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Transition Economics Division * Pohey ResearchbDepartment * ITheWorld 8ank

Living on Borrowed Time: Lesso$nsofthe Soviet Economy's Collapse:By William Easterly and Stanley Fischer

The ill-fated Soviet experience teaches many successor states has understand- ingtoWesternestimates, intheperiodus that capital accumulation directed ably distracted attention from these ret- 1960-89 yearly per capita economicbyplanners may achieve rapidgrowth rospective questions. Yet analysis oflthe growth in the Soviet Union was 2.4in the short run, only to run into pre- rootsoftheSovieteconomiccollapse- percent, slightly exceeding the me-cipitous declines in returns to capital besidesbeingintellectuallyfascinating- dianworldgrowthrate. Thus, growthand a collapse of growth. is full of lessons for every country, in- rate by itself does not give much of a

cluding those that emerged from the clue as to why the system was des-g n 1980, a conference was con- dismantledUSSR tined to fall. But ifwe relate results toj venedatAirlielHouse, in Virginia, the amount of effort expended to

with the theme "The Soviet Clandestine Underachievers achievethem,theSovietgrowthper-Economy: Toward theYear2000."The formanceno longer looks so respect-participants predicted an average an- Let us look at the Soviet economic per- able. The Soviet Union, with one ofnual Sovietgrowthrateof3.15 percent fornance before thecollapse. Accord- the highest investmnent rates in thebetween 1980 and 2000. "Recent So- )viet economic growth has been slowerthanitusedto be, butslowergrowthhas What's Inside,..

Letter to the Editorcharacterized all economies recently, Proposal for Currency Board in Russia Commenting on recent articles in Tmransitionand the USSR has no monopoly n se- Currency Board prophets, Professor Hanke onfiscalcentralizationinChinaandVietNam,rious economic problemsn.... At;ime and Schuler adopt their concept to Russia's DavidGisselquistwams:advisingmoferigor-when many countries, West and East, specific circumstances. (page4) ous central control over taxes and financingare troubled by inflation.. .or govern- Quotation of the Month: mThe Mafia could incapacitate regional and local govern-ment deficits, the economic problems of privatized 50 to 80Percent of Al Shops, ments, the catalysts ofreform in many coun-theUSSR(howeveruniquetheirunder- Hotels, and Services in Moscow." tries. (page 11)lying causes) cannot seemso unfamiliar Excerpts from Claire Sterling's newbook of- Economic Agenda of the Hungarian So-or incurable"-this was the prevailing fers surprising facts about the emergence and cdalists: Trasition Interviewview among many leading experts on power of the Russian Mob. (page 6) lmre Szekeres explain the intentions of thethe Soviet economy, according to the Structural Reforms In Bulgaria: How to HSP,frontrunnerofthe94election (e12)editors of the subsequent conference Reverse Decline? Milestones of Transition (page 13)volume. Bulgaria's economy and currency are in rela-

tivelybad shape-the statisticsconceal the sea World Bank/M Agenda (page 16)

Why did this assessment turn out to be changes taking place in this country whose Conference Diary (page 19)so miistaken only a few years later? communist leaders inthela'telOs mulled over NwBosadWrigPpr pg 1

applyingformembershipintheSovietUnion... NewBooksandWorlngPapers(page21)Why did the Soviet econonic system (page 8) BiblIographyofSelectedArticles(page26)finally prove inviable after many yearsof rapid growth? The grave crisis in __

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The World Bank/PRDTE

worldover 1960-89, could onlymanage cientresource allocation. Popular seers 87, onlyabout 0.15 percentofthegrowthgrowth roughly at the global average. Iike John-Kenneth Galbraith predicted slowdowncanbeattributedstatistically

convergenceofeconomnicperformance to increased defense spending.We can take the analysis further by and managerial styles betweenEastandusing studies that statistically relate per West. (Galbraith did not see much dif- Extensive Growth?capita growth performance to various ference between U.S. corporate bu-factors such as educational enrollments reaucrats and Soviet managers.) But The most popular hypothesis put for-(goodforgrowth)andpopulationgrowth the Sovietgrowthresidual becarnenega- ward inthe economics literature forthe(bad for per capita growth), as well as tiveinthe 1 960s (figure 1). Sovietgrowth Soviet growth slowdown is the exten-physicalinvestment(goodforgrowth). then deteriorated further in the 1970s sive-growth hypothesis: the Soviets re-These statistical regularities can be used and 1980s, even compared wih the gen- lied exclusively on capital accumulationto, predict what Soviet growth should eral global economic slowdown atthat as asource ofgrowthinstead ofturninghave been, given its level of education, time. How did the Soviet economy go tothetechnologicallydrivenproductiv-population growth, and investment, if it from being the hope ofthe future in the ity growth that is allegedly the source ofhad been a typical economy. In fact, 1950stotheunderachieverofthe 1960s Westemeconomicdevelopment(includ-all these factors should have boosted through the 1980s? ing Japan and the newly industrializedeconomic growth, as the Soviet Union economies of East Asia). The ratio ofhad a high investment rate, extremely Defense Overkill? the Soviet capital stock to output roselow population growth, and an impres- dramatically over time, which supportssive secondary enrollment ratio, one of One popular idea is that the USSR's the conventional wisdom on extensivethehighestinthe world. Sincethe Soviet spending on its large defense establish- growth. Unfortunately for the exten-growth rate was only average, there is ment, whichaccelerated with Afghani- sive-growth hypothesis, however, thealarge negative residual. (The residual stanand StarWars inthe 1980s, wasthe Soviets' risingcapital-outputrato wasi the difference between the predicted straw at broke the planners' backs. not so unusual. Many countries haveestimate and the actual outcome.) While there was some evidence that risingcapital-outputratios,includingsuchClearly, the Soviet economy was not defense spending contributed to the notable nonfailures as France>, Japan,typical. Controllingalsoforcountrysize $oviet slowdown, the effect is very and Korea. What madethe Sovietex-and repeating this exercise for other modest.Accordingto Israeli economist perience unusual was not extensiveeountries yields a striking conclusion: GurOfer, defensespendingintheUSSR growth itself, but the lowp to ex-the USSR had the largest negative 0inicreased from 2 percent of GDP in tensivegrowth.growth residual, and hence was the 1928 to 16 percentby1980.Butmostofworld'smostunderachievingeconomy thisincrease.occurred before 1960, that Investment from Abovebetween1960 andl1989. iEs, before the economic slowdown. The

intervention inAfghanistan and there- Why was the payoff so low? MartinInthe 1950s, the Sovietgrowth residual sponse to the challenges of Star Wars Weitzman, Professor of Economics atwas still positive. Early growth theo- increased defense costs by only about Harvard University, suggested manyrists, impressed with Soviet economic 1.6 percent of GDP between 1979 and years ago an arcane but important rea-performance, cited itas proofthatlong- 1987, accordingto defense expertDmitri son. In Western economies, capital (forterm growthwas not affected byineffi- Steinberg.Fortheoverallperiod960- example,mahinery andequipment) can

substitute rather easily for labor andFigure 1: Soviet growth residuals from the 1950s through the 1980s thus sustaingrowthevenwhenthelabor

force is notgrowing. The ease ofsubsti-0.025 tution in the Soviet Union as well as in0.02 Western economies; can be estimated

0.01s 2 statistically. Weitzman found, and weNegative residual,. Amounts by which Soviet growth did worse than world saitcly etna on,adw0.01 average, given Soviet investment, populasiox growh, and initial incomel have confirmed with more recent data,

0.005 0 g X S : that capitalwas an extraordinarilypoor0 substitute for labor in the Soviet Union.

-0.005 Whereas machines could replace labo r.0.01 16.inthe West,the Sovieteconomyseemed

-0.015- 90 to be constrained by technoloIgy that-0.02 1970\ almost required constant proportions:

-0.025 1980* onermachine,oneworker.Source: See Easterly and Fischer, "The Soviet Economic Decline: Historical and Republican Datae' 1994.

2 : April 1994

I'ransition

We can now understand whv Soviet worker than it was for the Soviets to system could have been reformed sue-growth was rapid early on, then de- substitute siniplyanotherdrill press for cessfully if reform had started earlier,clinedsoprecipitously. Inthebeginning, aworker. ItuAastheSoviets' inlabilityto say in the 1960s. But remember that thecapital was scarce: not all workers had replace workers with machines, rather Kosygin reforms in the 1 960s did notmachines. Givingamachineto aworker than the excessive accumulation of succeed in reversing the growth slow-without onevwill have a veryhigh payoff. machines per se, that was their undoing. down. The system of investment fromand the payoff will stay high as long as above was living on borrowed time.there are workers without machines Message to PolicymakersEventually, however, all workers will AttheconclusionoftheAmericanCivilhave machines and the returns to addi- What lessons can be learned from the War, Union General Ulvsses S. Granttional machines will fall off to virtually i ll-fated Sovi et experience? The rapid paid tribute to the people ofthe Coonfed-nothing. This is exactly the pattern we Soviet growih in the ] 950s teaches us erate States "who had fought so longsee in the Soviet industrial sector, for that high investment can hide a multi- and valiantly. andhad suffered so muchwhich we have estimated the return to tude ofeconomicsins. The underachiev- for a cause, though that cause was, Icapitalsince 1950(figure2).Therateof ingSovietgrcwthratesofl960-89show believe, one of the worst for which areturn to capital was high and constant that the wages of sin have to be paid all people ever fought." We can onlyhopeduring the period of rapid growth in the too suddenly and unexpected lv. that the peoples of the former Soviet1950s. But with the saturation of the Union,whoarethevictims ofoneofthelabor force with capital, a precipitous Wehavelinkedtheseverity andrapidity worst economic systems of' moderndecline in returns set in after 1960:, by oftheSoviet gyrowthdeclineover 1960- times, will have a brighter economicthemid- 1 970s, the return to new, invest- 1989 to the inabilitv of planners to re- future.ment in Soviet industry was essentially place labor witl etTiciency-improvingzero. We find a similar pattern for the capital, in contrast to the labor-saving This article is based on W Easterlyrest of the Soviet economy. successes of the rich variety of human (Macroeconomics and Growth Divi-

and physical capital goods in market sion, World Bank,). and S FischerWhyis itthatcapital could replace labor economies. Since administratively di- (M. LT, Cambridge, Massachusetts),relatively easily in market economies, rected capital investment programs con- "The Soviet Economic Decline: His-while the Soviets were stuck with an tinue to be a'eature of many coumtries, torical and Republican Data, " Worldalmost fixed-proportions economy? We the lessons ol'the Sovietgrowth debacle Bank Working Paper no. 1284, 1994.can speculate-although more research are still relev ant today-not leastin the 7b order: Ms. Rebecca Alcrrtin, theis needed to confirm or refute these formerSovietrepublicsthemselves. World Bank, Room N-11059, tel.speculations. In Western marketecono- (2OL)47-1320,Ea& cul:GCmltka),WorldBnkmies, an extraordinarily broad range of Could it have been different'? Looking Org (),Jnternet.capital goods was available to econo- back, it is tempting to believe that themize on labor requirements, includingnotjusthuman but physical capital and ]g e 2: Rate of re to phiysical c*al in Soviet indutrv, 19%87intangible capital as well-organizationaland entrepreneurial skills and software 0.3

for inventory control and productionscheduling. This broad range of capital o 2 4

goods sprang up because market incen-tives led to the exploration of every 0

conceivable type of capital that could beuseful in production.

