THE NEWSLETTER ABOUT REFORMING ECONOMIES TRANSITION Volume 8, Number 4 August 1997 EU Accession Should Be a What's Inside Partnership, Not a Dictate EU Calculates Enlargement Costs 3 by Michael Ellman Commission Presents Report Card 5 S ome officials of the EU Commis- as a "development integration." The new sion in Brussels and EU mem- accession agreements should contain Romania's Reform Efforts 8 ber governments believe that the arrangements concerning such matters forthcoming enlargement of the EU is as the structural/cohesion funds, envi- World Bank-NGO Dialogue 11 rather similar to the previous enlarge- ronmental and social policy, and transi- ments (1973, 1981, 1986, and 1995) and tion periods, which help new members Vulnerable Green Media 14 that no special arrangements will be re- quickly reduce the gap between their quired. This is a very superficial ap- level of development and that of the Structural Adjustment Review 16 proach. If it persists it is likely to lead to existing members. prolonged accession negotiations and Behind the Ruble's Ride 17 unsatisfactory arrangements for the ex- Ten transition countries (Bulgaria, Czech isting members, the new members, and Republic, Estonia, Hungary, Latvia, Hard Ruble Is Coming 18 the applicants who are not accepted in Lithuania, Poland, Romania, Slovakia, the first enlargement round. and Slovenia) have applied for member- Anticorruption War 20 ship. [The Commission has selected That the new applicants are transition Czech Republic, Estonia, Hungary, Po- Letters: Russian Employment 21 countries automatically raises a number land, and Slovenia for negotiations in the of special issues, which were explicitly first round.] The EU should simulta- Reform Speed and Social Costs 22 recognized by the pre-accession condi- neously negotiate with countries admit- tions laid down at the Copenhagen (1993) ted in the first round about the conditions Milestones of Transition 24 and Essen (1994) meetings of the Euro- of accession, and about medium-run pean Council. The applicants are much arrangements with those countries that Oneximbank Expands 26 poorer than the existing members. Natu- are left out in the first round. rally, comparisons of per capita GNP World Bank/IMF Agenda 27 that fail to take account of the discrep- Joining the EU today is different from join- ancy between market rates of exchange ing it, say, fifteen years ago, since it has World Bank Lending FY 97 28 and purchasing power parities, and the completed its single-market project and differences in the relative size of the is embarking on monetary union. Coun- Conference Diary 31 informal sector, give an exaggerated tries that apply today, some of which have view of the discrepancies in income only recently acquired monetary indepen- levels. Nevertheless, there is a sub- dence, eventually will have to give up their stantial difference with this enlargement. national currency and adopt one whose Bibliography of Selected Articles 39 Hence the new accession must be seen value will be determined in Frankfurt.While Macroeconomics and Growth Division Policy Research Department The World Bank M some applicants find this an attractive underdevelopment? tries that are currently members of the prospect (it will enable them to maintain * The accession should not turn into EU to give up their Commissioner and low inflation and end the depreciation of a one-sided dictate that the applicants favorable voting position in the Council their money relative to that of their main are obliged to accept. It must be a part- of Ministers, the hostility of influential trading partners), others do not. nership that takes account of the inter- groups in the EU to free movement of When countries joined before, they had ests and aspirations of the applicants, labor from the applicants, the discrep- to change ther p e i* The current accession process in- ancy in social and environmental tcasnge theirU policithes nuers ar- -volves istitutional changes of a sig- costs-all can prolong the negotiations eas-not the EU. With the new acces- oeinuoa sion, the EU itself will have to change nificantly greater scale than has been and hence perpetuate the division of Eu- its policies. It seems likely that some required in earlier accessions. A rela- rope. How to overcome these barriers? limit (expressed as a percentage of tively long transition period should beOne possibilitywould be tosetup quickly GDP) should be introduced on the required in order to achieve these an authoritative committee (analogous to amount any country can receive from changes and build up the competitive the Spaak and Delors committees, which the structural/cohesion funds in order to strength of the applicant countries, laid the groundwork for the Treaties of * The existing members have a re-RoeadMstih,rpcivl)ht reduce the fiscal transfers to the new . 9 . . applicants Rome and Maastricht respectively) that members. It also may be necessary to snsibilityston assis Theyappl would examine all accession issues- chane th Comon Aricutura Po Ic in the accession process. They should change the Common Anduto Po certainly not create unnecessary ob- such as trans-European infrastructureand (CAP) to reduce costs and to keep to stacles to a procedure that has the poten- communications; money, banking, and the commitments made to the other par- tial of making an imortant contribution to payments issues, particularly concerning ticipants in the WTO.pose in Agend the unity and prosperity of Europe. the relations between the European Mon- changes have been proposed in Agend a There should be clearly specified etary Union (EMU) countries and the rest; 2000. Seefollowingarticles.Theeditor] Thproposals for cooperative efforts be- energy and power; environment; competi- Western Europe already has sad ex- tween existing and future members tion policy; and agricultural policy-and amples of what can go wrong in thepro- come up with positive proposals aimed cess of unifying regions that differ (for example, in the fields of transport, at making a success of the forthcoming substantially in level of economic devel- telecommunications, and banking). enlargement. It is desirable that both the opment: southern Italy and the five prov- existing members and the applicants be inces of Eastern Germany. Since Special arrangements for those countries represented on such a committee and that economic integration, both regions have not acc pd n versthe Europ ea its proposals be accompanied by a time- become depressed areas, suffered pro- E a A (ehi h the Eur table for their implementaton. longed fiscal problems, and shown few Economic Area (which currently in signs of selfsustin e i gthe EU, Iceland, Liechtenstein, and Nor- Unless the interests of applicant coun- way). Besides providing participants with tries are properly considered, negotia- The trade statistics expose the risks in- access to EU markets, such an arrange- tions could drag on for years. Even if volved. Whereas in 1990 the EU was a ment should also define a path to future accession terms are agreed, the supe- major net importer of agricultural products EU membership for those who want it. rior competitiveness of the existing from Eastern Europe, it is now a major members could turn the acceding coun- net exporter. Even such traditional agri- The main danger facing,en,largement at tries into new depressed Mezzogiornos now exagrculturalseBulgariacand Lithuania next year as previously promised-but or east Germanies. In either case, Eu- now have agricultural trade deficits with will drag on for years. The June 1997 ropean stability could be endangered. the EU 12. This Is partly a result of pro- thectionis EU poicies udrt t reule ofp Amsterdam summit of EU leaders Michael Eliman is professor of economic tectionist EU policies under the rules ofsytmatheUiriyofA trd. showed how difficult it is to persuade systems at the University of Amsterdam. the CAP, but partly a result of the superior soe o ifcl ti oprud thmpetiCAP,nbut partl agresultiofet seio EU members to improve the efficiency He coauthored, with John Eatwell, Mats competitiveness of EU agribusiness. This,,' outcome is fineforWestEuropeanfarm-of their institutions if this means giving Karlsson, D Mario Nuti, and Judith Shapiro, outcome IS fine for West European farm- ers, processors, and distributors, but very up Commission membership, favorable the report, "NotJustAnotherAccession- adverse for East European agriculture, voting rights in the Council of Ministers, The Political Economy of the EU Enlarge- and the like, for the general interest of mentto the East,"publishedby the Institute What has to be done to ensure that EU Europe as a whole. The self-interest of forPublic PolicyResearch, London, teL 44- enlargement will contribute to the eco- the net recipients of the structural/co- 171-470-6100, fax 44-171-470-6111, nomic development of the transition hesion funds and the beneficiaries of the Email:ippr@easynetco.uk, website:http:/ countries that join, rather than to their CAP, the unwillingness of small coun- /wwwipprorg.uk * TRANSITION, August 199 7 (D 199 7 The World Bank Picking Up the Enlargement Tab European Union Plans Budget for 2000-2006 The European Commission, the highest 370 million. The scale of the changes that million hectares to close to 200 million executive body of the European Union, will be brought about by the next enlarge- hectares. Of the 60 million hectares of on July 16 released its opinions ("avis") ment is illustrated by area and popula- added land, two thirds would be arable, on the ten applications for EU member- tion increases (table 1). Average per increasing by 55 percent the EU's cur- ship from Central and Eastern Europe. capita GDP will decrease more than it rent arable area of 77 million hectares It concludes that accession negotia- did following all previous enlargements. (but with quite diverse land quality and tions should open with the Czech Re- The ten applicants, with an overall per climatic conditions). The agricultural Ia- public, Estonia, Hungary, Poland, and capita GDP estimated at 32 percent of bor force, projected at around 6.6 mil- Slovenia in early 1998. The 1,200-page the Community average, lag far behind lion in 2000 for the existing EU, could "Agenda 2000" took more than a year to Greece, Ireland, Portugal, and Spain, be expected to at least double. Currently, prepare. It also carries the Commission's whose average per capita GDP stands the agricultural area per person employed proposals for agricultural, structural and at 74 percent of the Community average. in the candidate countries is, on aver- horizontal policies, a reinforced pre-ac- age, 9 hectares compared with 21 hect- cession strategy, and the EU's financial As a consequence of the enlargement, ares in the existing EU. Enlargement framework beyond 1999. The EU Coun- major categories of EU budget expendi- would add more than 100 million food cil of Ministers will draft a final position tures are expected to develop in the fol- consumers to the internal market, if all for the EU summit scheduled for De- lowing way (see table 2 on page 4): associated countries were to join, but cember in Luxembourg. There, EU heads these consumers have, on average, a of state and government will make the 1. Common Agricultural Policy (CAP). level of per capita purchasing power that final decision on the start of the nego- Agriculture is relatively more important is only about one-third the level in the tiations. in the candidate countries than in the existing EU. EU in terms of area, contribution to GDP, The Commission is proposing a total of and, especially, share in total employ- Agricultural expenditure for the applicant 75 billion European currency units ($82.6 ment. On average, more than 22 percent countries would include the following: billion), or about 10 percent of the EU of the workforce (9.5 million people) is *Pre-accession aid, amounting to some budget during the period 2000-2006, for employed in agriculture, compared with ECU 0.5 billion per year, will be granted the eleven countries (Cyprus included) only 5 percent (8.2 million) in the EU. from the year 2000 in priority areas, such that are applying for membership. They Agriculture still contributes 9 percent to as modernizing farms and food distribu- propose maintaining the level of EU GDP, compared with 2.4 percent in the tion channels and maintaining food qual- spending at 1.27 percent of total Union EU. With enlargement, the Union's agri- ity control in the applicant countries. GNP between 1999 and 2006, but cap- cultural area would be expanded by 60 *Expenditures relating to the new members' ping aid to any current or future mem- ber at 4 percent of GDP. The Commission also suggests allocating some ECU 45 Table 1. Impact of successive EU enlargements billion ($49.5 billion) in aid to new mem- (based on 1995 data, in percent) bers as part of a regional aid budget of Increase Average ECU 275 billion ($302.5 billion). A radi- Enlargement in total GDP Changein per capita cal reform of the EU's Common Agricul- (EU Increase Increase (inpurchasing per capita GDP tural Policy is prescribed in the membership) in area inpopulation powerparities) GDP (EUR6= 100) document, with drastic cuts of EU-guar- From 6 to 9 31 32 29 - 3 97 anteed prices for milk and cereals. From 9 to 12 48 22 1 5 - 6 91 From 12 to 15, If enlarged by the ten Central and East including German European applicant countries, the Eu- unification 43 11 8 -G3 89 ropean Union would comprise an eco- From 15ito26 34 29 9 - 16 75 nomic area of up to 500 million consumers, compared with the current Source: Agenda 2000. © 1997The World Bank TRANSITION,August 1997 A Table 2. The new framework: EU budget expenditures, 2000-2006 support. The cofinancing require- (billion ECU, 1997prices) ment for the new member states will have to be progressively in- Category 19996 2000 2001 2002 2003 2004 2005 2006 creased. (To the present fifteen 1. Agricultural policy 43.3 44.1 45.0 46.1 47.0 48.0 49.0 50.0 member states, ECU 210 billi6n New membersb 0.0 0.0 0.0 1.5 2.0 2.4 2.8 3.3 would be allocated from the struc- Other applicantsb 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 tural funds and ECU 20 billion from 2. Structural and the cohesion fund between 2000 cohesion funds 36.1 35.2 36.0 38:9 39.8 40.7 41.7 42.8 and 2006.) New members 0.0 0.0 0.0 3.6 5.6 7.6 9.6 11.6 Other applicants 0.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Pre-accession aid, to be drawn from 3. Other internal actions 6.1 6.1 6.4 7.3 7.5 7.7 7.9 8.1 the ECU 45 billion allocation, would 4. External actionsc 6.6 6.6 6.8 7.0 7.1 7.3 7.5 7.6 be made available from the year 5. Administrative 2000. This assistance, to be expenses 4.5 4.5 4.6 5.1 5.2 5.3 5.4 5.5 granted at a constant rate of ECU 6. Reserves 1.2 1.0 1.0 0.8 0.5 0.5 0.5 0.5 1 billion a year would help bring the Total expenditures 97.8 97.5 99.8 105.1 107.1 105.9 112.0 114.5 applicant countries' infrastructures New members 0.0 0.0 0.0 5.8 8.2 10.8 13.3 15.7 up to Community standards, par- Other applicants 1.3 3.0 3.0 3.0 3.0 3.0 3.0 3.0 ticularly in the transport and envi- ronment fields. a. Earlier approved budget allocation. b. Final selection of new members will be announced at the EC summit in December. c. From 2000 includes ECU 1.5 billion in annual aid under PHARE to other applicants. 3. Other internalpolicies. Once the Source: Agenda 2000. applicants have joined, pre-acces- sion aid will have to be replaced from within this category. Funded priority pro- agro-environmental action programs, re- Without a change in policy, the eligible grams include the trans-European net- forestation, and market modernization population would amount to 60 percent works, research, education and training, measures will come to between ECU 1.5 of the total population. the introduction of environment-friendly billion and ECU 3.3 billion annually, from technologies, and measures to support the date of accession. The new member states would receive smali and medium-size enterprises. from the structural and cohesion funds Agricultural prices in the candidate coun- some ECU 45 billion between 2000 and 4. External actions. Prior to enlarge- tries are generally much lower than in 2006, taking into account their absorp- ment, as part of pre-accession aid, the the EU; in 1995, farm gate prices were tive capacity, the required effectiveness PHARE program has financed applicant just 40 to 80 percent of the EU level. of structural spending, and the need to countries' participation in projects co- New member states thus will not be eli- ensure a progressive rise in per capita ordinated with the EU. After the first gible for compensatory aids that would otherwise represent around two-thirds of Table 3. Changes in population eligible for Objective 1 additional expenditure, at least during a assistancefromstructuralfunds period after accession. Therefore, the ag- (based on 1995 data) ricultural guideline should suffice to fi- Eligible Objective 1 nance additional expenses induced by EU membership Eligible population Objective1 population enlargement. and year of population (percent, population (percent, 2. Structural policies. On the basis of enlargement (million) EU = 100) (million) EU = 100) present regulations governing allocation 12 (1989) 140.0 43.3 69.7 21.4 of structural funds, enlargement could 15 (1995) 185.6 49.8 94.0 25.2 increase from 94 million to 200 million 26 (2000+) 291.4 60.9 199.8 41.7 the population eligible for assistance un- Note: The structural fund Objective I Programn supports regions where per capita GNP is less than 75 der Objective 1, aimed at helping regions percent of the Union average. where per capita GNP is less than 75 Source: Agenda 2000. percent of the Union average (table 3). * TRANSITION, August 1997 C) 1997 The World Bank accessions, this aid should remain overall administrative expenditure ceil- The Commission's stable at ECU 1.5 billion a year and be ing-after taking enlargement into ac- concentrated exclusively on the coun- count-may increase more slowly than Report Card tries due to join at a later date. the GNP of the enlarged Community over the period 2000-2006. 5. Administrative expenditure. EU in- The evaluations on the following "report stitutions will have to be equipped to work 6. Reserves. Phasing-out of the monetary card" (p. 6-7) are excerpted from the in new languages, to assume a bigger reserve by 2003 should be possible in European Commission's opinions (offi- role in a more diverse Community, and view of the reform of the Common Agri- cially, "opinions concerning the applica- to accommodate nationals from the new cultural Policy. The emergency aid reserve tions for membership to the European member states'. If the new member could be cut back to ECU 200 million. Union presented by the ten candidate states entry is a sufficiently gradual pro- countries". The report card assesses the cess and is accompanied by the neces- Based on the EU Commission docu- applicants' progress toward democratiza- sary rationalization measures, the ments, Agenda 2000. tion, economic transition, and adoption of the EU's acquis communautaire-in other words, the laws, norms, and regu- The European Union's Pre-Accession Strategy lations followed by the Union. The appli- and the World Bank cations of Bulgaria, Latvia, Lithuania, Romania, and Slovakia, which were left The World Bank is ready to collaborate with EU institutions, including the off the Commission's shortlist, will be European Investment Bank, to help applicant countries meet membership reviewed annually. criteria. The next high-level meeting on this topic will be held in Brussels in early September. The 'grades" illustrate EC opinions, and are based on ratings given by the Hun- The Reinforced Pre-Accession Strategy, part of "Agenda 2000," refers briefly to garian World Economy Weekly possible areas of joint action. "Applicants will be required to undertake sub- (Budapest). The numerical grades range stantial investment in environmental protection, transport, energy, industrial from 1 (failing) to 5 (excellent). These rat- restructuring, agricultural infrastructure, and rural society. Resources for such ings do not reflect the official view of investments can be mobilized from international financial institutions. In- the World Bank. vestment linked to profitgenerating sectors, such as telecommunications, transport, and energy, can be jointly financed with the EIB, the EBRD and Outsiders' Perspective the World Bank. Funding agreements with these institutions will be concluded by the Commission. PHARE will act as a catalyst for public and private international loans by providing grants. PHARE, the EU's aid program to Central and Eastern Europe, will continue to operate as an accession tool. It was recently reoriented toward the fol- lowing top priorities, common to all applicants: *Reinforcing the institutions and administrations of applicant countries (70 wra f : A percent of PHARE assistance). *Bringing enterprises into line with Community standards (30 percent of PHARE assistance)." The different sources of EU support, taken together, amount to pre-acces- sion assistance of ECU 21 billion (at constant 1997 prices) over the period 2000-2006: 3.5 billion for structural assistance in agriculture, 7 billion un- der the cohesion fund, and 10 billion from the PHARE program. Thus there are plenty of opportunities over the next five years for close EU-World Bank cooperation to make the enlargement a success. Based on Agenda 2000. From the Hungarian magazine H6cipo. / 1997The World Bank TRANSITION,August 1997 A Country Political criteria Economic criteria Capacity to assume membership obligations Da4grla Grade = 4 Grade = 2/3 Grade = 2/3 Bulgaria has stable democratic mistitions that Bulgaria is stiL at the start of structural tratsformation The new Bulgaria would not be able to cope with competitive pressure and need to be reinforced at al levels of public government has undertaken to carry out rapid reforms in order to market forces withun the Union in the medium term. It has an administration, by fuUler respect for the rule of free prices and start privatiatiorL This policy should permit unsabtsfactorily low rate of adaptation of the EC rules and law The new govemment has announced a series recovery from the situation created by the recent crisis that saw a directives. Complete restructurig of the financial sector, in order of positive reforms, but some gaps remain in negative growth (-10.95/o of GDP in 1996), worsemng public to reestabhsh pubhc and investor confidence, is of high pnority fundamental rights. Fighting against corruption, deficits, hyperinflation (311% in 1996), and depreciation of the The weakness of publc administration is a major problem. improving the operation of the judicial system, ctnTency GDP per capita is 24% of the EU average. Trade with Bulgaria wil need to make substantial efforts in order to apply the and protecting individual liberties in the face of the EU now represents 35% of Bulgaria's extemal trade. EU standards in telecommunications, taxation, statistics, consumer too frequent abuses by the pohce and secret protection, and customs. services are necessary. The Turkish minority seems well integrated, but this is not so for the Roma Crech Rep. Grade = 4WS Grade = 4 Grade = 4 The Czech Republic is a stable democracy, Economic growth has been sustained since 1994, though at a The country has satisfactorily adapted EU rules and directives, guaranteeuig the rule of law, human rights, and lower rate (4.0%) in 1996. Despite tight fiscal policies, both trade though a considerable amoint of legislative work is required, respect for and protection of minorities Efforts and current account deficits grew in 1996. inflation stood at 8.8% particularly in the area of financial