoverbycriminalsandcorruptgov- whether certain "harmful activities" Prohibiting Money Laundering einment officials. should be deterred by civil damages or criminal penalties. "Illegal use oftrade- Moneylaunderingislinkedtoothercrimi- Slow Legislation marks," for example, is considered a nal activity, such as drug smuggling or crime under the draft. In the United bank fraud. The Russian MVD (Minis- Enacting criminal justice legislation in Statesthis activityis generallyaddressed try of Internal Affairs) currently esti- Russia would establish an effective sys- by civil prohibition rather than criminal mates that more than 3,000 criminal tem of commercial and criminal laws, sanction. Similarly, Russian lawmakers groups,usingthreats andblackmail, have help to protect businesses from orga- branded "negligent destruction of prop- established control over 40,000 busi- nized crime and corruption, and provide erty" as a crime, which in the United nesses, including more than 400 banks, a needed framnework for establishing States is generally addressed inthe civil nearly 50 stock exchanges, and almost the rule oflawin Russia. But itisproving law context whereby the injured party 1,500 enterprises in the government to be a slow and difficult process. Law- can sue the person who destroyed the sector of the economy. The draft Law makers apparently cannot agree on the property and recover damages. The onLiabilityforLegalizationofProceeds scope of proposed substantive legisla- Russian draft penal code also proposes of Crime, (the proposed law on money tion or even whether substantive or pro- criminal sanctions against government laundering), contains many important cedural reform should be given priority. officials who obstruct "legitimate entre- provisions that not only prohibit money For example, the draft penal code, after preneurship." These actions, however, laundering but also attempt to create a being rejected by the Federation Coun- may be better addressed through disci- structure permitting effective enforce- cil (Russia's senate), was passed again plinary proceedings within such offi- ment of the law's prohibitions. How- by the Duma with sufficient votes to cials' agencies, or through a civil suit by ever, the law could be inproved by clari- override the Federation Council, only to the aggrieved party. fying its terms. For example, the draft be vetoed by President Yeltsin, who law prohibits acts designed to conceal wants a criminal procedure code fur- Drafters could, more clearly, coordinate the source of funds obtained through ther developed first. A separate draft the creation of criminal prohibitions and "criminal activity," without defining the, law on organized crimne that includes civil causes of action. For example, the term, criminal activity. Also, the draft importantprovisions for combating crime draft penal code criminalizes false bank- law does not prohibit a person from and money laundering was also rejected ruptcies (as in the United States). Yet it using funds derived from a criminal act, by the Federation Council in October. has not been clarified how these new even if the person is aware of the origin criminal provisions and the civil provi- of these funds. A proposed law on money laundering is sions ofthe Russianbankruptcy law will also encountering delays because of a be squared. Similarly, money laundering The draft law also requires financial lack of consensus among potentially provisions in the penal code should be institutions to submit currency reports affected govermment agencies. Revi- coordinated with those in the proposed andrecordall significant financialtrans- sions to these draft laws, and other im- law on money laundering. Because of actions in a manner that fully identifies portant pieces ofcriniinaljustice legisla- the vague definitions and scope of these the person or business involved in the Volume 6, Number 11-12 7 The World Bank/PRDTE transaction. The legislation requires fi- minimum wage. Yet the law neither pro- dence to enforce the laws without fear nancial institutions to report suspicious hibits the structuring of financial trans- of retaliation. Thejudiciarymustbe free financial transactions to governmental actions to avoid these restrictions, nor to protect the individual rights and re- authoritieswithintwenty-four hours. Yet requires institutions to report transac- sponsibilities that are the cornerstone of terms such as "financial institution" and tions that, if deposited in aggregate a free market. Western governments "financial activities" and "transactions" amounts within a twenty-four hour pe- and business participants can encour- are not clearly defined. The term "finan- riod, will reach these same levels. It is age these types of reform. cial institution" appears to be limited to important to note that a commentary banks, and thus does not include other that typically accompanies the law, may Russian lawmakers should benefit from businesses that receive large sums of (1)clarify which, ifany, structuredtrans- abundant U.S. experience in these ar- money in exchange for goods and ser- actions, are in fact bogus, and thereby eas, and consider the following: vices, such as automobile dealers or must be reported, and (2) clearly define dealers in precious metals. Nor does it terms such as "suspicious" and "eco- * A balance should be struck between seem to encompass other financial ser- nomically inexpedient." criminal laws and civil/regulatory con- vice businesses, such as insurance and trols that will appropriately sanction dif- credit card companies. (In the United Exercising Due Diligence ferent types of prohibited activity. States such companies are required by lawto file currencytransaction reports.) Although it is unclear whether the pro- * Prohibitions needto be clearly defined. "Financial institution" may thus include posed relatively low fines for noncom- If they are vague or too broad, they may any business whose cash transactions pliance with these regulatory require- well discourage legitimate business ac- could be used to launder money. ments will deter money laundering, tivities without necessarily preventing Russian banks can prevent these illegal criminal deeds. The draft law also requires financial transactions by exercising due diligence. institutionstounilaterallyrefusetoimple- Again, international experience shows * No criminal statute, no matter how ment financial transactions if they are that banks should be suspicious oftrans- comprehensive, can guarantee the cre- either "suspicious" or "economically in- actions not supported by normal busi- ation of a market economy free from expedient." Yet neither "suspicious" nor ness practices; customers who refuse fraud and corruption. Although some "economically inexpedient" is defined to provide complete background infor- crimes will be prevented by enacting by the law. The draft law would thus mation; cash or wire transactions that laws that aim to eliminate the economic grant significant discretion to financial do not fit the profile of a certain type of incentives of illegal activity, the laws' institutions to determine which transac- business; customers who seem more effectiveness will ultimatelydependupon tions are "suspicious" or "economically interested in evading reporting require- thorough investigation, prosecution, and inexpedient." It could therefore be dis- ments than being made aware of them; enforcement. ruptive to the financial system, actually and unwarranted transactions such as promote corruption in the banking in- dispersing deposits at branch banks. Michael Gray is director of the US. dustry, and hinder legitimate business Banks should also ask for prior bank Department of Justice's Criminal activity. It would be preferable to re- references, conduct background inves- Division Program for Anti-Orga- quire financial institutions to report all tigations ofallpartners inajointventure, nized Crime Assistance to Central suspicious transactions (with "suspi- andcorroborateallinfonnationprovided and Eastern Europe and the former cious" clearly defined by the law) to an by applicants. Banks should also coordi- Soviet Union. The Department of appropriate government agency, while nate their activities with regulators, law Justice 's Michael Dittoe and John employing safeguards to ensure the con- enforcement agencies, and business as- Radsan contributed to this article fidentiality of information reported. sociations. from Moscow. The opinions ex- pressed in this article are those of The draft law further requires financial Effective Enforcement the author and do not necessarily institutions to report to the government reflect the official position of the any single cash transaction that is more For any of these nascent efforts to be U.S. Department of Justice. than 200 times greater than the mini- successful,thepoliticalwillmustexistto mumwageandanysinglenoncashtrans- enforce them. A critical element is a action that is more than 500 times the judiciary with the necessary indepen- 8 November-December 1995 Transition Quotation of the Month: "Criminal Financial Dealings Dramatically Increased in Russia" Russian Editor Reveals Banks-Mafia Connection Banking appears to be one of the most difficult to comprehend. Consider the The Tale of Several Scams dangerous occupations in Russia. Sev- following statistics: eral dozen Russian bankers have been *Law enforcement agencies say that The scheme typically used to swindle victims of mafia-style killings in recent nearly one-third of the $11.5 billion in large sums of money is the following: months. Among them were the heads of vouchers which have been sold at auc- the criminals choose a commercial bank Proftekhbank, Tekhno-Bank, Pragma- tion at the Moscow Interbank Currency and submit fake payment documents Bank, Mosbiznesbank, the Bank for Exchange have been bought with the for which they receive funds. These Development of the Wood Industry, "shadow capital" of Russian organized funds are quickly transferred to the ac- Kuzbassprombank, Eurasia-Bank, the crime. counts of bogus companies, and from chief manager of Incombank's St. Pe- *Experts believe that by late 1994, there they are scattered among foreign tersburg affiliate, the chief manager of Russia's criminal organizations con- bank accounts. The fraudulent letters of Agroprombank's St. Petersburg affili- trolled tens of trillions of rubles. Thus, credit used in Moscow originated from ate and the chief accountant of the the amount of"shadow capital" in circu- more than 20 cities of Russia-many of Russian Municipal Bank. The Russian lation in the country is roughly equal to them from Chechnya and Dagestan. authorities have not solved any of these that of legal government funds. The rubles received when these letters cases yet. *According to information available to are presented are quickly converted into the Main Economic Crime Department, dollars and sentto Israel, Hungary, Great Scary Dimensions in the capital, every year sums totaling Britain, France and Monaco. as much as the entire city budget- This crime wave is a derivative of the between two and three trillion rubles- Another common scheme is the diver- dramatic increase in criminal financial simply "vanish." In 1993 alone, law sion of credits (using fabricated docu- dealings in Russia. Law enforcement enforcement agencies brought several ments) and deliberate non-repayment officials report that financial fraud has hundred criminal cases involving at- of loans. A firm obtains credit from a reached unprecedented proportions. In tempted or actual thefts of more than commercialbank, securingtheloanwith 1993, Russian law enforcement agen- 700 billion rubles through banks. a letter of guarantee from another bank. cies reported 110,000 criminal offenses *Counterfeitingofbothforeigncurrency The borrowed funds pass through the in the realm of finance. In 1994, this and domestic securities has also in- accounts of several bogus companies numbergrewto 183,000, and in 1995,to creased dramatically. More than 19 and are eventually converted into for- 300,000. The amount of money misap- million rubles worth of fake vouchers eign currency with the help of a sham propriatedfromRussiacouldbeasmuch were discovered and removed from cir- contract with a Western company. The as $100 billion in the four year period culationduring 1993,whilein 1994 some contract is later annulled "by mutual from 1990-1994, according to special- 40,000 fake securities and 1.8 billion in agreement of the parties." The foreign ists in this area. No less than 4 trillion counterfeit rubles, produced mainly in currency is transferred abroad to a firm's rubles (several hundred million dollars) Chechnya and Azerbaijan, were confis- bank account. were misappropriated from Russian cated. In Moscow alone some 300 inci- banksthroughfakedpaymentdocuments dents of counterfeiting were reported Thefollowingexamplesoftypicalscams and false guarantees from foreign banks during 1994, 20 percent more than in were provided by police officers: during 1993-94 alone. 1993. It is estimated that the number of -Using a fake letter of credit (validated illegal foreign currency operations has in the name of the CBR Moscow Abandoning the "traditional" forms of tripled since 1993. Division's Cash & Payment Center), 4 white-collar crime, such as extortion or -The countrylost $20 millionwhenstate billion rubles were withdrawn from the money laundering, organized criminal credits were illegally diverted for other account of the Cash & Payment Center groups have found finance scams using purposes, according to estimates of the and transferred to the accounts of some bogus credit documents to be far more Main Economic Crime Department of firms in a number of Moscow commer- lucrative. The extent of this crime is the Russian Interior Ministry. cial banks. Volume 6, Number 11-12 9 The World Bank/PRDTE *Huge amounts of money (the police easy for large-scale financial fraud. According to police experts, managers have managed to trace only 3.8 billion Cynical law enforcement officials are of commercial banks are often involved rubles) were channeled to the accounts prone to believe that the leniency in the in the schemes. It is believed that the of a bogus Moscow company with the banking security system is no accident, commercial banks receive up to 30 per- help of forged letters of credit carrying since some high-ranking state officials cent of the sums stolen with forged the insignia of banks in Azerbaijan and have been known to benefit from the letters of credit. Criminal groups are Georgia. The money was transferred to financial scams. using increasingly sophisticated meth- another firm's account in one of ods to penetrate and ultimately control Moscow's commercial banks. Some of Gang Banks banks. Forexampletheybecome share- it was later converted into foreign cur- holders and seek to acquire a controlling rency; some amounts were invested in The crime groups which commit this share of stock. According to some esti- real estate or was invested into the fraud run well-organized, sophisticated mates, a quarter of the banks in Mos- ownership capital of other banks. operations. In late 1994 police made cow linked to organized crime are under *The management and the teller of the arrests inthe case ofan organized crimi- the control of ethnic Chechens. Interior Tomsk division of Sberbank were ar- nal group which specialized in financial Ministry experts argue that 95 percent rested for stealing approximately 520 schemes in Moscow, St. Petersburg and of Moscow banks and their affiliates million rubles during a period of eight Orenburg. Its organizers were thirty to are controlled by the criminal kingpins. months. The theft was accomplished by forty year old ethnic Chechens and using fake documents. Ingush. The group had its own security Aleksandr Zhilin is Editor for the *Themanagersofthe"AVA"and"Retro- squad, a powerful computer center Moscow Newspaper Moskovskie Service" firms organized (using several equipped with the latest software and Novosti. The original article ap- forged letters of credit) a transfer of 3.5 an extensive network of agents in the peared in Prism, a regular publica- billion rubles to two accounts in the divisions of the Central Bank, which tion of the Jamestown Foundation, Khimki and Ramenskoe affiliates of provided the group with banking forms a non-profit, educational organi- Unikombank. Then the money was and stamps and were responsible for zation. Information: The Jamestown "scattered" among the accounts of 200 organizing the acceptance of fake docu- Foundation, 1528 18th Street NW, commercial structures, including 113 ments and the transfer of the money Washington, DC 20036, fax (202) million rubles sentto the accounts ofthe received with these documents. Ac- 483-8337, (E-mail: Long@james Charity Initiative Fund of the Moscow cording to the police department which town. org). Red Cross Regional Committee. (The uncovered the criminals, more than 40 "AVA" firm was founder of this fund). billion rubles in damage was prevented. *Four forged letters of credit originating in Chechnya were used to steal 3.2 Social Sensitivity billion rubles. The money was trans- ferred to the "Zhilremstroi" firm's ac- count inthe Moscow branch of Sevemy bank. As soon as the money arrived at "Zhilremstroi" it was immediately trans- ferred to the accounts of other busi- nesses, while the general director of "Zhilremstroi" went into hiding. One reason why criminals can act on such a large scale, and virtually with impunity, is the flawed system of inter- bank payments introduced by the Cen- tral Bank of Russia in 1991. Moreover, to this day the system of verifyring bank-___ ing documents, and more importantly letters of credit, is rather primitive. Cor- ruption is another factor that makes it From the Hungarean Economy. 