0.15

Soviet investment from above, on theother hand, was limited to the narrow 0.1range of goods that planners could di-rectandcontrol-usuallyheaw machin- 0.05

ery, for physical capital, and formalschooling, for human capital. It is plau- 0 - ._.siblethatitwasalot easierfortheWest 195 0 1970 1980 19g7

to substitute adrill press plus computer-ized inventory control systemi for a Source: from W(`estern estimates ofcapital stocks, employment, and value added in indusir, see Easterly

cind Fischir. ", he Sov?ei Economic Decline: Historical and Republican Data, " 19!"4.

Volume 5, Number4 3

The World BankfPRDTE

Currency Board To Eliminate Inflation in Russia?New Approach of Steve Hanke and Kurt Schuler to Monetary Reform

"Stability is not everything, but with- current- and capital-account transac- The current foreign reserves ofthe cen-out stability, everything is nothing. " tions, the currencies ofmost developing tral bank and the $6 billion ruble stabili-(Karl Schiller, West Germany's Fi- countries are not. zation fund potentially available fromnance Minister between 1966 and *Does not maintain a truly fixed ex- theIntemationalMonetaryFundwould1972.) change rate. Instead, it maintains either provide more than 100 percent reserves

a floating rate, or a pegged rate that at the current exchange rate of aboutFor over two years, inflation in Russia lacks strong safeguards and can be al- 1,800 rubles per dollar.has rarely been less than 15 percent a tered rather easily.month. The Central Bank ofRussia-by *Does nothold foreign reserves of 100 Rather than converting the central bankgrantinglarge credits to the govemment percent. It holds a lower ratio, and that into a currency board, it might be moreand state enterprises at very negative often reduces its credibility and makes feasible to establish acurrency board asrealinterestrates-has perpetuatedtheir its currency vulnerable to speculative a parallel issuer. With a parallel cur-softbudget constraints andthe resulting attack. rency, budget constraints would hardeneconomicwaste. more gradually than with a board as a

A typical currency board: sole issuer. As a parallel issuer, the cur-The historical record of central banking *Has no power to increase or decrease rency board would issue a fully convert-in Russia is one of inflation and incon- the supply of money independently of iblerublewithanexchangeratefixed invertibility. But there is a way to end the wishes of market participants. Its terms ofthe reserve currency, but float-extreme inflation: establishing a new monetary policy is completely passive, ing in terms of the central bank ruble.monetary institution, a currency board. rule-bound, and transparent: it merely Under this arrangement, the central bankThe currency board system has an ex- exchanges its notes and coins for re- ruble could, for a time, continue to becellent record of providing sound cur- serve currency, or the reverse, in such used to finance soft budget constraints.rencies and has worked well in condi- quantities as marketparticipants demand.tions as difficult as those in Russiatoday. *Is more credible than atypical central The steps necessary to establish a cur-

bank. Credibility and arbitrage opportu- rency board as a parallel issuer wouldWhy a Currency Board? nities cause inflation and interest rates be to:

in acurrency board country to converge *Obtain a fairly large amount of initialA currency board is amonetaryinstitu- towardthe levels ofthe reserve currency foreign reserves (about $1.5 billion).tion that issues notes and coins fully country. Thesereserveswouldnotbetakenfromconvertible on demand at a fixed ex- *Canachievelowinflationlesspainfully the central bank. Instead, they could, forchangerateinto its "reserve"currency, than a typical central bank. example, be borrowed from the IMFwhich can be a foreign currency or a ruble stabilization fund or be financedcommodity. A currencyboard holds 100 Flexible Solutions with revenues from privatization.percent or slightly greater assets in the *Issue notes and coins equal to the initialreserve currency. (If a currency board A currency board could be established foreign reserves, and make the notesaccepts deposits, they too must be in Russia either to replace the Central and coins legal tender. (Central bankbacked 100 percent by the reserve cur- Bank of Russia or to issue a parallel notes and coins would also be legal ten-rency.) A currency board earns currency to the central bank ruble. der at the floating exchange rate be-seigniorage because its liabilities (notes In outline, the steps necessary to con- tween the central bank ruble and theand coins) pay no interest and its assets vert the central bank into a currency currency board ruble.)earn interest. board would be to:

*Separate the central bank' s currency- Objections and ResponsesThis definition implies differences be- issuing functions from its other func-tweenatypicalorthodoxcurrencyboard tions, such as bank regulation. *A currency board would notbe politi-and a typical central bank. *Fix an exchange rate with the reserve cally feasible ifthe Russian government

currency (a possible candidate is the were to continue to have large budgetA typical central bank: U. S. dollar which already circulates in deficits. On the other hand, if the gov-*Does not issue afully convertible cur- Russia). emient could reduce the deficits, thenrency. Although the currencies of most *Obtain sufficient foreign reserves to acurrency board would be unnecessarvdeveloped countries are convertible for back the monetary base 100 percent. to ensure a sound currency.

4 April 1994

Transition

But: Experience indicates that large But: Russians are already acquiring dollartotheU.S. dollar,butfHongKongdeficitswouldnotpreventtheintroduc- large amounts of foreign assets. For- is a colony of B iitn, not the Unitedtion of a currency board. For example, eign currency deposits are a large pro- States. Argentinais afflly independentinArgentinathegovemmenteliminated portion oftotal deposits, and Russians nation, althoughits cUrrencyboard-likea budget deficit of$6 billion (7 percent have accumulated large unrecorded system links the peso to the U.S. dollar.ofGDP) and acentral bank deficitof$6 sums in assets held abroad and foreignbillion after introducing a currency banknotesheld in Russia Besides, cur-board-likesystemin 1991. rencyboardshaveworkedwellinother Steve H. Hank is Profe,ssor of Ap-

populous, comparativelyclosed econo- plied Economics at Johns Hopkins*Acurrencyboardwouldrequirereduc- mies. UniversiyintBaltimore. Atpresenthetions in essential govermnent services. *A curency board with an exchange is counseling the Lithuanian govern-

. ' men~~~~t on,inn.a'sueratefixedto aforeignreserve currency, menBut: On the expenditure side, many would represent a type of humiliating Kurt Schuler is 6 postdocoralfellowsubsidies and militaiy expenditures could colonialism atJohnsHo UniversitynHaiti-be cut further without reducing essen- mtial services. On the revenue side, liber- But: A fixed exchange rate in itself oe Teatcei atybsdoalizing oil prices further could increase implies no colonial relationship with the the autho,res and F.Jnan,s bookA C Rus-revenueenormously. A currency board reserve currency. The Hong Kong cur-would eliminate the loss of revenue rency board system links theHong Kong Bonard ApproachtoRefomi Routledge,would eliminate ~~~~~~~~~~~~~~~London/Nw ork 1993caused by inflation during the lag be-tween assessing and collecting taxes.(The experience of Estonia suggests The Boards: A Concise History of 150 Years"that essenfial services can be well pro- If Russia established a currency board to were replaced by central bas as thevided under a currency board-like sys- replace the central bank or be a parallel colonies achieved independence andtem.) issuer, it would not undertake an untested, discarded institutio`s popularly associ-

experiment-point out Hanke and Schuler ated with colal rule. The successor*3liminating the Central Bank ofRussia in their summary of the history of currency central banks, haveo-n average not per-would deprive banks of a lender of last boards. During the 150 years that currency formed as wvel as the currency boards inresort and would leave depositors uin- boards have existed, they have operated terms of inflation, convertibility, or ec]-preort and in more than seventy countries. In every nomic growth.

case, they have provided stable, crediblecurrencies that have been fully convert- The most imnportant orthodox currency

But: Depositinsurance, if properly de- ible into their reserve currencies. board remaining today is in Hong Kong.signed, could protect the public while Hong Kong's recod of rapid economicavoiding the moral hazards that now Russia itself has had a currency board. growth is well known, and the currencyexist because the Central Bank ofRus- During the Russian civil war the anti-Bol- board has contributed to it. Recently,sia is a lender of last resort. Most cur- shevik government of the Archangel re- Argentma and Estonia have established

rencyboardsystmshav acheved reat gion established a currency board with currencY board-like systemis Those sys-British support. Research at the British tems have 100 percent foreign reserves

stability without deposit insurance by archives confirmed thatthe currencyboard and full or nearly fuMl convertibility. Butencouragingbranchingbyforeignbanks. was the brainchild of John Maynard theylack strong formalorinformalmo-Banks with international branch net- Keynes,whoatthetimewasaBritishTrea- etary constitutions, and hence have hadworks have more diversified portfolios sury official. some difficulty establishing credibilityand can often better protect themselves Th bod d i Rsi for their exchange rates. Even so, theyand depositors from risks than banks from1918to1919,and duringthefallofthe convertible currncies and in pv forcingwithoutsuchnetworks. anti-Bolshevik governnent, it moved to hard budget constraints on economic

London where it continued to operate until agents.*Russiaistoobigforacurrencyboard. 1920. It issued a currency convertible at aBecause the Russian economy is large fixed rate into the British pound. Its cur- InMarch 1994, theLithuanianparliamentandhas comparatively littleforeigntrade, rency was aparallel currency to other, more approved an orthodox currency boardit could not generate the foreign re- inflationary currencies issued in Russia, system with a strong formal monetaryserves tow susnota geat curreny bard. and was driving them out of circulation in constitution. It enteredintoforceonAprilserves to sustain a cuddency board. the Archangel region until the government 1. Under the new system the litas will beTherefore, Russiawoulddobetterwih fell. 100 percent backed by gold and sounda pegged or floating exchange rate Fromaboutl900to1960,currencyboards foreigncurrencies. ThelitasandtheU.S.maintained by the central bank. abounded in Africa, Asia, and the Carib- dollar will feely exchange at a fixed rate

bean. Most existed inBritish colonies. They of 4 litas per dollar.