services and taxation The to improve the operation of the judiciary and to in 1996. GDP per head is about 55% of the EU average. The country could apply the acquis from the date of accession, m intensify the fight against corTuption must be EUs share of Czech trade has reached 555/. The country is a education, research telecommunications, statistis. and consumer sustained There are some weaknesses in laws functioning market economy. But further progress will need to be protection But further efforts are required in agriculture, governing freedom of the press. Discrimination made over the next few years in strengthening corporate enviromnental protection and the energy sector. affects the Roma. governance and the financial system. The banking sector is dominated by a few, partly state-owned banks and its competitive position is not strong. The country should be able to cope with competitive pessure and market forces withi the Union m the medium term, provided that change at the enterprise level (restrucuing) is accelerated Although the qualty of exported goods is improving their value added is still low. Eatonia Grade = 415 Grade = 3/4 Grade = 314 Estonia is a stable democracy, with institutions The economy has been growing since the second half of 1993 Estonia has adopted signficant elements of the acquis relating to guaranteeing the role of law, human rights, and (4.0%/ in 1996). The govenrment has maintained balanced budgets the sinWe market It is well on the way to putting in place the respect for and protection of minorities. But in public fmances. External debt is low, though Estonia runs a necessary legislative foundation in company law, accounting data measures need to be taken to accelerate high trade and current account deficit Inflation rates have protection, and capital Lberahzation But them is still substantial atumrhzation of Russian-speaking noncitizens to decked over recent years, thanks to the currency board system work to be done on public procurement, mtellectual property, enable them to become better integrated into and a prudent fiscal stance, but stil stood at 23.1% in 1996. GDP frnancial services. taxaion and competition (especiaLy the Estonian society. Efforts to improve the per head is about 23% of the EU average. Fifty-four percent of transparency of state aids). There are doubts about the capacity of operation of the judicial system and to mtensify Estonia's exports are directed to the EU, and 66o% of its imports the Estonian administration to implement this legal fiamework the fight against cornuption need to be sustained. originate in the EU. Estonia can be regarded as a functioning Estonia should not have dfficulty in applying the acquis m the market economy. It has liberalized foreign trade and pnvatized the medium term in education research and technological public sector The legislative framework is largely in place. But development, smiall and medium-size enterpises, and with further land reform has been slow, and reform of the pension system has efforts, in telecommunicatons. Further progress is required in the not yet started The banking sector is healthy and expandmg fields of statistics. consumer protection, customs. envirorment, and stngly. Estonia should be able to make the progress necessary to agiculture. cope with competitive pessures and market forces within the Umcn in the medium term, provided in particular that the expod base is broadened Humgay Grade = 4/5 Grade = 4/5 Grade = 4 Hungary is a stable democmry, with institutions Hungarys renewed growth (1% in 1996) has been accompamed The legislative foundation, by adoptng EU rules and directives, is guaanteeng the nute of law, human rights and by progress toward stabilzation of public fiances, external almost completed in such areas as competition, public respect for and protection of mirites. accounts, and inflation (19.8% in 1996). Its GDP per capita is procurement, intellectual property, and company and accounting Hungary's pohtical institutions function properly. equivalent to 37% of the EU average. Trade with the EU now law Effective administrative reform is, however, required Hungary Certain improvements are still needed in the represents 60% of Hungatys external trade. Hungary is a should not have difficulty in applying in the medium term EU operation of the judicial system and in protection functioning market economy. Liberalization and pnvatzation have norms and regulations in education, trauiing research and for the Roma, but the measures recently taken by progressed considerably, and there has been strong growth of new technological development, and telecommunications. By contrast the govewment constitute progress. The fght private firms. The reform of pensions and social security needs to further efforts wil be needed in consumer protection and customs against corrupticn needs further reinforcement. advance rapidly [Parlament approved in July 1997. the new controls. as well as the environment The health system should be pension law, reforming the system. ] Hungary should be well able improved and EU health and "afety at work' standards applied to cope with competitive pressure and market forces within the Umon in the medium term, provided the macroeconomic conditions for strong investment growth remain in place. Its enterpnses are already competitive in EU markets. Restructurmng of industry and banks is well under way It has had a consigtently high level of foreign direct investment The key task now is to avoid unsustainable budgetary or extemal deficits. atvta Grade = 415 Grade = 3 Grade = 3 Latvia is a stable democracy, guaranteeing the Growth turned positive again in 1996 (2.8%). Since 1995 the Latvia would face senous dificulties m coping with competitive rule of law, human rights. and respect for and government has conducted a tight fiscal policy, though revenue pressure and market forces within the Union in the medium term. protection of minorities. But measures need to be colection is still a problem. The foreign debt ratio remains low, Public adrninistration is weak Progress was made to comply with taken to accelerate the rate of naturalzation of but the trade deficit is hig Inflation rate still stood at 17.6% in the single market legislation in banking industrial property tights, Russian-speaking noncitizens to enable them to 1996. GDP per head is about 18% of the EU average Forty-five and commercial law. It could apply EU norms in the medium term become better integrated mito Latvian society. percent of Latvia's exports are directed to the EU, and 50% of its in such areas as education, training research and technological Efforts to improve the operation of the judicial imports originate in the EU. Latvia has made considerable development and telecommunications; less so in sectors such as system and to intensify the fight against progress in creating a market economy But effective enviromnent and agriculture. The industy should be able to cope corruption need to be sutained implementation is lagging behind Not all the necessary regulatory with mtegration mto the single market in the medium term. bodies ae in place or working property Privatimtion is not complete; the remaining state-owned companies are generally in poor fnancial condition and there is a shortage of investors. Latvia would face serious difficulties in coping with competitive pressure and market forces within the Union in the medium tenm. Exports consist mainly of low value-added goods. Industrial restrucuring as well as enterpise restructuring, is still needed The banking sector is underdeveloped and weak in parts. Agnculture needs to be modernized * TRANSIMON, August 1997 ©D 1997 The World Bank Country Political criteria Economic criteria Capacity to assume membership obligations lithmuana Grade = 4/5 Grade = 3 Grade = 3 Lithasnia is a democracy, with stable institutions Since the introduction of a new currency and the establishment of Lituania progressed as complying with the single maket guar.nteeing the rule of law, human rights and a currency board in 1993/94, the GNP is increasing (by 3.6o/. in legislation m the areas of company law, data protection and respect for and protection of mmiories. Efforts 1996). Lithuania has mamtained a tight fiscal stance, Foreign debt accounting. Furthe work is necessary on intellectual property to improve the operation of the judicial system is at modest levels, and the trade deficit is under control. Inflation rights, liberalization of capital markets, financial services, taxation, and to intensify the fight against cornption need is down to 24.6% in 1996. GDP per head is about 24%/. of the EU and competition Applying the HU norms in education, tramnig to be sustained average. The EU is Lithunia's largest trading parbter, taking 37%/o research and technologicat development should not presert of total trade. The country has made progress in the creation of a significant difficulties. In the fields of telecommunications, market economy, but it would face serious difficulties in coping statistics, customs, environment, energy and agnculture substantial with competitive pressure and market forces within the Union in efforts wiU be needed the medium term. Relative price adjustments, large-scale privatization, substantial enterprise restructug and banlorptcy proceedings should continue. Financial discipline of aentprises is not enforced Agriculture needs to be modernized The bankmg sector is weak Pebnd Gade = 4/5 Grade = 4/5 Grade = 4 Poland is a stable democracy, with institutions By 1992 positive growth had started, and has continued since Poland should be able to cope with competitive pressure and guaranteeig the rule of law, human rights and (6 .0/O in 1996). The budget deficit has been reduced to below 3%/c market forces within the Union in the medium term. Particular respect for and protection of minorities. Efforts of GDP; and the debt-servicing burden, after rescheduling was effort and investment will be needed to apply EU norms in to improve the operation of the judicial system agreed in 1991, is being steadily reduced Inflation rate still stood agniculture, enviromnent and transport On the other hand, and to intensify the fight agamnst corruption will at 19.9% in 1996. GDP per head is about 31% of the EU average, substantial progress has been made on "approximating' mtellectual need to be sustained There are certain 70°/. of Polanis exports are directed to the EU, and 65% of its property, company law, taxation, accounting, and financial lliitationa to freedom of the press imports originate in the EU. Poland can be regarded as a services. Work is stil needed on public procurement data fimctionuig market economy. But pension and social sewrity protection, competition and liberalization of capital movements. systems need to be reformed Financial services are underdeveloped The banking sector needs further reform. Poland should be well able to cope with competitive pressure and market forces within the Urion in the medium term. Agriculture needs to be moderized Polish mdustry is charactenzed by the existence of both a dynamic competitive new private sector and large, mostly state-owned sector that need restrudunng. Movald Grae = 2 Grade = 4 Grade = 4 Slovakia does not fulfil m a satisfying manner Slovakia's growth in 1996 reached 6.9°/% while inflation feU to Significant progress has been achieved on adopting legislation the political conditions set out by the European 5.4%. This has been accompanied by an increase in budget related to key areas of the single market, such as company law, Council in Copenhagen The government does deficits and by a worsening of exteral accounts. GDP per capita banking free movement of capital and taxation More substantial not sufficiernly respect the powers devolved by is 41% of the EU average Trade with the EU now represent efforts are needed to apply the acquis in the medium term on the constitution to other bodies, and too often 36% of Slovakia-s imprts and 41% of its exports. Slovakia has standards and certification, industrial and intellectual property, diaregards the rights of the opposition In that introduced most of the reforms necesary to establish a market competition, public procurement and insrance; as well as in the context, the use of the police and the secret economy. Nevertheless, a restrictive Price Law has been of energy and environment sectors. Integration of Slovak idustry services is worying. Fuller independence of the introduced in 1996, and the draft Enterprise Revitalization Act into the European market could face diffculties over the medium judicial system woald ensure its function in would be a major step back from market mechanisms. The term unless it is diversified away from heavy industries and satsfactory conditions. The fight against fmnancial sector needs to be reinforced, and progress is needed in enterprise restructuring goes ahead corruption needs to be pursued with greater the regulation of the banrkuptcy process and capital markets. effectiveness The treatment of the Hungarian Enterprise restructuing has been slow, which is graduaUy minority needs to be improved It still lacks the undermining economic growth and external balance. Slovakia benefit of a law on use of minority languages. could cope with competitive pressure and market forces within the even though the Slovak authorities had Union in the medium term, if it pursued more tsansparent and undertaken to adopt one, as envisaged by the market-based policies. constitution 90venia Grade = 4/5 Grade = 4 Grade = 3/4 Slovema is a stable democracy, with institutions Slovenia had 3.1% economic growth in 1996. Public finances and For most sectors related to the smngle market, and in particular for guaranteeing the rule of law, human rights and external accounts were kept in balmce, inflation fell to 9.1% in accounting mutual recogniton of professional qualifications and respect fcr and protection of minorities. Some 1996. Slovenias GDP per capita is 59% of the EU average. Trade intellectual property, the legislative foundation is virtualy in place. improvements am needed in the operation of the with the EU now represents 65% of Slovenia's extenal tmade. Further legislative effort will be needed to achieve full absrmption judicial system, and in restoring property to Slovenia can be regarded as a functioning market economy of the acquis. Substantial work is still needed in the fields of former owners dispossessed under the cormmunist However, cormpetition lacks in some sectors, in particular the public procurement, competiton, insurance, freedom of capital regime. The effectiveness of the fight against financial sector. Fiscal and social security reforms are not yet movements, product conformity and standardization Introduction cornuption needs further strengthenig. completed Slovenia should be able to cope with competitive of VAT is a top prioty. Slovenia should not have particular pressure and market forces within the Union in the mediun term, difficulties in applying EU norms m the medium term in areas provided that rgidities in the econonmy are reduced. Enterprise such as education, traming, research and technical development, restructuring has been slow due to the consensual character of telecommunications, and customs.The Slovene industry can cope economic decision-maklng and the effots of workes and with the competitive pressure and market forces within the Union managers to preserve the status quo. Improvements in in the medium term. There may, however, be problems linked to competitiveness have been hampered by rapid wage growth certain labor market rigidities and for those sectors and companies, combined with low productivity growth. that have not yet undergone restructuring. Important progress will be necessary in the envirownment and employment and social affais, and energy sectors. Further adinimstrative reform wil be neoessary. Ronmnia Grade =4 Grade = 3 Grade = 2B3 In Romania, the November 1996 election led to A radical program of macroeconomic stabilizaton and stuctuml Compliance with the EU laws, norms and standards is slow. The genuine alternation of power The country has reform is being implemented at a time of dimmishing growth legislation has only taken on a small part of the acquis. The stable democratic institutins, but these stiUl need (7.1 % in 1995, 4.1% in 1996), accelerating inflation (56.91/o in fmancial sector needs complete restructuring in order tore- to be consolidated by fuler respect for the rule 1996) and deterioratirg budget and tading deficits. GDP per head establish essential public and investor confidence The pubhc of law at al levels of govenmment A nunsber of is 24% of the EU average. Trade with the EU represents 55% of administration is weak Romasia should not have significant gaps remain as regards respect for fundament Romania's exports and 52% of its imports. Romania has made difficulty in applying the acquis in the medium term in such areas rights. Efforts are needed m the fight against considerable progress in the creation of a market economy While as education, research and technological development, small and corruption to improve the operation of the prices have been ahmost fuUy liberalized, property tights are not medium-size enterprises; and consumer protection But substantial judicial system and protect individual tights yet fuUly assured for land, the legal system is still fragile, and efforts wil be needed in the fields of telecommunications; taxation against the police and the secret services. The economic policy has not always been coherent. Further efforts to and customs, environment, tsrsport, employment and social Htwaarian minority seems well integrated in the consolidate the administrative and legal framework and to address affaus, as well as agnculture. It is uncertain whether Romania will light of recent improvements in their situation persistent macroeconomic imbalances, are required to ensure a be in a position to assume the obligations of membership in the But this does not seem to be the case for the stable environment medium term. Rma, who corttute a significant minorty 0 1997The World Bank TRANSITION,August 1997 * Romania's New Government Means Business- The First Seven Months by Thomas O'Brien O n the night of November 26, brought economic failure to Bulgaria. of greatest market turbulence, has been 1996, huge crowds gathered in Furthermore, reforms were felt to be es- stable at around 7,100 to 7,500 lei per University Square in Bucharest, sential to unlocking the door to NATO dollar since early March; and the pre- celebrating the election of President and acceding to the EU (a widely shared mium between the market and official Constantinescu, and a new government aspiration-indeed, 80 percent of rate has all but disappeared. The national formed by the coalition Union of Demo- Romania's population supports the goal bank's net foreign assets have increased cratic Forces. Several months later, in of EU accession, the highest such rat- by more than $1 billion-about 1.3 July, President Clinton joined ing among countries waiting in line). months of import cover-over the first Constantinescubeforecrowdsinthesame half of 1997. Consumer prices, which square, and a nationwide poll confirmed The governmenfs reform program, in place rose about 20 percent a month during that the great majority of Romanians- since mid-February of this year, has gotten the first quarter as administered prices some 70 percent-accepted the sacrifices off to a good start. Its major goals are to: were freed or realigned, slowed to a demanded by the government's new re- monthly increase of 7 percent in April, 4 form program, believing it would bring * Establish a sound macroeconomic percent in May, and a little less than 2.5 brighter prospects for a healthy economy. framework to lower inflation and allow percent in June (consistent with the private sector-led growth. year-end target of 2 percent monthly in- The political cycle of reform in Romania * Accelerate structural reforms in key flation). The government's macroeco- seems to stand in contrast to many of economic sectors, thereby underpinning nomic program has won the support of its neighbors. Ceausescu's autocratic rule stabilization efforts and promoting in- the IMF, which has provided a new $430 came to a close with the revolution of creased productivity and output. million (equivalent) standby arrange- December 1989, but the legacy of rigid * Protect vulnerable groups from the ment, extending over thirteen months central planning has been felt through the worst vagaries of the transition, from late April. 