10 November-December 1995 Transition Old Myths about Poland's Reforms Die Hard by Jeffrey Sachs P rofessors Kabaj and Kawalik No matter how many times the claim is In the other categories as well, these ("Who Is Responsible for Post- made, the "shock therapy" reforms did measures do not reflect the sharp rise P communist Successes in East- not cause a "deep decline in food con- in the quality of food sold in Poland's em Europe?," Transition, July-August sumption," nor certainly in durable shops. Domestic food processing is 1995) repeat every hoary myth about goods consumption. Nor did "unduly one of the enormous success stories Poland's transformation, not recogniz- cruel reforms" cause the return of the of Poland's reforms. ing that the widespread myths of the left-wing parties. early 1990s have long been debunked. It appears, from preliminary data, that Despite their moans about "shock Consider the change in per capita food there may have been a decline in some therapy," Poland has been the fastest- consumption between 1989 and 1993, categories of per capita food con- growing country in Eastern Europe and during the period ofthe Solidarity-led sumption during 1994 compared with the former Soviet Union. governments (see table): 1993. This may be the result of Poland's severe drought and heat con- As the Financial Times reported (9/29/ Change in Per Capita Food Con- ditions in 1994; of the protectionist 95), "Poland's booming shipyards, cop- sumption, Poland, 1989-93 food import policies introduced by the per mines and re-vamnped factories are (percent) Leftist-Agrarian coalition in 1994, tuming out a flood of new or updated Item Employees Farmers Retirees which raised food prices and reduced products for export markets and suck- Bread 7.4 5.0 S9 food imports; or of some combination ing in capital imports for future growth Vegetable 5.7 4.5 6.6 of these and other factors. It is hard to at a similarly fast pace. Export-led Fruit 35.0 22.8 35.7 attribute the decline to price liberal- growth by Central Europe's biggest Meat -2.0 4.1 10.0 ization in 1990, or to the economyisdemonstratingboththevalue Fish -2.2 13.9 1.7 macroeconomic policies of the Soli- of earlier structural reforms and the Butter 42.5 -33.3 -37.9 darity-led governments. After all, real crucial importance of freer trade to the Milk -21.5 9.4 -16.9 GDP growth was an estimated 5 per- economicrehabilitationofpost-commu- Source: 1990 Polish Statistical Yearbook and cent in 1994, the highest in all of Eu- nist economies in general.... Official May 1994 Polish Statistical Bulletin,. rope. Fortunately, the 1995 weather estimates point to a 6.5 percent rise in and projected harvest are much Poland'sgross domesticproductin 1995 I separate various categories ofhouse- improved. afteraS percentgrowthin 1994." These holds to strengthen the point. House- rates could well be underestimated. hold consumption of bread and veg- Of course, the positive results of When various unrecorded transactions etables rises for every category, and Poland's reforms after 1989 are dra- are taken into account, notes the Finan- fruit consumption rises very sharply. matic in the case of consumer cial Times, Poland's export-ledeconomy Retirees enjoy a significant increase durables, for which the term "eco- could well be growing at around 8 per- in meat consumption and a slight in- nomic boom" accurately applies. And cent. crease in fish consumption as well. again, the gains in ownership are Only consumption of milk products across all types of households. Own- Every attemptat "gradual" reforminthe declines consistently. Part of this ership of VCRs, stereo tape record- region has been vastly more costly in measured decline in "consumption" ers, color televisions, cameras, auto- falling living standards than any costs certainly reflects the enormous im- mobiles, washing machines, freezers, that were incurred in Poland. And provement in milk quality (including andmany other big-ticket items soared Poland's success has come despite the the rapid spread ofpasteurized milk in between 1989 and 1993, during the factthatthe country, withhyperinflation consumption) and the consequent re- alleged social catastrophe thatthe two and plummeting output, was regarded markable drop in milk spoilage and professors bemoan. as the worst basket case ofthe region in wastage. Another part may reflect a 1989-a stark contrast to heavy early shift to a lower-fat diet now that many It is not surprising that various non- favorites like gradualist Hungary. more choices of high-protein fruits, economic measures of Poland's well- vegetables, and grains are available. being support the findings on consump- Volume 6, Number 11-12 1 1 The World Bank/PRDTE tion. Most important, Poland's life ex- cessfully, for deep debt relief for Po- the point that I was making in my pectancy has risen since 1989, ending land, to help overcome the formidable original article. It is high time for se- a long period of declining life expect- costs of communism that will remain rious reform of the inordinate fiscal ancy for males during the 1980s. for many years to come. costs of social welfare spending- Again, Poland's post-1989 record on partly to spur growth, partly to reduce life expectancy, together with that of Ironically, the articles immediately the flow of workers and enterprises the Czech Republic (the other radical preceding that of Professors Kabaj into the tax-evading black economy, reform country) is the best in the re- and Kowalik in the same July-August and partly to husband resources for gion, as shown in the following table. issue of Transition, one by World vulnerable groups truly in need. Bank staff and one by Oxford Change in Life Expectancy, Se- Analytica, make clear that the pen- The author is Professor of Interna- lected Countries, 1970-78 and sion costs in Eastern Europe are out tional Trade at Harvard University, 1989-93 of control, and that the pension sys- and has been advising governments Male Female tems are highly politicized and abused in several countries including Bo- Countryl970-781989-93 1970-781989-93 (for example, the disability pensions livia, Estonia, Mongolia, Poland, Poland -0.1 1.0 2.3 0.7 in Poland, which cover an inordinate and Russia. Czech Rep. 3.0' 0.6' 3.3 0.9' proportion of the population). This is Hungary -1.3 -1.4 2.3 0.0 Romania 1.3 -0.8 3.3 0.7 Russia 1.6 -8.3 1.3 -2.4 Economic Reform a. 1989-92. Source: Life expectancy at birth (change in years over the interval), table 3, p. 7, from Giovanni Andrea Corniawith RenatooPaniccia, "The Demographic Impact ofSudden Impov- erishment: Eastern Europe during the 1989- 94 Transition, " International Union for the Scientific Study of Population, Belgium, March 1995. Unfortunately, in many other coun- tries, particularly in the former Soviet Union-which failed to carry out a decisive stabilization program-the downward course of life expectancy is horrific. Like many other observers, Profes- sors Kabaj and Kowalik simply fail to differentiate between Poland's con- tinuing low levels of income-the legacy of forty years of communism and the atrocious macroeconomic poli- cies at the end of the 1980s-and the effects of the post-1989 economic reforms per se. The reforms did not cause a collapse of living standards, though the hardships in Poland are all too real. And while the professors castigate me personally for champi- oning radical economic reforms, they fail to note that I campaigned vigor- ously throughout the world, and suc- From the Hungarian Economy. 12 November-December 1995 Transition The Hidden Character of East European Capitalism: Recombinant Ownership by David Stark he central question of contem- preneurs still engage in private ventures majority stakes in most formerly state- porary debates in Eastern Eu- only as a second job; tax evasion is owned enterprises that transformed to T rope and countries of the FSU pervasive; and although employment is shareholdingcompanies. Butcentral and is by what means can private property slowly increasing in the private sector, local government agencies are rarely become the typical form of property the proportion of unregistered work- the sole shareholders of corporatized relations in economies overwhelmingly for which the state receives no social firms. The typical owners of large dominated by state ownership of pro- security payments and the employee shareholding companies are other large ductive assets? Much of that debate receives no benefits-seems to increase shareholding companies, as confirmed can be organized around two funda- faster. Some researchers label this tran- by a 1993 analysis of the ownership mental policy strategies: sition as one "from second economy to structure in Hungary's 195 largest en- - Transfer assets from public to pri- informal economy." terprises and twenty-five largest banks vate hands. Despite differences in the (the latter representing virtually the en- specific methods used for such privati- Private entrepreneurs complain of the tire financial sector). Identifying the top zation (such as sale versus free distribu- government's burdensometaxation, lack twenty owners of each enterprise and tion),thecommonassurnptionisthatthe of credits, negligible programs to en- bank allowed an accounting of more basic organizational units of the emer- courage regional or local development, than 90 percent of the shares held in gent market economy will be the pre- and inordinate delays in payments for virtually every company. (These com- existingbutnewlyprivatizedenterprises. orders delivered to public sector firms. panies employ an estimated 21 percent Develop a class of private propri- The private sector responds accord- of the workforce and account for 37 etors. The assumption is that this is a ingly: violations of tax codes, off-the- percent of total net annual sales and 42 slower, but more reliable road to institu- books payments to workers, and reluc- percent of annual export revenues.) tionalizingprivateproperty Publicpolicy tance to engage in capital investment should lower barriers to entry for small are rampant. Such government policies Some fonn of state ownership is present and medium-size private ventures and and private sector responses are clearly in the overwhelming majority of these recognize the existing second economy not a recipe for the development of a 220 companies ("companies" here re- entrepreneurs as the basic organiza- legitimate private sector as a dynamic fers to both enterprises and banks). In tional building block of an emergent engine of economic growth. thirty-six companies foreign investors market economy. hold the majority of shares. Hungarian As to the public sector, managers in individuals hold 25 percent or more of In Hungary property has been trans- large public enterprises have modified the shares in twelve companies. In formedinamajorway,withoutthecoun- andtransformed property relations; as a eighty-seven companies at least one try fitting into either strategy. From late result, "recombinant" property has major shareholder is another Hungarian 1988 to mid-1994, the number of state emerged, a form of ownership that can- company. In forty-two companies other enterprises declined by about 60 per- not be considered either as private own- Hungarian companies hold a majority cent; the number of incorporated ership with clearly defined property stake (50 percent + 1 share). Thus, shareholding companies increased more rights, or as a continuation or reproduc- almost 20 percent ofthe 220 companies thantwentyfold (from 11 6to 2,679); and tion ofthe old forms of state ownership. are unambiguous cases ofinterenterprise thenumberoflimitedliabilitycompanies , . ownership, while in almost 40 percent of increased from 450 units to rore than You Hold My Assets, I'm Holdig these large companies some degree of 79,000. But some firms exist only inthe interenterprise ownership is evident. courts' registries, having neverproduced The Privatization and State Hol any income. Agreat number of"dummy padng Galaxy of Corporate Satellites firms" were set up so that expenses Company(APVRt)andvarousistitu- (rent, telephone, apartment heating) tions of local government-which typi- Under the pressure of enormous debt, could be charged to them. Many entre- cally had exchanged their real estate declining sales, and threats of bank- holdings for enterprise shares-have Volume 6, Number 11-12 13 The World Bank/PRDTE ruptcy or, in the case of more prosper- in a similar orbit around the same enter- gests that the actual (de facto) eco- ous enterprises, to forestall takeovers prise, and frequently by shareholding nomic unit of the Hungarian economy is and to increase autonomy from state companies or limited companies spin- not the individual firrn but a network of ministries, directors of many large pub- ning around some other enterprise with firms. The real units of entrepreneur- lic enterprises were taking advantage of lines of purchase or supply to the corpo- ship and of restructuring are not the the law that allowed state enterprises to rate unit. Banks also participate in this individualpersonalityortheisolatedfirm establishjoint-stock companies (Rt) and form of recombinant property. but the social networks in which previ- limitedliabilitycompanies (Kft). Intypi- ously unidentified resources are recog- cal cases the managers of these enter- In many cases the establishment of new nized and recombined. Property is al- prises were breaking up the organiza- corporate forms is triggered by enter- readybeingreorganizedalongsuchlines; tion (along divisional, factory, prise debt. In the reorganization of the but such networks are not acknowl- departmental, or even workshop lines) insolvent firms, the commercial banks edged in public policy. As long as the into numerous corporations. (whose shares as joint-stock companies policy ofprivatization is based on getting are still predominantly state-owned) the highest price for a set of assets It is not uncommon to find virtually all become shareholders of the corporate already bundled in a given enterprise, activities of a large public enterprise satellites by exchanging debt for equity. and as long as the policies of restructur- distributed among fifteen to twenty such The complex, intertwined character of ing and debt consolidation operate on a satellites orbiting around the corporate property relations in Hungary means strictly firm- by-firm basis, the network headquarters. As newly incorporated that horizontal ties of cross-ownership properties of the Hungarian economy entities with legal identities, these new are intertwined with vertical ties of will be underutilized. Networks will units are nominally independent-reg- nested holdings: limited liability com- remain shady as long as they remain in istered separately, with their own direc- pany owned by private persons, by pri- the shadows of official policy. tors and separate balance sheets. But vate ventures, and by other limited liabil- on closer inspection, in practice their ity companies, in turn owned by Extend these findings to the East Euro- status is semiautonomous. Anexamina- joint-stock companies, by banks, and by pean region: the postsocialisteconomies tion of the computerized records of the large public enterprises, in turn owned cannot be adequately represented in a Budapest Court of Registry indicates, by the state. two-sector, public sector and private for example, that the controlling shares sector, model. The old property divide of these corporate satellites are typi- Network Called "Recombinet" has been so erodedthat what once might cally held bythe public enterprises them- have been a boundary is now a zone. selves. The limited liability companies that be- Perhaps the most ironic legacy of state gan as corporate spinoffs are some- socialism is that at precisely the time These corporate satellites are, thus, far times linked through ownership ties to that political and economic actors are from unambiguously "private" ventures; more than one shareholding company trying to free the economy from the grip yet neither are they unmistakably "stat- and, significantly, often linked to other of state ownership, our thinking about ist" residues ofthe socialist past. Prop- limited liabilitycompanies. This network property remains essentially Marxist. erty shares in most corporate satellites of direct and indirect ties between re- Policy advisers are busy looking for the are not limited to the founding enter- combinant properties, linking entities in owner, although-as developments prise. Top and mid-level managers, pro- a given configuration, can be called throughout the industrial countries fessionals, and other staff can be found "recombinet." The recombinet is not a show-transfomningpropertyrights has on the lists of founding partners and simple summation of the set of horizon- more to do with renegotiating relations current owners. Such private persons tal and vertical ties; rather, the charac- among a wide set of actors to resolve rarely acquire complete ownership of teristics of "horizontal" and "vertical" theirclaimsoverdifferentkinds ofprop- the corporate satellite, preferring to use should be replaced with such concepts erty rights. their insider knowledge to exploit the as "extensivity," "density," "tight" or ambiguities of institutional co-owner- "loose" coupling, "strong" or "weak" ties, Reorganization in Central and Eastern ship. Often these individuals are joined structural holes, and the like. Europe is yielding new property forms in mixed ownership by otherjoint-stock that are neither statistnor private; econo- companies and limited liability compa- The existence of pervasive interenter- mies in the region are mixed, not be- nies-sometimes by independent com- prise ownership and the emergence of cause there are state-owned firms and panies, often by other limited companies the recombinet organizational form sug- privately owned firms but because the 1 4 November-December 1995 Transition typical firm is itself a combination of vestments by others). By mitigating dis- Eastern Europe, directly bringing in new public and private property relations. In inclinationstoinvest,risk-spreadingrmight managerial practices that have strong these new property forms the charac- be one means to break out of othenvise indirect demonstration effects. Foreign teristics of private and public are dis- low-level equilibrium traps. Firms inthe investment can fit neatly into the exist- solved, interwoven, and recombined. postsocialist transformation crisis are ingmonopolisticstructureinherited*fom Property in East European capitalism is like mountain climbers assaulting a state socialism. Many Western multina- recombinant property and its analysis treacherous face, and the networks of tionalsarealltooeagertoprivatizestate- suggests the emergence of a distinc- interenterprise ownership are the ropes owned enterprises because of the inor- tively East European capitalismthatwvill lashing them together. dinate market share that they command. differ as much from West European Cigarette manufacturers, for example, capitalism as do contemporary East Diversity Is Beautiful are notorious for paying top price in Asian variants. exchange for state concessions that Economic development in Central and virtually guarantee monopolistic mar- Do these organizational monsters con- Eastern Europe does require more exit kets. And automobile manufacturers tribute to "creative destruction?" That (some, indeed many, firms must perish) seek state subsidies, preferential cred- litmus test is based on a widely held andmoreentryaswell. Butfordestruc- its, and strict import restrictions to re- assumption that economic development tion to be creative, these deaths must be duce competition. will be best promoted by "allowing the accompanied by births, not simply of selection mechanism to work" through new organizations but of new organiza- * De-institutionalization. Rules that bankruptcies ofunderperforrning enter- tional forms. once maintained boundaries between prises. Recombinant property would not separate organizations are relaxed and receive an unambiguouslypositive score Socialismfailednotonlybecauseitlacked organizational boundaries become measured by this standard. These