Volume 5, Number 4 5

The World Bank/PRDTE

Quotation of the Month: "The Mafia Privatized 50 to 80Percent of All Shops, Hotels, and Services in Moscow."Claire Sterling's New Book on the Economic Power of the Russian MobT he Russian mafia is the world's These were symptoms of a malignant The Russian mafia is richer by far than

largest, busiest, andpossibly growthpervadingtheeconomy,thebank- the forces of the law and much bettermeanestcollectionoforganized ing system, and the body politic. Russia equipped in weapons, communications

hoods, consistingof5,000gangs and the is in such chaos and so broke that few systems, and transport. Members areroughly3 millionpeoplewhoworkforor peoplecanstayhonestandsurvive. Even admitted only with a sponsor, and onlywith them. Its reach extends into all if not all lawbreakers are mafiosi, the afterprovingtheirvalorbykillingsome-fifteen of the former Soviet republics, mafia swims among them like a great body on orders, preferably a friend oracross eleven time zones and one-sixth predatory shark, recruiting some, ex- relative-exactlyliketheirSiciliancoun-ofthe earth's land mass. It intrudes into acting payoffs from others, frightening terparts. Once in, they risk its deathevery field of Western concern: the away rivals. Insatiable and seemingly penalties, communicateinaprivatejar-nascentfree market, privatization, dis- invulnerable, itswallows factories, co- gon, and flaunt the tattoos that signalarmament, military conversion, foreign operatives, private enterprises, real es- their eternal membership: a spider webhumanitarianreliefandfinancial aid, and tate, raw materials, and currency and for drug traffickers, an eight-point stareven state reserves of currency and gold-allandtold,one-quarterofRussia's for robbers, a broken heart for districtgold. economy in 1991, and between one- bosses.

third and one-halfby 1992.Rising from the ruins ofthe Soviet em- Themafiaisorganizedinsomethinglikepire, the new mafia has far outclassed Between 1989 and 1991, communism's a classic criminal pyramid. First, at thethe one that flourished under Leonid twilight years, the mafia's take shot up base, are common street hoods, underBrezhnev. The mafia was Brezhnev's from less than 1 billion rubles to 130 gang leaders who run theirterritory likesolution for a stifling centralized billion-the size of the Soviet national rnilitary boot camps. Moscow, for in-economy; it provided illicit goods and deficit. "Inthenextfewyears, its [gross] stance, is controlled by twenty criminalservices by stealing from the state, buy- will reach 200 billion rubles," A. Gurov "brigades"-sometribal, others regional,ingprotection, smuggling, cheating, and [then head of the Soviet Interior othersspecializedbytrade-totalingmorebullying and bribing its way into the Ministry's Sixth Departmentto Combat than 6,000 armed thugs. Anybody inKremlin. It was korruptsiya (corrup- Organized Crime] said in 1991. "Orga- businessinMoscow(whetherinrestau-tion) communist-style, a shared mo- nized crime will then control 30 to 40 rants, food markets, gas stations, flowernopolyofpowerbetweenpoSiticiansand percent of the country's GNP. . . ."In stalls, newsstands, casinos, beggars'crooks. Liberated Russiadeserves bet- 1993 ten directors ofthecountry'slarg- cornersattheKremlin) is "undersome-ter.Buttheold-guardpoliticiansarestill est commercial banks were murdered, body" who collects a monthly payoff.largelyinplace-yesterday's crooks are presumablyforfailingtoextendstillmore A level up from the gangs are a "sup-today's free entrepreneurs and outrageous loans than those they had ply" group and a "security" group.korruptsiya has become the curse of a granted already. The supply group serves as a conduit,stricken nation. "Corruption," Boris ensuringthatdirectivesfromaboveareYeltsin exclaimed lastyear, "is devour- By the start of 1992, soon after the carriedoutbelow.lTesecuritygroup ising the state from top to bottom." SovietUnion'sbordersopenedup,allof composedofrespectablecitizens-jour-

itsinstitutionsweregone,includinglhose nalists, bankers, artists, athletes, politi-In 1991, the year the Communists fell, for law enforcement. The Soviet-wide cians-who provide intelligence, legalthe All-Union Research Institute ofthe Sixth Department, created by Mikhail aid, social prestige, and political cover.Soviet Interior Ministry estimated that Gorbachev three years earlier to fighthalf the income of an average govern- organized crime, was dismantled along On top of the pyramid are the godfa-ment functionary was coming from with all other nationwide bodies. No thers, the indomitable vory v zakonebribes, compared with only 30 percent central authority remained to coordi- (thieves-within-the-code);theypreservebefore 1985. During the late 1980s the nate police intelligence, order arrests, a "tieves' ideology," administer jus-Soviet prosecutor-general's office in- control 36,000 miles of border, or over- tice, and plot strategy. There are 700dicted 225,000 state officials for em- see the movement of people, money, known godfathers at large or in prison.bezzlement, including eighteen who and goods. The only organization fully Guidingratherthangoveming,theypro-worked for the government's Depart- operationalinthenewCommonwealth vide most ofthe brains fortheir subal-mentto CombatEmbezzlement. of Independent States was the mafia. terns. Theyarenot absolute rulers over

6 April 1994

Transition

violentlyunrulyandfiercelycompetitive A Novosibirsk shop taking in 10,000 barely a year. But the first stage ofgangs. Rather, "each sphere of influ- rubles per day "contrived to hand in" privatization was an imperative call toence is undertheir control," according 240,000 rubles. Hundreds ofmillions of order. The logic of peace was inargu-to I. Pavlovich, deputy chief ofthe Rus- rubles were washed with little trouble. able: once inner harmony was restored,sian Interior Ministuy's Sixth Depart- Unlike the poor, who lost their lifetime the godfathers divided zones of influ-ment. Pavlovich says they meet periodi- savings because they had been hiding ence and went after the 6,000 enter-cally, settle territorial disputes, decide their rubles under their mattresses to prises coming up for auction in Mos-on operations, and make policy. Their dodgethetaxcollectors,themafiacame cow. The rules for privatization werepower inevitably surpasses the fragile out very well. fluid, corrupt officials were easilycomeRussian government's. Their edicts are by, andmostRussians,havingnomoneyinstantlytransmitted, unmistakably en- A few months later the godfathers met to speak of, could not compete. Withinforceable, andalmostuniversallyobeyed. again to consider Gorbachev's 500-day weeks, the Russian news agency Tass-

program fortransition to afree market. Krim Press reported that the mafiahadTwo stories illustratehowthe mafiahas Theylikedit. AfreemarketintheUSSR "privatized between 50 percent and 80of late transformed itself into a formi- meant not only mobility, relaxed bor- percent of all shops, storehouses, de-dable force. First, in January 1991 the ders, and dollars from abroad, but a pots, hotels, and services in Moscow."mostpowerfulthieves-within-the-code chancetomountthemostcolossalcrinri- Today, according to Yeltsin adviser Piotrgathered from all over the country to nalbuyoutinhistory. For allthe wreck- Filipov,whoheadstheCenterforPoliti-discuss afinancial emergency. Valentin age ofRussia's economy, it still had the cal and Economic Analysis, Russia'sPavlov, premier ofthe crumbling Soviet world's richestnatural resources. Once mafiacontrols 40,000 privatized enter-empire, had suddenlywithdrawn all 50- privatization got underway, according prises and collects protection moneyand 100-ruble notes from circulation. to Tatjana Kurjaghina, the Interior from 80 percent ofthe country's banksHis plan, he said, was to stop the illegal Ministiy's top social economist at the and private enterprises.flow of rubles out of the country and time,thewholecountrywouldbeupforprevent "a river of dirty money" from sale. Adaptedfrom Claire Sterling forth-comingin. Everybodyinthemaflakept coming book, Thieves' World, to beillicitcashreservesinthesenotes, which Althoughfewrealizeditatthetime,the published by Simon & Schuster.at the time were the largest denomina- Russian mafia was about to make a big (Copyright 1994, Claire II Sterlingtions issued. strategicleap-frommerelyfeedingoff Associates, Ltd. Printed by permis-

the economy to owning it. To prepare sion) Claire Sterling is an investiga-"My operational report showed that for privatization, however, the godfa- tive reporter based in Italy.thesethieves-within-the-code-thesu- thers needed to impose a new peacepermen, the big-time mafiosi-got to- among Moscow's eternally warring See also Sterling's recent article,getherto discuss ways of selling offor clans. Atrucethattheyhad worked out "Redfellas-Inside the New Russianexchangingthebanknotesfornewones in 1988, atDagomyson theBlack Sea, Mafia, " in the New Republic, a US.or of getting them out of the country," had ended in an orgy ofbloodshed after weekly magazine.Gurov later said on national television."Thethieves-within-the-codedecided . , Iwhere the rubles had to be exchangedor smuggled out. Then they gave per-mission to set aside a quarter of theentire sum for bribing the administra-tion."

The underworld mobilized overnight."Black-market currency sharks van-ished from Moscow," Gurov declared.The rublenotes were rushed to corrupt-ible state factories and banks in remoteregions to be exchanged under thecounter. The Konkuret co-op, with only1,000 rubles in its account, changed190,000 rubles in 50s and 100s intosmaller denominations attelocal bank. From the Russian daily Nezavisimaya Gazeta

Volume 5, Number4 7

The World Bank/PRDTE": :~~~~~~~~~~~~NF

Structural Reforms in Bulgaria: An Agenda toMove Forward

n 1991-92Bulgariaimnplemented The World Bank-in conjunction with $30million. [Formoreinformationaboutboth economicstabilizationand the Intemational Monetary Fund-has International Monetaty Fund, Supportstructural reforms-and made an supportedtheBulgarianreformslhrough to Bulgaria, see World Bank/IMF

irreversible turn to amr ket economy. a$25omillionstructuraladjustrnentloan Agenda, page 17].Since 1992 the pace of structural re- (approvedinAugustl991,andfullydis-forms has clearly slowed, but the coun- bursed), a $17 million technical assis- Structural reforms have been imple-tiyhasmadefurtherprogressinimnpor- tance loan, a $93 million energy loan, mented in thefollowing major areas:tant areas, includingthe introduction of anda$55 millionloanforPrivateInvest-the value added taX (VAT), the passage ment and Export Finance (PIEF). And Free marketprices now regulate moreofthePrivatizationLaw, andthelawon inApril 1993 the WorldBank, incoop- than 80 percent of retail tumover. (Inbadloans,andthe parliamentaydebate eration with several European institu- contrast, less than four years agoon mass privatization. tions, also cofinanced atelecom loan of Bulgaria's economy was still controlled