1990s. The painful social and economic dislocation that has accompanied reform Macroeconomic Stabilization Structural Changes in the transition economies of Central and Eastern Europe has been kept at bay in So far, the government has liberalized The government has liberalized trade, Romania, at least temporarily, through a the foreign exchange market, including accelerated privatization programs, and cautious and hesitant approach to eco- restoring exchange-dealing licenses to begun liquidating the most problematic nomic reform. But that hesitant approach sound commercial banks; sharply tight- nonviable state-owned enterprises (see has also prevented sorely needed adjust- ened monetary policy; eliminated the box on next page). It has also begun ments; the economic situation has dete- national bank's directed-politically mo- downsizing the oversized petroleum and riorated sharply through 1996 and the first tivated-soft credits; maintained an in- mining sectors. ("It's not the government quarter of 1997. comes policy for the public sector; and that is closing down factories, but mar- targeted a sharply reduced fiscal defi- ket laws,' Prime Minister Ciorbea has The radical change in the political land- cit, from 8.3 percent of GDP in 1996 to pointed out.) Utility tariffs-such as elec- scape signaled at the end of 1996 brought 3.7 percent in 1997. [To reach the 1997 tricity, gas, and heating-have been in- with it a bold and wide-reaching reform deficit targets Prime Minister Ciorbea creased to market levels, while utility agenda. This agenda was welcomed by announced further cuts in expenditures companies are being pressured to re- a public that was dissatisfied with the for defense, industry, scientific research, structure and to move toward financial previous slow pace of reform, and wished and agriculture, but more spending on equilibrium. Enterprises-now deprived of to secure a sustainable increase in their health, education, and labor. The editor.] budget subsidies-are being forced to find living standard. The public perceived that ways to restore financial discipline. market-friendly measures had brought As a result, the leu's exchange rate, Privatization of state-owned banks has economic success to Hungary and Po- which veered to nearly 9,000 lei to the begun; and banks will be more tightly su- land; and that stalling on reform had dollar in late February during the period pervised in the future. * TRANsTIoN, August 1997 © 1997The World Bank In the agriculture sector, price and trade $280 million and a new Agriculture Sec- turing and privatizing state-owned enter- liberalization has also taken off and bud- tor Adjustment Loan of $350 million. prises (see box). get subsidies have been reduced dras- tically. Simultaneously, privatization (or Over the medium term Romania faces And in the banking sector, though most liquidation) of state-dominated agricul- equally daunting challenges, which are prudential regulations have been estab- tural enterprises, including pig and poul- recognized in the government's pub- lished to EU standards, the national try farms and grain-trading firms, has lished economic development strategy, bank's supervisory and enforcement been put on the agenda. "Romania 2000." Structural reform and powers and capacity need to be further development of the private sector will strengthened. Tough action will have to The World Bank is supporting these require continued efforts. Perhaps the be taken to resolve difficulties with weak steps through a reactivated Finance and single biggest test will be acceleration and problem banks. Competition among Enterprise Sector Adjustment Loan of and deepening of the program for restruc- banks can be promoted by privatization At Stake: Transforming Romania's Loss-Makers On August 8 Romania's Prime Minister Victor Ciorbea an- ing transition countries. As a whole, these enterprises con- nounced the immediate closure of seventeen factories- tinue to rack up losses-often competing in tight or declin- machine plants, food processing facilities, and three oil ing markets, with high levels of staffing, poor capital stock, refineries-resulting in 30,000 job losses. The closures will and old-fashioned management and operations. About 75 be followed by liquidation of other loss-making enterprises. percent of the losses in 1996 were concentrated in sixty- Sorin Dimitriu, the chairman of the State Property Fund, eight of the largest and politically most sensitive enterprises. disclosed that the list of loss-makers slated for liquidation The rest of the losses were spread over some 5,000 small include more than 200 companies, many of them large. To- and medium-size enterprises. tal losses of thirty large state-owned enterprises have been running at $37 million a year and their debts total $268 mil- The plight of the flagship plant Roman, manufacturer of lion. The government hopes to reduce spending by closing Romania's DAC trucks in the Transylvanian city of Brasov, inefficient, loss-making factories. Romania's eleven oil re- illustrates the difficulties faced in dealing with loss-making fineries, with a total annual refining capacity of 34 million state enterprises. Before the 1989 revolution the plant em- metric tons, are producing well beyond Romania's consump- ployed 23,000 workers and produced tens of thousands of tion needs and have accumulated large arrears to the state trucks a year for the Soviet bloc and its allies. By last year, budget. The reform government has pledged to reduce faced with a vastly altered competitive marketplace, the Romania's vast capacities by about two-thirds as part of workforce was down to 13,800, while production had dropped plans to dismantle the National Oil Company and replace it even faster, to just 2,800 vehicles annually. Currently, the with a more efficient operation. plant is still operating and its fate remains unresolved. "The liquidation procedure can go on for months, but we There are already examples of successful attempts to rein- cannot sit and wait for those companies to incur more and vigorate economic performance at the enterprise level- more losses, 'Ciorbea said. "Any single day we delay threat- even in agriculture. Agricola International S.A., based near ens the macrostabilization we have achieved." To stop pro- the city of Bacau, has transformed what was once an old, duction, the government ordered immediate termination of slow-moving state-owned farm into a modern, profit-mak- energy, water, and raw materials to all seventeen factories. ing commercial agribusiness. Driven by strong Romanian Ciorbea said that his government's largest privatization management, the company attracted the attention of a Ger- agency would negotiate agreements with forty international man partner, which has taken a large equity stake in the investment banks on privatizing several dozen large Roma- business. By rationalizing lines of business, contracting nian firms. Laid off workers will receive compensation equal some activities to local farmers, and introducing financial to between six and twelve months' wages. (The average discipline, Agricola has been able to expand production, wage in Romania is about $80 a month.) sell about one-third of its output abroad, and triple its profit over the past three years. State-owned enterprises still account for about half of Romania's GDP, a higher share than in most quick-reform- Based on news agency reports. © 1997TheWorldBank TRANSITION,August1997 * (the Romanian Development Bank and reform of financial management, greater The new administration has already Bancpost being the two early candi- attention to primary services, and se- launched a campaign to educate the pub- dates), seeking out well-qualified stra- lective new investment are all needed. lic and gain their support in resisting tegic investors, and improving legislation pressures from incumbent privileged regulating bank insolvency. In the labor market, legislative and insti- groups-particularly special interests in tutional changes should help safeguard agriculture, and state-owned heavy in- In the agricultural sector, a functioning women's rights;and improved training and dustry and mining-to maintain the sta- land market, improved collateral mecha- information services should contribute to tus quo. nisms, and new, private sector-driven in- enhanced labor mobility. While the fund- vestments in infrastructure are needed. ing of the pension system is by no means Explaining the need for, and benefits of More generally, the commercial legal as precarious as in other economies in reform to the population should help code should support new small and the region, reform is vital to ensure long- maintain the program's momentum. Se- medium-size enterprises-likely engines term viability of the state pension fund, curing some early benefits (such as the of future job creation and economic and to encourage well-supervised private taming of inflation by end-1997) will also growth. Capricious bureaucratic involve- pension provision. help. Although 1997 has been a difficult ment in business must be eliminated. year for the economy, a slowing of infla- In strengthening and rationalizing the role tion, to an annual rate of around 4 per- Antipoverty Measures of the state, the government has made cent, should be achievable if reforms decentralization a guiding principle. In take hold. This is the surest way to im- The fight against poverty stands as a practice, this means downsizing the gov- prove living standards and make the in- top priority. One in five Romanians is ernment bureaucracy and handing over roads against poverty that the Romanian poor, according to a survey supported power and responsibility to local levels, people desire. by a World Bank poverty assessment, to the private sector, and to citizens. and up to one-third of families barely Public spending commitments should be Thomas O'Brien, Economist in the World have enough income to cover essential reviewed. The central administration Bank's Europe and Central Asia regional needs, according to a recent United Na- needs a broad overhaul with the aim of office, works on issues involving Romania. tions Development Program report. The enhancing public services, streamlining new administration is according much tax policy, and improving economic Meager Consolation greater attention to the poverty agenda. management. Civil service reform In a very tight 1997 budget the alloca- should result in better skills and higher tions for key welfare programs-includ- standards of professionalism, as well as ing child allowances, income guarantee improved pay scales. Changes in taxa- el schemes, agricultural pensions, and un- tion should ensure that personal and employment and severance payments- corporate taxes are consistent with %eA 0 have been increased by 25 percent. The evolving EU norms. World Bank has provided a $50 million Social Protection Adjustment Loan to Dialogue with the Public support this first-phase initiative, which is an integral part of the reform package. The going will continue to be tough in the coming months: the government will The near-term social protection mea- have to withstand the inevitable pres- sures must be accompanied by longer- sures for public spending beyond the term initiatives to develop the nation's constrained target, against a background human resources. of modest revenue performance. The I limited implementation capacity of the / In the education sector, curricula must professional civil service, and the dan- i be updated to better reflect students' ger of increased social tension, linked needs in the new society, and the school to the political and economic power of system must be streamlined. And in the vested interest groups, pose the main health sector-with Romanian health in- dangers to successfully advancing the dicators among the worst in the region- reform agenda. From the Russian daily Izvestia. M TRANSMON,August 1997 © 1997 The World Bank New Phase in World Bank-NGO Relationship? Workshop in Hungary Results in Promising Dialogue by Eliza K. Klose E nvironmental NGOs in Central for. Also in Hungary, taxpayers have the * Establish an NGO/Donor Working and Eastern Europe (CEE) and option of supporting a preferred NGO Group to see that the dialogue contin- the Newly Independent States with 1 percent of their personal income ues. The working group could also serve (NIS) of the former Soviet Union have tax.) Thus, NGOs in the Visegrad region as a mechanism for sharing information made significant strides since the col- can reasonably be expected to sustain and monitoring progress on the workshop lapse of communism. Their activities their activities in the near future, even recommendations. [In the meantime, this include environmental cleanup; estab- though much of the West's official (gov- recommendation has been accepted by lishing nature reserves and promoting ernment) assistance to environmental the donors. The Editor] eco-tourism; supporting alternative en- NGOs in Central and Eastern Europe is * Develop a mechanism for regular ex- ergy projects; identifying priorities and scheduled to end in 1998. change of information. drafting laws; providing public feedback * Set up an NGO endowment fund to on projects of the World Bank and other In the Balkans and the NIS, however, ensure financial stability; find ways to development institutions; monitoring pub- most governments are not yet prepared fund NGO emergency needs. lic officials and the private sector; fur- to support local philanthropy, much less * Provide training to enhance the orga- thering education and information NGO activity (except perhaps in Geor- nizational and professional capabilities dissemination; and providing services, gia). Thus, the capacity of the region's of NGOs. such as environmental monitoring and environmental NGOs to influence gov- * Fund studies of the economic readi- impact assessments. Financial and tech- ernments is limited, compared with their ness for philanthropy and the legal and nical assistance from the West-from Central European colleagues. policy conditions for NGOs in CEE and private foundations, government agen- the NIS. cies, and colleague NGOs-has fostered Nonetheless, environmentalists have * Increase the transparency of develop- these operations. found effective ways to educate and ment bank policies and project planning unite local citizens around environmen- and provide better public access to in- But circumstances for NGOs vary dra- tal concerns, addressing the severe pol- formation. matically from country to country. Con- lution problems left behind by the Soviet * Encourage governments to improve tinued NGO viability in the region system, along with new threats posed conditions for NGOs and increase citi- depends on the political and economic by the opening of indigenous markets zen participation in environmental conditions as well as the tax and legal and natural resources to Western busi- decisionmaking. frameworks in each country. There is a nesses. But their situation is precarious. huge gap, for example, between what The issue for these NGOs is not just Specifically, the World Bank has been NGOs in the Czech Republic, Hungary, sustainability-it is simple survival. Do- asked to: and Poland (the-"Visegrad region") can nor and lending agencies-if they are *Provide adequate and timely informa- aspire to, compared with what may be really concerned-must find flexible, in- tion about projects. accomplished by NGOs in such coun- novative , and long-term ways to sup- *Improve performance of local offices tries as Albania, Belarus, Bosnia, or port these NGOs. and their NGO liaison (some Bank offi- Uzbekistan. cials have thwarted NGO efforts to ac- At the recent international workshop of cess information). Most Central European governments are environmental NGOs and donors, in 'Translate key project documents into stable, have established legal incentives Szentendre, Hungary (see article, p. 12; local languages. for philanthropy, and are willing to dedi- box, p. 13), NGO activists presented the oInclude NGOs in planning country as- cate some portion of tax revenues to following recommendations to donors sistance strategies, making better use support nonprofit activities. (A small and lending institutions in order to pre- of NGO expertise; reimburse them if percentage of Hungary's annual fuel tax, serve the momentum of the green move- they provide consulting services, or un- for example, is set aside to support an ments in Central and Eastern Europe and dertake environmental assessments. environmental fund that NGOs can bid the former Soviet Union: 'Do a country-by-country study on leg- © 1997The World Bank TRANSITION,August 1997 A islation regulating NGOs and their fund- Highlights of the Szentendre Workshop ing, including tax incentives for private contributions. To review the impact of environmental is already available through other chan- None of these requests is particularly NGOs in the transition countries of Eu- nels (principally, the internet). Moreover, Nonew o these requestsris partdiclarly rope and Central Asia and the role of for- key documents are written in English and but to date few have been implemented eign assistance in enhancing their efforts, rarely translated into local languages, but tohdate fEE/NIS hveg n ImeeBntedos representatives of forty key NGOs met making them inaccessible to many in the CEE/NIS region. If the Bank does with delegates from donor organizations NGOs. Good-faith distribution of infor- address them in a prompt and visible (World Bank, USAID, EBRD) in May, at mation requires that funders and lend- manner-as was the impression given the Regional Environmental Center (REC) ers work actively and devote funds to in presentations by Bank officials at for Central and Eastern Europe in ensure that NGOs gain access to the Szentendre-it will do much to enhance Szentendre, Hungary. The meetings were information they need. its credibility with the NGO community. initiated and in part financed by the World *NGO outreach must be enhanced. The NGOs, for their part, should help Bank (with other financing from bilateral Green NGOs tend to work and cooper- the World Bank and other donor and lend- donors and USAID). ate with a limited range of organizations. ing organizations by facilitating work with .. .. .. ~~~~~~~~~~~~~~~~~~~It is important that they reach out to other citizen activists and local communities. Agreement-Disagreement environmental groups, collaborate ac- In many instances, competition among tively with other civic organizations, and NGOs severely constrains the Bank's During the discussions between NGOs, improve their efforts to inform, involve, attempts to deal with the public. donors, and lenders-the first meeting and motivate the general public. of its kind-several common themes *NGOs need more revenue, particu- If donors and lending organizations, par- ticularly development banks, will take and points emerged: larly from local sources. NGOs need *Environmental NGOs contribute to to diversify their income sources; they steps to follow the NGO recommenda- both environmental protection and the should reach out to the private sector, tions made in Szentendre, it will help to building of civil society. local foundations and local governments build the mutual respect and open dia- g bugue thamutualreessentialtoimpredic- *Cooperation between NGOs, donors, for financial support; solicit the public; and government bodies is highly de- collect membership fees and consulting operation between NGOs and the donor sirable. International funding to environ- fees; and raise money through sales of and lender community. mental NGOs should continue. various goods. Most green groups, how- Improved cooperation with donors and Environmental activists in CEE and the ever, lack the staff and know-how to lenders will, in turn, increase the likeli- NIS need continued financial support to engage in extensive fund-raising. Cur- hood of government support for NGOs, operate and to carry out their social and rently, most international funding is especially in those transition countries environmental programs. Ways of achiev- channeled to specific program needs thpeciatla mnhostelctransition taethies p ing an improved relationship with the such as environmental cleanup, policy World Bank and the EBRD need further development, or information dissemina- lic into account. Without the support of exploration. Government agencies at tion. Future funding should be more flex- governments-through improved tax and local regional and national levels must ible and creative. NGOs that work as legal conditions-NGOs cannot develop, ' g legan wondithoutsthe supportnof theop, be encouraged to cooperate closely with consultants to World Bank projects, for .' citizen groups in setting priorities and instance, should be able to cover some no society can become strong and Vi- able Ts,ciet fosteing te sstrongaindabIi making decisions. of their overhead costs in project work. able. Thus, fostering the sustainability *rnprnyadacs oifra of NGOs is an essential step in foster- *Tasaec n acs oifra in NGstb isociessenties. step infoster-tion are crucial. Environmental NGOs On many important points, workshop par- ing stable societies. place a high value on transparency and ticipants offered diverging points of view: The author is Executive Director of access to information. Lenders, such *Funding: equity versus efficiency. ISAR: A Clearinghouse on Grassroots as the World Bank and the EBRD, have Several participants criticized inequities Cooperation in Eurasia, 1601 Con- moved in recent years to increase the in funding to NGOs, that is, a distribu- necticu- venue, N W . Suite 30 1,amount of information they make avail- tion of financial support that favors ur- Washington, u C. 20009, tel 202-387- able to the public, even if obstacles to ban over rural, north over south, west 3034, fax 202-667-3291, Email: transparency and the flow of information over east, big over small, existing re- 3034,' fax 20-6-21 still exist. Local government and bank cipients over new groups, organization- e-iz@ia org.officials often withhold information that ally savvy groups over novices. Funders M TRANsnON,AUgUst 1997 (D 1997TheWorldBank and lenders justified their grant policies foster the rise of a culture of philanthropy been tenuous and, at times, confronta- with the need for long-term cost-effec- in civil society. But NGOs pointed out tional. NGOs often criticized Bank tiveness, but they also referred to a new that existing tax codes rarely encourage projects as well as certain aspects of strategy that shifts priorities from tradi- charitable giving by individuals or corpo- the Bank-NGO relationship. Bank repre- tionally favored regions and NGOs (CEE) rations. Legislative and policy conditions sentatives came to the workshop with to less-advantaged regions and organi- for NGOs vary across the region. (Condi- the objective of improving the relation- zations (the Balkans and the NIS). tions for NGO development appeared ship. At the outset, some NGO repre- *Reductions in USAID funding. NGOs generally more favorable in the Czech sentatives were ambivalent and others criticized USAID for pulling out of Republic, Hungary, and Poland than else- were opposed to collaborating with the projects in Central and Eastern Europe where.) The major obstacles to philan- Bank, believing that the institution was prematurely. USAID officials explained thropy are economic; the discretionary immutable. As the Szentendre workshop that many of their grant programs are income of the general population is gen- progressed, however, and the parties be- winding down because the agency's erally not high enough to support philan- came acquainted and grew more famil- original tunding authorization trom the thropy, especially given the lack of a local iar with each others concerns, the tone U.S. Congress was limited. tradition of private charity. of the discussion became more positive. *Indigenous fund-raising. Many funders and lenders suggested that the World Bank-NGO Exchange In responding to the NGOs' priority list, time was ripe for NGOs to turn to local World Bank representatives of the ECA corporations, governments, and individu- In the past, the relationship between the Region confirmed that: als for donations; the NGOs could thus World Bank and environmentalists has *The Bank is developing closer links with A Broader Framework-The Bank's View on NGO Partnership Following are excerpts from Marcelo Selowski's closing (nature conservation) and brown (urban, industrial) environ- statements at the Szentendre workshop: mental issues is crucial. *'The project" is the organizing principle underpinning the *Many environmental NGOs also deal with social issues in Bank's collaboration with NGOs. We want to involve NGOs their communities. The Bank has recently approved manda- to the extent that such involvement improves the quality tory social assessment guidelines. The Global Environment and benefits of the Bank's projects. Facility has had such guidelines in place for years. The Bank 'The governments are our primary clients: they secure our needs to develop expertise in this area. When assessments loans. We must work with them, in full collaboration. How- are very local and specific, NGOs can play a role. ever, by working with NGOs at the project level, the Bank oDecentralization will in the future be a major area of Bank can promote NGO-government dialogue by pointing out the involvement in the transition countries. The role of local contribution a particular NGO is making to a project. governments in raising revenues for and implementing pro- -The Bank's ECA (Europe and Central Asia) regional office grams in rural development, infrastructure, and the social will make special efforts to timely inform NGOs about Bank sector will become increasingly important. The more local projects that have environmental impact in an effort to in- the operational approach, the more the Bank stands to gain volve them at an earlier stage. Liaison officers in the resi- from partnerships with NGOs in project design and imple- dent missions have a crucial role to play in this. Within mentation. Thus, we expect an increase in Bank collabora- budgetary constraints, the ECA office will try to relieve tion with NGOs in the future. these staff of some other operational responsibilities so as *The Bank has to make difficult trade-offs in allocating its to allow them to better focus on their liaison role. resources. This influences the choices we make as to what *There are some limits to public consulting-it cannot be an environmental issues we can work on. As NGOs evaluate open-ended process. This will be even truer as more NGOs the Bank's contribution to the countries in transition, hope- become involved across more sectors. fully they will consider the Bank's operations within the larger, -Bank criteria for setting environmental priorities are guided overall context of social and economic development. by the Environmental Action Plan for