kinds a selection mechanism to eliminate or- blurred, generating new organizational of interenterprise ownership are classic ganizations that performed poorly but forms. In the Hungarian economy, in a risk-spreading and risk-sharing devices also because it put all its economic re- process that began in the early 1 980s, that mitigate differences across firms. sources into a single organizational previously well defined organizational By dampening the performance of the form-the state enterprise. Socialism clusters gradually overlapped; broad stronger and facilitating the survival of drasticallyreducedorganizational diver- economic, legal, and social changes the weaker firms in the interenterprise sity and in so doing prohibited a broad eroded the boundaries between state recombinet, they might even impede repertoireoforganized solutionstoprob- and private property. creative destruction in the conventional lems of collective action. The relative sense. paucity of organizational diversity in An economy's dynamic efficiency rests Eastern Europe gives added urgency to ondiversitywhichhingesonits abilityto But is atidal wave ofmass bankruptcies the question, where do (new) organiza- developneworganizationalforms.With- the long-term cure for the postsocialist tional forms come from? There are three out diversity an economy cannot adapt economies? An absolute hardening of types of processes generating new or- to changes in the environment-or it firms' budget constraints could destroy ganizational forms in Central and East- can adapt only at extraordinary cost. It enterprisesthatwouldotherwise be quite em Europe: is not in finding the right mix of public capable of making a high performance and private, butinfindingtherightmixof adjustment. Wanton destruction is not * Imperfect reproduction. The existing adaptabilityandaccountability,thatpost- creative destruction, and recombinant organizationoritsformerpersonneltries socialist societies face their greatest property might save some ofthese strug- to establish a new venture by reproduc- challenge. gling but capable firms through risk- ing a successful form. In most cases the sharing networks that do not require outcome is an imperfectly reproduced David Stark is Associate Professor of massive state bailouts. Extremely high organizational mutant. If it survives, a Sociology and International Business uncertainties in the postsocialist econo- new organizational form takes hold. It at Cornell University. His article, mies can lead to low levels of invest- can contribute to change only at a slow "Recombinant Property in East Euro- ment with negative strategic comple- rate, so its importance is negligible. pean Capitalism, " will appear in the mentarities (as when firms forgo AmericanJoumalofSociology, vol. 101, investments because they expect a slug- * Diffusion from outside. Western mul- no. 4, January 1996. gish economy based on the lack of in- tinationals are entering Central and Volume 6, Number 11-12 15 The World Bank/PRCTE Reform of China's State-owned Enterprises A Progress Report of Oxford Analytica U nder its Ninth Five-Year Plan, tial treatment, including large financial "township and village" enterprise sec- whichbeginsinJanuary, Beijing subsidies, their poor performance has a tors. In contrast, the state sector, be- U has committed itselfto concen- negative impact on many aspects of cause of its sluggish economic perfor- trating on a core 1,000 state-owned en- economic activity. The Chinese leader- mance andheavy indebtedness, is widely terprises. The others are to become ship has accepted the need for funda- perceived as an impediment to develop- candidates for bankruptcy, merger, di- mental state sector reform. ment: vestiture, and management buyout. Al- * In the first eight months of 1995, SOE most 50 percent of China's state-owned China's phenomenal economic growth industrial output expanded by only 8.3 enterprises (SOEs) made losses in the since 1979 was fuelled initially by agri- percent compared with a 13.7 percent first half of 1995, according to official cultural advance and more recently by increase for all industry. According to figures. Since SOEs receive preferen- the development of thriving private and estimates, non-SOEs, on average, re- Bureaucrats in Business-New World Bank Study on Headaches in Reforming State-owned Enterprises Bureaucrats who run state-owned enter- gies: increased competition, iberalizedtrade, performance contractsfailedto improveprof- prises(SOEs)shouldnotbeblamedforthe liftedprice controls, easedbarriersto entry, itability or total factor productivity, and in ills of these companies: they are not nec- and, simultaneously, hardened budgets, some cases even produced worsening per- essarily incompetent, but rather, they have through reducing or eliminating subsidies formance. Managers were able to use their to deal with contradictory goals and per- to SOEs. Both the Czech Republic and Po- informationadvantage to negotiate multiple, verse incentives, a new World Bank study land reformed their financial systems, im- soft targets; the contracts failed to give points out. Drawing on an extensive new proved regulation and supervision, and management anincentivetoimproveperfor- data base, the report finds that, despite ended directed credit. Poland introduced mance; and governments werenot commit- morethanadecadeofprivatization, state- legislationthatentrustedbankswithinitiat- ted to the process and frequently reneged owned enterprises account for nearly as ing bankruptcy at poor-performing firms. on key promises. Thus, these contracts large a share ofdeveloping market econo- This decentralized approach can propel should be used only if they convey clear mies-1 Ipercentonaverage-astheydid troubled firms to restructure and privatize reform signals andprovide rewards for im- fifteen years ago. (In industrial countries more rapidly, andpushinviablefirmsto liq- proved performance, as well as curb the state sector's share dropped to 7 per- uidate, early signs indicate. goverrnent's tendency to renege. cent from 9 percent in 1980. Transition economies are now privatizing in much Reformers (successful and unsuccessful Management contracts between govern- greater volumes than developing econo- alike) tried to improve the incentive struc- mentandprivate managers. Thesearrange- mies, but they started out with a much ture by changing the relationship between ments were not widely used; however, they larger stock.) state enterprise managers and the govern- proved generally successful in transition ment. They introduced new oversight bod- economies, such as Poland and Romania. In Comparing state-ownedenterprises'finan- ies andincreasedmanagerial autonomy and two-thirds of the cases studied they im- cial returns, productivity, and deficits, the accountability. Results are mixed. Looking proved profitability and productivity. They report finds that Chile, Mexico, and the for answers, the report considers contracts work best when they are competitively bid, Republic ofKorea were the more success- between govermnent and state enterprise when the contractors' fee is linked to firm ful reformers among nine developing mar- managers, between governmentandprivate performance, and when government com- ket economies (also including Egypt, managers, and between government and mitment to the contract is signaled by, for Ghana, India, thePhilippines, Senegal, and owners of newly privatized monopolies. example, providingfor contract renewal and Turkey). Although comparable data were arbitration of disputes. They are largely notavailableforthetransitioneconomies, Performance contracts between govern- confined to afew sectors-namely, hotels, partial information suggests that the Czech mentandstate enterprise managers. These agriculture, ard water. The cost to the gov- Republic and Poland had good results, contractswerecommonundercentral plan- ernmentofobtainingtheinformationneeded and China mixed results, amongthetransi- ning and are still widelyused in China under to negotiate, monitor, and enforce a manage- tion economies investigated. the contract responsibility system. Some ment contract is one reason. Information is transition governments have considered in- more easily available, and contract transac- Successful reformers inbothtransition and troducing avariant ofthese to improve SOE tions costs thus lower, in sectors where tech- market economies followed similar strate- performance. In the developing countries, nology is not changing rapidly and output 16 November-December 1995 Transition quired less than a third as much invest- Problem Child: the State-owned *The use of subsidized credit and gov- ment as SOEs to achieve equivalent Enterprise emnent transfers to support SOEs is industrial output. inflationary. Ithampers Beijing's attempts * Although SOEs account for less than The poor performance of SOEs has to control inflation and prevent another 50 percent of gross industrial value out- hurt economic development in fourmain boom-bust economic scenario. put, they mounted up almost two-thirds ways: of the 65.5 billion renminbi ($7.89 bil- State revenues: China expects its lion) official losses made by Chinese Direct macroeconomic implications: budget deficit in 1995 to be a mere 1.5 firms in the first nine months of 1995. .Channelingofresources into loss-mak- percent of GDP. If policy lending by This represented an 18.8 percent in- ing SOEs for political purposes means centrally controlled banks-most of crease in state sector losses over the inefficient allocation. It constrains the which is, effectively, transfers to same period last year. SOE profits were economy's ability to generate balanced SOEs-is taken into account, the also down, by more than 20 percent. growth. Many SOEs still receive privi- central government's true financial Moreover, nonofficial statistics suggest leged access to key resources, espe- deficit is 6 percent of GDP, and pos- total losses by SOEs may exceed 100 cially oil and electricity. siblv higher. SOEs thus impede the billion renminbi in 1995. is a single, homogeneous product (as with long-establishedsubsidies-were reluctant reform should be correspondingly less. water or sugar); or where the private con- tosacrificetheirsupportbase. Governments * Thedomesticprivatesectorisapotential tractor has an international reputation to thatweremoresuccessfulinreformingtheir buyer or competitor for the state firm, and protect, the market is competitive, andqual- state enterprises can be characterized as should help spur the process. ity is easily compared (as with hotels). follows: * The habits and apparatus (such as stock Moreover, undertheconditionswhere man- * Mobilizing wide support. In the Czech exchanges) ofmarketsare alreadyinplace, agement contracts can work, especially in Republic andPolandthepolitical transition making it easier to carry out reforms. competitive sectors, privatization will often away from the communist regime consti- * The market economy is not simulta- offergovernments higherbenefits (revenue tutedafundamental rejection oftotalitarian neously trying to reorder or recreate its from the sale) and lower costs (no need to government and state control of daily life. trading system, political system, financial monitor, enforce, and negotiatethe contract). * Controlling the levers ofpower and hav- institutions, judicial structures, and other ing the means to overcome opposition. The key institutions of society, making change Regulatory contacts between the govern- Czech Republic's strategy ofuniversal share less wrenching. ment and private owners of a monopoly distribution increased popular support for (mainlyininfirstructure). Inmostcasesthese privatization, and also overcame the objec- But in a sample of twelve countries, the contracts improvedperformance. However, tions of managers who expected to be able three transition economies were among at this time only a few countries were ready to retain control over their privatized enter- the more successful state enterprise re- to privatize their monopolies in infrastruc- prise if the ownership shares remained dif- formers, suggesting that being in transi- ture. [Hungary just recently escalated the fuse. tion may be an advantage. Politically process, privatizing electricity, gas, and oil a Having credible reform policy-for ex- charged reforms may be easier to push production and distribution. The editor.] ample, compensating state employees who through in the context of widespread, Regulatory contracts work best if govern- lost theirjobs, as promised. The Czech gov- sweeping change than when they are part ments separate the competitive parts of a ernment followed through on its promises of a more routine incremental reform firm (such as separating cellular telephones and, consequently, was able to push through process. from the state's telecommunications mo- its program of sweeping macroeconomic nopoly) andinitiate competitivebidding for reforms. Bureaucrats in Business: The Econom- the rest (such as for basic telephone ser- ip, WoldBankPofiGovernm epOr- vice); if price regulation is designed to re- If any one of these conditions is not met, ship, WorldBani PolicyResearch Report, wardimprovedperforniance; and ifthe gov- divestiture and other measures to improve Oxford UniversityPress, 1995, 346 p. To ernnentdemonstratesitscommitmenttothe the efficiency of state enterprises cannot ordelphia, PO. Box 72021 contract-forexample,bydesignatingclear succeed. 473-1155, fax. (202) 676-0581; or visit procedures to resolve disputes. Inprinciple,developingmarketeconomies, the WorldBank bookstores, in the United In most countries the refonnof state-owned in comparison with transition economies, States, 701-18th Street, N. W, Washing- Inmosterpris ies s rthereforn distate-oinined g have an easierjob reforming and divesting ton, D. C or in France, 66 avenue d'Iena, enterprises was rather disappointing; gov- their state-owned enterprises: 75116, Paris, (Email: books@world emments-vawarethat refoms anostinvan- * Thestate-owned sectorhasamuchsmaller bank. org) (Internet: http://www.world ably involve eliminating jobs and cutting share in the economy; thus, resistance to bank.org/) Volume 6, Number 11-12 17 The World Bank/PRDTE government's ability to fund education, ings deposits last year is believed to Bankruptcy and Mergers social security, and infrastructure. have come from enterprise deposits in nominee accounts to take advantage of The hardest task facing the government Effect on banks/financial sector re- higher interest rates. is the closure of the worst-perforniing form: The government is seeking to *Withtherightcapitalinvestment,many SOEs. A bankruptcy law has been in convert its four giant specialized banks SOEs will be able to compete in a more place since 1986, buthas been little used into commercial operations. These open market-oriented economy. These owing to its inadequate nature and to banks, wholly state-owned and under companies will remain dominant in key state concern over the social implica- the direct supervision ofthe State Coun- sectors and are set to play a significant tions of mass closures. A pilot project in cil, control the bulk of banking assets role in the economy for many years to eighteen "pioneer" cities is currentlyunder that are critical to China's financial sta- come. way. Some 474 SOEs have been iden- bility. Their transition is jeopardized by tified as suitable candidates for bank- the large amounts of policy loans. Last Impressive advances have been made ruptcy or merger. Bankruptcy proce- month, Dai declared that "problem inincreasingmanagementautonomy and dures have begun for 161 of them, but loans"-where repayment is at least in providing incentive structures for onlv 58 have actually been declared one year in arrears-constitute 20 per- workers: bankrupt. The bankrupt companies had cent of all advances made by the four * Top managers now sign contracts combined debts of 3.2 billion renminbi banks. specifying performance targets, and ($385 million) and assets of just 1.87 theirpay is frequentlylinkedto sales and billion. Interenterprise debt: Many troubled profits. SOEs are unable to pay their debts to - Management turnover has increased A much-delayed new draft of the bank- other firms. According to official fig- to almost 20 percent a year, reflecting ruptcy law should be presented to par- ures, debt owed among enterprises stood the fact that managers can be sacked or liament next month. This could improve at 400 billion renminbi in the first eight demoted for poor performance. the situation, as it recognizes a creditor's months of 1995. This figure would prob- * Uniform wage increases have been claims on a defaulter's assets. Current ablymorethandoubleifunpayablebank abandoned, leaving enterprises free to law effectively allows only for the pro- loans were included. set relative wages. tection of workers. Consequently, many As long as subsidized credit continues, creditors, especiallybanks, prefertokeep The Bright Side however, managers of loss-making firms debts "sleeping" rather than obtain only have only limited incentive to improve part or none of a liquidation settlement. SOEs still play a critical role in the performance. Furthermore, in some economy: cases managers effectively collude with An alterative to outright closure is the - SOEs account for 46 percent of indus- workers to use state subsidies to pay absorption of ailingSOEs by moreprof- trial output, albeit down from 70 percent bonuses all around, regardless of eco- itable ones. The goverment has indi- in 1990. Moreover, they are responsible nomic performance. cated that it is preparcd to constder for around half of all exports and most special loan terms for companies that urban employment and wages. Of the 1,000 SOEs targeted for special merge. For the core 1,000 companies, a * SOEs are responsible for most large- ssistan under the Ninth Five-Year more comprehensive program of inter- scale activities, which are the areas that Plan, 800 are in the industrial sector. est payment exemptions, debt-equity most interest foreign investors. All Chi- These account for about two-thirds of swaps, and debt forgiveness is being nese firms with overseas share listings state industrial assets and more than 70 considered. In theory, such a program are majority state-owned. Likewise, percent of sales revenue profits and of rationalization could bring consider- most joint ventures with foreign inves- tax remittances generated by all SpOEs able efficiency savings. However, these tors involve state companies. (The pri- The implication is that the other 13,000 will only be realized if the new owners vate sector is dominated by small-scale large andimedium size SOEs and 86,000 are given a free hand to close plants and concerns.) small SOEs-which are not considered lay off workers. * Although 46 percent of SOEs reported vialt Economy-will be lefYa losses at the end of the first half-year, fend for themselves Theywill presum Keiretsu Yes, Privatization No others reported healthy profits. Depos- its by enterprises have been rising: 30 ably become candidates for bankruptcy, Although Beijing has accepted the need percent ofthe increase in individual sav- merger; divestiture, and management for ownership reform in order to en- buyout. 