State of a Nation: A Snapshot on the Bulgarian Economy

Debt negotiations. On April 14 negotia- and the settlement is to be concluded by and implement the new 18 percent, single-tors representing the Paris Club of credi- June 30. Finance Minister Stoyan rate value added tax that was introduced ontors agreed todeferpeymentonBulgaria's Aleksandrov said his country plans to im- April 1. (A shortfall in tax revenues and anapproimately $1.5 5billion govement mediately buy back debt originally worth increase in expenditure contributed to adebt. This is the country's third such $1.2billion. budgetdeficitofl I percentofGDPlastyear.)agreement with the Paris Club. The debt Restitution to former owners of urban prop-will be., reschedulec over eleven years, Total payments to creditors in 1994 may erty (houses and shops) confiscated underfolloiwing a'se'venye't graceperiod dur- amount to $850 million. With Bulgaria's of- the comnunist regime has resulted in theingwhichBul will oulypay interest. ficialreservesreachingaround$600million, return of the majority of retail businessesPrevious,"unpaid'interest installments are foreign financing is essential. Since unilat- and cafes and restaurants to private hands.being, firansferd t the principal debt. erally declaring a moratorium on debt in The country is still without a bankruptcy

March 1990,:Bulgaria has been cut off from law, and only a few bankrupt companiesBulgaria also made progess toward con- Westen commercial financing. Foreign in- have been closed down. On the other hand,cluding a Debt and Debt Service Reduc- vestment totaled only $220 million by the the government has taken steps to refinancetion(DSR) entofitsforeignpdebt end of 1993. $2.4 billion in bad loans made by banks toto 400 London Club comiercial banks. state enterprises before 1991. It also issuedThese debts were racked up in the 1980s The leva. Since January the leva, the na- its first bonds to convert enterprise debtby the fom nSt' e. A tenta- tional currency, has depreciated sharply and into government debt. The aim is to maketive agreementonf,cluded iii mid-April in- its exchange rate has sunk to 57 leva to the companies easier to privatize and tovolves the rescheduling of $6.1 billion of dollar. AccordingtoBulgarianNationalBank strengthen the banking system.thedebtprmncialplus$2billionininterest President Todor Valchuv, the underlyingfac-owed. Deutsche isnk-which has been torsforthedepreciationofthelevaarerising Mass privatization. Twoyearsafterpassingchairing the negotiation nfirmed that inflation, shrinking domestic production, the a privatization law that envisaged the sale ofthe deal offred ito the soughly 400 credi- growing budget deficit, political instability, more than 3,000 companies, the agency re-tors would present theme with the follow- and the lack of external financial support for sponsible for selling large and medium-sizeing options: economic reforms. The central bank has companies has completed fewer than twenty*Transform their claims into discount raised the short-term deposit interest rates transactions and government ministriesbonds (worth 50 percenit of the nominal in several stages from 27 percent to 57 per- have sold only 100 small businesses. Invalue). cent. Commercialbankshavehadtoincrease August 1993 the Lyuben Berov government;Transform their claimis into front load their cash reserves and limit their lending. adoptedaprogramofmassprivatizationwithinterest reduction bonds (to be adjusted the aim of giving citizens a share of nationalinaccordc ewitrtratesoverseven Econonltarget. TheBulgarianparliament wealth on an equal and just basis; achievingyears). has passed a tough budget that limits the greater efficiency in the management of*Havetheirclaimr*puOasedbytheBul- 1994 deficit to 6.7 percent of gross domestic companies; and establishing the financialgarian state (at 25 percent of the nominal product and reckons with a 30 percent infla- preconditions for a national social insur-value). By mi4-M the. creditors are to tion rate. To reach this deficit target the ance scheme.have selec,ted one of the thee options, govermnent plans to imptove tax collection

8 ; : 0 . April 1994

Transition

by central plans.) The levahas become '7Rade liberalization has been carried -Privatization has been slower thana convertible currency on the current out in several steps, the most recent expected. Still, the legal and institutionalaccount, with a single floating exchange being comprehensive tariffreform, fol- framework has been established-therate. Price controls, however, have been lowed by replacementofalmost all quo- Privatization Law was enacted in Aprilmaintained on several products and ser- tas by tariffs. The import-weighted av- 1992. Initially, important progress wasvices, including energy, teleconmuni- eragetariffis I Ipercent, and dispersion made through restitution; around 60cations, water supply, and transport. is low by intemational standards. Due to percent ofall claimed property was re-These controlled prices had been in- domestic shortages, exports of major turned to former owners. Restitutioncreased to bring them closer to world grain products have been temporarily wasamajormethodofprivatizingstatemarketlevels. Prices of electricity, heat- banned. The prohibitions on grain ex- property. For 1994, a draft program ising, and coal have also been increased, ports are expected to be phased Qut by targeting320 enterprises, including 70but because of some delays, and the theendofSeptember l994andreplaced large enterprises. Also, a mass1994 exchange rate depreciation, fur- by export taxes. The current temporary privatizationproposalisunderconsider-ther price adjustments for these com- 2percentimportsurchargewillbegradu- ation in parliament (seebox).modities are planned later this year. ally lowered to 1 percent nextyear, and

is expected to be phased out altogether The private sector, which had a mar-by the end of 1995. ginal role in the economy before 1989

Each Bulgarian citizen over the age of 20 is disapproval of the privatization scheme, particularly adverseconsequences for live-entitled to receive one registered voucher claiming that the program: stock. Bulgaria is now a large net importerworth 30,000 leva ($600). The voucher is to *Makesnodistinctionbetweenefficientfurms of foodstuffs.be paid for in six equal installments from and loss-makers.1999 to 2005, minus the sum paid upon ac- -Fails to specify the companies that will be FiftypercentofBulgaria'sfarmlandisnowquisition. The acquisition cost of each privatized. (The target is to sell 320 firms in in private hands, most of it outside thevoucher is 5 percent of its value, or 1,500 1994-or around 10 percent ofthe state sec- highly productive agncultural regions.leva, which is to be paid into the national tor-and the plan indicates only the excep- About25 percentoflandhasbeenreturnedbudget as prepaid interest on the voucher. tions: "strategic" sectors such as arma- to former owners.The initial amount received will be used to ments, transport, oil refiing, and energycover part of the state's privatization ex- generation will be excluded.) European Un'ion association. Bulgaria'spenses. It is also intended to help finance -Involves trust funds that could themselves prospects improved withthe initialing of asocial security costs. Citizens have a choice become new monopolistic structures. European Free Trade Association (EFTA)between two types of privatization: partici- -Suggests a high minimum application for in February, and the sigrning of an Euro-pation in the privatization of twenty-five to share vouchers-around 75 percent of the pean Union (EU) association agreement inthirty enterprises, with a bank acting as a 1993 average monthly wage. (LJp to 40 per- March. These agreements will come intotust (or holding company), or in the direct cent of the population is now below the effect in May (EU) -and July (EFTA). Thepnrivatization of one enterprise through the official poverty line.) Facilities aimed at al- EFTAagree.entenvisagesaten-yeartran-acquisition of its shares. lowing payments to be extended until 2005 sition to afree trade zone, with restrictions

do not benefit the significant proportion of mainly on steel and textiles during thisExperts from the ministries of finance and pensioners in the population. period. TheEU agreement, which is similarindustry are to draw up a list of around 500 to those already:concludd with Poland,large and medium-size enterprises-with an To rationalize procedures and further facili- Hungary, and Romania, envisages a ten-expected total value of 180 billion leva ($3.6 tate the participation of employees, the gov- year transition to a free trade area andbillion)-to be included under the mass enment has proposed twenty amendments eventual EU membership-although at anprivatization program. These enterprises to the Privatization Law. The new amended unspecified date.must have already been transformed into version, however, has not gotten past aindividual joint-stock companies and must second reading in parliament There is still EUcountrieswillfillyliberalizetradewithnot be threatened by bankruptcy. The op- no consensus within the govermnent on the Bulgaria in four years, while Bulgaria is toportunities envisaged by the scheme would technical details of the scheme. IiberalizetradewiththeEUinnine.Exportsnot impair the right of workers to acquire on oftextiles (20 percent oftotal exports to thepreferential terms up to 20 percent of the Agriculture.Agriculturalproduction,which EUJ) and steel-defined.as "sensitive" byshares of the enterprise in which they are accountsfor30percentofBulgarianGDP,is the EU-will coptinue to'be regulated byworking, as was stipulated by the expected to fall by 2 percent in 1993. This separate protocols establishing quotasPrivatization Law of 1992. follows declines of 8 percent in 1992 and 8 outside the general liberalization frame-

percent in 1991. Output of the three main work.But two major trade unions, as well as the crops (wheat, corn, and food and fodderPrivatization Agency and the probusiness grain) has fallen to the levels of the early Compiled from reports of the OxfordEconomic Association, have registered their 1 970s. The decline in cereal output has had (U.K.)-based Oxford Ana4ytica and fromvarious press accounts.

Volume5, Number 4 9

The World Bank/PRDTE

Bulgaria: Major Economic Indicators The telecommunications, rail, water

Indicator 1989 1990 1991 1992 1993a 1994a supply, and environmentalprotection-______________________________________________ _ # -sectors have been pressing organiza-

Real economic growth -1.9 -9.1 -11.7 -7.7 -5.0 -2.0 tional, technological, and pricing issues.Industrial productionc -17.6 -23.3 -21.9 -8.0 4.0 Reforms are under way. The WorldConsumerprices 6.4 23.8 338.5 91.3 75.0 55.0 Bankiswellpositioned,throughfutureUnemploymentrate 0.0 1.6 11.1 16.4 17.0 18.0 lending, technical assistance, and eco-

a. Estimate. nomic and sector work, to assist theb. Forecast. governmentindevelopinganenergyandc. Public Sector. environment strategy that will addressSource: V4ennalnstituteforComparativeEconomicStudies (WIW99. the most acute problems of these sec-

tors.