Central and Eastern Europe. Preventing severe damage to human health from Marcelo Selowsky is Chief Economist of the World Bank's industrial pollution and lead is a key priority. Balancing green ECA Regional Office. © 1997 The World Bank TRANSITION, August 1997 X the nongovernmental sector. The Bank strong working relationships with coun- $10,000 to $15,000. wants to make its operations as trans- try and project managers in the resident -The GEF Small and Medium-size parent as possible. missions. Grants Program. Grants are available to *NGOs can participate in World Bank *The Bank is offering an increasing num- a wide range of applicants to help them projects both as volunteer and paid con- ber of grant-making and community as- access resources of the Global Environ- sultants. sistance programs, for which NGOs are ment Facility. Topics supported: biologi- *Headquarters staff is being reduced and eligible. These include: cal diversity, climate change, international reorganized to promote efficiency, and -The Small Grants Program. Grants waters, and the ozone layer. The propos- more tasks are being devolved to coun- totaling some $600,000 a year support als are funded for up to $1,000,000. try-level offices (resident missions). conferences and seminars, special pub- -ForestMarketTransformation Initiative. Those should become important contact lications, networking activities, and edu- This coalition of conservation NGOs, points through their NGO liaison offic- cation- and information-related activities. private sector forest industry leaders, ers. Green NGOs will be able to develop Individual grant amounts range from researchers, development practitioners Green Media Is Vulnerable in Transition Economies by Diana Urge-Vorsatz Recent surveys show that in Central and Eastern Europe, enough to make front-page headlines. environmental awareness is still at an alarmingly low level: *The national, state-owned media is in theory able to dis- the topic "environment" is still at the bottom of political, eco- seminate information regularly on key environmental issues, nomic, social-and even individual (citizen)-priority lists. and to engage the wider public in dealing with environmental This is despite high pollution levels, soaring death rates, problems. But in practice the national media in Central and falling life expectancies-and other far-reaching conse- Eastern Europe currently pays little attention to these is- quences of environmental pollution. sues, giving low priority to environmental columns and pro- grams. This is partly explained by the national media's scarce Transforming environmental attitudes in the Central and East financial resources, and partly by the scarcity of journalists European societies rests on two pillars: education and the who are qualified to cover environmental issues.. media. But should the market-oriented media feel respon- *Most local media-grassroots, NGO publications; local, sible for educating the public? And is it acceptable for the citizen-initiated newsletters, and magazines; radio and TV government-owned print and electronic (radio and TV) me- broadcasts-arecommittedenvironmentalists.Theyembrace dia to continue "educating the masses," after forty to sev- the ideals of public participation in decisionmaking, and the enty years of socialist media-manipulation, brainwashing, right of unrestricted access to information. But fierce com- and indoctrination? Can environmental journalists afford to petition for the limited funds available to such media (through be biased in their enthusiasm, or should they be content foundations, membership fees, or private charity) often hurts with impartial, comprehensive reporting? their quality and their influence. During a recent international conference titled "Media and the What can be done? Strong public pressure should per- Environment" at the Central European University (CEU) in suade government and business to take bolder steps to Budapest, all these soul-searching questions were raised, improve environmental conditions. The twin pillars of edu- but only a few were answered. It became apparent, however, cation and the media must support the call to environmen- that in the transition countries the flow of high-quality envi- tal action. International financial institutions, including the ronmental information is still severely impeded in the media. World Bank, should help promote environmental aware- *The private media is profit-driven; consequently, it is ready ness in the transition economies, through support for "green" to voice environmental concerns as long as it means busi- education and training courses, environmental publications ness. For example: Gradual, slow environmental processes, and radio and TV programs, and environmental training for such as the loss of biodiversity or the depletion of the world's journalists. fossil fuel resources, do not make for eye-catching head- lines, and thus, they do not enjoy wide media attention. In TheauthorisAssistantProfessor, DepartmentofEnvironmental contrast, environmental catastrophes-such as oil spills, Sciences and Policy Central European University H-1051 nuclear accidents, and poisonous smog-are spectacular Budapest, Nador u. 9., Hungary (Email: vorsatzd@ceu.hu). m TRANSlnON, August 1997 © 1997 The World Bank and financiers, and the World Bank tries Donors Working Group is likely to be- *the GEF Small and Medium-size Grants to induce a shift in private sector be- come a valuable forum for discussing Program, see the GEF Website: "http:Hl havior in the remaining intact forest fron- joint actions to address the need for train- www.worldbank.org/html/gef". tier areas, including in Russia. ing and capacity building. *the Forest Market Transformation Ini- -The Russia GEFgiodiversity Conser- *The Bank can seekabetter understand- tiative, contact Ken Newcombe, the vation Project. A local Biodiversity Ac- ing of the legal and tax status in which World Bank, Environment Department, tivities component of $2.5 million is manyNGOsoperate.TheBankwillmake fax 202-477-0560, or Sue Hall, Execu- earmarked to finance projects in the special efforts to finance a comparative tive Director, Strategic Environmental Baikal region. Grants of $1,000 to study that will analyze how tax regimes Associates, fax 509-538-2550. $50,000 are available to NGOs. in the various transition countries encour- *the Russia GEF Biodiversity Conserva- -The Bank has agreed to participate in age (or discourage) philanthropy, a po- tion Project, contact Elena Mikhalenko, a working group to continue the dialogue tential source of NGO funding. GEF Project Manager in Moscow, fax initiated through the workshop meetings. 7095-5773. NGO representatives and donors-pri- vate foundations, bilateral donors, and For more information about: Based on "NGOs and the Future-NGO/ international fiinance institutions-will *the Small Grants Program, contact Donor Workshop Szentendre,"a summary meet shortly. Peter Hemsch, the World Bank, tel. 202- report by Eliza Klose, with Irmgard Hunt 473-3501, fax 202-522-2654, internet: and D.J. Peterson; and on World Bank Short-term Steps "P hemsch @ worldbank. org". sources. World Bank representatives offered a series of initial steps in the short term Train of Transition to respond to NGO concerns: *The Bank and NGO representatives can work jointly on guidelines for the NGO ;> liaison officers in the resident missions, with the goal of building a strong, com- mitted liaison staff. [Consultations have already begun with an assigned repre- sentative of the NGO group. The editor.] eNGOs can be provided timely informa- _ - --< - tion about the environmental aspects of new Bank projects. oKey documents can be translated into local languages, to the extent that budget and human resource constraints allow. *The Bank can better utilize NGO ex- pertise in designing and implementing new Bank projects. At the same time, the Bank recognizes that NGOs need / _____________ more training and skills development to be able to collaborate as partners or con- sultants. The Bank can encourage greater complementarity between the demand for NGO services and the train- , a ing activities that donors decide to fi- nance. Training opportunities at the Bank's Economic Development Institute (EDI), particularly in financial and busi- ness management, can also enhance NGO capacity. The newly created NGO- Fromthe Russian weekly St Petersburg Press. © 1997The World Bank TRANsITION, August 1997 * A New World Bank-NGO Initiative: Joint Review of Structural Adjustment T he World Bank, in conjunction policymakers in the review countries. Doug Hellinger, the Development with national governments and This gathering will be similar to the GAP's Executive Director, who coor- a worldwide network of almost national forums and will be public and dinates the SAPRI international citi- 1,000 civil society organizations, has fully transparent. zens' network, explained during the launched a review to assess the eco- two-day conference that the aim is "to nomic and social impact of structural SAPRI grew out of discussions be- give a voice to those who have been adjustment policies on various social tween World Bank staff (led by Lyn excluded from economic policymaking, groups (primarily the poor, the elderly, Squire, director of development policy) and to give governments greater flex- low-income large families, small farm- and representatives of nongovernmen- ibility to respond to the needs of their ers, small businesses, minorities) in tal citizen groups (led by the Wash- own people." He credited Bank Presi- the borrowing countries. The project, ington, D.C.-based Development dent James Wolfensohn, who in his known as the Structural Adjustment Group for Alternative Policies, or De- two years in office has made an un- Participatory Review Initiative (SAPRI), velopment GAP). It is hoped that the precedented effort to open the Bank's will be carried out first in Hungary and initiative will demonstrate that partici- operation to public scrutiny and to lead in several developing countries: pation of a wide spectrum of civil so- the institution toward greater involve- Bangladesh, Ecuador, El Salvador, ciety can improve economic ment with local groups and institutions Ghana, Mali, Uganda, and Zimbabwe, policymaking and help identify practi- in member countries. and probably others. cal and necessary steps to improve the lives of ordinary people. At an estimated cost of about $4 mil- Over the next twelve to eighteen months lion, the initiative is being financed by a national steering committee, composed World Bank President James the Norwegian government and private of representatives of nongovernmental Wolfensohn, at the first global forum foundations, with the World Bank and organizations, labor unions, farmers' as- of SAPRI, held in Washington, D. C., NGOs adding their labor and facilities. sociations, women's groups, chambers in early July, noted that the program Prospective funding from the European of commerce, manufacturers' associa- must be a joint exercise, a three-way Union, Sweden, and other countries is tions, churches, as well as government partnership between the World Bank, being discussed. ministries and the World Bank, will be governments, and community groups. set up in each of the participant coun- "Structural adjustment covers many For further information contact, at the tries to coordinate the review. They will things. It was designed to try to de- World Bank, RajivKochar, tel. 202-4 73- hold public forums, conduct field inves- velop a macroeconomic framework 1395, Email: rkochar worldbank.org; tigations, and pull together several as- that is positive for all the people in orBranko Milanovic, tel. 202-473-6968, pects of economic adjustment programs. the country. If we learn that some of Email:bmilanovic@worldbank.org. The the things we are doing do not have SAPRI website is under construction; Concrete actions related to changes that effect, we are ready to change in national adjustment policies, the them," he told the SAPRI meeting. The Development Group for Alterna- opening of the adjustment-planning tive Policies maybe reached at tel. 202- process to broad local participation, As Wolfensohn stated, "I'm concerned 898-1566, e-mail:dgap@igc.apc.org, and modifications in the Bank's own about the 100 million people who are be- website: http://www.igc.org/dgap/ adjustment-planning instruments will ing added to our planet every year. I'm saprin/index.html. be on the agenda. The findings and concerned about the 3 billion people who follow-up actions of the participating live on less than two dollars a day and Based, in part, on reports of RFEIPL, countries will be presented at a major the 1.3 billion people who live on less than IPS, and Reuters. forum (perhaps held in a participating one dollar a day-their exponential growth, country's capital) and discussed with and the reduction in equity and increase senior Bank management and in poverty that we have to arrest." M TRANSITION, August 1997 (D 1997 The World Bank The Ruble's Roller Coaster Ride by William Easterly and Holger C. Wolf T he ride of the ruble has been tion declined one-to-one, with declining money growth rate. But this didn't hap- nothing if not exciting. The ruble's money growth rates after a four-month pen in Russia, suggesting that the value, compared with the dollar, lag (figure 1). This was a simple confir- progress of stabilization continued to be took a steep dive between 1992 and 1994, mation of the monetarist view of inflation. viewed with skepticism. including a near crash on Black Tuesday- However, there was a puzzle in the 1992- October 11, 1994. Then, in the spring of 94 period. Real money balances (total Behind the Ruble Appreciation: 1995 1995, the ruble staged a remarkable come- value of privately held cash and bank de- to 1997 back. It appreciated by some 7 percent in posits, corrected with the inflation rate) nominal terms from April through June were falling while the ruble was appreci- The agreement on the IMF-supported 1995, an unusual occurrence in an ating in real terms (ruble depreciation has program in March 1995-followed by economy with high inflation. Russia's cen- been slower than the inflation rate, figure monthly performance reviews required tral bank bought a substantial amount of 2). Since falling real money balances are for tranche releases-provides a pos- dollars, implying that the ruble would have usually taken as a sign of falling demand sible, and plausible, break point for ex- appreciated even more without this inter- for money, and real appreciation is usu- pectations. This was precisely the point vention. Partly in response to the ruble ally taken as a sign of rising money de- at which the ruble reversed its long de- recovery and a buildup of reserves, an mand, the signals were contradictory. cline and staged a comeback. A popu- exchange rate band was introduced in July Anyway, how could demand for money lar view at the time attributed the ruble 1995, as an additional anchor of the stabi- be falling when inflation was falling? appreciation to a sharp increase in de- lization effort. mand for the Russian currency, in re- The puzzle is explained by overshoot- sponse to improved credibility in the The band-initially ranging from 4,300 to ing. Overshooting results from slowly- wake of the IMF program. 4,900 rubles per dollar (with the spot rate adjusting inflation. Inflation responded to at 4,565) and since revised upward-has monetary tightening, with about a four- The argument is plausible. However, the been largely successful: the ruble's roller month lag. In the meantime, real money mere fact of the ruble appreciation coaster ride has come to a halt. The wild balances declined, since money growth wouldn't prove by itself that there was a climb observed in the early years of slowed but inflation did not. The ex- reversal of inflationary expectations. The Russia's transition has been replaced by change rate-in contrast-responded observed reversal in early 1995 is a gently sloping nominal depreciation immediately to monetary tightening with equally compatible with the overshoot- trend, leaving the exchange rate in mid- real appreciation. The decline of mon- ing model outlined above; in the pres- July 1997 at around 5,800 (Rb 5.80 to etary growth thus caused a temporary ence of "sticky" inflation, the added the dollar, if the new ruble-see the box decline in real balances and a tempo- monetarytightening-entailedinthelMF- on p. 18-were introduced now). rary real appreciation until prices could supported program-would have led to adjust. However, monetary policy was a real balance contraction, a real inter- In explaining the evolution of the ruble tightened further each period, so prices est rate hike, and hence upward pres- exchange rate, two periods must be dis- never caught up over this time. Since sure on the currency. The distinction was tinguished: in the first three years fol- nominal money supply growth slowed, of obvious importance for the conduct lowing the dissolution of the FSU, the real balances continued to decline, and of monetary policy. To put it most sim- ruble was driven primarily by changes the real exchange rate continued to ap- ply, if money demand had finally in- in the growth rate of money supply; since preciate as inflation persisted for sev- creased then having money supply grow early 1995, changes in money demand eral months at its previous rate. faster than prices was no cause for con- have been the deciding factor. cern. If demand for money had not re- Why did the strict one-to-one relation- sponded, then money supply growth Early Puzzles: 1992 to 1994 ship between nominal money growth and higher than inflation would soon lead to inflation persist, implying no change in a resurgence of inflation. Data reveal a fairly stable relationship money demand? Normally, as inflation between money supply and prices in slows down, faith in the currency returns In the early summer of 1995, indirect both this and the following period. Infla- and the inflation rate trails behind the evidence suggested that a structural shift C 1997 The World Bank TRANSMON,August1997 U Will the Hard Ruble Crowd Out the Dollar? Declaring an end to the era of inflation, Russian President dollars. An article in Delovoy Mir ("Rumors about Pov- Boris Yeltsin in early August announced that the central erty of Russians Exaggerated," July 23, 1997) quotes a bank will lop three zeros off the ruble next year with the recent report of the Russian Federation State Statistics introduction of a new ruble note. Starting January 1, 1998, Committee: from January to April 1997 Russians spent the central bank is to issue new notes and coins, including about 107,600 billion rubles, or about 21.4 percent of a shiny new kopek, which will be used in parallel with the their money incomes, on buying foreign currency. This is old bills for one year. An old 1,000 ruble note will be equal to 6.4 percent higher than for the same period last year. a new 1 ruble note. By the start of 1999 the government According to modest estimates, Russians have $20 bil- plans to phase out use of the old notes, but old rubles can lion to $30 billion on hand, an amount that is roughly be exchanged for new notes until 2002. The new hard ruble equivalent to the total amount of cash rubles in the country. signals an end to inflation and the economic slump of years About 6 percent of Russia's adult population expressed past, central bank Chairman Sergei Dubinin said. Once- the desire to spend their vacations this summer at for- rampant inflation, which peaked in 1992, has been brought eign resorts (including the Baltics). Considering that the largely under control, with the government forecasting a 12 average cost of such a vacation is $450 to $600, this percent rate this year. The redenomination will not affect means that at least $3 billion has been accumulated just Russia's monetary policy next year, the chairman confirmed. for the purpose of visiting foreign countries. It is pur- chases of currency and not consumer goods that ac- The central bank will also maintain its exchange rate policy counts for the bulk of cash expenditure in excess of of "gentle ruble decline" in 1998, targeting a gradual depre- incomes. ciation of the ruble against the dollar at a rate a little lower than the inflation rate. Monthly inflation in the first quarter of Despite the central bank's efforts to de-dollarize the this year averaged 1.5 percent, while the depreciation of the economy and increase the cash money supply, Russians ruble was less than 1 percent. A real appreciation of the are in no hurry to part with their U.S. currency, and are currency is not in Russia's economic interests-it hurts ex- using it as a means of saving as well as making pay- ports. The central bank will stick to its policy of a gradual ments. Data collected by the central bank show that the and pre-announced depreciation of the ruble within the cur- average amount of foreign currency purchases made at rency band, Dubinin pointed out. currency exchange points in commercial banks exceeds $1,000, which is what led central bank First Deputy Chair- Introduction of the new ruble could give a boost to the man Sergey Aleksashenko to believe that "it is not ordi- government's economic reforms by removing inflationary nary citizens who are purchasing dollars." expectations and persuading Russians to choose rubles over dollars, luring some of the so-called mattress money In the first half of 1997 10 percent of the country's richest into ruble bank accounts, notes Stephanie Baker in a re- citizens accounted for 32.3 percent of all money income- port filed in Moscow for RFE/RL. "it should encourage people compared with about 29 percent last year; the poorest 10 to hold their savings in rubles,' she writes, quoting Roland percent accounted for 2.6 percent of money income com- Nash, an economist at the Moscow investment bank Re- pared with 2.2 percent in 1996. The minimum wage-in naissance Capital, "which should free up some capital to other words, the poverty line-in Russia averaged 410,000 invest in the real economy." rubles ($70) per person per month in the first half of this year. Twenty-one percent of the country's citizens-31.1 For the time being, however, a large and increasing share million Russians-had money incomes below the subsis- of average Russian household income is spent purchasing tence level. in demand had indeed occurred: the term broadly based increase in demand for flation rates have gradually declined from structure of interest rates and of ruble- ruble assets. 5 percent per month in the summer of dollar futures suggested expectations of 1995 to a recent 1.5 to 2 percent. The declining inflation and depreciation rates, The next year and a half have borne out nominal exchange rate has remained while robust gains in the stock market- that the spring of 1995 was a turning point within the band, gradually depreciating. even in dollar terms-suggested a for inflation and for money demand. In- The rate of depreciation has fallen short M TRANSI-RON, August 1997 a 1997 The World Bank 32% - ~~~~~Figure 1. Ruble money growth and Inflation o h nlto ae ic h nrdc tion of the band, the real exchange rate has appreciated by 24 percent. Part of 27% - - Ruble money growth, lagged four months the real appreciation probably reflects con- 27% Ruble money growt, logged four monthstinued strong demand for ruble-based assets: the Moscow stock index has - ~~~~~~~~~~~~~~~logged a 169 percent dollar return since 'F 2% ~~~~~~~~~~~~~~~~~~~~~the fall of 1995. CPlinflotiou ~Interpretation Traps 8~~~~~~~~~~~~~~~~~~~~P nlto 117% But we now see an upward trend in real . ~~money balances, which-given the sta- bilization of the rate of money growth- probably reflects increased money 112% - - % ~~~~~~~~~~~~~demand. Real money balances and the real exchange rate started moving in op- posite directions precisely in the spring 7% -of 1995. The strict one-to-one relation - ~~~~~between monetary growth and inflation has been broken. Money growth has pro- ceeded faster than inflation-real M2 has 2% ~~~~~~~~~~~~~~~~~increased some 20 percent since June a ., ~~~~~~~~~~~~~~1995-allowing remonetization of the Figure 2: Ruble money growth and real money balances economy. 