1 8 November-December 1995 Transition courage market-oriented behavior exchanges and others are keen to be preparing for an overseas share issue.) among SOEs, it has repeatedly stated its listed because of the benefits of injec- * Inadequate social security. In addi- opposition to privatization. Last month tions of nonstate capital. The develop- tion to layoffs, the divestiture by SOEs Prime Minister Le Peng ruled out priva- ment of corporatization and the expan- of social functions, such as hous- tization as a way of improving Beijinig's sion ofdomestic stock exchanges should ing, health care, education, and pen- prospects of joining the World Trade create a wealth of opportunities for pri- sions, will lead to hardship for many Organization. An East European-style vate investors. Private and foreign par- previously privileged workers. The mass sell-off of state industry is not ticipation is likely to be mainly restricted expansion of state welfare activities considered compatible with the devel- to minority shareholding in the "subsid- and the development of a social opment of a socialist market economy. iaries" of state-owned holding compa- security system have not kept pace nies. with reform, officials admit. The la- Instead ofprivatization, Beijing has em- bor ministry is drafting laws on so- braced the concept of corporatization. Hainan Airlines provides a good ex- cial insurance and labor contracts, Many surviving large and medium-size ample of how ownership structures in and is considering laws on employment enterprises are earmarked for transfor- major industries are likely to develop promotion, training, and dispute settle- mation into joint-stock companies with over the long term. The authorities ap- ment. public ownership spread across a vari- proved the sale of a 25 percent stake to * Regional impact. It is commnon for a ety of state institutions and enterprises. American Aviation Investment with the town or towns, or even regions, to be In this way, majority "state" ownership proviso that it would help the airline dependent on a few industries and state is maintained, even though the central "study" foreign management and tech- firms. For example, Maanshan Iron and government has little or no direct role in nology. The rest of the shareholders are Steel, which is listed in Hong Kong and running the company. state institutions (56 percent), the gov- Shanghai, has plans to lay off an un- emmnent (4 percent), and other individu- specifiednumberofits 53,000workforce, Corporatization fits well with Beijing's als (15 percent). which accounts for 13 percent of the vision of a more dynamic state sector city's population. However, the finms' that dominates key sectors of the Obstacles to Reform actions are constrained because the city economy. It provides a mechanism for cannot absorb its surplus labor. the formation of state sector conglom- Apart from ideological reservations, erates and possibly also the develop- there are some major interlinked ob- Excerpted from recent Asia Pacific ment of cross-ownership in the style of stacles to reform and the reshaping of Daily Briefs of Oxford Analytica, the the Japanese keiretsu. However, this the state sector: Oxford (U.K)-based research group. strategy can only succeed in raising ef- ficiency if subsidies are progressively * Unemployment. Fear of high levels of withdrawn. Furthermore, conflicts of unemployment is the main factor hold- interest between shareholders and en- ing back rapid reform. Urban unem- terprises are likely as the former will ployment is officially 4.8 million (2.8 frequently include the administrative and percent of the urban population). How- regulatory bodies of the former central ever, an estimated 30 million out of 100 planning apparatus. million SOE workers are redundant. 2 U Official statistics show a 66 percent t For smaller companies and noncore increase inlabor disputes in 1994, mainly subsidiaries of larger ones, Beijing is caused by labor-shedding. Officials likelytoallowmanagementbuyoutsand claim to have found new work for 99 divestiture. The decisions on individual percent of the workers laid off in the cases will be left largelyto local authori- fifty-four pilot bankruptcies. A promis- ties, as they control most small SOEs. ing scheme has been pioneered by Dongfeng Motor Co., China's third larg- Although full privatization is politically est automobile company, which in 1995 unacceptable, partial privatization istak- shed 15 percent of its workforce by "We'resae! He's accepted our ing place. A number of SOEs have been offering enhanced pension packages to privatization offer!..." listed on foreign and domestic stock workers who retire early. (Dongfeng is From the Hungarian Economy Volume 6, Number 11-12 19 The World Bank/PRDTE Book of the Month Marie Lavigne: The Economics of Transition: From Socialist Economy to Market Economy by Martin Schrenk In a market that is flooded with ad hoc The Past: Real Socialism as well as the growth of the parallel collections of diverse country-focused, economy, were the byproducts of the issue-specific papers (pieced together Why did real socialism collapse, and political disintegration. bytheireditors'heroic efforts), this book why did this happen at this particular takes a pointedly different approach by time? Although the efficiency gains of The parallel or "shadow" economy, re- presenting a cross-country, cross-issue the system were declining continuously garded by many analysts as an invalu- synopsis. Part I develops the concept of since the 1950s and had all but disap- able breeding ground for entrepreneur- "real socialism"-in contrast to "ideal peared by the mid 1980s, there was no ship during socialism, is one ofthe most socialism," as an abstract model of per- specific economic reason that triggered harmful legacies of socialism, claims fect internal consistency at par with the the collapse. (One could add that most the author. She argues that the shadow textbook version of capitalism. The au- capitalist countries, whether with ma- economy created the institutions, the thor presents a synthetic prototype ture democratic or astute authoritarian resources, the mentality, and-most economy that combines features rel- governance, had weathered even more important-the networks that permit- evant "most of the time" (in fact from severe crises and longer stagnation pe- ted the explosive growth of corruption the 1960s to the 1980s, when a series of riods.) In the author's view the system and crime, once central control by the piecemeal reforms was already under had the potential to "muddle through" party-state began to wither away. In way)to"mostcountries"withinthisgroup indefinitely. The kiss ofdeath was deliv- agriculture for instance, the parallel (just briefly citing country specific fea- ered by the breakdown of the command economy was able to achieve a dispro- tures). Part II deals with the legacy of and control monopoly ofthe communist portional high share only through mas- real socialism for the formulation of ef- parties. sive appropriation of inputs from the fective transition strategies and policies. state and the collective sector. In the Soviet Union, Gorbachev let the "In the East economists and politicians lid come off by pernitting discussions Present: Transition in the Making alike endorse the fundamentals of neo- on the dismal economic performance of classical economic science. Their West- earlier periods, and on the stifling party The author links the rapid ernergence of em advisers eagerly support this atti- control engulfing the daily life of Soviet newwealthto the symbiotic relationship tude, especially as the standard citizens. Glasnost encouraged opencriti- between the nomenclatura and the par- adjustment and stabilization packages cism, public discussions, andpublication alleleconomy. Duringtheearlyandmid- which they recommend are based on of alternative points of view. The party 1980s,members ofthebureaucraticand the same theoretical assumptions," the rapidly lost control over the unfolding managerial elites were not yet able to author points out. She expects that "the process. At some point the "Brezhnev accumulate tangible personal wealth or disillusions inthetransition process will doctrine"-the Soviet Communist to engage in inconspicuous consump- lead to a more complex approach, closer Party's claim to ideological and political tion. But once these formal and informal to the political economy concept." In leadership over the parties in the other barriers were torn down, the already this context, "knowledge ofthe pasthelps socialist countries-was discounted as existing networks of informal coopera- understand the inertia of the present." no longer legitimate. In tum, the rapid tionwithinthe state sectorand across its She suggests that inspiration be sought disintegration ofthe socialistgovernance borders were refocused to serve rapid "in new approaches, such as the institu- in the "brother countries" undermined accumulation of wealth. tionalist one, and the combination of the Soviet Communist Party's claim to economics with political science and represent the leading force of society. Quick mass privatization does not cre- history." The emergence of the administrative ate efficient corporate governance by and managerial elites exploitingthe open- itself, claims the author, who terms "illu- ing power vacuum, the rapid disintegra- sionary" the hope that a capitalist entre- tion of the traditional economic system, preneurial elite of owners will emerge 20 November-December 1995 Transition spontaneously. "Spontaneous privatiza- In reading the book, however, one can- finding a feasible transition path. And tion" is, in her view, irrelevant, for there not avoid asking whether it delivered on while the author explicitly advocates a are not enough new owner/managers the promise-implied in the sequencing "theory of transition," she does not who can replace the previous manage- ofthe two parts-of pointing to relevant progress beyond listing some of its in- rial class. But, in some sense, all forms prescriptions for the future through gredients. Perhaps the most fruitful "po- of privatization are bound to end up as analysis of the past. From that perspec- litical economy" hypothesis-though it "spontaneousprivatization,"withgover- tive, the book is a mixed success. The must still be backed up by evidence-is nance largely resting with the estab- paradigms it proposes-the political the symbiosis during the 1980s of the lished insiders. economy for the past, and parallel economy and the nomenclatura microeconomic niche theories for the which in the 1990s merged into a new If the transition is viewed as a continu- present-do not coincide. For instance, class of wealth-holders. ing process of indefinite duration- the presentation of the CMEA system clearly, this is the author's position- of mutual trade in the first part is per- Marie Lavigne, The Economics of Tran- then a transition theory is essential to haps the most brilliant summary ever sition: From Socialist Economy to Mar- avoid misplaced analogies related to written. However, it is by now history. ket Economy, New York, NY, St. other cultural models. The author lo- Similarly, although the causes of the Martin's Press, 295 p. The author is cates such theory squarely in the do- collapse of real socialism will rightly Professor at the University of Pau, main of microeconomics. She lists a engage a generation of historians, it is France. Martin Schrenk is Consult- number ofanalytical paradigms that are not immediately clear whether the ant, Transition Economics Division, relevant-such as theories of property author's hypothesis will contribute to the World Bank. rights, transaction costs, industrial orga- nization, incentives, principal/agent re- Upswing lations, decisionmaking in the context of bounded rationality, strategic behavior, and asymmetric access to information. Inher viewtransition economies will for anindefiniteperiodremain mixedecono- ;i mies, displaying a specific inertia of the former system. Therefore, "state de- sertion" ofits shareholder role would be s , ' - destructive. Instead, governance by the state will have to focus on nudging man- agers toward an adaptive path to entre- preneurial attitudes. The author advo- -____ . cates the prudent use of "industrial - A ___ = policy," without discussing its function and scope in any detail. Bottom Line /; The first part of ths book, with its su- " perb overview of the initial conditions that created countless institutional con- straints for the transition process, and the second part, the intricate intersec- tions between different subject areas, \. ' are invaluable to analysts that are new- "a a o comers to the world of transition. The book's quality belies the modesty of its . R -L author, who wants her work to serve merely as a "textbook." From the Hungarian Economy. Volume 6, Number 11-12 21 The World Bank/PRDTE Letter to the Editor The "Checklist" Is Correct class-usually the principal consumer fell to 4.6 percent in August 1994-in by Stanislav Menshikov in any developed market economy- other words, the 1995 reduction is al- has been effectively wiped out by fiscal most identical to the pattern established The "Checklist for Action inthe Russian and monetary restriction imposed ontop the year before. Economy" (Transition, September- of high inflation. October 1995, page 10) rightly points to The principal source of inflation in Rus- a serious bias in the Russian govern- In such an economy stabilization and sia today is the upsurge in energy and ment's current economic policies: economic recovery are impossible un- raw materials prices. This is the result macroeconomic policies rely too heavily less monetary and fiscal restriction is ofthe monopolistic oroligopolisticposi- on monetarism. The "Checklist" is cor- supplemented by active stimulation of tion of these industries, which are able rect in suggesting a more "expansionary aggregate demand. In such an economy to export a large part of their output economicpolicy"forRussia,onethat"is inflation is generated mainly by while limiting supply to domestic cus- consistent with overall growth." In an nondemand factors. Wage-pushed in- tomers. Via cost-push this inflation has economy where half of the available flation might have been the case two been transmitted to final products due to capital and close to a fifth oftotal labor years ago, but not now. Between June the numerous barriers to competition are not utilized, reliance on fiscal and 1994 and June 1995 average wages that organized crime has erected to re- monetary restriction is tantamount to rose by a factor of 2.4 while wholesale strict the free entry into markets of both using a weight-reduction diet to treat a prices increased by a factor of 3.7. In- consumer and producer goods. patient suffering from severe malnutri- dustrialproduction fell only slightlydur- tion. What that patient needs is more, ing that period (but the level is only half Privatization, which couldhave promoted not fewer calories, hydrocarbons, pro- what it was in 1991), meaning that unit competition, was implemented in a way teins, fats, and vitamins. Today's Russia laborcosts rose much slowerthan prices. thatledtocriminalizationoftheeconony is like that patient: it needs a compas- and therefore to its further monopoliza- sionate doctor, attentive to the needs of Either way, inflation is neither demand- tion. Restraints to competition have be- the poor, not a rich man's doctor who pulled nor labor-cost-pushed. Andthus, come a continuous rather than one-time becomes dictatorial and inpatient when the finance restriction that has led to factor in diffusing inflation. The actual treating the poor. widespread delays in the payment of degree ofmonopolization is much higher wages (and pensions) has had little if than suggested by traditionally used in- The "Checklist" also rightly indicates any constraining effect on inflation. But dicators. that inflation in Russia is of a "different it did prevent recovery of industrial pro- nature" than inflation in Latin America. duction, which in the first half of 1995 So I agree with the "Checklist" when it At present the Russian economy is suf- fell by 5 percent compared with the calls for significant changes in Russian fering not from excess demand due to same period in 1994, and was 4.4 per- economicpolicy, suggesting, amongother excess money supply but from falling cent lower than in the second half ofthe things, stimulation ofaggregate demand aggregate demand and the inability of year. and supply-side measures. Of course, most producers to find a sufficient num- the list is hardly a concrete agenda for ber of domestic consumers who are Nor did fiscal and monetary restraint action since it was meant to outline a abletopay. Thus farin 1995 realdispos- help curb inflation; average monthly general approach rather than a detailed able income has fallen by 10 percent wholesale price increases reached 13.6 action plan. and real wages by 29 percent. Wages percent for the first half of 1995, up are less than half of what they were in from 11.6 percent for the same period in Messrs. Tulin and Nellis do not state 1991. Half ofall consumer goods soldin 1994, and from 9.6 percent, measured point-blankthatexpansionaryeconomic Russia are bought by a well-to-do elite forthe second halfof 1994. The boast of policies are out of order. If they believe, that constitutes only 20 percent of the having brought consumer price inflation as I do, that such policies are not incom- total population; in contrast, the lower down to 4.6 percent this August from 18 patible with fiscal and monetary disci- economnic brackets account for 40 per- percent in January impresses only those pline, then why not give that advice to cent of the population but buy only 16 whose memory is failing; in January the Russian authorities? This would percent of economic goods. The middle 1994 inflation rose to 17.9 percent and certainly help change the lopsided mon- 22 November-December 1995 Transition etarist.mentality prevailing in the Mos- indicator than official real GDP mea- and its decline in GDP, compared with cow ministries. If not, chances are that sures. some other countries in the region, does a new, left-centrist government would not necessarily indicate a higher degree tum the tables completely against both Thedatapresentedby Mr. Dobozi should of underreporting of economic activity. monetarism and the Fund. be interpreted without over generaliza- The level of underreported output in tion. It is true that for three countries in Russia, according to some estimates, is Stanislav Menshikov is a Russian the region-Bulgaria, Hungary, and comparable to that in Bulgaria and Ro- economist and currently a visiting Poland-the