(contribufing around5 percentofGDP), distributed so far. To help farmers ob- The key policy challenge today is toin 1993 accounted for an estimated 37 tain bank financing, land protocols or accel the pol i zation tocess,percentofGDP (althoughsomeofficial temporary land titles can be used as erate the pnvatization process,estimates putitat 18 percent). Thenum- collateral under the amended land law imposefinancialdisciplineonall enter- berofregistered privatefirms increased Clearly, the sooner the process is com- pnses, and move ahead with enterprisefrom less than 10,000 in 1989 to more pleted, the sooner and better private restructurng and financial sector re-than300,000in1993 Theprivatesector agriculture will be 'able to respond to form. Bank and enterpriserestructuringnowaccountsformorethanSOpercent new market signals in this important should be addressed simultaneously: of all retail and wholesale trade in the sector-oneinwhichBulgariahastradi- assets of the one are liabilities for thecountry. tionally had comparative advantagein otherX

Europe.*Banking consolidation is on the Bulgaria's negotiations with its com-

agenda New regulations have been is- Input and output prices of agricultural mercial creditors to cutadebtreductionsued oncapitaladequacy,theprovision- products continue to adjust to world deal could be coincluded this year. Theing ofbad loans,and soon. The national market levels. Remaining differentials country could then be relatively wellbank has started to carry out on-site betweendomesticandworldpricesseem placed to regain creditworthiness andinspections of some banks, and there to be related, in equal measure, to im- thus remove a major source of uncer-are plans to gradually privatize several perfection of the domestic and foreign tainty and exteral fnancing constraintbanks.' markets andto explicitgovemmentcon-

-trols. The latter include product price An important lesson of the transition-Social welfare programs have been floors, and minimum import prices on process is that stabilization and struc-

restructured. However, the retirement some agricultural products. Indirect tural reforns are iextricably linked.age, which has already been increased, pricecontrols shouldbephased outsoon, Once an economy s successfully stabi-is still lower than in the market econo- with some minimum prices probably lizedtheeconomicrecoveryrequiresamies. Key issues involve the need for retained. continued solid macroeconomic envi-budgetay affordability, for improving ronmrent,impyng the relentless pursuittargeting to the trulyneedy, and for im- Energy restructuring has been cen- ofprudent monetaly fiscal and income provingthe efficiency andtransparency teredaroundpriceliberalizationandin- policies, and sincere efforts to keep theof transfers. stitutional reforms. But the prices of exchange rate competitive.

electricity, heating, and coal have been.

'Agricultural reforms have progressed increased, and because ofsome delays To ensure sustaable growth, the insti-

simultaneouslyonbothlandreformand and exchange rate depreciation, addi- tutionalandpolicy-relatedobstaclestoproduct pricing. Land reform was un- tional price increases are planned. The private saving, investment, and entre-dertaken withthe aims of reestablishing WorldBank's energyloan is designed to preneurshipneedtoberes ovedthroughprivate property rights by restitution, assist the electricity subsector and to structuralreforms.distributingthe assets of liquidated col- intensify the policy dialogue on pricing . .gilectivefarms, and demonopolizing and and institutional restructuring. The lat- Zeluko Bogetlc Aprivatizingagroprocessingenterprises. ter effort is aimed at clarifying respon- Europe and Central AsiaRestitutionisrunningbehind schedule. sibilities and improving coordination Count Department I

among the various institutions in this World BankNonetheless, 42 percent of agricultural important sector.land preserved for restitution has been

10 April 1994

Transitionm~~~~~~~~

Letter to the EditorLet Them Eat out of Separate Kitchens: Comment on Fiscal Recentralization in China

Mr. ShahidJavedBurki'srecentarticle not allowed to run deficits and the cen- taxautlhority-asrecommendedbymany("A New Wave of Structural Reforms tral government's own budgetary re- experts-moves exactlyagainstthe post-in China," Tansition,December 1993, sponsibilitiesnarrowed. 1978 reform objective of gradually es-p.5) includes some controversial state- tablishing "separate kitchens" forments on fiscal (re)centralization in Priortoreformsfroml978,government subnational governments. Such a shiftChina Theissueatstake is closelylinked revenues were not so clearly divided would tend to put subnational govern-to IMF and World Bank recommenda- and assigned to govermments at differ- ments at all levels at the mercy of cen-tions to countries in Eastern Europe and ent levels. Therefore, it does not make tral transfers. This could break the linkCentral Asia, as well as to China, Laos, much sense to separate out the central between taxing and spending, discour-andVietnam. government revenues from total gov- agingbudgetdiscipline.

emnent revenues.The article states that "the central Creatingdisciplineinachaoticeconomygovernment's share oftaxrevenues has From 1978 on, "eating out of separate is offered as justification forfallen steadily from close to two-fifths kitchens"becameaguidingprincipleof recentralizing control over taxes andof GDP in 1978, to about one-sixth of reform, meaning that governments at spending. Procentralizationviewschar-GDP in 1992. Therehas been no corre- everylevel (national, provincial, prefec- acterize the advice given to many for-spondingdeclineinexpenditure."Infact ttral, county, and township) were en- merly centrally planned economies. Anduringthe period 1978-90, forgovem- couraged to take steps toward achiev- article on Vietnam in the January issuements at all levels, revenues (adjusted ing self-sufficiency, and particularlyto of Thansiton(DavidDollar,"Vietnam'srevenuesincludingfiscalextrabudgetary coDecttaxestocoverexpenditures. Also, EconomicOptions-CopingwithMount-revenues) declinedfrom 37.1 percentto many enterprises were reassigned to ing Resources," p. 14) advises," ...the23.9 percent ofGNP, while total expen- subnationalgovemmnents,allowingcom- centralgovernmentneedsto assertcon-ditures(adjusted expenditures including petition and markets. trol over public expenditure and bor-fiscal extrabudgetary expenditures) fell rowing. Otherwise, borrowing andfrom 36.8 percent to 26.0 percent of Meanwhile, ministries of the central spending by government at differentGiNP. Hence, duringthe period, thebud- governmentretained controloversome levels and bypublicfirms couldtake offgetdeficitdidnotexceed-2.2percentof sectors of the economy through state- in an uncontrolled manner and under-GNP except for 1979 and 1980, when owned enterprises (SOEs). These SOEs mnine economic control."the deficit was -5.2 percent and -3.2 are the rump of the former centrallypercent ofGNP, respectively. ("China: planned economy. Since the central SimilaradvicehasbeenimposedonLaos.BudgetaryPolicyandlntergovernmental government's SOEs are oftenless prof- However,argumnentsforrecentralizationFiscal Relations," World Bank report itable than the rest ofthe economy, the to control.budget deficits and inflationno. 11094, p. 228.) As for central gov- central government pumps in directed are not convincinginas much as centralemmentexpenditures, thesehave fallen credit. It may be that this credit puts governments can control budget defi-from 16.7 percentofGNPin 1978 to 8.8 some inflationary pressure on the cits with simple litnits on subnationalpercent of GNP in 1990. And in 1990 economy. Instead of shifting tax rev- governmentborrowing(ifanylirnits arecentral government revenues came to enues to the center, an alternate pro- needed)andcancontrolinflationthrough9.4 percent of GNP, implying a central market solution to this situation may bankingreformandmonetarypolicies;government surplus of 0.6 percent of well be to cut down efforts for price directcontrolofsubnationalgovefmmentGNP. distortionthroughicentral planning, that taxes and spending are not necessary.

is, to expand the share of competitiveThese statistics do not support the as- markets. Economies in transition have demon-sertion that the central govenunent, to strated apattern of devolving authoritycover its deficit, had to borrow heavily Itisno surprisethereforethatconserva- to regional and localgovernments. ThisfromthePeople's Bank ofChina, "add- tives are fighting for more centralized is a common characteristic in formering fuel to inflationary pressures." In- revenues to be able to pour money into comrnmunistcountries inEuropeaswelldeed,themovetowardsubnationalgov- thecentrallyadministeredportionofthe as Asia. In Asia, authorities in Chinaemment fiscal autonomy probably economywhiletryingtosqueezeenter- and Vietnam have, at least through thereduced pressures for budget deficits prises reporting to subnational govern- present, been able to follow consistentbecause subnationalgovernnments were ments. It is clearthat a centralization of devolutionary paths, assigning

Volume 5, Number 4

The World Bank/PRDTE

subnational governments authority for In Eastern Europe and Central Asia, users, and local bodies. It may be thatSOEs as well as taxing and spending. conflicting efforts on the part of some efforts to centralize some activities in'Vigorous growth has been associated "reformers" to recentralize govern- some transition economies arewith these reforms, which give more mentauthoritythroughnational tax re- antireform, contributingtoconfusionandunits (enterprises, subnational govern- forms and other changes may run conflictments) opportunity to act without cen- countertothe"natural"reformprocesstralgoveImmentoversightandapproval. in which authority over enterprises and David Gisselquist

government activities falls to workers, Consultant

Who are the Hungarian Socialists and What Do They Want?Interview with Vice President Imre Szekeres

mre Szekeres, execve vice the unemployment rate to halffrom its Who will support such a belt-tight-president ofthe Hungarian So- current 13 percent, and easing social ening program?X cialist Party (HSP) visitd the tenions. A. If we get a broad mandate from the

UnIedStatesin mid-April.Uemetwith Q. What are the means to achieve voters, we can ask both wage earnersleading business people and senior gov- those targets? andentrepreneurs to cooperate in break-emmentomejcalsto proide, detoaisabout ing the current trend of economnic stag-the HSP'sintentions if tparty-legaI A. First, we are ready to create a more nation and growing domestic and for-successorto the pretr i Hu r investment-friendly environmentto at-

ian Socialist [commisti, Workers' tractyearlyabout$1.5 billionwoh a trilateral deal between thegovewr- Party-winstheforthcomiingparliamnen- foreign investmnent. Incentives would aet tiaerploder,al d betwe oeneth govern

0 W e > b { includein~~~~~I vestrnenttax credits, freetrade a gr 6 l ltaly elections, on Mayt 8.(Voters will include' ineteta ceistrehae mn,emlyr,demplioyeesAWitcast their ballots again in the second zones, and acceleration of bank tte-round, on May 2.9.) Most recent polls prnvatization. We also foresee large- lac fHnainTaeUinMNSZOSZ -activelyparticipatingonhaveprojectedthe Sociaiists-whonow scale development and reconstruction ( yp t'* gdefinme themselves as Ia Western-style of the infrastructure (housing, roads, orsd nteeecincmag,wdefine= tern sgle of te rn*atmcXre ousing,roadsb expect organized labor to apgrege 'to asocial democratic party.-as sure win- utilities)throughacceleratedsaleofcon: xetognzdlao oaret ners. Theothermajoropposition party, cessions to foreign companies. Second, voluntary wage-restraint measure inthe liberal Alliance of FreeDemocrats we would eliminate current uncertain- fordan eventual econoraetc recoveryd(AFD)-apossible oaliipartner--is ties in agriculture and encourage bothsecond inthepolls. Teleadingpartyof private and collective farming. Agricul- Ifthenextgovernmentismoresensitivethe present conservative government, turalproductioncouldincreaseannually to social needs, better-qualified profes-the Hungarian Democratic Forum by 4 to 5 percent. Tird, the planned sionally, and more competent than its(HDF) is third. Mr. Szekeres gave a fiscalreformwouldconstrainthestate's predecessor,Iseeno problemwith cut-short interview to Transihon editor, role in the economy, increase the ma- tingadealwiththepublicatlarge. UnderRichardHirschler. neuvering possibilities oflocal govern- suchleadership,Hungary'sinternational

ments and the private sector, and trim standing could improve, not in spite ofQ. There are fears in some busi- taxes on enterprise profits and personal but because of a government that in-ness circles that a Socialist or a So- incomes. And finally, the government cludestheSocialistParty-assumingthatcialist-led government could re- willfocus moreofitsattentiononsocial thenewgovemmentpursues apredict-verse the transition process....How affairs, health, education, and the envi- able, transparent, and stable policy baseddo you respond to those worries? ronment. A complete overhaul of the onnationalconsensus.