8.10 300% This episode shows how confusing it can be to interpret simple statistics like 7.90 real money balances, the real exchange 25/e rate, and inflation during stabilization. If Realmoney balances real money balances increase, is it be- 7.70 cause money supply is being expanded ~.too rapidly, or is it because demand for 20% money is suddenly rising? The analyst ~7.50 must use other information like the real exchange rate, real interest rate, and even 7.30 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~ ~~the term structure of interest rates and 7.30 ~ ~ ~~~~*15% t the stock market, to assess whether sta- 8 *, ~~~~~~~~~~~~~~~~~ ~~bilization is finally achieving success. * - *-. ~~~~~~~~~~ ~Using such information, we catn now look 7.10 ~~~~~~~~~~~~~~~~~~back and see that the wild roller coaster -e 10% ~ride of the ruble was finally leveling out with the beginning of the IMF-supported 6.9 Ruble money stabilization pormin the spigof 1995. growth *porm srn 5% William Easterly is Lead Economist, and 6.70 Holger C. Wolf is Consultant with the World Bank's DEC Research Group. This article is based on the authors'article in 6.50 I I II I0% the International Journal of Finance and t .9~~. ~ ~~.o Economics, 1996, vol.1, 251-61. © 1997 The World Bank TRANSITION, August 1997 * World Bank, IMF Escalate War against Corruption Latest Ranking by Transparency International orruption has gotten worse in Transparency International's index is The World Bank has also called for mea- the Czech Republic, Poland, based on seven international surveys of sures to fight corruption in World Devel- and Russia, but has improved business people, political analysts, and opment Report 1997: Rethinking the in Hungary, according to the 1997 in- the public about their perception of cor- State. It advocates incentives for public dex of corruption perception, released ruption in different countries. (Corrup- officials to perform better, (improving by Transparency International, a cor- tion can be defined as the abuse of their pay, reforming the civil service, re- ruption-fighting organization founded in public office for private gain.) Developed straining political patronage, establish- 1993 and based in Berlin. (Website: by Johann Graf Lambsdorff, an econo- ing effective rules), and steps to keep http://www.transparency.de/press/ mist at G6ttingen University, Germany, arbitrary actions in check through in- 1997.31.7.cpi.html) the index draws on surveys undertaken creased competition, and citizen part- by Gallup International, the World Com- nerships with the private sector. The index ranks only the 52 countries petitiveness Yearbook, Political and Eco- (of almost 200 sovereign states) for nomic Risk Consultancy in Hong Kong, A recent conference of the Council of which sufficient information is avail- DRI/McGraw Hill Global Risk Service, Europe, in Prague, spotlighted other en- able from coverage by at least four Political Risk Services of Syracuse, New demic causes of corruption, primarily in major surveys. Most people perceive York, and data gathered directly from the transition economies. The spread of Denmark to be the least corrupt nation, Internet sources. corruption and organized crime in and Nigeria the most corrupt. Rankings Ukraine and other former Soviet repub- range from 0 (most corrupt) to 10 (least The International Monetary Fund, in new lics threatens to undermine the fragile corrupt). guidelines released in August, has foundations of their emerging civil soci- warned its member countries that finan- eties, Ukraine's Justice Minister Serhiy Seven transition economies were rated: cial assistance may be withheld or sus- Holovaty told the conference. Former pended if government corruption is Soviet elites in those countries continue Transparency International's preventing their economies from mov- to cling to power. Having wielded tremen- Corruption Perception Index, 1997 ing out of trouble. The guidelines spe- dous administrative control over the Score cifically mention as causes for lives and activities of citizens under Rank Country 1997 1996 corruption the diversion of public funds communism, the nomenklatura is now through misappropriation, involvement the virtually uncontrolled arbiter of the 1 Dzenmark 9.94 9 53 of public officials in tax or customs distribution and use of state property. 27 Czech Republic 5.20 5.37 fraud, the misuse of official foreign ex- 28 Hungary 5.18 4.86 change reserves, and abuse of powers Today, because of the absence of ac- 29 Poland 5.08 5 57 by bank supervisors, as well as corrupt countability within hierarchical power 37 Romania 3.44 - practices in regulating foreign direct in- structures, the scope for fraud, corrup- 41 China 2.88 2.43 vestment. The IMF has also taken a tion, and embezzlement is broad. The 43 Viet Nam 2.79 - stand against countries that consider nomenklatura is not interested in seri- 49 Russia 2.27 2.58 bribes to foreign governments to be a ous economic and administrative reform 52 Nigeria 1.76 0.69 legitime business expense (and even because its members profit handsomely -Not available. allow a tax deduction for bribes). The from the unregulated environment. Ac- IMF sees two main ways in which it can cording to Holovaty, the link between Transparency International chairman promote good governance: organized crime and corruption has a Peter Eigen notes that much of the * Improving the management of public special character in the former Soviet corruption comes from the massive resources, including reform of treasuries, republics: "Organized crime and certain use of bribery and kickbacks by multi- budget preparation, tax administration, aspects of government activity are of- national corporations, headquartered in and accounting and audit procedures. ten indistinguishable." As a result, he ar- leading industrial countries, trying to * Creating a transparent and stable eco- gues, there is an "increasing buy contracts in developing countries nomic and regulatory environment, for institutionalization of corruption, enor- and economies in transition. example, in tax codes and commercial law. mous loss of revenue to state budgets, M TRANSITION, AUgUSt 1997 © 1997 The World Bank retardation ofthedevelopmentofthepri- but also in the political and law en- at combating corruption has been vate sector, monopolization of certain forcement communities. Pal considerably hampered by some aspects of economic activity, and per- Vastagh, justice minister of Hungary, member governments lack of politi- vasive unjust enrichment." noted that corrupt practices that had cal will, stemming from "the penetra- developed under Communist rule tion of criminal organizations in Similarly, Czech Justice Minister continued to flourish in post-Com- government." Vlasta Parkanova, who chaired the munist Hungary. Deputy Secretary- proceedings, warned that corruption General Peter Leuprecht told the Based, in part, on reports by Robert in the Czech Republic has prolifer- meeting that the Council's four-year- Lyle, Joel Blocker, and RFE/RL and ated not just in public administration old drive to aid international efforts other newsagencies. Letters to the Editor Peculiarities of Russia's Employment Statistics In the April 1997 issue of your publica- construction and repair work (57 percent) hoarding, which was already extensive tion, it was reported that the and in commerce (12 percent). About 8 in the prereform period, has increased unemployment rate in Russia was 9.7 percent of these "unemployed" even even more. Because of the inflated percent at the end of 1996, including reg- owned a private shop, cafe, or kiosk. workforce, the wage structure became istered unemployed, part-time workers Apparently, manypeopledefine"employ- compressed, real wages decreased, and workers on unpaid leave (Transition, ment" as a contract-based job in the for- many workers were put on unpaid leave, April 1997, p. 27). The ILO claims even mal sector. and huge wage arrears accumulated. higher rates, putting unemployment at 22 Privatization has not led to rapid restruc- percent of the labor force in Russia. Simi- Surprisingly, the share of the unem- turing of enterprises or downsizing of larly high figures are published regularly. ployed who rated their economic situa- their workforces. Although unemployment and underem- tion "good" and "very good" was higher ployment have become a painful reality than among other social groups. And the Huge wage arrears, which reached 53 tril- for many, such statistics do not adequately share of the unemployed whose income lion rubles (about $9 billion) in April 1997, reflect the labor situation in Russia, as well was growing more rapidly than the infla- have produced a high proportion of work- as in many other transition economies. tion rate was also higher than among the ing poor in the population. Transitional in- population as a whole. Apparently, un- come transfers to working families have While according to GOSKOMSTAT data employed workers have more time and been suggested to relieve the pain. But more than 40 percent of workers on ad- opportunity to undertake activities in the the government is already unable to meet ministrative leave in Russia receive no shadow economy, which can be much its obligations-how could it finance such compensation, other surveys show that more rewarding than wage employment transfers? Is it appropriate to cushion the most such workers are able to find alter- in the formal sector. blow caused by deficiencies in wage and native sources of income. By one sur- employment policies by introducing new vey, 71 percent of workers on Households try to support themselves in social benefits? administrative leave have earnings from many ways. Employment in domestic other sources, including 16 percent who economics has expanded, including at It would better serve Russia's interest if remained at the same workplace "on their family plots (almost 60 percent of house- the government supported downsizing own" (Segodnya, December 22, 1995). holds own a small lot). In 1995 the share of those enterprises that need to retrench of household output in total agricultural excess labor and encouraged job cre- The situation is similar with regard to the production reached 43 percent. Some sur- ation by legalizing and promoting activi- unemployed. According to surveys veyshaveshownthatin 1995, forthe first ties in the informal sector. This could made by the Public Opinion Research time, incomes from entrepreneurship and include removing bureaucratic barriers Center (VCIOM)-conducted between property exceeded income from wages. to the registration of small businesses September 1994 and March 1996-on and the self-employed, as well as intro- average, 24 percent of the unemployed In the formal sector, from 1991 through ducing tax and other incentives. were engaged in activities that provided 1996, employment declined by 11 per- them additional earnings. Most "em- cent, but measured GDP in real terms Arvo Kuddo, Labor Economist at the ployed unemployed" were involved in fell by 40 percent. As a result, labor World Bank's ECA Regional Office. / 1997 The World Bank TRNsSMON,August 1997 E Speedy- Reforms Pays Off, but Social Costs Must Be Considered In their article "Reform Boosts Growth immediate negative impact of liberal- My findings (reported in the table), based and Foreign Investment" (Transition, ization policies on output-for ex- on in-depth studies of twelve reforming June 1997), Marcelo Selowsky and ample, in the Baltic and CIS economies (China, the Czech Republic, Ricardo Martin make a convincing states-does not, in their view, Estonia, Hungary, India, Kazakhstan, case in favor of "good policies": sound "change the general proposition that Latvia, Lithuania, Poland, Russia, policy reforms; boost economic growth fast stabilization, liberalization, and Uzbekistan, and Viet Nam), provide simi- and foreign direct investment. Even the privatization bring benefits earlier." lar encouraging results. (These findings Reform Speed and Transiition Record: 1991-95 Inflation Decline Dedine Foreign Trade Foreign FDI assshare Speed GDP Unemploy- over from peak exchange policy investor in gross fixed of grovdh mentrate Rate rebrnm to next regime in regime in perception investmentin reform in 1995 in 1995 in 1995 peniod year 1995 1995 byend-1995 latestyear I. High speed 1.Poland 3 9 5 4 4 7 4 6 8 2. Estonia 4 6 3 1 1 2 2 2 2 3. Latwia 9 3 4 2 3 3 3 5 3 4. Lithuania 7 4 7 3 7 4 6 8 7 5.CaBchR. 6 1 1 8 5 1 1 4 6 6. Met Nam 2 - 2 5 6 6 10 7 4 II. Medium speed 7. Hungary 8 7 6 10 10 9 5 3 1 8. India 5 - - - - 8 7 11 10 9. China I - - - - 5 11 1 5 Ill. Low speed 10. Russia 10 5 9 7 9 11 9 9 9C 11.Kazakhstan 12 8 8 6 2 10 8 10 lic 12. U2zbe'kisfanr 11 2 10 9 12 12 12 12 12c Correlation 0.48 (12) -0.25 0.62b 0.758 0.5 0Q74a 0.78a 0.52" 0.58W coefficientwith 0.66a(11 (9, vwithout (10, vwthout (10, without (10, without (12) (12) (12) (12) reform speed withoutChina); Asia) India and India and India and ranking 0.87a(9, China) China) China withoutAsia) Correlation coefficientwilh 1995 foreign exchange regime ranhing 0.698(12) 0.66P(12) 0.61a(12) Correlation coefficientwith 1995 trade policy regime raning 0.46 (12) 0.48 (12) Correlabon coefficientwith (end-1995) foreign in\estor perception ranking 0.85a(12) Note: The correlation coefficients are the pairwise Spearrran rank correlation coefficient estkmtes. The sarrple size is stated in parentheses under each estirrte. a. These estirretes are statistically significant at the 5 percent level. b. These esbirates are statisticaly significant at the 10 percent level. c. These rankings are not based on any calculations. I have assumed that the Russian share of FDI in gross fixed investzmnt in 1995 was higher than that in Iia, Kazakshtan, and Lkbeklstan, in that order. Rank 1 is assined to the country with the highest 1995 GDPgrowth rate and Fl) share in gross fixed investrrent (in the latest year), the rrDst liberal 1995 foreign exchange and trade poicy regirres, and the rrost poskive foreign investor perception by end-1995. Rank 1 is assigned to the country with the lowest 1995 unerrpboyrrent and inflation rates, and the sharpest decline of the inflation rate during the period and from its peakto next year. The decine in the inflation rate for each country over the reform period is calculated as the proportionate difference between the highest inflation rate and the 1995 inflation rate. hIflation rate decline from peakto next year is measured as the proportionate drop between the highest and next year's inflation rates. China, Viet Narrn and hIdia are orritted fromthe sarrple in estimrtng the correlation between reform speed rankng and 1995 unerrployrrent rate ranking because the unenployrrent problem in these Asian econorries is not corrparable with that in the rerreining countries. The former is essentially structural, whereas the latter restLted from nacroecononic stabi&oation and privatization mreasures. Idba and China are orritted fromthe sample in estimating the correlation coefficient between reformspeed ranking and the three infltion rate rankings because these two econonies were not nrarked by the extrerre initial inflation rates prevaiing in the remainrig countries. Viet Nanis inflation rate in 1988 was 400 percent. Source: Data are available from Padrmr Desafs introduction in Going Gobal: Transition from Plan to flarket in the vWorld EronormV (WT Press, 1997). * TRANSYrION, August 1997 (D 1997 The World Bank are discussed at length in my introduc- tion dincuthed forthcngt volume, Goingr Figure. Country Ranking According to Reform Speed and 1995 tion in the forthcoming volume, "Going Uepomn ae Global: Transition from Plan to Market in Unemployment Rates the World Economy," to be published by _ the MIT Press.) C X 8 Poland Kazakhstan The estimates generally support the con- c 7 clusions reached by Selowsky and Martin: c S 6 * Estonia Hungary * The correlation coefficient between ' ,6 5 reform speed and 1995 GDP growth rate 4 * Lithuania Russia is 0.87 if the three Asian economies 3 * Latvia (which did not experience an output de- 2 2 cline) are omitted. I R Uzbeldstan * The coefficient between reform speed I 1e and inflation decline is 0.75 if China and 0 India (which did not experience high in- 0 2 4 6 8 10 flation) are omitted. On the other hand, Reform Speed Ranldng links of reform speed with the 1995 in- ---->Lower Reform Speed flation rate (with a coefficient of 0.52), and with the decline of inflation rate from ment rate for Estonia, Latvia, Lithuania, * The choice of speedier reforms is de- its peak to the next year in a single and Poland, the celebrated cases of sirable in those economies where, in swoop, are rather weak (0.50). shock therapy, is negative, at -1. Such the pursuit of successful transition, the * Correlations between reform speed and a trade-off implies that though speedy risk is judged to be unimportant, and foreign exchange regime, trade regime, reforms may produce good outcomes the short-term costs are deemed to be FDI environment, as well as FDI share such as growth and globalization, they socially acceptable. in gross fixed investment, range from may come at the cost of short-term un- 0.52 to 0.74. It is reasonable to conclude employment. Further, rising unemploy- Padma Desai is Gladys and Roland that speed pays off in terms of increased m ent may itse If endanger the Harriman Professor of Comparative Eco- globalization. sustainability of reforms by provoking nomic Systems at Columbia University, * Globalization has also proceeded in a political reaction. New York. lockstep: an exchange rate regime, marked by a convertible currency in Happy People place, evidently plays a role in enhanc- ing foreign investors' positive view and actual response, that is, increased in- vestments. (The coefficients are 0.66 . and 0.61.) The exercise also suggests a link between the foreign exchange and trade regimes in 1995 (0.69). * Speedy reform and lower unemploy- A ment rates do not go together: the cor- relation coefficient between reform speed and the 1995 unemployment rate is -0.25, although statistically not signifi- cant. (The three Asian economies, where . defining and measuring unemployment iel;A presents problems, are omitted.) Speed is good for growth turnaround but may t result in higher unemployment (see fig- "We found paradise on earth. They-say they have-no idea who is the ure).The correlation coefficient between island's finance minister:' the GDP growth rate and the unemploy- From the Hungarian magazine H6cipo. D 1997The World Bank TRANSITION,August1997 * M ilestones of Czech Republic Jan-June Jan-June Item 1996 1997e In July the Czech Republic's central Transition budgetshowed a 6 billion crown surplus, Trade deficit -1,194 -997 and the January-July budget closed with Exports 6,767 9,376 The Central European Free Trade an aggregate 8.8 billion crown deficit. Imports 7,961 10,372 Agreement Experts forecast a full-year budget defi- Revenue -254 -153 cit of 10 billion to 15 billion crowns. The Tourism 406 551 The latest report from the Slovak Sta- monthly consumer price rise in July was Investment -816 -645 tistical Office indicated several posi- 3.5 percent. Year-on-year inflation was Other payments 156 -59 tive economic developments last year 9.4 percent, up from 6.8 percent in June Unreturned transfers 513 350 in countries in the Central European The huge jump was mainly the result of Current account balance -934 -800 Free Trade Agreement (CEFTA), includ- one-off rent and energy price hikes, Direct capital investment 723 1,082 ing rising GDP, falling unemployment which accounted for 84 percent of the Note:Allamountsaremillionsof U.S. and a slowdown in inflationary trends. inflation rise. dollars. In 1996 Slovakia had a 6.9 percent a. Projected. GDP growth rate while Poland had 6 The Czech foreign trade deficit widened percent, the Czech Republic 4.4 per- in June by 9.6 billion crowns ($280 mil- Hungary will become the most dynamic cent, Slovenia 3.1 percent, and Hun- lion) to reach a six-month total of 74.4 economy in the region in the next two gary 1 percent. Poland had the highest billion crowns (more than $2 billion). The years, according to a report prepared by unemployment last year (12.4 per- half-year trade deficit is 9 percent larger a Dresdner investment bank, Dresdner cent), Slovakia ranked second with than in 1996. However, the June monthly Kleinwort Benson. The report attributed 10.9 percent, and Hungary was third rise is the smallest so far this year. The the improvements to the government's with 9.2 percent. Consumer prices in figures suggest that the late-May devalu- austerity package, introduced in 1995. Slovakia grew 5.8 percent last year. In ation and the package of import-curbing Analysts were optimistic enough to the Czech Republic the average year- measures are taking effect. Nonethe- project 5 percent GDP growth next year. on-year growth was 8.8 percent, in less, Prague's import requirements may But the investment bank also expects Slovenia 9.7 percent, in Poland 19.9 rise as a result of current flooding, while an increase in the central budget deficit percent, and in Hungary 23.6 percent. exports will be hit by the new Slovak next year. The report's projections are All the surveyed countries had a for- import surcharge. as follows: eign trade deficit. Of the 422 Czech investment funds Indicator 1996 1997 1998 Exchange rates of the national curren- and companies, 305 (72 percent) reg- GOP cies against the U.S. dollar fell in all istered losses last year. Total losses 1 3D.0t3.5o5 CEFTA countries: the Slovak crown amounted to 37.3 billion crowns (due Inusral output weakened by 7.9 percent, the Czech to losses in securities trading, over- (% chnle) 3.3 6.0 5 crown lost 2.7 percent, Slovenia's cur- estimation of securities in portfolios, Unemplioyment (%) 10.5 10.0 9.5 rency lost 12.3 percent, Poland's zloty and buildup of reserves). Last year the Inflation (%) 20.0 17.0 15.0 fell 16.5 percent, and the Hungarian forint funds employed 1,540 people, 6.5 per- Tradbalance dropped 18.4 percent. Slovakia's foreign cent less than in 1995. The average Current account debt grew 34 percent last year, the sec- monthly wage per employee reached ond highest increase after Slovenia (34.7 22,848 crowns, 2.4 times the average (b $) 1.7 -2.0 percent). In the Czech Republic foreign wage ($1 = Kc 34.84). - Not available. debt grew 23.3 percent, while it fell 12.7 percent in Hungary and 7.7 percent in Hungary The European Investment Bank (EIB) Poland. (Romania became an official is expected to grant more loans to Hun- member of the CEFTA on July 1, joining Hungary's current account deficit for garian companies, in a wider range of the Czech Republic, Hungary, Poland, the first half of 1997 was $800 million, sectors and with easier access. That Slovakia, and Slovenia. Estonia, Latvia, down from $934 million in 1996, accord- will also apply to companies in other Lithuania, Macedonia, and Ukraine have ing to national bank figures (see table, countries on the EU accession list, expressed interest in joining. above). Chris Knowles, head of the EIB M TRANSIlTON, August 1997 C 1997 The World Bank telecoms department, said in Central Asia Russia Budapest. Knowles was in Budapest to sign a loan guarantee agreement The Armenian government raise elec- Russia's monthly inflation