cumulative change in elec- mania. professor at the Erasmus University, tricity consumption appears to be close Rotterdam, Netherlands. to the cumulative change in GDP. But What makes the former Soviet repub- these observations are an insufficient lics different is their better access to Helpful Data Utilized under Doubt- basis for claiming there is a universal energy resources and, probably related ful Methodology relationship between these two indica- to that, the generally slower rate of eco- tors for transition economies. In par- nomic reforms in the FSU-the FSU In his recent publication ("Electricity ticular, electricity consumption data are countries have experienced a much Consumption and Output Decline-An inadequate to confirm a hypothesis on slowerincreaseinrelativeenergyprices, Update," Transition, vol. 6, no. 9-10, unitary elasticity of decline in output. enormous subsidization ofpersonal con- pp. 19-20), IstvanDobozi presents some sumption in the housing sector, and a additional data on changes in electricity Giventhe wide variety in both economic much less aggressive path toward en- consumption as they compare with offi- conditions and economic policies across terprise reform. Russia, which domi- cial data on GDP decline in some Cen- the transition economies, one might ex- nates the regional energy markets, until tral and East European countries during pect, contrary to what Mr. Dobozi sug- recently has provided its neighbors with 1990-94. Mr. Dobozi furtier develops gests, that the countries in the region underpriced energy (compared with arguments he published earlier in col- would show substantial variation in the export prices to the rest of the world). laboration with Gerhard Pohl (Transi- dynamics of their energy consumption. Open borders within the FSU have tion, vol. 6, no. 1-2, p. 17) to prove that The methodology proposed by Dobozi- helped consumers in other former re- electricityconsumptionisasuitableproxy Pohl ignores the crucial policy factors publics to get fuel at low Russian do- forrealoutputtrendsintheregion. Based that influence energy consumption, such mestic prices via smuggling. Under such on his findings, Mr. Dobozi asserts in as the level of domestic energy prices, circumstances, not surprisingly, incen- particular that the current level of de- the progress of enterprise reform, the tives for saving energy appeared to be clineinoutputintheformerSovietUnion hardness of budget constraints, and the weak in the former Soviet Union. Thus, is, on average, underestimated to a speed of structural adjustment in both the degree of underestimation of eco- greater degree than is the decline in output structure and energy consump- nomic activity in the FSU seems to be CEE countries. tion mix. It also ignores the fundamental less than a direct comparison of elec- cross-countrydifferences in energy self- tricity consumption data with official Today, everybodywouldprobably agree sufficiency: other factors being equal, GDP numbers would suggest. that all official data on decline in output one might expect that the relationship in the FSU are greatly overestimated. between output decline and energy con- Analysis of output contraction during There is some consensus that the cumu- sumption would be different in energy- the transition is still an important prob- lative fall in output over the past four rich countries (Kazakhstan, Russia)than lem for most countries in the region. years has been about one-third of 1990 in some Eastern European states that However, it seems doubtful that a better GDP-not half, as claimed in govern- are heavily dependent on energy im- understanding of this phenomenon can ment statistics. However, it does not ports and consider the imposition of be reached using simplistic and prima- mean that the real level of economic energy-saving policies a priority for rily technical approaches. activitycanbe calculated using the avail- strengthening national independence and able data on electricity consumption. As security. Lev Freinkman Vmcent Koen mentioned in his com- Consultant ments (Transition, vol. 6, no. 4), the On the whole, that a wider gap was Russia Country Operations dynamics of electricity consumption is reported between the fornner Soviet World Bank not a more reliable summary economic Union's drop in electricity consumption Volume 6, Number 11-12 23 The World Bank/PRDTE Milestones of Transition Romanian officials in 1996 expect 4.5 between 5.5 and 6.0 percent. Real GDP Singapore alone, with a population of percent growth in GDP, 4.7 percent for the first nine months of the year less than three million people. growth in industrial production, a 3.5 stood at 4.8 percent, according to offi- percent increase in agricultural produc- cial figures. Year-on-year inflation stood The National Bank of Hungary (MNB) tion, and an 8.8 percent increase in in- at 8 percent in November and unem- plans to maintain the current crawling vestment. Inflation is forecast at 20 per- ployment at 2.8 percent. Out ofthe 1996 peg devaluation of the forint-1.2 per- cent. It has been announced that a budget expenditures of 497.6 billion cent per month-during the first half of majority (51 percent) ownership in 554 koruny ($18.7 billion), social welfare 1996. and to lower that rate during the companies will be offered to interna- will receivethemost, oneinthreekoruny. second half of the year. The MNB pre- tional investors for cash, swapping 49 The state sector will account for 43.3 dicts a 1996 current account deficit of percent of holdings for coupons that percent of GDP next year, a decline of less than $2 billion (compared to $3 Romanians earlier received for free. 0.9 percent. billion in 1995), GDP growth 1.5 to 2.0 percent higher than the expected 0.5 to Romania's first stock exchange since The Czech Republic in November 1.5 percent in 1995, investment 9 to 11 World War II opened on 20 November recorded its third highest monthly cur- percent higher than in 1995, and con- in Bucharest. A total of seven compa- rent account deficit of the year, accord- sumer price inflation of 19 to 21 percent nies was quoted at the opening session, ing to figures of the Statistics Office (compared with about 30 percent tin with five more due to appear in the near released on 27 December. The shortfall 1995). The Ministry of Industry and future. Of the seven listed companies, in November was 10.6 billion koruny Trade predicts a 7 to 10 percent rise in only one is completely in private hands; ($398million), comparedwith 12billion exports and a 4 to 6 percent rise in the Romanian state still holds a 70 per- koruny ($451 million) in October, the imports in 1996-a narrowing of the cent stakeintheothersix. Initially, itwill worst showing to date for 1995. For the tradedeficit, duetoproductivitygrowth, operate only once a week. Brokers' first eleven months of 1995, the cumu- economic restructuring, and commissions are subject to a maximum lativetradedeficitwas 86.7billionkoruny macroeconomic stabilization. There are of 8 percent. In 1996 ($3.26 billion), more than seven times 25,000 foreign companies in Hungary, higher than for the same period last and total foreign investment now stands EU member countries, meeting in year. at around $8 billion. Real wages are Madrid on 16 December, said they ex- expected to fall next year, but the down- pected to start membership talks with The Czech Republic became the first ward trend should end by 1997, with a East European countries (as well as postcommunist state in Eastem Europe modest rise in 1998. withCyprusandMalta)withinsixmonths to gain access to the Organization for after the EU's intergovernmental con- Economic Cooperation and Develop- On 2 November Latvia fundamnentally ference, scheduled to end in mid-1997. ment (OECD), when it joined the mem- reformed its pension system, linking All applicants will have the same start- bership on 27 November. Hungary and benefits to contributions, which are in ing conditions. The summit asked the Poland are expected to follow in its turn tied to wages. Other provisions EU Commission to conclude reports on footsteps in 1996. In January the Czech include indexing benefits to inflation, the countries seeking membership. Republic is to submit an application to allowing workers to choose when to Meanwhile, Bulgaria has become the join the EU. retire (though the pension is lower the eighth East European country to for- younger they retire), a gradual reduc- mally apply for membership. The recent annual United Nations Con- tion in the rate of social tax on employ- ference on Trade and Development re- ers (from 37 percent to 33 percent), and The Czech economy is poised to surge ported in early December that Central anincrease inthat rate onworkers (from ahead in 1996, analysts say. Industrial and Eastern Europe, including the I percent to 5 percent). A better link productionboomedin 1995,pumpingup former Soviet Union-a region with between benefits and contributions is a third-quarter GDP that was 6.3 per- more than 300 million people-took in expected to increase incentive to re- cent higher year-on-year, mostly the about $6.5 billion in direct foreign in- frain from activities yielding undeclared result of strong domestic demand. In vestment in each of the last two years. income. Latvia now has perhaps the 1996, GDP growth is expected to be That is less than the FDI recorded for most modern pension system in the re- gion. 24 November-December 1995 Transition The Latvian Economic Court on 12 export duties will be halved. The gov- domestic grain could be exhausted by December declared Banka Baltija, for- ermnent is responding to the fact that June 1996, and that Russia might need merly the largest conmmercial bank in crude oil exports fell 5.1 percent in the to buy up to 6 million metric tons ofgrain the Baltic States, officially bankrupt. first ten months of 1995. The tax on by the summer of 1996. The activities of the bank were sus- crude oil exports is currently $46 per pendedinMay 1995. Lossestothebank's metric ton. The duty on gas exports was Russia and the London Club of 600 200,000 depositors are estimated at increased in early November from $2.6 creditor banks have concluded a frame- some200millionlati($370nmillion). The to $6.5 per 1,000 cubic meters. work agreement on the rescheduling of government has paid out slightly more loans and interest totaling $32.5 billion. than 1 million lati in compensations to In the first eleven months of 1995, In a mid-November meeting in Frank- 6,214depositors. Russia's GDP fell by 4 percent and furt it was decided that Russia will be industrial output by 3 percent compared granted a seven-year grace period, dur- In late December Lithuanian police with the same period in 1994, according ing which it will only pay interest. The arrested high officials of the country's to official figures released in mid-De- agreement does not formally forgive two largestcommercialbanks, Litimpeks cember. GDP for 1995 is estimated at any of Russia's debt, as did a similar Bank and Akcinis Inovacinis Bank 1,650-1,700 trillion rubles ($360-$368 agreement with Poland, but it spreads (LAIB) on charges of squandering large billion). The rate of economic decline out the repayments over twenty-five sums. Both banks have been shut down slowedin 1995 incomparisonwith 1994, years. Over the past four years the until furthernotice, bringing Lithuania's when Russia's GDP and industrial out- banks rolled the loans forward every financial sector activity to a halt. put were down 15 percent and 21 per- ninety days. On 15 November the Paris Litimpeks squandered 150 million litai cent, respectively. Official figures also Club ofofficial creditors had also agreed ($37.5 million) and LAIB 271 million. show a 12 percent decline in real in- toreschedulethe$40billionitis owedby Citizens have deposited some 300 mil- come over the first eleven months of Russia, although a timetable was not lionlitai ($75million)inLAIB. Thegov- 1995. agreed upon. einment guaranteed interbank loans of up to 300 million litai to avoid a paralyz- In Russia the ruble corridor has been The number of Russian banks regis- ing chain reaction. By 20 January the extended for the six months beginning teredas of 1 October 1995-2,570 com- banks should resume operation. on 1 January, and the ruble will be al- mercial banks and 5,760 bank lowedto float between 4,550 and 5,150 branches-is still relatively scant, in The average monthly income of a to $1, insteadofthepresent4,300-4,900 relation to the size of the economy, and Lithuanian family member in the third band. That means the ruble will be al- many banks are quite small, according quarter of 1995 was 265 litai ($66), ac- lowed to devalue by up to 13 percent. to Sergei Dubinin, the new head of the cording to a survey of 1,244 families First Deputy Prime Minister Anatolii Central Bank. According to a survey conducted by the Lithuanian Statistics Chubais and others oppose devaluation conducted bythe Public Advisory Com- Departnent. In real terms income rose because it will tend to increase inflation. mittee on Banking Legislation of the by only 5.6 percent, and it actually de- (Figures for November show inflation Federation Council, 40 percent of the creased by 13.8 percent compared with to be holding at 4.5 percent per month.) commercial banks were founded with a a year ago. Food purchases accounted Exporters want the ruble to fall in order capital base of less than 500 million for 57 percent of all expenses, with to restore their profitability. Aleksandr rubles ($110,000). hnthefirstninemonths housing, heating, and energy costs mak- Livshits, President Yeltsin's chief eco- of 1995,114commercialbankshadtheir ing up 11 percent. A mere 2.1 percent nomic adviser, in a 22 November inter- licenses revoked for violating financial was spent on health care, compared view expressed support for both an eas- legislation. with 4 percent on alcohol and tobacco. ing of conditions for exporters and some relaxation in interest rates. Russia reduced energy supplies to CIS Russian President Yeltsin issued a member countries in 1995. For the pe- presidential decree abolishing as of 1 Agriculture ministry official Alexander riod January-November 1995, Russian December, all export duties on refined Vasyutin said Russia's main grain har- deliveries of gas, crude oil, and petro- oil and timberproducts. From 1 January vest in 1996 could recoverto 77 million- leum products were down in volume by 1996, exportdutiesonallotherproducts 80 million metric tons after the drought 9 percent, 19.5 percent, and 57 percent, are scrapped, except those on crude oil, damage of 1995. But an Economy Min- respectively, compared with the same gas,andsomeindustrialgoods,onwhich istry forecast suggests that reserves of period in 1994, despite a higher unit Volume 6, Number 11-12 25 The World Bank/PRDTE price. The value of Russia's overall ex- turesofl89.4billionkoruny,GDPgrowth zation program launched on 22 Novem- ports to CIS countries for this period of 5 to 6 percent, and inflation of 6 to 7 ber. Up to 28 million adults should be- declined by 3.5 percent to $12.4 billion percent. come shareholders, and new manage- against- the same period last year. Im- ment should be brought to more than ports totaled$11.5 billion, upbyaspec- Cuba's economic plan for 1996 aims to 500 firms. Each citizen is allowed to tacular 24.2 percent against the same increase the pace of economic recov- have one coupon, costing 20 zlotys ($8) period in 1994, mainly on account of ery through a rebound in sugar produc- apiece. After twelve months, the cou- foodstuffs importedby Russia from CIS tion and higher revenues from the grow- pon holders-if they do not sell their countries. Overall Russian exports dur- ingtouristindustry. JoseLuis Rodriguez, coupons on the free market-can ex- ing the first eleven months of the year economy minister, forecast GDP growth change their certificates into fifteen rose 21 percent and the trade surplus of 5 percent in 1996, double the 2.5 shares, one for each of the fifteen na- widened to $31 billion. percent announced for 1995 (compared tional investment funds, which will be with an overall 35 percent decline from traded on the Warsaw Stock Exchange. Russian oil and gas production in 1995 1989 to 1993). Exports should increase (The fifteen funds, which control the is projected at 296 million tons of crude by 20 percent and imports by 15 per- 500firms, areworthatotalofabout$3.1 oil and 551 billion cubic meters of gas, a cent. In the first detailed statistical re- billion.) Analysts say that up to 30 per- 4 to 5 percent drop compared with the port on its economy in five years, Cuba cent of the firms participating in the corresponding figures for last year (308 has used IMF guidelines to compile pre- program, mostly medium-size firms, are milliontonsand58 1 billioncubicmeters, viouslyunpublishedbalanceofpayments in a difficult financial situation. respectively), according to the figures. The reportputs the total foreign government's Economic Situation Cen- debt at $9.1 billion at the end of 1994. Latest Polish statistics put the number ter. of people currently working in the un- Poland's GDP is expected to grow 5.5 derground economy at at least two Ukraine will step up structural reforms percent in 1995 and 6.5 percent in 1996, million, with43 percentnotpayingtaxes and bring down rising inflation to a Finance Minister Grzegorz Kolodko and another 57 percent holding second monthly average of 1 percent in 1996, anmounced. In 1996, imports are pro- jobs with untaxed earnings. PresidentLeonidKuchma said. National jectedto grow 13.6 percent and exports Bank Chairman ViktorYushchenko said 16 percent, while investment will in- Bulgarian National Bank governor that sluggishprivatizationis amajorrea- crease by 8.5 percent. Real wages will Todor Valchev on 15 December sug- son the budget deficit exceeded the grow 3.5 percent (5.5 percent in the gested that the projected 1996 budget IMF-supported target of 7.2 percent of public sector). The unemployment rate deficit of 4.5 to 6.0 percent of GDP will GDPin 1995. Only2trillion($11 million) remained steady at 14.7 percent in No- hurt health, education, andthe legal sys- of the 92 trillion karbovantsi ($526 mil- vember. While Kolodko forecasts con- tem. (A deficit of 7 percent GDP equiva- lion) expected from privatization in the sumer price inflation for 1996 at 17 per- lent is expected in 1995). For 1996 the first nine months of 1995 has been col- cent, down from 22.7 percent in 1995, government projects 20 to 25 percent lected. The government has been forced the national bank projects 19 to 21 per- inflation (35 to 40 percent in 1995); an to underfinance government activities cent. To stem inflation, the central bank exchange rate of 80 to 83 leva to the rather than print money to avoid further recently revalued the zloty by 6.4 per- dollar (currently 69.4 leva), a budget jumps in inflation. As aresult, hundreds cent from 2.7 to 2.53 zlotys per dollar. deficit of 4.5 to 6.0 percent of GDP, 2.5 of thousands of Ukrainian coal miners, By early November, foreign reserves percent growth of GDP (about the same teachers, physicians, and academics reached$13.5 billion, up from $6 billion as 1995), and a25 percent annual inter- havenotbeenpaidsincethe spring 1995. at the start of the year. est rate (4 percent at end 1995). The projection calls for reintroducing adniin- In Slovakia, which, according to the Nine hundred fourteen state enterprises istrative control over wages at state Financial Times, is the second fastest (27 percent ofthe total) in Poland were enterprises for the first time since 1990. growing economy in Eastern Europe, transformed into joint-stock companies Bulgaria's foreignreserves standat$1.4 the current account for the first eleven owned by the state treasury between billion while debt payments in 1996 will months of 1995 remained in surplus, at July 1990 and October 1995, according be $1.25 billion. 