A. I would like to dissipate those fears. large budgetary redistribution systems Editor'snote:Welearnedafter deadline

We want to accelerate the process lead- is also on the agenda. thatinthefirstround the Socialist partyingtomembershipintheEuropeanUnion, Q. We all know that the code word (HSP) took a lead with 33 percent ofand strictly adhere to our guiding prin- "reforming the great redistribution the vote. The ruling rightwing HDFciples,respectingdemnocralicinsttions, systems"-pensions, education, dropped to third place with 12 percent,civil rights, andthe principles of a mar- health care, childcare, various fam- and the liberal AFD took 20 percent. Inketeconomy Our major economic goals ily support schemes-will mean a the forthcoming second round on Mayincludejump-starfinggrowthby 1996- net income loss for many families. 29, the HSP has good chances to win97, curbinginflation,graduallyeliminat- with a landslide, and form a coalitioning foreign and domestic debts, cutting governmentwiththeliberals.

12 April 1994

Transition

Milestones of Transition

Czech exports growth in March led to ders and public voucher purchases. As The Romanian parliamentapproved aasmall trade surplus in thefirst quarter, was the case in the first wave, most lawintroducingataxonlandownership.reported the Czech Statistical Office. voucher owners have sold their cou- Although most agricultural land is nowLastyear the trade balance was in defi- ponsto the400 investmentprivatization worked by privatefarmers, only 15 per-cit. ExportstotheEuropeanUnion(EU), funds that now own 63.5 percent of all cent ofthe5. 1 million private landown-which now account for 42.3 percent of vouchers. ers have received full titles to propertythe total, grewby 24.1 percentin 1993. returned under a 1991 act. This hasRaw materials and semimanufactures Hungary'sfinanceminister,IvanSzabo, prevented them from using their land asaccounted foralmost 60 percent oftotal criticizedthecentral bank, "whichcould collateral to raise capital for seeds andexports last year, compared with 37 destroy the country's fragile economic equipment.percent in 1989. The 1993 current ac- recovery ifit raises interest rates to helpcount showed a surplus of$360 million, tackle astubbornlyhigh current account The Romanian government announceddue largely to a surplus of $1.1 billion deficit." What Hungary really needs is massive pricehikes forgasoline, naturalfromtourism. Foreign direct investment more foreign investmentto help plugthe gas, electricity, and thermic energy be-last year was only 41.7 percent of the gap, the finance minister said. The Na- ginning April 7. A liter ofgasoline now19921evel. PortfolioinvestmentofWest- tional Bank of Hungary has flashed cost 450 lei (about 27 cents), up fromemrfirmsreached$1 billionin 1993. The warnings that itwill nothesitateto raise 400 (22 cents). Prices for electricitycapital account showed a surplus of interest rates to help rein in the current also increased by42 percent, from 28 to$2.5 billion. accountdeficit, which preliminary data 40 lei per kilowatt. Officials predicted

putatbetween$800millionand$1 bil- that the hikes will result in a generalMore data from the Czech Republic: lion in the first quarter of 1994. The price increase of between 12 and 14In 1993consumerspendinggrewby4.1 shortfall hit a record $3.46 billion last percent. (Romanian consumer pricespercent, while GDP fell by 0.3 percent, year, a performance the central bank rose 5.9 percentin February, comparedand industrial output dropped by 5.3 says it cannot allow this year if it is to with January.) Prices for train, tram,percent. The private sector accounted preventpushingupthe$24.5 billionfor- and trolley-bus tickets are expected tofor 39.4 percent of output, compared eigndebt. rise soon. The new prices are still farwith 21.9 percent in 1992. Inflation, below the Western European average,currently at9 percent, is likelyto remain Hungary's gross domesticproductfell butthe increase is substantial by Roma-below lOpercentthisyear. Thegovern- by 2 percent in 1993, according to a nian standards. The average monthlymenthas forecast 1994 GDP growth of preliminary estimate bytheCentral Sta- salary in Romaniais about 106,000 lei2 to 3 percent. The unemployment rate tistical Office. GDP fell 4.5 percent in ($63).stands at 3.5 percent. 1992 and 10.2 percentin 1991 aslHun-

gary started the difficult transition to a InRomania 1,287,000peoplewerereg-Sharesvaluedatmorethan$5 billionin market economy after four decades of istered as unemployed in March,861 Czech companies that are being communistcentralplanning. In absolute Rompress reported. (This translates toprivatized underthe second wave ofthe terms, 1993 GDP exceeded $33 billion. 11.3 percent ofthe work force, up fromvoucherprivatizationprogramhavebeen Per capita GDP stood at $3,500. 11.1 percent in February.) Unemploy-on offer fromApril 1 to April25. More ment was higher among women andthan6 million Czechs purchased vouch- A recent Hungarian-Russian deal young people, who represented someers and registeredto bid for shares inthe settles part of an outstanding $900 mil- 56 percent and 30 percent of the total,companiesslatedforprivatizationwhen lion Soviet-era trade debt to Budapest respectively. Between 10,000and 12,000the second wave was launched in the by letting Hungarian companies pur- people are losing theirjobs every weekfall of 1993. AboutS00 companies will chase stakes in Russian enterprises as inRomania.be offering more than halftheir capital. they are privatized. Hungary's Minister(Thefirstwave, duringwhichsome 1,400 of International Economic Relations, China's Prime Minister Li Peng in hiscompanies were privatized in both the Bela Kadar, said that Hungarian com- speech to the National People's Con-Czech Republic and Slovakia, ended in panies are pressing for shareholdings in gress urged slower and more stablespring 1993.)Foreigners will beallowed the Russian energy, vehicle manufac- growth, andcontrolofinfiation. Li calledto move in, possibly by the end of May, turing, and pharmaceutical sectors. for GDP growth of9 percentin 1994-and freely purchase shares, except in Hungary's proposals imply a debt-for- the rate was 13 percent in 1992 andbanks. Many large companies are sold equity swap worth as much as $500 1993-andsetatargetfornationalretailby a combination of direct foreign ten- million,Kadarsaid. price inflation in 1994 of less than 10Volume 5, Number4 13

The World Bank/PRDTE

percent, downfrom 13 percentlastyear. growth. The rejected bill on wage struc- Rejecting the shocktherapy prescribed(Consumer price inflation in thirty-five turing and fundingwouldhave regulated by some reformers, Russia is pursuingmajor cities was an annual 24.5 percent wages in 6,000 enterprises in which the a gradual approach to curing its eco-in March, compared with 25.9 percent state owns not less than 80 percent of nomic ills and becoming a full-fledgedin February. Rural inflation for March the shares. Enterprises that exceeded member oftheworld economy. Callingdropped by a meager 0.1 percent from thepermittedwagegrowthceilingscould the policy"creeping stabilization," Rus-a level of 20.9 percent in February.) Li have been penalized to the tune of 150 sian Finance Minister Sergei Dubininsaidthebudgetdeficitisrisingandnoted percent of the excess amount. said that the government has opted foramong the causes increasing outlays on a more cautious strategy to steady itsdomestic and foreign debt, less money OnMarch25 theIMF's executive coun- shakyeconomyinlight ofthe steep dropbeing collected from state firms, and cil formally approved the fulfillment of in output it has already suffered. He alsohigherwagestocivilservants.Theprime Poland's standby arrangement for said that the economy needs time tominister announced that state firms will March 1993-April 1994. IMF approval adjust, addingthatinflationisnotallthatno longer have to contribute to funds for clears the way for a 20 percent reduc- high,giventheenormouseconomictrans-transport and energy projects and that tion in Poland's $33 billion debt to for- formation Russia is undergoing. EvenBeijing is setting aside funds to handle eigncreditorgovernmentseffectiveApril under this strategy, 1994 will see an 8bankruptcies and dismissed workers. 1. (The Paris Club reduced Poland's percent decline in GNP; a 12 percentTurning around state firms introubleis debt by 30 percent in 1991.) Another drop inindustrialoutput;a5 to6percentbasically the job of the firm' itself, he agreement was reached March 1 with unemployment rate (translating intoadded. (Accordingtoofficialdata,nearly the London Club to reduce Poland's about 3 million unemployed); and an41 percent of state-owned businesses commercial debt of$13.2 billion by45 annual inflation rate that will reachsuffered losses in the first quarter of percent. Repaymentistolastthirtyyears, around500percent,withmonthlyinfla-1994.) until 2024, with maximum annual pay- tion falling to 7 to 9 percent by the end

ments of $400 million. The initial cost of the year. (Russia's 1994 real firstInthefirstquarterofl 994, Chinaposted willbearound$1.3 billion, ofwhich$500 quarterGDP contracted 17 percentfroma 19 percent gain in exports. China's million will be provided by the World the same period ayear ago, with indus-trade deficit was $1.28 billion, but ex- Bank and 300 million bytheIMF, leav- trial output down25 percent over first-portgrowthoutpacedimportgrowthfor ing 500 million to come from central quarter 1993. Monthly inflation fell tothe first time in two years. bank reserves. The deal will provide 8.7 percent in March, down from 9.9

Polish enterprises with access to inter- percentinFebruaryand22.0percentinChina said yesterday it will open more national bank lending and equity mar- January. Inflation averaged 20 percentsectors to foreign capital to boost over- kets. in 1993.)seas investment. Jiao Sufen, director ofthe foreign division of the Ministry ofForeign Trade and Economic Coopera- _tion, said the government will permitoverseas investors to operate in realestate, retail, finance, insurance, cargoand transportation agency services, andconsulting.