rate eased to with Matav, the Hungarian telecommu- tricity prices for consumers by 12 per- 0.9 percent in July, from 1.1 percent in nications company. EIB loans commit- cent to the dram equivalent of $0.042 June. Presidential administration deputy ted to Hungarian companies total ECU per kilowatt-hour, beginning on Septem- head Alexander Livshits told Echo 872 million. ber 1. Energy prices for enterprises will Moskvy that he was uncertain whether rise by 20 percent, but enterprises will the Russian economy would begin to The National Bank of Hungary is likely be entitled to a 50 percent price dis- grow in 1998. The government is still "of- to propose lifting restrictions on count at night. Energy ministry officials ficially" expecting economic growth of long-term capital movements as of said that the increases are in line with about 2 percent next year. 1998, but the freeing of short-term an earlier agreement signed with the movements is not expected yet, an of- World Bank. The officials said that elec- Prime Minister Viktor Chernomyrdin said ficial of the Bank's regulatory depart- tricity prices will have to be raised to Russian budget revenues for the first ment announced. The central bank $0.06perkilowatt-hourbyJanuary 1999 half of 1997 were 64 percent on target, would like to monitor how the economy in order to make Armenia's energy sec- while spending totaled 68 percent of responds to a growth upswing this year tor profitable. planned levels. Whereas 58 percent of before considering further large-scale taxes were collected in the first quarter, currency liberalization. In Georgia energy prices for both the figure for the second quarter saw 87 commercial enterprises and domes- percent. Finance ministry officials admit- Poland tic consumers rose to 4.5 tetri ted that the tax situation improved after ($0.035) per kilowatt-hour beginning the Gazprom natural gas company paid The Polish Sejmapprovedthefirstthree on August 1. off its arrears, but described that elements of the government's plan for company's payment as a one-off move radical reform of the country's pension Tajik wages are now worth less than at that was unlikely to change the general system: the creation of private pension the start of the year. The Tajik state sta- trend. The continuing crisis in industry, funds, the creation of company pension tistics agency reported that real income where 48 percent of enterprises were programs, and the use of state assets dropped by 1.8 percent from April to loss-makers, is narrowing the tax base. to fund pension- reform. By 2010 pen- May and has dropped by 37.9 percent sioners will account for 11 million of since the beginning of 1997. The offi- PresidentYeltsin has signed adecree lib- some 40 million citizens, compared with cial average wage is reportedly 3,699 eralizing the export of gold and silver a pensioned population of 9 million to- Tajik rubles per month, but a kilogram bullion as of October 1.Yeltsin also signed day. Under the proposal the government of beef costs 1,200 rubles, a liter of into law a bill imposing a 0.5 percent tax will create between ten and twelve pri- vegetable oil more than 1,000 rubles, on purchases of foreign currencies and vate pension funds to relieve the and a kilogram of sugar 650 rubles ($1 foreign currency payment instruments. underfunded, state-run social insurance = 320 Tajik rubles). system. Investors will soon get their first chance Kyrgyz President Askar Akayev has to buy Russian corporate debt on an Citizens under 30 will make mandatory signed a decree whereby 8 percent of open exchange, Andrei Kozlov, deputy payments into the new private funds, shares in leading enterprises will be chairman of the Russian central bank, while those between 30 and 50 will be distributed free of charge among pen- disclosed. Issues of ten top companies able to voluntarily transfer payments sioners, invalids, World War II veter- are expected to be listed on the Mos- from the state-run system to the pri- ans, and low-income families. This will cow Interbank Currency Exchange, vate sector. The government will super- include shares in leading companies Russia s largest exchange, by 1998. The vise the operation of the private funds. scheduled to be privatized, such as the next eighteen months. Russian cor- The new pension funds are scheduled Kyrgyztelekom, Kyrgyzenergo, the na- porate securities often offernyields nearly to start in January 1999. An average tional airline, and the two largest pub- double those of government paper, but Polish pension is now 608 zloty ($200), lishing houses, Uchkun and Akyl. The the market is virtually unregulated and or some 60 percent of the national av- measure is intended to "ensure social suffers from a severe information defi- erage wage. justice." cit. The central bank requires foreign- C 1997The World Bank TRANSION,August 1997 * ers to use special bank accounts when national debt ratings in preparation for GDP grew 9.5 percent in the first six investing in Russia, but it has not said eurobond issues. months of 1997. The annualized retail what kind of bank account they need for price index rose a negligible 1.8 percent short-term corporate debt. Special bank China between January and June and is ex- accounts have been designated for eq- pected to rise just 3 to 4 percent for the uity and treasury investments. Only a few As a result of double-digit growth in con- whole year, lower than the official target Russian companies have received inter- sumption and investment, annualized of 6 percent. Prices have been falling The Omnipotent Oneximbank: Taking Over Russia's Industry? Alfred Kokh, Russia's privatization chief, has resigned. Un- 38 percent stake in Norilsk Nickel one of the world's major der his reign numerous state assets were sold off cheaply producers of nickel and platinum group metals. Svift's win- to top banks in deals that critics charge were rigged. The ning bid was for about $250 million. The winner has to invest resignation, writes Wall Street Joumal correspondent Betsy an additional $300 million and also pay back a $170 million McKay, signals a new era of openness and transparency in loan Oneximbank extended to the government in November the privatization process. As the government focuses on 1995. (In exchange for that loan, Oneximbank gained man- raising revenue to pay off rising debts, upcoming deals are agement rights over the 38 percent Norilsk stake.) likely to be modeled on the Svyazinvest sale, which, de- Oneximbank ranks as one of Russia's biggest commercial spite the public outcry from a consortium of banks that lost banks, with assets of 21,000 billion rubles ($3.5 billion) at the bid, fetched a price well above the stake's market value, the beginning of the year, John Thornhill points out in his Kokh, who stepped down as both chairman of the State article in the Financial Times (August 7). The bank was Property Committee and deputy prime minister, was replaced one of the first to receive a rating from a Western credit in both posts by economist Maxim Boycko, who has served agency-Ba3 from Moody's-enabling it to issue a $200 as Boris Yeltsin's deputy chief of staff. million eurobond in July. The bank is part of the broader Selling off its economic assets will help the Russian govern- Interros Group, an industrial holding concern controlling ment pay off a massive backlog of wage arrears by the end of twenty-four companies with a combined turnover of $10 the year. In July, Yeltsin instructed the government to pay off billion. Prominent among them is Sidanco, Russia's fifth- its debts to the armed forces within two months and all wage biggest oil producer with reserves greater than those of arrears to teachers, doctors, and other state employees within Mobil. Oneximbank also has a large stake in MFK-Renais- three months. First Deputy Finance Minister Aleksei Kudrin sance-one of Moscow's biggest investment banks, with estimated in May that wage arrears total 53.7 trillion rubles a strong presence in local debt and equity markets-and ($9.3 billion). Of that, he said, 11.2 trillion rubles are owed to the ability to provide its parent company with additional federal, regional, and local government workers and the rest to financing power. non-state enterprise workers. Several sales over the past few The MFK arm of the group, known as International Coi- weeks helped the govemment exceed its privatization revenue pany for Finance and Investment, owns 17.5 percent of the target of 10 trillion rubles ($1.7 billion) this year. Novolipetsk Metallurgical Combine, one of Europe's biggest Russia's Oneximbank, headed by former First Deputy Prime steel producers. The group is also a major shareholder in Minister Vladimir Potanin, has pledged to pour more than $1 Komsomolskaya Pravda, one of Russia's biggest newspa- billion into the budget in auctions for telecommunications pers. The Onexim-MFK Group is considering bidding in the holding company Svyazinvest and metals giant Norilsk government's sale this fall of 51 percent of RAO Rosneft, Nickel. The Onexim-MFK Group consortium, including fin- the last state-owned integrated oil company in Russia. ancier George Soros (who invested $980 million), won a 25 Rosneft has oil businesses ranging from the rights to some percent stake of the Svyazinvest for $1.9 billion. Svyazinvest of Russia's biggest untapped wells to a network of gas sta- holds controlling shareholdings in eighty-five of Russia's tions across Russia's eleven time zones. Vladimir Potanin, eighty-seven regional telecommunications providers as well head of this huge business empire, graduated in 1983 from as in RAO Rostelecom, the long-distance and international the Moscow State Institute for International Relations, the telecommunications giant. Oneximbank is already consid- training school for future diplomats. He then worked for the ering taking part in the fall tender for another 24 percent of Soviet foreign trade ministry for eight years. As the Soviet Svyazinvest. On August 5 Svift, a closed joint stock com- Union collapsed, he established his own bank: the United pany affiliated with the Oneximbank, won an auction for a Export-import Bank-the Oneximbank. m TRANSITION, August 1997 © 1997 The World Bank across the board, in part because of two told North Korean leaders during a re- tance from the World Bank and the consecutive years of bumper harvests, cent visit. Nunn said that if North Ko- Asian Development Bank. which have brought down food prices. rea sought cooperation with the West, We appreciate the contributions from Ra- Annualized exports grew 26.2 percent it could expect reconstruction assis- dio Free Europe/Radio Liberty Newsline. in the first six months of 1997, to $80.8 billion, while imports dropped 0.3 per- cent, to $63.1 billion. The rise in ex- W orld Bank/IMF Agenda ports appears to be partly attributable to the dumping of excess production on world markets. MIGA: Investment Guarantees on Kong's status as an international busi- Record Level ness center," said James Lau of the Hong A recent survey by the State Statistical Kong Monetary Authority (HKMA), host- Bureau estimated that about 50 percent The Multilateral Investment Guarantee ing the event. On the occasion, the World of industrial state-owned enterprises in- Agency (MIGA) broadened its invest- Bank will release its report China 2020: curred net losses in 1996 amounting to ment guarantees against political risks Development Challenges in theNewCen- 1.3 percent of GDP. Two years ago only into eleven new countries in fiscal 1997, tury, on the future of China. A series of one-third of such enterprises were including Azerbaijan, Georgia, and Ro- seminars will be organized on the theme loss-makers. In industry, years of mania. The insured projects were mainly "Asia and the World: Capital, Competitive- double-digit growth in fixed-asset invest- in infrastructure, where financing is in- ness, and Community." The official bud- ment have led to overcapacity. While creasingly based on public-private part- get for the meetings is expected to reach stockpiles are rising, investment in indus- nerships. The agency issued seventy HK$485 million. The June 30 handover tries such as metallurgy, petrochemicals, guarantee contracts covering $614 mil- ceremonies, according to the South China and textiles has been falling. lion in twenty-five member countries. Morning Post, had a government alloca- MIGA also negotiated the establishment tion of HK$233 million. People's Democratic Republic of Korea of an investment guarantee fund for Bosnia that provides long-term guaran- Bosnian Central Bank Plans On August 1 the Republic of Korea gave tees for small and medium-size invest- Convertible Mark the green light to five local companies, ments in the region. In the past fiscal among them Samsung Electronics, the year, ninety-five countries benefited The Central Bank of Bosnia has started country's largest electronics company, from MIGA's investment marketing ser- operations, according to an announce- and Kolon International, a leading manu- vices, including countries in Eastern ment, August 11, the head of the bank, facturer of textile products, to invest in Europe and Central Asia. Next year Serge Robert, a French banker. Trans- North Korea. The other companies are MIGA guarantee capacity could reach actions will be electronic until the three apparel and food-processing compa- its limit if it does not negotiate more room sides can agree on a design for a com- nies. The move brings to twenty the through innovative cofinancing arrange- mon currency. New bills are expected to number of South Korean firms that have ments. MIGA has already begun to share go into circulation three months after the been allowed to pursue business in the out part of its risks through private in- design is approved. The new monetary North. Only two have so far invested in surers and investment guarantee funds. unit will be called the "convertible mark" the North for joint ventures: Daewoo, and pegged on a one-to-one basis to the with a $5 million investment in a cloth- Ready for Hong Kong? Hong Kong German mark, which has long been the ing company in North Korea's western Is Ready unofficial second currency throughout port of Nampo; and Taechang, which the former Yugoslavia. Current Bosnian invested $6 million in a project to pro- Hong Kong is getting ready to accom- dinars can be exchanged at the rate of duce mineral water in the eastern prov- modate, feed, and protect 12,000 to 100 dinars for one convertible mark. ince of Kangwon. 14,000 participants from 181 countries attending the World Bank-IMF annual New Pledges To Bosnia Pyongyang could break out of isolation meetings, September 23-25. The joint and economic ruin if it takes sincere annual meetings of the two Bretton Participants at the third international do- steps towards detente, former U.S. Woods institutions, taking place a little nors conference for Bosnia-held in Brus- Senator Sam Nunn and former U.S. am- more than ten weeks after the territory's bassador to South Korea James Laney handback to China, will "enhance Hong continued on page 29 © 1997 The World Bank TRANSITIoN,August1997 * World Bank Lending, FY 1997: China and Russia-Largest Borrowers Transition economies in Europe and Central Asia saw $5.1 the preceding fiscal year, when $4.2 billion went to the region. billion in World Bank projects approved for the 1997 fiscal The social sector received the largest share, with loans total- year ending June 30. This is nearly a $1 billion increase over ing $935 million. Russia was the largest borrower in the re- World Bank Lending to Europe and Central Asia, FY 97 (millions of U.S. dollars) Country/project (Principal amount) Countiy/projectname (Principal amount) Armenia Lithuania Highway Project-Supplemental Financing 15.00 Social Policy & Community Social Services Development 3.70 Enterprise Development Project 16.75 Structural Adjustment Loan 80.00 Azerbaijan Highway Project 19.00 Farm Privatization Project 14.70 Energy Efficiency/Housing Pilot Project 10.00 Gas System Rehabilitation Project 20.20 Macedonia, formerYugoslav Republic of Bosnia and Herzegovina Structural Adjustment Loan 30.00 Emergency Industrial Re-Start Project 10.00 Structural Adjustment Credit 30.00 Local Initiative Project 7.00 Moldova Essential Hospital Services Project 15.00 Port Access and Management Project 9.00 Transition Assistance Credit 90.00 Poland Emergency Housing Repair Project 15.00 Port Access and Management Project 67.00 Emergency Electric Power Reconstruction Project 35.60 Romania 16.30 Emergency Public Works and Employment Project 10.00 Agricultural Sector Adjustment Loan 350.00 Emergency Landmines Clearance Project 7.50 Social Protection Adjustment Loan 50.00 Emergency Demobilization and Reintegration Project 7.50 Second Roads Project 150.00 Bulgaria Reform of Higher Education and Research Project 50.00 Critical Imports Rehabilitation Loan 40.00 Bucharest Water Supply Project 25.00 Social Insurance Administration Project 42.00 Russia Rehabilitation Loan 102.00 Social Protection Adjustment Loan 800.00 Croatia Structural Adjustment Loan 600.00 Enterprise and Financial Sector Adjustment Loan 95.00 Electricity Sector Reform Support Project 40.00 Coastal Forest Reconstruction and Protection Project 42.00 Health RefoTm Pilot Project 66.00 Emergency Transport and Mine Clearing Project 102.00 Education Innovation Project 71.00 Georgia Enterprise Restructuring Services Project 85.00 Power Rehabilitation Project 52.30 Bureau of Economic Analysis Project 22.60 Oil Institution Building Project 1.40 St. Petersburg Center City Rehabilitation 31.00 Agricultural Development Project 15.00 Slovenia Hungary Investment Recovery Project 49.30 Quick Start Gas Turbine Project 60.00 Tajikistan Enterprise and Financial Sector Adjustment Loan 225.00 Pilot Poverty Alleviation Project 12.00 Public Finance Management Project 7.75 Agricultural Recovery and Social Projection Project 50.00 Kazakhstan Turkmenistan Real Estate Registration Pilot Project 10.00 Urban Transport Project 34.20 Pilot Water Supply Project 7.00 Water Supply and Sanitation Project 30.30 Treasury Modernization Project 15.80 Ukraine Uzen Oil Field Rehabilitation Project 109.00 Coal Sector Adjustment Loan 300.00 Kyrgyz Republic Export Development Project 70.00 Rural Finance Project 16.00 Agriculture Sector Adjustment Loan 300.00 Public Sector Resource Management Adjustment Credit 44.00 Electricity Market Development Project 317.00 Iatvia Social Protection Support Project 2.60 Welfare Reform Project 18.10 Uzbekistan Highway Project 20.00 Pilot Water Supply Engineering Project 5.00 Structural Adjustment Loan 60.00 Total 5,035.40 * TRANSITION, AUgUSt 1997 X 1997 The World Bank gion, receiving loans of $1.7 billion, in- mained the World Bank's largest bor- for 77 percent of the amounts tendered, cluding an $800 social sector develop- rower. It received almost two-thirds of contracted, and disbursed. ment loan-the largest ever in the region. the $4.9 billion that went to East Asia in *Multilaterally administered programs China, with $2.8 billion in loans, re- FY 1997. Cumulative lending to China and projects have accounted for 61 since the country rejoined the Bank in percent of reconstruction aid, com- FY 97 Lending to East Asia's 1981 is now $28.12 billion. Infrastructure pared with 39 percent in bilateral fund- TYa7s niong tonom lending accounts for nearly half the to- ing through national aid agencies, Transition Economies tal portfolio, with agriculture, social sec- nongovernmental organizations, and (Principal tors, environment, and industry making other bodies. The EU has been the Country/project amount) up the remainder, largest donor so far, while the World Cambodia Bank as a lead agency has provided Agriculture Productivity Russia is the second-largest borrower. one-third of the total project costs. ImprovementProject 27.00 Ukraine is sixth ($989.6 billion), and Ro- Disease Control and Health mania ninth, ($625 billion). In FY 1997 DevelopmentProject 30.40 the World Bank approved a total of $19.1 Terms for Albanian Aid China billion in new loans, less than in FY 1996 DevelopmentProject ($21.4 billion), and FY 1995 ($22.5 bil- The IMF will provide post-conflict Stage II 430.00 lion). But gross disbursements increased emergency assistance for Albania, but WaigaoqiaoThereal to nearly $20 billion, up from $19.3 billion long-term aid will depend on whether Power Project 400.00 in FY 1996 (compared with $21.4 billion the authorities restore security, con- National Rural Water in FY 1995). solidate their control over all parts of Supply Project 70.00 the country, close down investment Qinba MountPns Poverty continued from page 27 pyramid schemes, establish satisfac- Reduction ProJect 150.00 tory tax records, and cut the budget WanjiazhaiWaterTransfe 40000 sels, July 23-24, and cochaired by the deficit. On August 6 an IMF spokes- Project40 0o00oWorld Bank and the European Union- man said that plans to help Albania ThermaloPowerProject 400.00 pledged $1.2 billion for continued financ- have been worked out and that an IMF FourthBasic EducationProject 8500 ing of the reconstruction effort. The delegation will go to Tirana in mid-Au- HeilongiangAgricultural pledges, from forty-eight countries and gust. The European Commission and DevelopmentProject 120.00 thirty international organizations, are for the World Bank are to hold a meeting SecondNational projects involving housing, banking of donor countries in Brussels once the HighwayProject 400.00 sector restructuring, social services, Albanian government defines an Second Xinjiang and telecommunications repairs. The IMF-approved reform program. Highway Project 300.00 two earlier donors conferences, in De- VocationalEducation cember 1995 and April 1996, together NoTariff Increase Means No Reform Project 30.00 secured $1.85 billion for the first year Electricity Loan for Ukraine Lao People's Democratic Republic of the reconstruction program. By Third Highway o h eosrcinporm yT d ITproveH tProectay0 mid-i1 997, projects worth some $926 mil- The World Bank has suspended disburse- Improvement Project 48.00 Mongolia lion had reportedly been implemented ments of a $317 million Electricity Mar- BankingandEnterprise under the Priority Reconstruction Pro- ket Development Loan to Ukraine as a Sector Adjustment Credit 10.00 gram. Disbursement details: result of the failure of the Ukrainian au- Banking,Enterprise,andLegal *The Muslim-Croat Federation has re- thorities to bring electricity tariffs to a Technical Assistance Project 20.00 ceived some 98 percent of the funds, full cost recovery basis as previously VietNam with just 2 percent channeled to the agreed. The indefinite postponement of Water Supply Project 98.61 Bosnian Serb Republic (RS). Within the the tariff adjustment has jeopardized the Second Highway Federation, most funds were directed to financial viability of the thermal genera- Rehabilitation Project 195.60 projects in Bihac, Sarajevo, and Tuzla. tion companies that are financed by the Rural Transport Project 55.00 *Projects focusing on the repair of trans- loan disbursements, the Bank said. The Total 3269.61 portation and electric power networks, loan, approved last October, was to build housing reconstruction, and support for up fuel stocks and spare parts, and to government institutions have accounted install metering and other modern equip- © 1997The World Bank TRANSITION, August 1997 * ment over three years to bring Ukraine's Hungary Launches Regional Health a strong signal of the government's com- electric utility industry up to standards, Project from World Bank Loan mitment to enforce financial discipline. particularly because of the loss of the It recommended a tougher approach on Chernobyl nuclear plant. The action will The Hungarian government is using a liquidations and bank restructuring. Bul- not automatically affect other loans to World Bank loan to launch a $27 million garian authorities expect to receive the Ukraine, will be assessed on a case-by- grant program for the modernization of next IMF loan tranche of $84.5 million case basis. health care facilities throughout the coun- by mid-August. try. Of the total, $18 million will come from IMF, Ukraine Agree on Standby the World Bank's $91 million health care In One Sentence modernization loan and $9 million from the Ukraine reached agreement in principle central budget. The Ministry of Welfare will *The World Bank on July 29 approved a with the IMF on a one-year standby loan invite regional consortia, which cover at $10 million IDA credit to Armenia that of around $525 million. Depending on the least two counties with 900,000 to 3 mil- will be used to improve primary health decision of the IMF board of directors, lion inhabitants, to participate. Regions care and the efficiency of public health the loan will be disbursed through July may bid on programs to make local health expenditures. 