3.3 billion koruny ($111.5 million). The to the Polish Privatization Ministry. The 1996 budget plans on revenues of 162.4 process will get a boost as coupons are The United Nations 1995 Human De- billionkoruny($5.6billion)andexpendi- distributed under the new mass privati- velopment Report-which measures 26 November-December 1995 Transition GDP, real spending power, life expect- Albania's recently privatized compa- ing to ILO counselor Daniel Vaughan ancy, andeducationlevel-putBulgaria nies. The government is preparing to set Whitehead. The ILO suggested that the in 65th place among the 174 UN mem- up a register of shares. In the first round region's governments should try to im- bers. In 1991 Bulgaria ranked 33rd and of privatization, twenty large and me- prove productivity insteadofrestraining in 1994 it was 48th. According to the dium-size state-owned enterprises were wages. report, average life expectancy went privatized through the sale of vouchers. down by almost four years since 1991, Of the 4,000 shareholders in Albania, The government of Kazakhstan has and is now 71.2 years. Men's life ex- 2,700 are employees of the privatized accepted an economic reform plan ex- pectancyisonly67.6years,andwomen's companies, mainly in public services, tendingthrough 1998 andadraftbudget 74.4. Some 7 percent of the Bulgarian trade, construction, andagriculture. The for 1996. In a 28 November session, population are "absolutely illiterate." A second round of privatization will in- Kazakhstan Prime Minister Akezhan rankingofwomensemancipation, which clude industrial enterprises. A total of Kazhegeldin pledged to continue includes women's participation in eco- 350 companies will become private by macroeconomic stabilization and eco- nomic andpoliticaldecisionmaking,puts the end of 1996. Meanwhile, 4.4 billion nomic restructuring. The program aims Bulgaria in 20th place, two below Hun- lek ($48 million) in privatization bonds to bring inflation below 12 percent in gary. Bulgaria andHungary are the only have been provided to people perse- 1998, a significant drop from the 42.4 former Communist countries among the cuted for political reasons under com- percent it ran in the first ten months of top 20. munism. 1995. It is hoped that next year's infla- tion rate will be 26 to 28 percent, while China's adjusted GDP is seen growing According to the Intemational Labour the value of the tenge will drop from 9.7 percent in 1995, according to China Organization, restrictive incomepolicies 63.3 to $1 downto 71 to$ 1. GDP in 1996 Securities, citing State Information Cen- in Central and Eastern Europe, have should reach 1.31 trillion tenge at the ter data. Figures released by the State not resulted in economic recovery and latter rate. Kazakhstan's cabinet has Economic and Trade Commission pre- can lead to serious social tensions. Af- approved a draft 1996 budgetthat plans dict a gradual cooling of China's over- ter the fall of communist regimes in the adeficitof3.3 percent ofGDP, ahalving heated economy in 1996, with 9 percent region, most countries slashed real ofinflation, and stability forthe national GDP growth, compared with 11.8 per- wages to curb inflation and rein in soar- currency. cent in 1994 and 9.8 percent in the first ing budget and current account deficits. nine months of 1995. The retail price "If real wages further decline ... we see Slovenia becomes a member of the index is forecast to rise by 15.5 percent some serious economic and social risks," Central European Free Trade Agree- in 1996, almost the same rate as mea- says Werner Sengerberger, director of ment (CEFTA) in January 1996,joining sured for the first eleven months of 1995 the ELO's Central and East Europe Team. the Czech Republic, Hungary, Poland, on a year-on-year basis (15.4 percent). The restrictive policies have not only and Slovakia. Slovenia's Minister ofEco- Retail prices are expected to rise an aggravated social and political problems nomic Relations and Development Janko annual 14 percent in 1997. in the region; they have also proved Dezelak expects a substantial increase economically inviable as consumption in trade with CEFTA members. Inflation in Albania was 0.7 percent for fell along with living standards, accord- October. Since the national bank ex- pects inflation to run at between 1 per- Reserve cent and 1.2 percent during November and December, the goal of 10 percent annual inflation in 1995 appears attain- able. The budget deficit target, 7 per- cent of GDP, is also within reach. These figures continue the improving trend that began in 1992, when inflation was inthe triple digits and the budget deficit was a double-digit share of GDP. In Tirana a stock market will open in March 1996, and will trade shares in From the Hungarian Economy. Volume 6, Number 11-12 27 The World Bank/PRDTE World Bank/IMF Agenda IMF Standby to Romania main of the standby credit, whose term Donors Pledge $2.3 Billion to Viet expires inFebruary 1996. Thomas Wolf, Nam The IMF has approved an extension of head of the IMF mission in Moscow, Romania's current standby credit announced that an agreement on the Donors at their Paris meeting in early through April 1997, and has augmented three-year extended financing program December pledged to give Viet Nam the amount available by $280 million. probably would be signed in January $2.3 billion in aid. World Bank Director The extension of the IMF program was 1996. Callisto Madavo, Chairman ofa consul- requested by the government to help tative group meeting, reported that $1.8 continue external support for Personnel Changes in the World billion will be project aid, $360 million macroeconomic and structural adjust- Bank program aid, and $130 milliontechnical ment measures, the IMF said. Economic assistance. Viet Nam is aiming for 8 to performance in. Romania during 1994 Effective 1 January1996, JohannesLinn 10 percent economic growth and 14 was marked by a sharp improvement in replaces the retired Wilfried Thalwitz as percent inflation in 1996, and a World confidence, but developments in the first Vice President, responsible for the Eu- Bank report has advised that deeper nine months of 1995 presented a more rope and Central Asia Region. Mr. Linn, and faster reforms are needed if such contradictory picture, as further accel- a German national, joined the Bank growth is to be achieved. (At last year's eration in growth was accompanied by through the Young Professionals Pro- donors group meeting, $2 billion was the reemergence of balance of pay- gram in 1973. After serving in various pledged for Viet Nam in 1995.) ments pressures. The 1996 programaims positions in the Bank, in 1991 he was toachieve4percentgrowth, bring down appointed to Vice President, respon- IDA Credit to Viet Nam's Banks..; inflation to less than 20 percent, and sible for financial policy and risk man- reduce the current account deficit to 3.4 agement. Also effective 1 January 1996, AnIDAcreditof$49 millionwill streng- percent of GDP. Kemal Dervis is promotedto Vice Presi- then the commercial banking sector in dent, Middle East and North Africa VietNamthroughnewnationalandcom- World Bank Loan to Latvia Region. He will continue to oversee the mercial interbank payment clearing and Bank's operations in Bosnia. Mr. Dervis, settlement systems. The credit will fi- Latvia can accelerate its municipal ser- a Turkish national who joined the Bank nance both technical assistance and vice development, under a $27.3 million in 1977 as Economist, served as Direc- equipment. Besides the State Bank of World Bank loan approved on 14 De- tor of EMENA (later Europe and Cen- Vietnam, six other commercial banks, cember. The loan will help rehabilitate tral Asia Regional Office), Country De- accounting for 90 percent ofVietNam's the transport system in Riga and the partment II, since 1987. banking sector, will take part in the water and wastewater treatment plants project. in Daugavpils, and will set up a pilot Mr. Dervis's successor as Director of municipal development fund to channel Country Department II (grouping Alba- ...to Armenia's Infrastructure long-term credit for small-scale invest- nia, Bosnia-Herzegovina, Croatia, Czech ments in other municipalities. Republic, Hungary, Poland, Slovakia, and An IDA credit of$ 12 millionto Armenia Slovenia) is Jean-Michel Severino, a will finance small-scale infrastructure Russia Draws IMF Standby Tranche French national, who will assume his projects inthepoorestareas ofthecoun- new position on 15 April 1996. Mr. try, and will assist the local implement- The IMF has agreed to disburse the Severino is currently Director of Devel- ing agency, the Armenian Social In- eighth tranche of its standby credit to opment inthe French Ministry of Coop- vestment Fund. Microprojects in Russia, a payment worth about $550 eration. Kenneth Lay takes over the infrastructure will includethe rehabilita- million.The IMF's $6.25 billion standby Directorship of Country Department I tion of clinics, primary schools, and loan to Russia, approved in March, was (Bulgaria, Cyprus, FYR Macedonia, feeder roads, as well as improvements suspended following the military inter- Portugal, Romania, and Turkey) as of in sanitation and water supply. Overall vention in Chechnya. In April the IMF January 1996. Mr. Lay, a U.S. national, goals are to improve living conditions, agreed to resume payments in monthly joined the Bank in 1982, and replaces strengthen small local contractors, gen- installments. Four more tranches re- acting Director Christiaan J. Poortman. erateemploymentthroughpublicworks, 28 November-December 1995 Transition and enable policymakers to better ana- IFC Stake in Cetal equipment and facilities for wastewater lyze trends and conditions. and municipal waste management; to The IFC, together with ABN-AMRO extend credit to large-scale industrial ..and to Albania's Agrobusiness Bank, the Czech Zivostenka Banka, the enterprises to carry out pollution abate- Hungarian Foreign Trade Bank, the mentworks; to fund water quality moni- An IDA credit of $6 million to Albania, Polish Development Bank, and the Eu- toring and management; and to finance approved on 12 December, will help to ropean Bank for Reconstruction and technical assistance and training. develop and restructure the country's Development (EBRD), has set up the agroprocessing sector, so as to improve Central Europe Telecommunications ...Developing the Labor Market.... the marketing of farm products. The Agency Line (Cetal). Cetal will have credit also provides for the training of $100millioninfundingandaimstooffer AWorldBankloanof$10millionandan farmers and for assistance to entrepre- credits and shares to teleconmuunica- IDAcreditof$20million,bothapproved neurs and professional associations. tions firms. The IFC and EBRD will on December 19, will support a pilot each provide $33 million to Cetal. project aimed at attacking chronic un- Nicaragua Buys Back Debt Cheap deremployment in China's state-owned GEF Grants to Save the Ozone enterprises. The project will provide le- Nicaragua has bought back $1.1 billion gal expertise as well as employment and of its commercial bank debt ataprice of TheGlobalEnvironmentFacility(GEF) training services in five cities and the 8 cents to the dollar. The total value of will provide a total of $23.6 million in province ofZhejiang. Accordingto some the transaction, including canceled in- grants forenvironmentalprojects inthree estimates, 15 percent, or 16.8 million, of terestclaims, is$1.4bilion. Thebuyback transition countries. The World Bank is China's state enterprise workers could will eliminate 81 percent ofthe country's one of three implementing agencies of be made redundant with little or no im- outstanding commercial bank debt. The theGEF. Bulgaria,HungaryandSlovenia pact on production capacity. World Bank's Debt Reduction Facility will receive $10.5 million, $6.9 million for IDA-Only Countries backed the ,and $6.2 million, respectively, to phase ...and Controlling Disease operation with a $40 million grant; the out ozone-depleting substances (ODS) Inter-AmericanDevelopmentBankpro- as agreed by the 1985 Vienna Conven- IDA has approved a credit of $ 100 mil- vided a $40 million loan; Holland, Swe- tion and the 1987 Montreal Protocol on lion to boost disease prevention in ten den, and Switzerland, offered additional ODS. On 21 December the GEF ap- poor provinces in China. The credit will support of $8 million. proved a grant of $3.2 million to Russia supporttrainingofhealthworkers, imple- to help to identify and reduce the emis- mentation control of sexually transmit- New IFC Guidelines sion of greenhouse gases. ted diseases, encouragement of com- munity-based interventions, and The IFC has adopted anew set ofguide- Poland Gets Energy Loan coordinationamongprovinces, cities, and lines for operating in emerging market health agencies. economies. Provisions ofthe guidelines The World Bank has approved a $160 include increased use ofjoint mandates million loan for a power transmission Solving IDA Funding Crisis with conmmercial and investment banks project in Poland. The loan will provide to conduct feasibility and other work; a 95 percent ofthe foreign exchange com- Thirty-two donor countries meeting in pledgenottobidcompetitivelyforpriva- ponent of the estimated $276 million Luxembourg and London in mid-De- tization business under normal circum- total project cost. cember agreed on the outlines of an stances; use of private advisers to the interim plan for refunding the World "fullest extent" possible; and the adop- China Portfolio: Fighting Pollution... Bank's IDA, to begin in July 1996. tion of strict standards for IFC partici- This interim solution would put to- pation in the underwriting and place- The World Bank on 19 December ap- gether a three-year IDA replenish- ment of securities.(lnformation: proved a loan of $125 million and a ment of some $14.3 billion (compared Mauricio Perea, IFC, Corporate Re- credit of $25 million for an urban envi- with current IDA funding of roughly lations Unit, Room 1-3133, tel. (202) romnental project in Hubei Province, to $20 billion). The plan would exclude 473-7997, fax (202) 676-0355.) support wastewater handling, air pollu- the United States for about two years, tion control, and solid waste manage- ment. The loan will be used to purchase (continued on page 31) Volume 6, Number 11-12 29 The World Bank/PRDTE Reconstruction in Bosnia A donors meeting involving fifty coun- only 35 percent of the country's needs, will operate for at least six years as a tries and twenty-seven international about 80 percent of Bosnia relies on out- currency board, issuing currency only organizations, convened inBrussels and side food aid. with full foreign exchangebacking. Fur- hosted by the World Bank and the Euro- * Less than one-quarter ofthe prewar work- thermore, the government and public pean Commission, agreed on 21 Decem- ing population is employed. sector entities will refrain from financ- ber to mobilize a $500 million aidpack- ing fiscal expenditures through domes- age for war-torn Bosnia and At the Brussels Conference, the World tic bank loans. Herzegovina over the first quarter of Bank-which will serve as coordinator of 1996. The initial infusion is to be fol- aid money and economic consultant to Onceadmittedasa WorldBank member, lowed by a longer-term, $5 billion pro- Bosnian government-and the European Bosnia would likely be eligible to bor- gram-the largest reconstruction effort Conunissionpresented apriorityprogram row from IDA (the International Devel- inEurope since the end of World War II. for the first quarter of 1996. The key pri- opment Association). The World Bank orities: will set up a trust fund to administer Preliminary data collected bythe World * Service Bosnia's foreign debt. (The total donors' contributions. The EC would Bank and other sources paint a bleak foreign debt amounts to $4.2 billion; the make an exceptional upfront effort for picture of Bosnia's present social and country is more than $1 billion behind in specific rehabilitation projects and criti- economic situation: its loan payments to commercial banks, cal imports amounting to a contribution a Infouryears ofwar, about250,000 per- donor nations and international organi- of$112 millioninthefirstquarterof 1996. sons were killed, more than 200,000 were zations.) wounded, (and an estimated 2.3 million * Reorganize the country's transport, Longer- term projects, primarily rebuild- were displaced), out of a total prewar power, gas, and water andwaste manage- ing infrastructure, transport, water and population of roughly 4.5 million (the ment sectors, as well as provide financing sewerage, will require around $5 billion population is now estimated at 3.4 mil- for agricultural production and for re- over a three-year program period, nearly lion). building the education and health care half of which should be committed by * Annual per capita income has plunged systems. the first year, according to World Bank to about $500 from $1,900 in 1990. * Establish a social fund to help the eld- estimates. The initial proposal allocates * Around 45 percent of all industrial erly and other particularly vulnerable $900 million for the restoration of the plants, including perhaps 75 percent of groups. electricity grid and$600 millionfor hous- all oil refineries, have been destroyed, * Jump-start production in small and me- ing. Priorities also include restoration of and a much higher percentage has been dium-size enterprises by providing work- food production and agricultural distri- robbed of machinery and equipment. ing capital. bution, rebuilding schools and hospi- * The surviving industry operates at 5 to - Make available backup reserves to the tals, as well as some smaller investment 6 percent or the level of its prewar capac- central bank. in industry. Final agreement on financ- ity. * Strengthen domestic institutions that ing the reconstruction effort is expected * Thirty-five percent of roads and 40 will play an important role inthe recovery during a major donors' conference, percent of bridges are damaged or de- program. plannedforMarch 