Inhisfirstdecisionsincebeingappointed,Poland's new finance minister anddeputyprimemiister, GrzegorzKolodko(an economist without party affiliationwhoheadstheWarsaw thinktank,Insti-tute of Finance), postponed thereintroductionofawagetax, as aresultof nationwide strike actions ofthe Soli-daritytradeunion.Thegovernmentcoa-lition of the Democratic Left AllianceandthePolishPeasantPartywasforced Good heavens! Do you remember being intoxicated and writing thattogivein. asthesocialunrestwasthreat- letter to the World Bank? Well, they sent you a check for $15,000.ening to wipe out this year's economic F e d I

FromtheH1Agalan1da9yNap9Gazdasag

1 4 .April 1994

Transition

President Yeltsin signed Russia's fed- Chubais was confidenttheremaining45 aiy 1994, which orders that taxes beeral budget law in April for the second million vouchers wouldbeinvestedbe- paid on all loans to Russia-based firmsquarter of 1994. Expenditures are set at fore mid-June. About 80 percent ofthe (except loans channeled through Rus-46trillionrubles, revenues at28.6trillion 20,000 eligible large-and medium-size sian banks), appliesto foreigninvestorsrubles, and the deficit at 17.4 trillion enterpriseshave alreadybeen converted as well. First Deputy Prime Ministerrubles. The central bank is ordered to intojoint-stockcompanies. Chubaishigh- Oleg Soskovets has denied the exist-provide acredit of 10.6trillion rubles to lighted several features of the ence of the tax.cover part of the deficit: the credit will postprivatizationprogram,includingthebe for ten years at 10 percent a year, transfer of part of the funds derived Estonia's consunerprice indexrose inwithrepaymentstartingin 1998. Russia's fromprivatizationtosocialsecuritypur- March by 8.9 percent. The monthly in-parliamentary Economic Policy Com- poses and the use of G-7 grants for creases in January and February weremitteeproposedtherejectionofthedraft supportingpostprivatizationoperations. 5.2 percent and 5.5 percent, respec-federalbudgetfor 1994. Inadditiontoits tively. The greatest increases were foralleged neglect of military conversion, Russia's Deputy Prime Minister re- rents at 18.5 percent; milk and eggs,the draft was said to have reduced allo- sponsible for agriculture, Aleksandr 13.3 percent; and transport and com-cations to education, training, culture, Zaveryukha has warned that spring munications, 9.7 percent. In Februaryand basic research, and to have over- planting could take place thisyear "at a the country exported goods worthlooked possibilities for additional rev- low agrotechnical level" and, as a re- 1,160.4millionkroons($86million)whileenues. [It is still hoped that the federal sult, that "a significant portion of the importinggoods valued at 1,311.7 mil-budget for the entire year will be ready crop will be lost. " The original official lion kroons. Russia received 25.8 per-for the president's signature by June or projection of this year's grain harvest cent of the exports; Finland, 20.8 per-July.] was 85 million-89 million tons, but ex- cent; and Sweden, 10.4 percent.

perts have predicted a lower output of Estonia'simnports camemainlyfromFin-ViktorGlukhikh, chairman ofRussia's just over 75 million tons. The leader of land (39.0 percent), Sweden(12.2 per-State Committee for the Defense In- the agrarian faction in the State Duma cent), and Russia (10.0 percent). Farmdustries, claimed thattheproduction of said he will fight to raise the farm sub- produce was boththe leading export atmilitary hardware has declined by 78 sidyfrom 9trillionto 20 trillion rubles. 25.1 percent, and importat 1 8.1 percentpercent since 1991, and that output in (notincludingoilandgasimportsthroughFebruary was 38 percent down from The Russian cabinet agreed to a plan pipelines or exports of electricity). InFebruary 1993. If the currentdraftfed- allowing state and collective farms to February Estonia's gold and hard cur-eral budget for 1994, which allocates auction offland to their workers as pri- rency reserves increased by 32.5 mil-37.1 trilfionrublesforthemilitaiy-indus- vate property. For the first time in the lion kroons to 5,373.7 million kroonstrial complex, is approved by parliament, country's history, Russians would be ($392 million). The gross income ofup to 3 million defenseworkers couldbe able to acquiretitle to land. The reform Estonianfamilies inJanuarydeclined bylaid offthis year, Glukhikh warned. programallowsforbuyingandsellingof 15.6 percentfromits December levelto

farmlandwithsome restrictions, includ- 833.12kroons perfamilymember, withAccording to parliament's Committee ing that the land must continue to be consumption innominal prices overtheon Budget, Taxes, and Finances, the usedforfarmingandbeownedbypeople sameperiod declining byl 8.6 percenttoRussian government intends to repay capable of working it effectively. About 612.73 kroons per person.$4.7 billion out of a total of $32 billion 14,000 of Russia's more than 250,000duethisyearin principal and intereston private farms folded in 1993. Agricul- The distribution ofprivatization checksits foreign indebtedness. The total for- ture Minister Viktor Khlystun told re- began April 1 in Belarus. Each checkeigndebtoutstandingatthebeginningof porters that although he is optimistic is worth 25,000 Belarussian rubles, and1994 was put at over $80 billion: this aboutdevelopmentofprivate farms, he individual entitlement depends on agefigure excludes debt to East European believes they will accountfor only 14 to and length of employment. The averagecountries and commercial arrears. 15 percent of agricultural land by the Belarussian will receive 1.5 million

end of the decade.[See also Farm rubles'worthofchecks ($150). ThelistOnApril7RussianDeputyPrimeMin- Privatization in Russia on the next of enterprises up for sale was madeister Anatolii Chubais presented a re- page.] publicinthemiddleofApril,andthesaleport on the progress to date ofvoucher of assets will begin on July 1.privatization and outlined his plans for The Russian tax authorities began re- Belarussians who reached the age of 16postvoucherprivatizationdueto starton quiringforeignfirms to pay a23 percent byAugust3,1993, qualifyfortenchecks.July 1. By early April, 105 million Rus- tax on investment capital, beginning insians had invested their vouchers, and mid-April. ApresidentialdecreeofJanu- t(hWe RFERL Research Institute )

Volume 5, Number 4 15

The World BankWPRDTE

World Bank/IMF AgendaFinally: $1.5 Billion to Russia performanceinadheringto 1994 budget structure its cumbersome oil and gas

goals. sector. The twenty-year loan, with aOn April 20 the International Monetary five-year grace period, is aimed at de-Fund approved a second drawing of How Much Does Russia Need in velopingextractionandrestoringsome$1.5 billion for Russia under the Sys- 1994? 300 kilometers ofoilpipeline. Itwillhelptemic Transformation Facility (STF) in upgrade facilities, introduce new tech-support of the 1994 economic reform AttheirApril24meetinginWashington, nologies, and streamline regulations.andstabilizationprogram. Russia'sfirst D.C., the finance ministers and central Romaniahas natural gas reserves esti-drawing underthe STF, also $1.5 billion, bankers of the G-7 group of major in- matedat517 billioncubicmeters, andoil :was approved by the IMF on June 30, dustrial nations heard cautiously opti- reserves approaching 300 million tons.1993. The main goals ofthe 1994 pro- mistic appraisals of the state of the Crude oil and natural gas productiongram include further reduction of the Russian economy from Russian offi- decreased more than 40 percent be-inflation rate through tighter fiscal and cials and from representatives of inter- tween 1976 and 1991. Crude oil produc-monetarypolicies.(Themonthly rate of national financial organizations. Pros- tion is expected to decline from a levelinflation is projectedto decline to 7 per- pects are good for accelerated of 16 milliontons in 1990to 14.8 millioncent bythe end oftheyear.) The decline disbursementofupto$1 billionin World tons in 1995. The World Bank loan isin real GDP is to be contained to 10 Bank funds that are alreadyin the pipe- expected to encourage foreign invest-percentin.1994, compared with 12 per- line. According to the April25 The Fi- ment. A separate Bank loan, also ap-cent in 1993. The program calls for a nancial limes, Russia will need $34 proved April 5, targets Romania's edu-reduced creditexpansionwhich, intum, billion in external finance in 1994, in cation system. The $50 millionloanwillrequires a significant cutback in the additiontothenew$1.5 billion STF loan. fund training in central administrationbudget deficit. The enlarged govern- and curriculum developmentas well asment deficit (including the net opera- Farm Privatization in Russia payforbettertextbooks and equipment.tions of the federal and local govern-ments and the extrabudgetary funds) is Russiais moving ahead with a pilotland Bucharest Negotiates with the IMFexpected to decline from 8 percent of privatization program promoted by theGDP in 1993 to 6.5 percent of GDP in InternationalFinanceCorporation(IFC), InnegotiationswiththeIMF, Romania1994. the private sector investment arm ofthe announced plans to restrict its budget

World Bank. In the Nizhny Novgorod deficit to 3.6 percent of GDP in 1994The export regime will be liberalized, region, about 400 kilometers east of and to take stricter measures to elimi-includingtheeliminationofexportquo- Moscow, up to 100 farms will be nate interenterprise debts, have one-tas,withthe exception ofcertain energy privatized in the next year. With the third ofGDP. Itwillstriveforparliamen-products and nonferrous metals. The support of Regional Governor Boris tary approval ofthe liberalization ofthecentralized export scheme will be Nemtsov, five farms along the Volga foreign exchange market; the introduc-phased-out this year and eliminated as Riverhavealreadybeenprivatizedwith tion of a stock exchange; and acceler-of 1995. Government imports will be financial backingfromtheU.S. Agency ated structural reforms, includinglimited to certain foodstuffs, medicines, for International Development and the privatization. These measures are to beand veterinary products. Astothenew British Know-How Fund. Under the implementedinl994-95, and animme-phase oftheprivatizationprogram, start- program, members living and working diate loan of $160 million will be pro-ingonJulyl auctionsofenterpriseshares on the farms are automatically entitled vided depending on the result ofthe IMFwill be conducted on the basis of cash to equal shares of the land. But they reviews in November 1994 and Mayrather than vouchers. Participation of havetobuyequipmentandsupplieswith 1995. FurtherIMF credits of$900 mil-direct foreign investment in the bidding certificates, based on their se- lionwillbedisbursedoverthenexteigh-privatizationprocesswillbeencouraged. niorityinthe collective. The projectwill teen months. (The National Bank of

move into other pilot regions. (In Russia Romania's latestfigures indicate atradeThe STF loan will set the stage for more than 90 percent offarming is still deficit of$1.26billionin 1993. Currentnegotiationsona$4billionstandbycredit. collectivelyowned.) account deficits are expected to ex-According to Camdessus, those talks ceeds $1 billion dollars for each of thewillprobablybeginthissummerandwill World Bank Loan to Romania next five years. Annual inflation wasdepend greatly on the formulation ofthe running at 261 percent in March, and1995 budget, as well as on Russia's A $175.6 million World Bank loan, ap- monthlyfiguresarerising-8.3 percent

proved April 5, will help Romania re- in March over a level of 5.9 percent inFebruary.)