1998, with the first IMF review scheduled services more up-to-date and less costly, *Also on July 29, the Bank approved a for November. Ukrainian officials hope that such as the use of outpatient surgery $70 million loan to Romania to help fi- the loan will be transformed into an ex- home care, in lieu of hospital treatment, nance the repair of about 900 seriously tended fund facility later this year. The where possible. damaged pre-university schools, mostly IMF has made such a change conditional in rural areas. on accelerating reforms in Ukraine. Fol- World Bank Lends $150 Million *The IBRD will charge a lower rate for lowing the approval of the extended fund for Higher Education in Hungary its variable-rate loans over the next six facility, Ukraine will resume talks. on new months: as of July 1, the interest rate World Bank loans. Ukrainian GDPfell 7.5 The World Bank will provide a $150 mil- will be cut to 6.54 percent, down from percent in the first half of 1997 from the lion loan to help reform higher education the earlier 6.70 percent. same period in 1996, according to the in Hungary, Culture and Education Min- *On July 15 the Bank approved a $20.9 Ministry of Statistics. ister Balint Magyar announced. The loan million IDA credit to Georgia that will will be supplemented with budgetary re- strengthen local governments' organiza- Flood Assistance to Poland sources, and thus some $250 million will tional, management, and financial base. be available for a six-year reform pro- *The IMF has approved a $45 million The Polish government plans to borrow gram aimed at making the system of Extended Structural Adjustment Facil- up to $300 million from the World Bank higher education more responsive to the ity (ESAF) loan to Mongolia and expects and the European Investment Bank to economic and social needs of the coun- an annual 6 percent GNP growth by help rebuild the southern part of the try. That includes promoting the integra- 2000, and a single-digit inflation rate. country, where floods swamped more tion of universities and colleges. Adjustment Credit to Azerbaijan than 5,000 square kilometers. Basil Kavalsky, country director for Poland Qualified IMF Endorsement A $70 million structural adjustment and the Baltic States, said that before to Bulgaria credit was approved to Azerbaijan on any loan decision could be made the July 24. It will support government ef- Bank's mission had to examine the In mid-July the IMF Executive Board forts to reform the banking sector, fully scope of damages and assess assis- approved the release of a $137 million liberalize domestic and foreign trade, tance needs. But he encouraged the second tranche of a $510 million, four- and improve social policy. government to start repairing the infra- teen-month standby agreement. On July structure immediately, saying that the 25 the board completed its first review IMF Satisfied with Russia's Economy- Bank's future loan would reimburse costs of the country's economic program fol- Chubais borne now. Kavalsky said that the floods lowing the loan's approval in April. The were unlikely to cause any significant IMF said that Bulgaria needs to fully First Deputy Minister Anatoly Chubais slowdown of economic growth this year, implement measures to strengthen the said an IMF mission visiting Russia was but suggested that inflation might be Central Bank's supervision of the bank- satisfied with its economic performance higher than the 13 percent forecast by ing system. The IMF recognized that the and would recommend payment of the the government for December. swift adoption of a currency board was $700 million second installment of last * TRANSITION, AugUst 1997 © 1997 The World Bank year's $10 billion Extended Fund Facility C f Languages: Polish, English. loan. Both the Russian government andC ofe renice Information:HubertGabrisch, lnstitutfuer the IMF agreed that the system for col- Wirtschaftsforschung Halle, Delitzscher lecting taxes needed to be improved fur- Diary Str. 118, 06118 Halle (Saale), Germany, ther, and one possibility was for the IMF tel. 49-345-7753-831, fax 49-345-7753- to provide consultants to the Federal Tax Integration and Transition in Europe: 820, Email: gabrisch'iwh.uni-halle.de Service. The Tax Service said in the first The Economic Geography of Interaction half of 1997 it collected 123.9 trillion September 11-14, 1997, Budapest, Institutions in Transition rubles, half as much as in the same pe- Hungary September 18-20, 1997, Radenci, riod of 1996 and 87.4 percent of the Fi- Slovenia nance Ministry's target of 138.3 trillion Organizer: The Department of Planning rubles. Tax collection was up almost a and Regional Development, University Organizer: Institute of Macroeconomic third in June from May, the Service said. of Thessaly, Greece. Research and Development, Ljublana Information: George Petrakos, Department (IMAD). World Bank Probe Clears Russian of Planning and Regional Development, Call for papers: Contact conference or- Group University of Thessaly, PedionAreos 38334 ganizer below. A World Bank inquiry has found no finan- Volos, Greece, tel. 30-421-82845, fax 30- Information: Irena Rink, IMAD, fax 38661- cial improprieties in the use of World Bank 421-63793, Email: petrakos @helle. uth.gr 1782070, Email: irena.rink@zmar. funds at the Institute for a Law-Based sigov.mail.si Economy (ILBE), a Moscow-based think A New Vision of Development Coop- tank. ILBE was set up in 1995 by Harvard eration for the 21st Century-OECF/ First Paris Workshop: The Second University's Institute for International De- World Bank Symposium Stage of the Transition velopment, to promote legal reform in September 17, 1997, Tokyo, Japan September 29-30, 1997, Paris, France Russia (helping to train Russian advisers, write economic legislation, and so on). Topics: Joseph Stiglitz will lay out the Organizer: Reforming and Opening Post- ILBE won a $4 million contract to man- main themes of the proposed Policy Re- Socialist Economic Systems (ROSES)- agea$31 millionWorldBankPrivatization search Report on aid effectiveness, University Paris I, GASI-University Implementation Assistance Loan. The in- highlighting key research results that Marne la Vallee. quiry was launched after the U.S. govern- guide our thinking. The vice president Call for papers: Deadline September 1, ment alleged in press reports in May that of OECF will speak on "Addressing Glo- 1997. two top Harvard University advisers to the bal Issues." This symposium will be fol- Information: Vladimir Andreff, University Russian government, Andrei Shleifer, lowed by a one-day technical workshop of Paris 1, Pan theon Sorbonne Sciences Russian project director, and Jonathan directed at a more specialized audience, Economiques, 90 rue de Tolbiac, F-75634 Hay, Moscow field manager and adviser with participants from aid agencies, re- Paris Cedex 13, France, tel. 33-1- to Russia's Federal Securities Commis- search institutes, and academia. The 40771848, fax 33-1-45847889, Email: sion, had violated conflict-of-interest regu- workshop will reflect the themes high- waroses@grenetfr lations and used their positions for lighted in the symposium and allow a personal gain. Harvard immediately re- more technical discussion of various Regenerative Energy in the Running lieved them of their duties in the project. studies and research efforts. -Economic Alternatives for Central Both men were instrumental in helping Information: Raquel Luz, World Bank, Europe? form ILBE and Hay was involved in its 1818 H Street, N.W., Room N11-053x, October 1, 1997, Zittau, Germany management. The Bank's inquiry, which Washington, D.C. 20433, United States, investigated spending under the loan, es- tel 202-473-9059, fax 202-522-1152, Organizer: Saxon Institute for Regional tablished that there was proper documen- Email: rluz@worldbank.org Economy and Energy Economics. tation for all billings to the World Bank, Language: German. and contrary to press reports, there was The Fulfilment of EU Convergence Information: Daniel Ludwig, Saech- no misuse of World Bank funds. A sepa- Criteria: The Case of Poland sisches Institut fuer Regionaloekonomie rate U.S. government investigation has September 15-17, 1997, Warsaw, Poland undEnergiewirtschaft, Theodor-Koerner- been under way since March. Organizers: Polskie Towarzystwo Allee 16, 02763 Zittau, Germany, tel. Based on RFE/RL reports and other news Ekonomrist6w (PTE); the Institute for 3583-611259/611420, fax 3583-510626, agency reports and on World Banksources. Economic Research (Halle). Email. sire@orion. hrz.htw-zittau.de c 1997 The World Bank TRANSmON,August 1997 U Russian Economy in Transition Central Europe's Human Potential for Economic and Social Technologies in October 2-3, 1997, Helsinki, Finland Management Transitional Society October 16-18, 1997, Sinaia, Romania December 2-3, 1997, Perm, Russian Organizer: Working Group on Technology, Federation Economy and Society of the Finnish- Organizers: CEEMAN, International Man- Russian Commission for Scientific and agement Foundation. Organizers: Perm State University, Ad- Technological Cooperation. Topics: Strong features of Central and ministration of Perm Region. Topics: This conference features Rus- East European economies; increasing Topics: Scientific basis for social and sian and Western experts, with sessions leadership, initiative, and teamwork; de- economic technologies and models dur- on Russia's economic and sociopolitical veloping economies such as China, In- ing transformation. situation and outlook, Russian forest in- dia, Hong Kong, and Singapore; potential Information: International Conference, dustry cluster, regional aspects of tran- development in Romania. Economic Theory Department, Perm sition, and Russia's foreign economic Information: CEEMAN, Brdo pri Kranju, University, 15Bukireva St, Perm 614600, relations. 4001 Slovenia, teL 386-64-221-761, fax Russia, tel. 7-3422-396286,-396588, fax Information: Pentti Vartia, Research In- 386-64-222-070, Email: ceeman@iedc- 7-3422-337176,Email: info@psu.ac.ru stitute of the Finnish Economy (ETLA), brdo.si tel. 358-9-609900; or Vesa Korhonen, Unit Civil Society in Russia: Citizen Par- for Eastem European Economies, Bank Romania Investment Summit ticipation, Self-Help and Self-Organi- of Finland, tel. 358-9-1832834, fax 358- October 29-30, 1997, Bucharest, zation in System Change and the 9-1832294, Email: vesa. korhonen @bof. fi Romania Perspectives for Cooperation in Eu- rope as a Whole EUROGRAD '97 Organizer: International Herald Tribune. December 12-14,1997, Loccum, Germany October 16-18, 1997, St. Petersburg, Topics: Future investment potential in Russia Romania. Language: German Information: Ursula Lewis, International Information: Dr. Joerg Calliess, Dr. Organizer: Eurograd Institute. Herald Tribune Conference Office, 63 Christoph Huettig, EvangelischeAkademie Languages: Russian, English, German, Long Acre, London WC2E 9JH, United Loccum, Posffach2158, 31545Rehburg - French (simultaneous interpreting). Kingdom, tel. 44-171-420-0309, fax 44- Loccum, Germany tel. 49-(0)5766-81-0, fax Topics: Problems of reform in Russia's 171-836-0717, Email: ulewisciht.com 49-(0)5766-81-188/128, Intemet: http:// regions, public-private partnerships in the www evika. de/extern/loccum/loccum.html municipal administration of cities in west- Congress on the Eastern Enlargement ern Europe, and the role of international of the European Union: Social and The Envisioned Enlargement of the cooperation in reform in Russia. Perspec- Cultural Consequences for Poland European Union and its Globalisation tives on: the experiences of St. Peters- November 20-21, 1997, Warsaw, Poland January, 1998, Chicago, Illinois, United burg and Russia's regions in the reform States of municipal housing, the experiences of Organizers: German-Polish Society As- Organizer: European Association for the cities of western Europe in the ad- sociation in cooperation with the Comparative Economic Studies ministration of housing complexes, and Friedrich Ebert Foundation-Representa- (EACES) Executive Committee new technologies for saving heat, energy, tion in Poland, BAO BERLIN Market- Information: Vladimir Andref University and water in housing and municipal ing Service GmbH, Polish Robert .ofmaris ,PantheonSrobnn Scivens, economies. Schuman Foundation.~~~~ of Paris 1, Pantheon Sorobnne Sciences, economies. Schuman Foundation. cnmqe,9 u eTlic -53 Information: Boris Grintchel, Institut Languages: German and Polish (simul- Paris Cqedex 13, France, tel 33-1 EUROGRAD 14, pr. lzmailovski, PB 242, taneous interpreting). Paris fax 33-1-45847889lEmail: 198005 St. Petersburg, Russia, tel. 7- Information: Heinrich Machowski, 40771848, fax 33-1-45847889, Email: 812-112-64781-6772, fax 7-812-112-6506, Deutsches Institut fuer Wirtschaft- waroses@grenetfr Email: root@eimi.spb.ru sforschung, Kooperationsbuero We appreciate the contributions of the Coop- Osteuropa- Wirtschaftsforschung, eration Bureau for Economic Research on Fifth Annual Conference of the Cen- Koenigin-Luise-Strasse 5, 14191 Berlin, Eastem Europe, Koenigin-Luise-Str. 5, D tral and East European Management Germany tel. 49-30-897708-36, fax 49- 14195, Berlin, Germany tel.4930-897708-68, Development Association (CEEMAN): 30-897708-99, Email: coop@diw- fax 4930-897708-99, Email:.tnbakova Ndiw- Developing and Mobilizing East and berlin.de berlin.de, or dbowen @diw-berlin.de. M TRANSITION,AUgUSt 1997 ( 1997 The World Bank New Books and Working Papers The Macroeconomics and Growth Division regrets that it is unable to provide the publications listed. World Bank Publications To order: Gracie Ochieng, Room S5-042, Bernard Hoekman and Simeon Djankov, tel. 202-473-1123, fax 202-522-3247, Competition Law in Bulgaria after Cen- To receive ordering andprice information Email: gochieng@worldbank org tral Planning, 1789, June 1997, 24 p. for World Bank publications, write: World Bank, PO. Box 7247-8619, Philadelphia, Szczepan Figiel, Tom Scott, and Panos Bulgaria's Commission for the Protec- PA 19170, United States, tel. 202-473- Varangis, How Government Policies tion of Competition tended to deal with 1155, fax 202- 676-0581; or visit the Affect the Relationship between Pol- "unfair" trade practices and contract en- World Bank bookstores, in the United ish and World Wheat Prices, 1778, forcement problems between 1991 and States, 701 18th Street, N.W, Washing- June 1997, 35 p. 1995, rather than focusing on hardcore ton, D.C., orin France, 66 avenue d'lena, anticompetitive behavior. Retaliations for 75116 Paris, Email: books @ world Government intervention is the main rea- egregious violations of the law were not bank.org, Internet: http://www.world son for the low correlation between cash dire enough to pressure firms to abide bank. org prices for Polish wheat and wheat futures by the law. Recently proposed amend- prices in Chicago and London. It reduces ments to the law may strengthen the Policy Research Working Papers incentives for Poland's private sector to law's deterrent effect. use existing wheat futures contracts in To order:'JenniferNgaine, Room N5-056, Christiaan Grootaert, Poverty and So- foreign commodity exchanges to hedge tel. 202-473-7947, fax 202-522-1159, cial Transfers in Hungary, 1770, May against price risks, and prevents the Email: trade@worldbankorg 1997, 77 p. development of Poland's own wheat fu- tures exchange. Alain de Crombrugghe, Wage and Pen- In 1993, Hungary spent 27.7 percent of To order: Jean Jacobson, Room N5-026, sion Pressure on the Polish Budget its GDP on social expenditures, well tel. 202-473-3710, fax 202-522-3564, 1793, June 1997, 48 p. above the average for the European Email:jjacobson@worldbank.org Union (21.8 percent) and the OECD (22.3 Poland's current economic recovery percent). [The 1995 austerity package ConstantineMichalopoulosandDavidTarr, should create jobs, not raise wages. drastically cut budget expenditures, in- The Economics of Customs Unions in Engineering equitable opportunities for cluding social outlays in Hungary. The the Commonwealth of Independent all requires moderating the claims of the editor.] Cash transfers were 19 percent States, 1786, June 1997, 30 p. best protected groups-and reforming of GDP, with more than half going to the pension system. pensions. Various family and child allow- The customs union's proposed for To order: Mani Jandu, Room N7-032, ances accounted for 4.2 percent of GDP, Belarus, Kazakstan, Kyrgyzstan, and telephone 202-473-3103, fax 202-522- and unemployment benefits amounted Russia, all members of the Common- 0304, Email: mjandu@world bank.org to 2.4 percent. Reform of the social wealth of Independent States (CIS) safety net has become urgent. and the Free Trade Area established Xiaonian Xu and Yan Wang, Ownership among the twelve CIS members, are Structure,CorporateGovernance,and In 1993, 58 percent of the Hungarian Corporate Performance: The Case of population had an expenditure level be- likely to lock those countries into the Chinese Stock Companies, 1794, June low the subsistence minimum. Poverty old technology of the former Soviet 1997, 54 p. has therefore been measured againstthe Union. The effects of such organiza- minimum pension (absolute poverty line) tions will be especially negative for A typical listed stock company in China and at two-thirds of mean household ex- the countries that have already estab- has a mixed ownership structure, with penditure (relative poverty line). In 1993, lished relatively liberal trade regimes. three predominant groups of sharehold- 4.5 percent of the population had an ex- ers each holding about 30 percent of the penditure level (per equivalent adult) To order: Minerva Patena, Room N5- stock: the state, legal persons (institu- below the minimum pension, and 25.3 048, tel. 202-473-9515, fax 202-522- tions), and individuals. (Employees and percent below the relative poverty line. 1159, Email: mpatena @ worldbank.org foreign investors together hold less than ( 1 997 The World Bank TRANSITION, August 1997 U 10 percent.) Ownership is heavily concen- Ferreira investigates the distributional Between 1965 and 1995, China's infant trated: the five largest shareholders ac- consequences of policies and develop- mortality rate declined from 90 per 1,000 counted for 58 percent of outstanding ments associated with the transition live births to 36-less than half the rate shares in 1995, compared with 57.8 per- from central planning to a market sys- predicted for the country's income level. cent in the Czech Republic, 42 percent in tem. The model suggests that even an During the same period, life expectancy Germany, and 33 percent in Japan.The mix efficient privatization designed to be at birth rose from 55 to 69 years, higher and concentration of stock ownership sig- egalitarian may lead to increases in in- than in many comparable Asian coun- nificantly affect a company's performance: equality (and possibly poverty), both tries. And the maternal mortality rate fell *There is a positive, significant correla- during the transition and in the new from 26 to 15 per 100,000 deliveries, a tion between concentration of ownership steady state. rate comparable to that in similar Asian and profitability. economies. These favorable results con- *The effect of concentrated ownership Creating new markets in services that ceal more recent trends, however. Since is even more profound if most owners are likewise supplied by the public sec- the early 1990s, mortality rates have in- are institution-dominated companies and tor may also contribute to an increase creased in many provinces, particularly not state-dominated companies. in inequality. So can labor market re- among infants and children under 5. *Profitability is positively correlated with forms that lead to a decompression of the proportion of institutional shares; it the earnings structure and to greater The recent erosion in health gains stems is either negatively correlated or flexibility in employment. The results from three factors: uncorrelated with the proportion of state underline the importance of retaining -Changes in government financing of the shares and of tradable A-shares held government provision of basic public health sector have increased inequity, mostly by individuals. goods and services, removing barriers inefficiencies, and costs for medical -Labor productivity tends to decline as that prevent the participation of the poor treatment. the proportion of state shares increases. in the new private sector, and ensuring *China's public health programs are tra- that suitable safety nets are in place. ditionally not well prepared to prevent Thus, institutional shareholders seem to To order: Michael Geller, Room N7-078, communicable diseases and injuries. have a positive impact on corporate gov- tel. 202-473-1393, fax 202-522-0056, -The shift to a more market-oriented ernance and performance, state owner- Email: wdr@ worldbank.org economy has changed environmental ship seems to lead to inefficiency, and and behavioral risk factors, thus diver- an overly dispersed ownership structure Aymo Brunetti, Gregory Kisunko, and sifying the types of disease across re- can create problems in the Chinese set- Beatrice Weder, Institutions in Transi- gions. ting. tion: Reliability of Rules and Eco- To order: Lilac Thomas, Room T7-015, To order: Joyce Chinsen, Room G5-031, nomic Performance in Former tel. 202-458-1288, fax 202-522-1778, tel. 202-473-4022, fax 202-522-1714, Socialist Countries, 1809, August Email. shossain@worldbank.org Email: Jchinsen@worldbank.org 1997, 47 p. Shaikh l.Hossain, Making Education in BarbaraFakinandAlaindeCrombrugghe, Indicators of the predictability of rules, China Equitable and Efficient, 1814, Fiscal Adjustments in Transition political stability, the security of property August 1997, 32 p. Economies: Social Transfers and the rights, the reliability of the judiciary, and To order: Clydina Anbiah, Room T7- Efficiency of Public Spending: A Com- the lack of corruption are used to investi- 015,tel.202-458-1275, fax2O2-522-1778, parison with OECD Countries, 1803, gate differences in economic performance. Email:shossain @ worldbankorg July 1997, 32 p. The results suggest that the predictability To order: ManiJandu, Room N7-032, tel. of the institutional framework may explain Other World Bank Publications 202-473-3103, fax202-522-0304, Email: a large part of differences in foreign direct mjandu@worldbank.org investment and in economic growth among World Development Report 1997:The transition economies. State in a Changing World, 1997, 265 p. Francisco H. G. Ferreira, EconomicTran- To order: Michael Geller, Room N7-078, sition and the Distributions of Income tel. 202-473-1393, fax 202-522-0056, Five fundamental tasks lie at the core and Wealth, 