1996. stroyed. * Damage to the railway system is esti- The WorldBank will make a special allo- A recent Financial Times editorial mated at $1 billion. cation of $150 million to Bosnia, in ad- pointed out that the task at hand is not * Seventy-eight percent of electrical gen- vance of the country's becoming a mem- only the reconstruction of an economy erating capacity is out of commission, ber of the WorldBank Group. Arrears on that has been more than 70 percent and coal production is less than 10 per- debts tothe World Banl and the IMF that destroyed.The challenge is also to build cent of prewar levels. were inherited from the former Yugoslav a different kind ofeconomy than was left * The damage to the telecommunications Federation totaled $489 million. Those ar- by Tito to the former Yugoslavia. Even system is estimated at more than 500 rears hadtobe clearedupbefore the coun- before the war, the country faced million; daytime international telephone try could join the Bretton Woods organi- hyperinflation and risked defaulting on call completion rates have dropped to 1 zations. itsforeign debt. Rapidprivatization, self- or 2 percent. help building projects, and an effective * One-third of all health care facilities The IMF approved Bosnia and food-aid system are the keys to restart- and half of the country's school build- Herzegovina for membership on 21 De- ing economic activity, according to the ings have been seriously damaged or cember and granted the country an emer- editorial. The Timesaddedthatthe World destroyed; the infant mortality rate has gency$45 millioncredit(usedprimarilyto Bank has also stressedthe needtobuild doubled. repay Holland, which had provided short- the administrative structures necessary * Seventy percent of the total housing term financing to clear Bosnia's arrears of to sustain longer term reforms and infra- stock is destroyed or damaged. $37 million). The IMF supported a plan structure investment. * Domestic food production satisfied whereby the country's new central bank 30 November-December 1995 Transition (continued from page 29) IMF officials expressed their support of bilize the som (the national currency), the Uzbek government's tight monetary increase foreign trade, and advance the with the hope that the the U.S. would and fiscal policies. privatization of state property. come aboard again once it has cleared its arrears of $935 million and over- to Azerbaijan EBRD Tripled Payments come the antipathy toward foreign aid exhibited by the Republican-domi- The IMF is offering $127.3 million in Payments made by the European Bank nated Congress. The participants support of the Azerbaijan govermnent's for Reconstruction and Development reached a consensus on the urgent 1995-96 economic reform program. Of (EBRD) in the first half of 1995 to the need to keep up the flow of IDA cred- the total, $84.8 million is being made twenty-eight formerly communist coun- its to the most needy nations, whose available under a one-year standby tries in Eastern and Central Europe and ranks have grown with the addition of credit, and $42.5 million is being dis- the former Soviet Union amounted to Bosnia and the Asian countries of the bursed as Azerbaijan's second drawing $587 million, triple the amount in the FSU. under the systemic transformation fa- sameperiodofl994. Operatingprofitin cility(STF). the first six months also registered a IMF Agrees with Hungary on large rise, increasing more than fourfold Standby ... and to Kyrgyzstan to $25.7 million. The increased operat- The IMF has increased the amount of ing profit reflected substantially higher The IMF and Hungary have set the . income from banking operations, the basis for an agreement over a standby loans available to Kyrgyzstan under the EBRD said, adding thatthese now make arrangement, pending parliamentary gramefroma$105 millionto $131 million up 28 percent of the Bank's gross in- approval of satisfactory 1996 budgets come. approval budgets ~The move comes in response to the for the country's two social security T funds. Parliament is expected to pass country's efforts to reduce inflation, sta- the budgets early 1996. Hungary's so- cialist-led government expects a boost _ of international confidence once the IMF standby is signed. It does not intend to Al draw on the credit. (Official reserves a were up by $2 billion, reaching $9.2 . billionby October1995, anda furither$3 billion in revenue from the latest priva- tization wave is also expected to flow in.) In fact, in October 1995 Hungary made an advance payment of $620 mil- lion it owed to the IMF. New IMF Credit Package to Uzbekistan.... The IMF approved a $259 million credit package to Uzbekistan on 18 Decem- ber. The agreement includes $185 mil- lion in standby credit and $74 million from the IMF's systemic transforma- tion facility (STF). The funds will be used to help limit negative growth to 1.5 percent in 1996, against 3.5 percent in 1994 and 2.0 percentin 1995, as well as to hold the annual inflation rate to an anticipated target of 21 to 25 percent. From the Hungarian Economy Volume 6, Number 11-12 31 The World Bank/PRDTE Conference Diary Division, 11-13 Charterhouse Build- Information Service, London Busi- ings, London ECIM 7AN, tel. ness School, Sussex Place, Regent's (44171) 505-1023, fax (44171) 490- Park, London NWI 4SA, UK, Real Estate, Construction, and Con- 8932. tel. (441 71) 706-6870, fax (441 71) struction Project Finance in Russia 402-8979, (E-mail: cisme-info November 15-16,1995, NewYork City, International Round Table on Priva- lbs. lon.ac. uk). New York, United States tization in the Economies in Transi- tion European Societies or European Sponsored by the Geonomics Institute, December 8-10,1995, Knez Mihailova, Society? Social Exclusion and So- the conference focused on legal and Belgrade cial Integration in Europe: Theo- regulatory reform; providing warehous- retical and Political Perspectives on ingandmaterialstransportationservices; Sponsored by the European Centre for Poverty new construction versus improvement Peace and Development of the United March 26-31, 1996, Blarney, Ireland projects; housing markets and construc- Nations University for Peace. The pur- tion projects; commercial construction, pose of the International Round Table Organized by the European Commis- design-build, and turnkey projects; lo- was to examine experiences and results sion/ESF. cating and working with dealers and to date, as well as future prospects and Information: Josip Hendekovic, Eu- agents; local production and availability directions for privatization in the econo- ropean Science Foundation, 1 quai of building materials; safety and envi- mies intransition. Roundtable proceed- Lezay-Marnesia, F-67080, Stras- ronmental standards and specifications; ings will be disseminated to interested bourg Cedex, France, tel. (3388) 767- and project financing and financing for government, business, and scientific 135, fax (3388) 366-987, (E-mail: import of wholesale machinery and structures inthe economies in transition euresco. esf org). equipment. to help them in their privatization ef- Information: Geonomics Institute, 14 forts. Harvard-Columbia Arden House Hillcrest Avenue, Middlebury, Ver- Information: Mr. Miodrag Cabric, Conference mont 05753, USA, tel. (802) 388- MA., Special Adviser, the European March 29-31, 1996, New York, United 9619, fax (802) 388-9627. Centre for Peace and Development States (ECPD) of the United Nations Uni- Satellite Communications in Russia versity for Peace, Belgrade, Knez Cosponsored by Harvard University's and the CIS Mihailova 7/II, tel. (381-11) 625-878, Russian Research Center and Colum- November 28-29, 1995, Moscow, Rus- fax (381-11) 623-169. bia University's Harriman Institute, the sia 20th Annual Arden House Conference Sponsored bythe Adam Smith institute, will be held at the Arden House Confer- Sponsored by the Adam SmithlInstitute, ence Center in Harriman, New York. the conference discussed current and Researching East European Mar- The conference theme this year: The future trends-analyzing the recent kets-The View from the Region Russian Elections-HowWill Growing changes in Russia's space research February23,1996,London,UnitedKing- NationalismAffectForeignlnvestment? policy; conversion of military into civil dom As in the past, speakers will be drawn installations; developments in platform from the academic, government, and launchers, space complexes, and equip- Organized by CIS-Middle Europe In- business sectors in Russia, Europe, and ment for satellite communications; co- formation Service andthe London Busi- the United States. operation with the international busi- ness School. Topics will include meth- Information: Harvard Russian Re- ness community; and business ods of research and sources of search Center, Harvard University, opportunities in the Russian space in- information-company data, market 1737 Cambridge Street, Cambridge, dustry: designing and operating com- sector reports, statistics-in Bulgaria, MA, USA, 02138, tel. (617) 495-8900, mercially-oriented space systems. the Czech Republic, Hungary, Poland, fax (61 7) 495-8319, (Email: Information: Dorothea Jilli, The Romania, and Russia. chess@husc7.harvard.edu). Adam Smith Institute, Conference Information: Wendy Shelley, CISME 32 November-December 1995 Transition The Role of Banks in the Develop- 375438, (E-mail:ussurdejATcyf- macroeconomic modeling of the transi- ment of Small and Medium-size kr edu.pl). tion, evolutionist and institutionalist ap- Enterprises proaches, theories of corporate gover- April 26-27,1996, Krakow, Poland Institutional Changes and Problems nance; organizationandpropertyrights, of Economic Adjustment network economics, post-Keynesian The conference will focus on factors September 12-14, 1996, Grenoble, theory of the state, theory of economic that hinder the development of small France integration, gravity models, endogenous and medium-size enterprises in post- growth, and theories of regulation. Ab- communist countries. Methods of fi- The European Association for Com- stracts may be sent to: Xavier Richet, nancing this development will be dis- parative Economic Studies will hold its ROSES, University of Paris 1, 90, rue cussed by bankers, researchers, and fourth conference in cooperation with de Tolbiac, 75634 Paris 13, France, other conference participants. ROSES at the University of Grenoble tel. (331) 4077-1848, fax (331) 4584- Information: Prof Jan Jerschina, the II, France. Abstracts addressing the 7889, (E-mail: richet lendit. univ. Jagiellonian University, Grodzka, 52 following topics are invited: paris3.fr). st. Krakow, Poland, tel./fax: (012) New Books and Working Papers The PRDTE unit of the World Bank regrets that it is unable to supply the publications listed World Bank Publications pation to Governance, World Bank The Hungarian economy is emerging DP no. 304, 1995, 30 p. from a severe four-year recession with To receive ordenng and price infor- positive developments on numerous mation for publications of the World Country Studies economic fronts, but with major weak- Bank, write: World Bank, PO. Box nesses remaining because of large cur- 7247-8619, Philadelphia, PA 19170, China: Macroeconomic Stability in rent account and fiscal deficits. Policy- USA, tel. (202) 473-1155, fax (202) a Decentralizing Economy, World makers have to stabilize the economy, 676-0581; or visit the World Bank Bank Country Study, 1995, 250 p. and balance the fiscal and current ac- bookstores, in the United States, 701- count, without hampering economic 18th Street, N W, Washington, D. C. Recurring inflationary pressure on the growth. Long-term, overdue structural or in France, 66 avenue d'Iena, Chinese economy has been caused pri- reform should embrace both the wel- 75116, Paris, (Email: marily by funding the consolidated gov- fare system-pensions, health, educa- books@worldbank.org) (Internet: ermnent deficit through increased bor- tion, family benefits-and the tax sys- http://www.worldbank.org/). rowing from the central bank (over the tem, aswellasthepublic sector, including past five years, this borrowing has fi- the administration. Healthy growth, a Discussion Papers: nanced more than two-thirds ofthe defi- streamlined economic structure, and a cit). Local government-led surges in in- modem legal framework could pave Dale F. Gray, Reforming the Energy vestment demand have been another Hungary's way toward European inte- Sector in Transition Economies: major factor in generating inflation. If gration. Selected Experience and Lessons, China wants a high, sustained growth World Bank DP no. 296, 1995, 126 p. rate and successful reforms, it has to Other reduce the central bank's role in financ- Raj Bhala, Towards a Payments Sys- ing the consolidated deficit, and it must World Bank Atlas, 1996,28th edition, tem Law for Developing and Transi- promote greater economic decentrali- 36 p. tion Economies, World Bank DP no. zation, suggests the country study. 299,1995,42 p. This annual comucopia of international Hungary: Structural Reforms for statistics-organized under three Robert Picciotto, Putting Institutional Sustainable Growth, World Bank themes: people, economy, and environ- Economics to Work: From Partici- Country Study, 1995, 190p. ment-shows that between 1985 and Volume 6, Number 11-12 33 The World Bank/PRDTE 1994, China's economic growth was the stock markets and foreign investment CERGE-EI Working Papers, Prague third highest in the world, with 6.9 per- has grown rapidly since the 1980s). cent (in atie with Singapore), surpassed To order: Ms. Lucie Coxova, CERGE- only by Thailand (8.2 percent) and South IMF Working Papers EI Library, PO. Box 882 Politickych Korea (7.8 percent). Many countries * veznu 7, 111 21 Prague 1, Czech achieving high economic growth rates To order IMFFpublications: IM Pub- Republic, tel. (422) 240-05186, fax also have high levels of literacy, reflect- lication Services, 700-19th Street, (422) 242-11374. ing the link between basic education and N. W, Washington, D.C. 20431, USA, growth. The Atlas showsthatBotswana, tel. (202) 623-7430, fax (202) 623- Alena Cerna, Eva Tosovska, and Pavel China, Indonesia, Korea, and Singapore, 7201. Cetkovsky, Economic Transformation all with economic growth rates of more and the Environment, WP no. 57, than 6 percent in the past decade, have Guillermo A. Calvo, Ratna Sahay, and April 1994. 96 percent or more oftheir primary-age Carlos A. Vegh, Capital Flows in children enrolled in school. Central and Eastern Europe: Evi- Josef Kotrba, Czech Privatization: dence and Policy Options, IMF WP Players and Winners,WPno. 58,April Zeljko Bogetic and Arye L. Hillnan no. 95/57, May 1995, 34p. 1994. (eds.), Financing Government in the Transition: Bulgaria, World Bank Re- In contrast to experience in Latin Jan Svejnar, Katherine Terrell, Daniel gional and Sectoral Studies, 1995,254 p. America, foreign direct investment in Munich, and Mario Strapec, Explain- Central and Eastern Europe has in- ing Unemployment Dynamics in the David, J. Donaldson, Privatization: creased significantly as a result of capi- Czech and Slovak Republics, WP Principles and Practice, IFC Lessons tal inflows in the transition economies. no. 60, April 1994. and Privatization Series, 1995, 96 p. But this stream of FDI has not spurred higher investment ratios; rather, those Jaromir Veprek, Zdenek Papes, and The report describes the experiences of ratios have fallen, while consumption, Pavel Veprek, Czech Health Care in countries that have privatizedtheir state- as a share of GDP, has increased Economic Transformation, WP no. owned enterprises with the assistance throughoutthe region. [Substantial GDP 63, April 1994. of the International Finance Corpora- decline throughout the region must also tion (IFC), the private sector arm of the be considered. The editor.] To the ex- Olga Vybomr, The Reform of the World Bank Group. tent that capital inflows are financing Czech Health Care System, WP no. temnporary increases in consumption- 64, April 1994. Gerhard Pohl, Gregory T. Jedrzejczak, and causing real appreciation ofthe cur- and Robert E. Anderson, Creating rency, as well as real wages, to over- Ales Cerny and Stepana Lazarova, Capital Markets in Central and East- shoot-the inflows may need to be Growth and Business Cycles in ern Europe, World Bank Technical discouraged. "Second best policies" to Czechoslovakia According to the Paper no. 295, 1995, 44 p. (Also avail- stem expenditures in the private sector, Basic Neoclassical RBC Model, WP able in Russian). such as imposing capital controls, levy- no. 65, April 1994. ing taxes, and raising interest rates on Trends in Developing Economies government debt, have their drawbacks Jaromir Stach and Josef Nedoma, A 1995, 1995, 586 p. (available on dis- too. Dynamic Model of the Investment kette). Behavior of a Joint-stock Company Robert J. Flanagan, Institutional Struc- and Impacts of Investment Incen- Economic features of the individual ture and Labor Market Outcomes: tives, WP no. 67, June 1994. countries, current socioeconomic issues, Western Lessons for European medium-term prospects, and develop- Countries in Transition, IMF WP no. Mitchell Orenstein, The Political Suc- ment strategies. Regional Extracts: Vol- 95/63, July 1995,24 p. cess of Neo-Liberalism in the Czech ume 1, Eastern Europe and Central Republic, WP no. 68, June 1994. Asia (covering 23 economies) Volume Vincent Koen, Price Measurement 2, Emerging Capital Markets (cov- and Mismeasurement in Central Unemployment control and wage regu- ering 22 developing countries where Asia, IMF WP no. 95/82, August 1995, lation, bankruptcy prevention, social 22 p. safety nets, and active labor market 34 November-December 1995 Transition policies, although inconsistent with the dom, tel. (44171) 878-2900, fax Princeton University Press Publi- Thatcherite rhetoric of the government, (441 71) 878-2999. cations, Princeton form the backbone of its popular sup- port. The skillful implementation of the Daniel Cohen, The Transition in Rus- To order: Princeton University Press, privatization program has also contrib- sia: Successes (Privatization, Low 41 William Street, Princeton, NJ uted to the government's popularity. Unemployment ... ) and Failures 08540, United States, tel. (609) 258- (Mafias, Liquidity Constraints ... ). A 5714, fax (609) 258-1335. M :kin Z. Kler, The Governance Theoretical Analysis, CEPRno. 1224, of Privatized Firms: Problems of August 1995, 24p. Stephan Haggard and Robert R. Power and Control, WP no. 71, May Kaufman, The Political Economy of 1995. PeterBofinger, The Political Economy Democratic Transitions, October of the Eastern Enlargement of the 1995,391 p. CED Working Papers, Bratislava EU,CEPRno. 1234,Augustl995,40p. Susan L. Woodward, Socialist Unem- To order: Center for Economic De- Tito Boeri and Michael C.Burda, Ac- ployment: The Political Economy of velopment (CED), ELITA, Economickdl tive Labor Market Policies, Job Yugoslavia, 1945-1990, September Literarna Agentura, VYDA VA- Matching and the Czech Miracle, no 1995,443 p. TELSTVO a DISTRIBUCL4 Klincova .1302, November 1995. ul. c. 35 821 08 Bratislava, tel. (427) Center for the Study of Public Policy 526-1797, fax (427) 21-1388. The Czech Republic is the only country Working Papers, Glasgow in the region to have gone through radi- Pavol Erben and Anton Novak, Stan- cal transformation without experienc- To order: Centre for the Study of dard Methods of Privatization in ing mass unemployment. Active labor Public Policy, University of Slovakia, and Danes Brzica, Role of employmentpoliciesplayedamajorrole Strathclyde, Livingstone Tower, 26 Investment Companies and Invest- in this unique situation: unemployment Richmond Street, Glasgow GI iXH-, ment Fund Managers in Exercising insurance was severely tightened (halv- Scotland, tel. (0141) 552-4400, fax Ownership Rights, June 1995, 82 p. ing the duration of benefits, reducing (0141) 552-4711. eligibility), while subsidies for private Large investors are exposed to strong sector employment and public work Igor Gurkov, Popular Response to political pressures, from both national schemes were implemented on a large Russian Privatization: Surveys in governments and local authorities, as scale. Enterprises, SPP no. 245, 1995. well as from different interest groups. Independent supervision over the capi- Property Foundation Working Pa- Richard Rose, Mobilizing Demobi- tal market helps to create a competitive pers, Budapest lized Voters in Post Communist So- environment, which in turn prevents in- cieties, SPP no. 246, 1995. formation misuse and tax fraud. Strong To order: Property Foundation, In- capital markets foster economic growth stitute for Privatization Studies, H- Arthur H. Miller, Vicki L. Hesli, and and efficient resource allocation. 1387 Budapest, Box 44, 18, Gyori ut, William Reisinger, Understanding 1123 Budapest, Hungary, tel. (361) Democracy: A Comparison of Mass Anna Pilkova and Lubomir Blecha, 202-5175, fax (361) 202-1093. and Elite in Post-Soviet Russia and Banking in Slovakia, and Vladimir Ukraine, SPP no. 247, 1995. Tikl, Private Sector Development in Gyorgy H. Matolosy, Privatization: Road Freight Transportation, June Midway, May 1995, 60 p. Richard Rose, What Are the Alterna- 1995,83 p. tives to Democracy in Post-Com- SandorKopatsy, On Eastern Europe's munist Societies?, SPP no. 248, 1995. CEPR Discussion Papers, London Chances of Catching Up, March 1995, 16p. David Laifin, Identity in Formation: To order: Centre for Economic Policy The Russian-speaking Nationality Research, 25-28 Old Burlington in Estonia and Bashkortostan, SPP Street, London WIXILB, UnitedKing- no.249,1995. Volume 6, Number 11-12 35 The World Bank/PRDTE Other Working Papers factories to domestic and foreign inves- no. (95)62, Paris, 1995. To order: tors. They also lacked the populist ap- OECD, 2 rue Andre-Pascal, 75775 Laszlo Csaba, Transition and/or Mod- peal of the massive voucher-based as- Paris Cedex 16, France, fax (331) ernization in Eastern Europe, Kopint- setownershipthattheRussianand Czech 4524-1843. Datorg Discussion Paper no. 29, April programs offered at the very start ofthe 1995, 46 p. To order: Kopint-Datorg, privatizationagenda. Natalija Kazlauskiene and William H. Economic Research, Marketing and Meyers, Beyond Privatization: De- Computing Co., Ltd., H-1081 To order: Columbia University, The veloping a Market Economy for Budapest, Csokonai u. 3., Hungary, Harriman Review, Harriman Institute, Lithuanian Agriculture, Baltic Re- tel. (361) 266-6640, fax (361) 266- 1218 International Affairs Building, port no. 95-BR20, Center for Agricul- 8858. 420 West 118 Street, New York, NY tural and Rural Development, Iowa, 10027. August 1995, 18 p. To order: Center Debt Conversion Program: Guide- for Agricultural and Rural Develop- lines for Bulgaria: Final Study, Inter- Economic Restructuring and De- ment, Iowa State University, 578 national Center for Economic Growth, fence Conversion in a Russian City: Heody Hall, Ames, Iowa 50011, USA, Center for the Study of Democracy, The Case of Zhukovsky, Moscow tel. (515) 294-1183, fax (515) 294- Sofia, Bulgaria, 1995. To order: Center Oblast. OECD, Centre for Co-opera- 6336. for the Study of Democracy, I Lazar tion with the Economies in Transition Stanev Street, 1113 Sofia, Bulgaria. Padma Desai, Russian Privatization: A Comparative Perspective, The Harriman Review, vol. 8, no. 3, New York, August 1995, 34 p. Russian privatization was marked by the strategic decision in 1993 to corporatize large and medium-size fac- tories by formally converting them into joint-stock companies prior to their re- structuring. Their ownership was diver- sified via a massive subscription of fac- rA tory shares by the public, in exchange for vouchers. By contrast, small assets in the trade and service sectors were sold or auctioned, or were leased (with .L. prospects for their ultimate purchase). The quick corporatization of a large . \ \ number of factories and the speedy sale _ of small assets to private owners were momentous achievements. The next phase: selling publicly owned shares on the stock exchange; and offering the new issues of stock for cash, which could generate needed capital from both foreign and domestic investors. By contrast, Hungarian and Polish pro- grams lacked a coherent strategy and a decisive drive, and lost at least three years in failed attempts to sell inviable 3 6 November-December 1995 Transition Marinko Papuga, Capital Market To order: International Research and unemploymentrate, rapidprivatization, Development in Croatia, IRMO no. Exchanges Board (fREX), 1616 H and continuous popular support for the 16, September 1995, 25 p. To order: Street, N W, Washington, D.C. 20006, transition, have been brought about in IRMO, Ulica Ljudevita Farkasa USA, teL (202) 628-8188, fax (202) part by judicious government policies. Vukotinovica 2, PO. Box 303, 10 000 628-8189, (Email: irex@info. There isno doubtthatthe Czech Repub- Zagreb, Croatia, tel. (38501) 4554- irex. org). lic provides an important case study for 522, fax (38501) 444-059. analysts and policymakers interested in L. Nelson and I. Kuzes. Radical Re- understanding the complex process of Laszlo Urban, Impact Analysis of form in Yeltsin's Russia: Political, transition. To order: Academic Press Changing the Rates of Excise Duty, Economic and Social Dimensions, Limited, 24-28 Oval Road, London Democracy After Communism Foun- M.E. Sharpe, New York, 1995. To or- NW] 7DX UK dation, Hungary, 1995, 15 p. To order: der: ME. Sharpe, 80 Business Drive, Democracy After Communism Foun- Armonk, New York 10504, USA. Newsletters and Special Publica- dation, Falk Miksa u. 30.111. 3., tions Budapest 1055, Hungary, tel. (361) Privatization in the Transition Pro- 269-3009, fax (361) 269-3035. cess: Recent Experiences in East- C.E.E.P.N. Newsletter, the newslet- ern Europe, United Nations, NewYork, ter ofthe Central and Eastern European Mark Michalski, Regulation, Modern- 1994,418p. Privatization Network. To order: ization and Commitment in Polish CEEPN, Dunajska 104, PO. Box 18, Telecommunications Infrastructure, John E. Ray, Managing Official Ex- 61109 Ljubljana, Slovenia, tel. in Modernization in Central and East- port Credits: The Quest for a Glo- (38661) 1683-396, fax (38661) 346- ern European Economies, Franco- bal Regime, Institute for International 660. Austrian Center for Economic Rap- Economics,Washington, D.C., 1995,318 prochement in Central Europe, Vienna, p. To order: Institute for International Civil-Military Relations and the Austria, 1995. Economics, 11 Dupont Circle, N.W, Consolidation of Democracy, con- Washington, D.C. 20036-1207, USA, ference report by the International Fo- New Books tel. (202) 328-9000, fax (202) 328- rum for Democratic Studies and George 0900. C. Marshall European Center for Secu- Simon Johnson and Gary W. Loveman, rity Studies. To order: International Starting Over in Eastern Europe: Avrham Shama, Entry Strategies of Forum for Democratic Studies, 1101 Entrepreneurship and Economic U.S. Firms to the Former Soviet Fifteenth Street, N. W, Suite 802, Renewal, Harvard Business School Bloc and Eastern Europe, California Washington, D. C. 20005, USA, tel. Press, Boston, May 1995, 256 p. Management Review, vol. 37, no. 3, (202) 293-0300, fax (202) 293-0258. spring 1995, 167 p. To order: Califor- To order: Harvard Business School nia Management Review, 350 Bar- Economic Reform Today, a publica- Press, Soldiers Field Road, Boston, rows Hall, University of California tion of the Center for International Pri- MA 02163, USA, tel. (617) 495-6117 ,Berkeley, CA 94720, USA, tel. (510) vate Enterprise (CIPE), an affiliate of or (800) 545-7685. 642-7159, fax (510) 642-1318. the U.S. Chamber of Commerce. Spe- cial issue no. 2/1995, Business Asso- Marguerite Mendell and Klaus Nielsen, Jan Svejnar (ed.), The Czech Repub- ciations: Building Democracy. To Europe: Central and East, Montreal lic and Economic Transition in East- order CIPE, 1615 H Street, N. W, Black Rose Books, 1995, 270 p. To ern Europe, Academic Press, Inc., Washington, D.C. 20062-2000, USA, order: Black Rose Books, C.P 1258, 1995,434p. tel. (202) 463-5901, fax (202) 887- Succ. Place du Parc, Montreal, Que- 3447. bec, H2W 2R3, Canada. In five years, the highly centralized and completely state-owned Czech economy News in Brief, a bimonthly publication A Journalism Handbook for Work- have been transformed into one gov- by the International Research and Ex- ing Journalists in the Baltics and erned by market principles and private changes Board (IREX). To order: Other Emerging Democracies, In- ownership. While favorable initial con- IREX, 1616 H Street, N. W, Washing- ternational Research and Exchanges ditions have undoubtedly helped, many ton, D.C. 20006, USA, tel. (202) 628- Board, Washington, D.C., 1995, 63 p. of the positive results, such as the low 8118, fax (202) 628-8189. Volume 6, Number 11-12 3 7 The World Bank/PRDTE The Free Market, newsletter of the FernandezandP.E.Guidotti,"Exploring nese Style." To order: International Lithuanian Free Market Institute. To Interactions Between Capital and Re- Publishers Distributor, c/o PO Box order: Birutes 56, 2600 Vilnius, serve Requirements" [in transition 90, Reading, Berkshire, RGI 8JL, UK, Lithuania, tel. (3702) 352-584, fax economnies];Y QianandB.R.Weingast, Tel. (44-1734) 560-080 Fax: (44- (3702) 351-279. "Market Preserving Federalism, Chi- 1734) 568-211. The Privatization Newsletter of the Czech Republic and Slovakia. Issue no. 33/34, April-May 1995, includes Foreign Direct Investment and Privati- zation, by Vladimir Benacek and Alena Zemplinerova. To order: Institute for Economics (IFS), Smetanovo na 6, 110 00 Prague 1, Czech Republic, fax (422) 2481-098 7. The Vietnam Business Journal, pub- iishedby VIAM Communiications Group Inc. To order: 17AM Communications, 381 Park Avenue South, Suite 919, New York, NY 10016, USA, tel. (212) 725-1717, fax (212) 725-8160. Transition Brief, a new newsletter of the Centre for Cooperation with Econo- mies in Transition. The first issue in- cludes Salvatore Zecchini's article on Perspectives on Economic Transition. To order: Centre for Cooperation with the Economies in Transition, OECD, 2 rue Andre-Pascal, 75775 Paris Cedex 16, France, fax (331) 4524- 1843. Journal of Policy Reform, a new jour- nal from Harwood Academic Publish- ers, startinginearly 1996. Editors: Arvind Panagariya, University of Maryland, Center for International Economics, College Park, MD 20742-721 1, USA, tel. (301) 405-3546, fax (301) 405- 7835, (E-mail: JPRgECON. UMD. EDU), and Dani Rodrik, Columbia Uni- versity. The journal analyses the suc- cesses and failures of countries under- taking reforms. Papers in the first two issues include G. A. Calvo and F. Coricelli, "The Political Economy of Delayed Reform"; A. Drazen, "Mon- etary Policy and Interenterprise Arrears in Post-Communist Economies"; R. B. From the Hungarian Economy 3 8 November-December 1995 Transition Bibliography of Selected Articles Postsocialist Economies try during Transformation [in the International Energy Law: Special Czech Republic].EasternEuropean Supplement [on CEE]. Petroleum Budina, N., J. Hanousek, andcZ. Tuma. Economics: A Journal of Transla- Economist (U.K.) 62, suppl.: I-XVIII, Money Demand and Seigniorage tions (U.S.) 33:74-96, January-Feb- May 1995. in Transition. Eastern E-uropean ruary 1995. Economics: A Journal of Transla- Keupink, E., and A. Lennaerts. Envi- tions (U.S.) 33:54-73, January-Feb- Croatia Sets about Building a Na- ronmental Action Planning in Ro- ruary 1995. tion. Euromoney (U.K.), pp. 206- mania. Land & Water International 18, September 1995. (Netherlands) 82:13-16, 1995. Gazaryn, A. State Control and Eco- nomic Misconduct in the Period of Czaba, L. Economic Transformation Kornai, J. Eliminating the Shortage Transition. InternationalReview of in theVisegrad Countries: A Com- Economy: A General Analysis and Administrative Sciences (Belgium) parison. Helsingin Yliopisto, Examination ofthe Developments 61:229-39, June 1995. KansantaloustieteenLaitos, Keskus- in Hungary. Economics of Transi- telualoitteita(Finland) 353:1-18, Au- tion/EuropeanBankforReconstruc- Investing in Success, Euromoney gust 6, 1993. tionandDevelopment(Intemational) (U.K.), p. 287, September 1995. 3:13-37, March 1995. The Czech Republic, A Financial McTigue, E. Global Finance's Cen- Times Survey, The Financial Times, Lehmann, H., and M. Schaffer. Pro- tral Banker Report Cards. Global November 22, 1995, 4 p. ductivity, Employment and Labor Finance (U.S.)9:41-42, September Demand in Polish Industry in the 1995. Gray, G. Slovenia Catches Up the 1980s: Some Preliminary Results Czechs. Euromoney (U.K.), p. 202, from Enterprise-level Data. Eco- Mihalyi, P. Common Patterns and September 1995. nomics of Planning (U.K.) 28(1) 1- Particularities in Privatisation: A 27, 1995. Progress Report on the Transition Hitchens, D., K. Wagner, J. Birnie, J. Economies. Acta Oeconomica: Pe- Hamar, and A. Zemplinerova. The Moore, P. The Privatization Game riodical of the Hungarian Academy ComparativeProductivityofManu- in Poland. Euromoney (U.K.), p. 185, ofSciences(Hungary)46(1-2):27-61, facturing Plants in the Czech Re- September 1995. 1994. public and Hungary.EconomicSys- tems (Germany) 19(3):187-218, Perry, D. Republic of Macedonia. Perkins, F. StateEnterprise Reform September 1995. Transition (Czech Republic) and Macroeconomic Stability in 1(1 5):40-48, August 1995. Transition Economies. Institut fur Hornschild, K., and A. Scherzinger. Weltwirtschaft an der Universitat Structural Problems Restrain the Pudney, S. Income Distribution and Kiel, Kiel WorkingPapers (Germany) Development of Innovative Poten- the Reform of Public Housing in 665:1-53, December 1994. tial in East Germany. EconomicBul- Hungary. Economics of Transition/ letin/Deutsches Institut fur European Bankfor Reconstruction Soft Landing or Recession? Wirtschaftsforschung (Germany) andDevelopment(International) 3:75- Euromoney (U.K.), p. 306, Septem- 32:3-12, March 1995. 106, March 1995. ber 1995. Central and Eastern Europe Hungary's Petroleum Privatization Reform ofPrivatization Law in Hun- Limited by Economics. Oiland Gas gary, International Financial Law Bohata, M., andM. Fischer. Perfor- journal (U.S.), pp. 21-27, July 4, Review (U.K.), pp. 12-14, Septem- manceoftheManufacturinglndus- 1994. ber 1995. Volume 6, Number 11-12 39 The World Bank/PRDTE Bibliography of Selected Articles continued Republic ofMacedonia: Financial People's Republic of China. Linz, S. Russian Labor Market in Times Survey. Financial Times Hastings International and Com- Transition. Economic Development (U.K.), pp. 27-30, July 7, 1995. parative Law Review (U.S.) andCultural Change (U.S.)43:693- 18(2):359-95,winter 1995. 716, July 1995. Rose, R., and C. Haerpfer. Democ- racy and Enlarging the European Ma, J. China: Central Government Maddock, N. Agriculture after So- Union Eastwards, Journal ofMar- CredibiityandEconomicOverheat- cialism: The Transformation and ketStudies(U.K.)33(3):427-50, Sep- ing. Economic Systems (Germany) Development of Lithuanian Agri- tember 1995. 19(3):237-61, September 1995. culture. FoodPolicy (U.K.)20:129- 37, April 1995. Slovakia, A Financial Times Sur- CIS and the Baltics vey, The Financial Times, December New Western Investment Fund for 20, 1995, 4 p. Baidina, 0., and E. Baidin. Russian the RFE. Russian Far East Update Banking's Coming Shakeout: (U.S.) 5(9):3, September1995. Svab, I. Primary Health Care Re- Houses Built on Sand. East/West form in Slovenia: FirstResults.So- Letter (U.S.) 4(3):1-14, July 1995. Russia Comes in from the Cold. cial Science and Medicine (U.K.) Euromoney Supplement (U.K.), p. 41(1): 141-44,1995. Brock, G. J. Firm Inefficiencyinthe 313, September 1995. City of Vilnius during the Voszka, E. Revival of Redistribu- Perestroyka Period. EconomicSys- Ukraine: Cast in a New Light, tion in Hungary.ActaOeconomica: tems (Germany) 19(2):79-1 00, June Euromoney Supplement (U.K.), p. Periodical of the Hungarian Acad- 1995. 195, September 1995. emy of Sciences (Hungary) 46(1- 2): 63-78,1994. Easterly, W., and S. Fischer. The So- Viet Nam vietEconomicDecline. WorldBank Zemplinerova, A. Market Structure Economic Review (U.S.) 9(3):341- Gates, C. L. Enterprise Reform and Adjustment during Privatization. 71, 1995. Viet Nam's Transformation. The Privatization Newsletter of the ASEANEconomicBulletin, 12(1):29- Czech Republic and Slovakia (U. S.) Focus on Banking. RussianFarEast 52, July 1995. 35:1, June 1995. Update (U.S.) 5(10):7-10, October China 1995. Jansen-Verbeke,M.,andF. Go. Tour- ism Development in Vietnam. Tour- China:A Financial Times Survey, Kokins, U. Latvian Tax Reform ismManagement (U.K.) 16:315-21, The Financial Times, November20, Gathers Pace. Tax Planning Inter- June1995. 1995, 4 p. national Review (U.K.) 22:28-32, July 1995. Viet Nam: A Financial Times Sur- Drumm,L. Note: Changing Money: vey. The Financial Times, Novem- Foreign Exchange Reform in the ber 13, 1995, 6 p. TRANSITIONis a regularpublication ofthe WorldBank's TransitionEconomiesDivision, PolicyResearchDepartment. Thefindings, | views, andinterpretations published in thearticles are those ofthe authors and should notbeattributed tothe WorldBank orits affiliated l organizations. Nordo anyofthe interpretations or conclusions necessarily represent official policyofthe WorldBankorofits Executive Directors orthecountries they represent. Richard Hirschleris theeditorandproduction manager, Room N11-003, tel. (202)473-6982, E- 'mail: RHirschler@_Worldbank. org. Jennifer Prochnow-Walker is the research assistant, desktop publisher, and producer ofgraphs and figures. Ifyou wish to receive Transition, send name and address to Jennifer Prochnow-Walker, room N- 11023X, the World Bank, 1818 H StreetNW, Washington, D.C. 20433, orcall (202)473-7466, orfax (202)522-1152 orEmail JPROCHNOWWALKER@Worldbank.org. Information on upcoming conferences on transforming economies, indication ofsubjects of special interest to our readers, letters to the editor, and any other reader contributions are appreciated. 40 November-December 1995