1808, August 1997, 44 p. Email: wdr@worldbankorg of every government's mission, without which sustainable, shared, poverty-re- Using a model of wealth distribution, dy- Shaikh I. Hossain, Tackling HealthTran- ducing development is impossible: namics, and occupational choice, sition in China, 1813, August 1997. *Establishing a foundation of law. * TRANSITION, August 1997 © 1997 The World Bank -Maintaining a nondistortionary policy 5454, fax 202-522-1500 E-mail: pic@ The eighth edition of this annual report environment, including macroeconomic worldbank.org reviews the long-term prospects for de- stability. veloping countries in light of changes in -Investing in basic social services and Belarus: Prices, Markets, and Enter- the global environment and provides a infrastructure. prise Reform, A World Bank Country detailed discussion of selected aspects Protecting the vulnerable. Study, 1997, 248 p. of the global integration process in those Protecting the environment. countries. Michael Cernea and Ayse Kudat, So- Some new insights are emerging about cial Assessments for Better Develop- Jeni Klugman (ed.), Poverty in Russia: the appropriate mix of market and gov- ment: Case Studies in Russia and Public Policy and Private Responses, ernment activities in achieving these Central Asia. Environmentally Sustain- 1997, 296 p. tasks. Markets and governments are able Development Studies and Mono- complementary: the state is essential for graph Series no. 16,1997, 228 p. [from Magda Lovei (ed.), Phasing Out Lead putting in place the appropriate institu- Azerbaijan, Kazakstan, Kyrgyz Repub- from Gasoline in Central and Eastern tional foundations for markets. And lic, Russia, Tajikistan, Turkmenistan, Europe: Health Issues, Feasibility, and government's credibility-the predictabil- and Uzbekistan]. Policies, 1997, 94 p. ity and consistency of its rules and poli- cies-can be as important for attracting Social assessments were used in the The use of lead additives in gasoline is private investment as the content of formulation of individual projects, such declining rapidly worldwide. Many coun- those rules and policies. as restructuring Russia's coal sector, tries have completely eliminated leaded helping to create a water supply sys- gasoline, but in Central and Eastern Countries in transition face a special tem in Baku, and responding to envi- Europe lead still ranks as one of the challenge of changing roles and capa- ronmental degradation in Uzbekistan's most serious and widespread environ- bilities. Some transition countries retain Aral Sea region. mental hazards. inherent capabilities, like qualified people and usable equipment, but they China's Management of Enterprise Jacob P. Meerman, Reforming Agricul- are not organized to perform their new Assets: The State as a Shareholder, A ture: The World Bank Goes to Market, roles. The task of improving effective- World Bank Country Study, 1997, 111 p. 1997, 180 p. ness in transition countries is easier because capability does not start from China's reform of industrial state-owned Assessing World Bank experience with a low base, but more difficult because enterprises (SOEs) seeks to maintain the fifty agricultural sectoral adjustment rebuilding capability means changing state ownership of key enterprises while loans approved by the Bank's Board of attitudes, not simply assigning new re- improving their performance by estab- Directors since 1979, the report finds sponsibilities. lishing market-oriented incentives. The that shifting the focus in the 1990s from state tries to carry out the shareholder supporting public production and public The job of reorienting the state toward functions that are performed by private control to supporting market liberaliza- the task of "steering, not rowing" is far owners in market economies. SOE per- tion, has substantially improved the qual- from complete in Central and Eastern formance could be improved through ity of recent operations. Europe. But most countries are on the diversifed ownership, integrated cross- way to improving capability and account- regional and cross-sectoral Raylynn Oliver, Model Living Standards ability. Low state capability in many shareholding, and simplified organiza- Measurement Study Survey Question- countries of the CIS is a serious obstacle tional structures. Further developing naire for the Countries of the FSU, Liv- to further progress in most areas of eco- property rights, eliminating policy-in- ing Standards Measurement Survey nomic and social policy. Reorientation duced barriers to entry and exit in com- Working Paper 130, 1997, 144 p. (The of the state is still at an early stage, and petitive sectors, and requiring questionnaires areavailable in English and a host of severe problems have emerged independent audits of financial accounts Russian, and in electronic format.) from a general lack of accountability and would also help. transparency. Shahid Yusuf and Weiping Wu. The Dy- To order: Public Information Center, Global Economic Prospects and the namics of Urban Growth in Three Room GC1-300,1818 H Street, N. W Developing Countries, 1997 [forthcom- Chinese Cities, Oxford University Washington, D.C. 20433, tel. 202-458- ing in September 1997]. Press, 1997, 248 p. C) 1997 The World Bank TRANSITION,August 1997 The OECD believes that China will be need to be aware of the economic his- Matija Rojec, The Development Poten- the world's largest economy by 2020. tory of their partners. tial of Foreign Direct Investment.in the China's urban economy has been the Slovenian Economy, WIIW no. 235, driving force behind accelerated growth. Klaus E. Meyer, The Determinants of April 1997, 44-p. By the same token deterioration in ur- West-East Business: An Analysis of ban centers could constrain future ex- Ownership Advantages, Working Pa- Foreign companies in the Slovenian pansion. The interplay between per 3, March 1997, 39 p. manufacturing sector outperform their geography, size, and industrial structure domestic rivals because of optimum determines the industrial vigor of cities. Snejina Michailova, Bulgaria in the company size (which determines pro- The experiences of Shanghai, Tianjin, Process of Systematic Transforma- duction techniques, product line, skill in- and Guangzhou show that all these fac- tion-An Overview, Working Paper 4, tensity, and salary level), high capital tors must be made to work for the city June 1997, 45 p. intensity, proper assets structure, large through effective policymaking. export orientation, healthy structure of Niels Mygind, Different Paths of Tran- financial sources, and solvency. CEPR Publications sition in the Baltics, Working Paper 5, May 1997, 39 p. Rural Development Institute To order: Center for Economic Policy Publications Research, 25-28 Old Burlington Street, Niels Mygind, The Economic Perfor- London WIX 1LB, United Kingdom, tel. mance of Employee-Owned Enter- To order:RuralDevelopmentinsbtute, 4746 44-171-878-2900, fax 44-171-878-2999, prises in the Baltic Countries, Working 11th Avenue N.E., no. 505, Seattle, Wash- Email: cepr@cepr.org Paper 6, May 1997, 46 p. ington 98105, United States, tel. 206-528- 5880, fax 206-528-5881, Email: rdi@ Willem H. Buiter, Ricardo Lago, and There is no indication that employee- u.washington.edu H6lbne Rey, Enterprises in Transition: owned enterprises perform worse than Macroeconomic Influences on Enter- comparable enterprises in the private RoyL.Prosterman,RobertG.Mitchell,and prise Decision-Making and Perfor- sector. Employee-owned enterprises Bradley J. Rorem, Prospects for Peas- mance, Discussion Paper 1601, April might be more sluggish in shedding la- ant Farming in Russia, RDI Reports on 1997, 41 p. bor, but productivity and profitability is Foreign Aid and Development no. 92, often better than for other enterprises. United States, January 1997, 37 p. Vivek H. Dehejia, Optimal Restructur- ing Under a Political Constraint: A Klaus E. Meyer, Enterprise Transfor- Russia's 1996 grain harvest would have General Equilibrium Approach, Dis- mation and Foreign Investment in been 150 million tons, instead of 69 mil- cussion Paper 1619, April 1997, 12 p. Eastern Europe,Working Paper7, June lion tons, had Russian farms been as 1997, 20 p. efficient as Finnish ones. Russia's 26,000 Center for East European Studies giant agricultural enterprises, still collec- (CEES) Publications Snejina Michailova, Interface between tives in all but name, produce even less Western and Russian Management today than they once did: in 1996 the old To order: CenterforEastEuropean Stud- Attitudes: Implications for Organiza- Soviet farms produced 35 percent less ies, Copenhagen Business School, tional Change, Working Paper 8, June grain per hectare than Canadian farms Dalgas Have 15, DK-2000, Frederiksberg, 1997, 28 p. and 60 percent less than Finnish family Denmark, tel. 45-3815-3030, fax45-3815- farms. There has been no net increase in 3037, Internet: http://www.econ.cbs.dW1 WIIW Publications the number of peasant farms in Russia institutes/cees To order: WIIW Vienna Institute for Com- since the beginning of 1994. Saul Estrin and Klaus E. Meyer, The parative Economic Studies, Oppolzergasse SaulEstin ad Kaus . Myer,The6, A-10O0, Vienna, Austri'a, tel. 431-533- Most collective and state farms have East European Business Environ- 6601 Vienna, been privatized and re-registered as ment: Opportunities and Tripwires for 6610, fax 431-533-6610-50. jointstock companies and other forms, Foreign Investors, Working Paper 2, Leon Podkaminer, Hermine Vidovic, and but they continue to function as ineffi- February 1997, 24 p. The legacy of the others, Weiterhin Divergierende cient behemoths whose hundreds of socialist past cannot be shed overnight. Entwicklung in den Reforml5dern, members have little incentive to maxi- Foreign investors entering the region WIIW no. 167, May 1997, pp. 321-41. mize production, reduce production * TRANSITION, August 1997 ( 1997 The World Bank costs, or preserve capital assets. They The Center for Land Reform Support of LAszl6 Csontos, Janos Kornai, and still suffer from the inefficiencies of col- Vladimir Oblast (province), created in Istvan Gyorgy T6th, Tax-Awareness lective agriculture. Only about 6 percent August 1996 and funded by the United and the Reform of the Welfare State: of Russia's agricultural land is in peas- States Agency for International Devel- Results of a Hungarian Survey, ant farms, but those farms are already opment, is providing free legal advice Harvard Institute of Economic Re- producing far better yields than the large and assistance to peasant farmers and search Discussion Paper Series 1790, collectives. agricultural land share owners exercis- Cambridge, Massachusetts, United ing their land rights. The Rural Develop- States, January 1997, 22 p. The land of the old collectives and state ment Institute oversees and provides farms is being distributed as land shares, guidance to the Center. Kim R. Holmes and James J. Przystup but in most places it is being leased back (eds.), Between Diplomacy and Deter- to the collective at rates equivalent to SIGMA Publications rence: Strategies for U.S. Relations the land tax. Even the least productive with China, Heritage Foundation, United land yields 100 times more than that To order: SIGMA, Head of Publications States, 1997, 264 p. value. This availability of cheap rental Service, OECD, 2 rue Andr6-Pascal, To order: Heritage Foundation, 214 Mas- land depresses the lease value of land 75775 Paris Cedes 16, France. sachusetts Avenue, N.E., Washington, shares and interferes with the emerging D.C. 20002-4999, United States, Internet: land share rental market. Even these low Budgeting and Monitoring of Person- http://wwwheritage.org lease payments are a valuable income nel Costs, SIGMA Papers 11, 1997, 56 p. supplement for landowners-especially Marvin Jackson, Intra-Balkan Trade pensioners, who generally own around Personnel costs often constitute the and Economic Cooperation: Past Les- 40 percent of land shares. (While Rus- main cost factor in state budgets, and sons for the Future, Leuven institute sian peasant farmers paying 11 to 15 thus their control is critical to ensuring for Central and East European Studies percent of total yield in rent and large the most effective and efficient use of Working Paper 62/1997, 24 p. enterprises pay around 3 percent, simi- limited budgetary resources. To order: Katholieke UniversiteitLeuven, lar rents in the United States are equiva- Ch. Deberiotstraat 34, 3000 Leuven, lent to 25 percent of yield.) Public Management Forum, a bi- Germany, teL 3216-326-598, fax 3216- monthly newsletter for Public Adminis- 326-599. The Russian government should under- tration Practitioners in Central and take an intensive program to inform pen- Eastern Europe. Anjali Kumar, Kwang Jun, Anthony sioners and other landowners about their Saunders, Susan Selwyn, Yan Sun, rights and options. Most of them con- Other Publications Dimitri Vittas, and David Wilton, China's tinue to lease land back to the old enter- Emerging Capital Markets, Financial prises (it seems less risky, and they Beyond the MFN Debate: A Compre- Times Publishing Asia Pacific, Hong want to avoid offending old leaders who hensive Trade Strategy toward China, Kong, 1997, 318 p. might cut their pensions). But this is Asian Studies Center Backgrounder no. To order: Financial Times PublishingAsia merely a continuation of collective farm- 148, May 16, 1997, 29 p. Pacific, Suite 1808, Asian House, 1 ing. Another major impediment to peas- To order: Heritage Foundation, 214 Mas- Hennessy Road, Wan Chai, Hong Kong, ant farmers is the unavailability of sachusettsAvenue, N.E., Washington, D.C. teL 852-2863-2600, fax 852-2520-6646, machinery. 20002-4999, United States, tel. 202-546- Email: pphkgthk.super.net, Internet: (Excerpted from a report by Robert Lyle 4400, Internet: http.//www.heritage.org htfp://www.pearson-pro.com.hk for RFE/RL) P6ter Bod, German Capital In Hungary: Marina Kesner Skreb, State Intervention Leonard J. Rolfes, Jr. and Bradley J. Is There a Special Relationship? Dis- for Growth Promotion in Market Rorem, Legal Assistance in Rural Rus- cussion Papers in German Studies no. Economies, Institute of Public Finance sia: A Report on the Activities of the IGS97/4, University of Birmingham, Occasional Paper Series 1, January "Center for Land Reform Support of United Kingdom, 1997, 34 p. 1997, 29 p. Vladimir Oblast," Rural Development To order. University of Birmingham, In- Institute Reports on Foreign Aid and stitute for German Studies, Edgbaston, Industrial policy has undergone a trans- Development no. 93, United States, May Birmingham B15 2TT, United Kingdom, formation from a targeted policy-di- 1997, 17 p. teL 0121-414-7182, fax 0121-414-7329. rectly supporting selected industrial ( 1997 The World Bank TRANSITION,August 1997 U sectors, either national champions or tutethatpromotestheideasofeconomic agement in Central and Eastern Euro- lame ducks-to one relying on horizon- liberalism based on the principles of in- pean Countries). tal measures-investing in infrastruc- dividualfreedom and responsibility,a free To order: SIGMA-OECD Information ture, financing labor retraining, market and limited government involve- Services, 2 rue Andr6-Pascal, 75775 developing information networks for fi- ment. Paris Cedex 16, France, tel. 331-4524- nancial markets, supporting research Toorder:TheFreeMarket,56BirutesSt., 7900, fax 331-4524-1300, Email: and development, and promoting envi- 2004 Vilnius, Lithuania, tel. 3702-724- sigma.contact!oecd.org, Intemet: http:/ ronmental protection. Such interventions 241, fax 3702-721-279, Email: laimas il /www. oecd. org/puma/sigma web benefit all market agents and distort rela- freeni.aiva.it tive prices as little as possible. Even Polish Banking and Economic Re- these horizontal state intervention must Georgian EconomicTrends: Quarterly view, published by the Adam Smith be limited in time, consider all costs and Review, a publication of TACIS. Research Centre. benefits, and be as transparent as pos- To order: TACIS, European Expertise To order: ASRC, ul. Bednarska 16, 00- sible. Service, Cotswold, Heol-y-Parc, Pentyrch, 675 Warszawa, Poland, tel. 4822-630- To order: Institute of Public Finance, Cardiff, CF4 8ND, United Kingdom, tel. 8205, fax 4822-630-8403. Katanciceva 5, 10000 Zagreb, Croatia, 44-1222-890-722, fax 44-1222-892-761, tel. 385-1-433-006, fax 385-1-277-089, Email: 101716.321 @compuserve.com Romania Economic Newsletter, a Internet.' http://www.ijfhr quarterly publication by COSMOS, Inc., Management Development and Gov- reporting and analyzing economic devel- The 1997 Guide to Preparing for EMU, ernance in Progress (MDG), a publi- opments. Euromoney Research Guides, United cation of the Management Development To order: Romania Economic Newslet- Kingdom, 1997, 35 p. and Governance Division, UNDP. ter, COSMOS, Inc., PO. Box 30437, To order: Euromoney Publications PLC, To order: Kendra Collins, teL 212-906- Bethesda, Maryland 20824, United Nestor House, Playhouse Yard, London, 3654, fax 212-906-6471, Internet: http:// States, tel. 301-229-5875, fax 301-229- EC4V 5EX, United Kingdom, tel. 44-171- www.undp.org/undp/bpps/mdgd/ 5876. 779-8888. Moldovan Economic Trends: Monthly Special Report on Agriculture, Newsletters/Special Publications Update, TACIS, Government of Food Production and Food Trade in Moldova-European Expertise Service, the Russian Far East, Russian Far Central Banking-Monetary Policy in Moldova. East Update, Seattle, Washington, Transition: The Case of Central Eu- To order: Moldovan Economic Trends, 1996. rope, volume 8, no. 1, August 1997. Govemment Building, Room 219, Piatsa To order: Russian Far East Update, PO. To order: Central Banking Publications, Marii Adunari Nationale, 1, Chisinau, Box 22126, Seattle, Washington 98122, Ltd., 27 Chancery Lane, London WC2A Moldova, tel. 3732-234-013, fax 3732- United States, tel. 206-447-2668, fax 1PA, United Kingdom, tel. 44171-404- 234-057, Email: ADP@metmoldova.su, 206-628-0979. 6435, fax 44171-404-6436. Internet: http://www.mIdnet.com. U.S.-Kazakstan Monitor, published East European Constitutional Review, NewsNet, a newsletter of the American by the United States-Kazakstan by the Central European University and Association for the Advancement of Council to facilitate ties between the the University of Chicago Law School. Slavic Studies (AAASS). This issue con- American business community, insti- Volume 6, number 1 (1997) contains tains "Reinterpreting the Soviet Experi- tutions and individuals, and their "Constitutional Courts on Trial,""How Not ence: Phase I," by Abbot Gleason. counterparts in Kazakstan, and to to Promote the Rule of Law in Eastern To order: NewsNet, American Associa- assist in buildin a vital rivate sec- Europe," and "Multi-nationality and Con- tion for the Advancement of Slavic Stud- g sensus on Rights in the Baltic States." ies, 8 Story Street, Cambridge, tor in Kazakstan. To order: CSCEE, University of Chicago Massachusetts 02138, United States. To order: U.S.-Kazakstan Council, 2000 Law School, 1111 East 60th Street, Chi- L Street, N. W., Suite 200, Washing- cago, Illinois 60637, United States. PMF-Publication Management Fo- ton, D.C. 20036, United States, tel. rum, a bimonthly publication produced 202-416-1624, fax 202-416-1865, The Free Market, a bimonthly newslet- by SIGMA (the Program for Support for Email: USKC @aol.com, Internet: ter of the Lithuanian Free Market Insti- Improvement in Governance and Man- http://www.uskc.com X TRANSITION,August 1997 (D 1997The World Bank Bibliography of Selected Articles Postsocialist Economies CIS and the Baltics tory Drive, Hemdon, Virginia 22070, tel. 202-219-0515 or 703-834-0125.) Chadha, B., and F Coricelli. Fiscal Con- The Aginskoye Gold Mining Project: straints and the Speed of Transition. A Case Study in Complexity. Russian China Journal of Development Economics Far East Update (United States) 7(8), (United States) 52(1):221-49, 1997. August 1997. Dorn, J.A. Trade and Human Rights: The Case of China. Cato Joumal 16(1): Kornai, J. The Reform of the Welfare Aukutsionek, S. Surveys of Industrial 77-98, 1996. State and Public Opinion. The Ameri- Enterprises in 1996: Results and Fore- can Economic Review (United States) casts. The Russian Economic Barometer Hanstad, T, and Li Ping. Land Reform 87(2):339-43, May 1997. (Russia) 6(1):3-7, 1997. in the PR China: Auctioning Rights to Wasteland. Loyola of Los Angeles In- Central and Eastern Europe Baidina, 0. Russian Taxation: Regula- temational and Comparative Law Jour- tion and Reality. East/West Letter nal (United States) 19(3):545-83, April Boltho, A., W. Carlin, and P. (United States) 6(1): 1, 4, January- 1997. Scaramozzino. Will East Germany Be- February 1997. come a New Mezzogiorno? Journal of Hong Kong Returns to China: A Fi- Comparative Economics (United States) Cohen, A. U.S. Policy in the Caucasus nancial Times Survey. Financial Times 24(3):241-65, June 1997. and Central Asia: Building a New (United Kingdom), June 16, 1997. "Silk Road" to Economic Prosperity. Domanski, C.Z., and B. Nowakowska. Backgrounder of the Heritage Founda- Mastel, G., and A. Szamosszegi. Spatial Disparity of Unemployment tion, (United States), p. 1-20, July 24, China's Growing Trade Imbalance. in Poland. Statisticsin Transition-Jour- 1997. The International Economy (United nal of the Polish Statistical Association (To order: 214 Massachussetts States), p. 58, May-June 1997. (Poland) 2(7):1151-64, December 1996. Ave.,N.E., Washington D.C. 20002-4999, tel. 202-546-4400, Internet:http:// Viet Nam Gantcheva, R. An Opportunity for Re- www.heritage.org) valuation of Fixed Assets and Mate- Dollar, D. Economic Reform, Open- rial Stocks of Bulgarian Companies Kapeliushnikov, R.Joband LaborTurn- ness, and Vietnam's Entry into by Current Market Prices. Statistics in over in the Russian Industry. The Rus- ASEAN. Asean Economic Bulletin Transition-Journal of the Polish Statis- sian Economic Barometer (Russia) (Singapore) 13(2):169-84, November tical Association (Poland) 2(7): 1175-84, 6(1):31-51, 1997. 1996. December 1996. Kazakstan. A Financial Times Survey. Gates, C.L. Economic Reform and A Jungle of [Lithuania's] Budgetary Financial Times (United Kingdom), July Openness in Vietnam: Micro-eco- Policy. The Free Market (Lithuania) 23, 1997- nomic Response and Transforma- 1(18):1-3, 1997. tion. ASEAN Economic Bulletin Russian Finance: Plenty To Go (United States) 13(2):212-28, Novem- Romania. A Financial Times Survey. Around. The Economist (United King- ber 1996. Financial Times (United Kingdom) June dom), p. 62-64, August 9, 1997. 25, 1997. Truong, D., and C. L. Gates. Vietnam Sheffield, S.S., and M.W. Liefert. Agri- in ASEAN-Economic Reform, Sajo, A. What Is Wrong with Western cultural Issues Figure Prominently in Openness, and Transformation: An Support for East European Legal Re- Russia's WTO Accession. International Overview. ASEAN Economic Bulle- form-Universal Rights, Missionaries, Agriculture and Trade Reports, NIS and tin (Singapore) 13(2):159-68, Novem- Converts, and "Local Savages," East the Baltics (United States), p. 27-32, ber 1996. European Constitutional Review (United May 1997. States) 6(1):44-50, winter 1997. (To order: USDA ERS-NASS, 341 Vic- © 1997TheWorld Bank TRANSMON, August 1997 A Subscribe to TRANSITION Today Your subscription for calendar year 1997 will include four issues (June, August, October, TRA N SITIO N and December) at a rate of US$20. In 1998 the rate will be $30 per year for six issues. You may subscribe now for four issues in 1997 and six issues in 1998 for $45, or $5 off the full rate. The February and April 1997 issues of TRANSITION are distributed on a complimentary Editor: Richard Hirschler basis and will be supplied free of charge to all new subscribers. 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