16 April 1994

Transition

Algeria Gets $1 Billion million. (An equal sumwas provided in one of the country's fastest-growingOctober 1993 as afirst STF loan, along economic regions. The project includes

IMF Managing Director Michel withaseventeen-monthstandbycredit.) buildingacoal-firedthermalpowerplantCamdessus proposed that the Execu- Lithuania's 1994programforeseesGDP at Yangzhou, setting up transmissiontive Board approve combined funds of growth of 4 to 5 percent, single digit lines, training in financial and manage-$1 billion to Algeria in a standby credit inflation by the end of 1994, and a cur- ment capacity, and implementing envi-and a drawing from the CCFF (com- rentaccountdeficitof$330 million.The ronmental programs. Besides providingpensatory and contingency financing budgetdeficitwill bekeptatlessthan 1 the$350millionloan, theBankwillalsofacility, afumdthathelps outmembersif percent of GDP, in part by adopting an partly guarantee repayment to theterms oftrade deteriorate). Earlier, the 18 percent value added tax, effective JiangsuProvincialElectricPowerCom-Algerian dinarhad been devalued by4O May 1,1994. The newly setup (April 1) panyofa$120millioncommercialbankpercent, to 36 per U.S. dollar. The new currency board is expectedtohelp fight loan forthe project.discountrate is 15 percent and the bank inflation and bring about lower interestrate is 24 percent. The official inflation rates. ... Gas Development in Sichuan...rate is higher than 30 percent. With ayearlypopulationgrowthof2.5 percent, World Bank Loan for Power Gen- With help from a $255 million World240,000 newjobs annually are needed eration in Jiangsu... Bank loan approved March 17, Chinato keep unemployment below 20 per- will spend almost $1 billion to developcent of the work force. Algeria's re- The World Bank has approved a $350 new gas fields, rehabilitate old wells,form program allows afaster develop- million loan to help Chinacombat acute and improve gas transmission in thementoftheprivatesectorandintroduces power shortages in Jiangsu Province, southwestern province ofSichuan. Pertargeted social measures to alleviatepoverty Algeria expects to negotiate Conspicious spendingdebtrelieffromthedonorcountries, andfurtherloansfromothermultilateralin-stitutions.Servicing$26billioninforeigndebtcurrentlytakesabout70percentofthe country's income from oil and gas.

Improving Mass Transport inKazakhstan

OnApril 11 theWorldBank approved aloan of $40 million to Kazakhstan tosupport the country's urban transportprogramrinthemajorcities. (The loanisfor seventeen years, including a five-year grace period, with a variable inter-est rate, currently 7.27 percent.) AStandby Credit to Bulgaria... ll

On April 11 the IMF approved a $97milliontwelve-monthstandbycreditanda$162 millionsystemictransformationfacility(STF)loantosupportBulgaria'seconomicprogramforl994.Iftheeco-nomic restructuring continues, the IMFwill consider afurther$ 162 million as anext STF drawing.

... and STF Loan to Lithuania Look, we already have our own beggar...

The IMF also approved Lithuania's re-quest for a second STF loan of $36 From the Hungarian magazine Hazitok

Volume 5, Number4 17

The World Bank/PRDTE

capitaincome in China's mostpopulous controlflooding on the lower reaches of gas and liquid petroleum reserves nearprovince(ll0millionpeople)isonlyhalf theYellow River and protect more than the country's borderwith Somalia. Resi-the national average, partly because of 100 million people living there. And to dents will be able to draw from thean acute energy shortage. The project improvethelivelihoodsofl8l,000people project'scommunitydevelopmentfimd,willfinance lOOnew wells, gas-gather- who will have to move because of the which will finance local "micro-ing and -processing facilities, and seis- project, a separate $110 million credit projects" to spread directbenefits frommic exploration. Underthe plan, output from the IDA will fund part of a half- the project to people living in the area.will also be boosted in almost 200 reha- billion dollar resettlement program. Abilitated wells, leading to a total yield, powerstationinthedamwilleventually Cambodia Gets $773 Millionwith the output of I100 new wells, of an generate almost 5,400 gigawatts anhour.additional 68 billion cubic meters of gas Thirty donornations and twelve intera-between 1995 and 2015. IDA Credits to Laos tionalbodies,includingtheWorldBank,

participated at the second meeting of... Water Treatment in Shanghai... Laos will provide newroads, expanded the International Committee on the Re-

:water systems, and better planning in constructionofCambodia.TheypledgedThe World Bank approved on March 8 Luang Namtha Province with the help atotal of$773 millioninemergency aid.a $160 million loanto help fund a $457 ofa$9.67 millioncreditapprovedMarch Ofthetotal, $486millionwasearmarkedmillion water treatment program for 15 by the IDA. Laos will improve its for 1994,$271 million for 1995, and anShanghai,whichwithitsl4millionresi- only highway linking the agricultural additional$15.77millionwassetasidedents is the world's fifth-largest city, southwiththe central andnorthemrparts forland mine clearance. Thenextmeet-and one ofthe most densely populated. obfhe country using another IDA credit ing will be held in Paris in 1995.The project, which will clean up the of $30 mnillion, approved on April 14.area's water supply and environment The World Bank's forestry loanof$8.7 Mozambique Tackles Bank Reformand ensure safe drinking water for 10 millionwillsupporta$20.3 millionprojectmillionrpeople, willalsoreceivefunding aimedatbetterrmanagingandexploiting In Mozambique a new project, partlyfrom the city. therapidlydisappearingforests ofLaos. fundedbyacreditof$9 millionfromthe

IDA, will accelerate the process of de-... Agiculture on the Songliao Plain... $1.1 Billion to Ethiopia veloping betterbanksbyproviding bet-

tertrainingforthe men and women whoA wide-ranging plan to boost agricul- Member nations of the Consultative run them. Under the' program, manag-turalproductionandsmall-farmincomes Group forEthiopia, atameetinginParis ers, supervisors, and accountants willon China's Songliao Plain is being sup- on March 7 and 8 chaired by the World learnmodemrbankingpractices andhowported byanIDA creditof$205 million, Bankpledged $1.1 billionoverthenext to play their vital role as the countryapproved February 24. The funds will two years to support Ethiopia's reform capitalizes on long-awaited peace andhelp reclaim wastelands for farm use, program. About$350millionofthecom- elections. Mozambique is the poorestestablishaquacultureprograms, provide mitmentswillgotobalanceofpayments country in the world in terms of pernew machinery, and improve irrigation support; the rest willfinance projects in capita income.and drainage systems. The program is private sector development, health, andexpected to generate almost $200 mil- education.EthiopianFinanceMinister ... and Rehabilitates Roads andlion in added annual revenue for forty AlemayehuDabasaidthatinflationhas Coastal Shippingcounties onthe plain, some of which are dropped from 26 percentto less than 10among the poorest communities in percent. Thecountryhasweathereda The IDA approved a$188 million loanChina. Mostofthe2.5 millionfarmfanni- currency devaluation of 142 percent on April 11 to Mozambique's Secondlies inthe project areanow make about withoutgreat social strife. Its gross do- Roads and Coastal Shipping Project.$140 a year. mesticproductincreasedby7.6percent Total cost ofthe loan is $814.6 million;

during 1993, which Daba attributed to the Government of Mozambique is al-... and Dam Construction on the the unleashing ofprivate sector forces. lotting $169 millionandtherestis com-Yellow River ingfromdonornationsandintemational

Ethiopian Gas Project to Save institutions.Theprojectincludesemer-A World Bank loan to China of $460 Forests gencyrehabilitationandmaintenanceofmillion, approved April14, willhelp fi- about 11,700 kilometers of mainlynance the centerpiece of the country's With a $74.3 million credit from the unpaved roads and aroad sign program$2.3 billiondanconstructionplan: a 154- IDA, Ethiopia will tap into rich natural in all ten provinces.meter-high rockfill dam atXiaolangdito

18 April 1994

Transition

Conference Diary -

Key speakers include: Mr. Boris Technology on the VolgaFedorov, former Minister ofFinance in May 14-21, Volga RivertheRussianFederationGovemment,and

Russia-USA: Prospects for Coop- one of the leading architects of the re- AdelegationofU.S. executives will saileration and Investment in Banking form process in Russia; and Mr. the famous Volga River on a luxuryand Financial Markets Alexander Khandruev, Deputy Chair- cruise ship and visit four cities-onceMay 5-6, The Grand Hyatt, New York man, Central Bank of Russia. centers ofthe Soviet military industrialMay9-10,Fontainebleaullilton,Miami Information: Global Management & complex, now capials ofdefense diver-Beach, Florida Technology, Inc., tel. (516) 887-0763, sificatiOnandhigh-technologyindustly-

fax (516) 887-3682. on a trade mission that will place Rus-The conference is sponsored by the sian companies in direct contact withRussian Bankers Association, the Rus- Third Biennial World Countertrade potential American partners. The ob-sian Agency of Banking Information, Conference jective: to "match" U.S. manufactur-andGlobalManagement&Technology May 8-11, Philadelphia, Pennsylvania ers with prescreened Russian'compa-Inc. 'nies seeking partners for strategic

The conference, which is presented by alliances,jointventures,licensingagree-The occasion will provide Amencan the World Countertrade organizations ments, outsourcing arrangements,bankersandfinancialmanagementspe- with sponsorship from the American knowledgeagreements,andtechnologycialistswithauniqueopportunitytomeet Countertrade Association, will cover developmentcooperativerelationships.with senior executives of more than current thought-provoking issues in 'fortymajorRussiancommercialbanks, today'sworldeconomy The conference is being organized byrepresentatives of the Central Bank of the U. S.-NIS Chamber of CommerceRussia and the Russian Bankers Asso- Speakers will address thefollowingtop- and Industry, in association with Mos-ciation, and U.S. and Russian govern- ics: East European Markets as Seen by cow Business University, National In-ment officials directly responsible for International TradingHouses; Current stitutefor World Trade, Russian Acad-formulatingpolicieshavingadirectin- Countertrade Situations in Rusiaand emy of Science, and Volga Riverfluence on U. S.-Russian relationships the OtherNIS; How to Use Turkey and Chamber of Commerce and Industry.inthe fields ofbanking and finance; and IrantoWorkwithNISAsianRepublics; Corporate sponsors include the Eastto establish contactswithpotentialpart- The Italian, South African, French, European Investment Magazine andnersinRussiathatcouldbecomecandi- United States, Canadian, and Austra- FINNAIR, the official trade missiondatesforAmericanbankingandfinance lian Governmental Approach to airline.activities in the Russian Federation. Countertrade; The CountertradePoten- Information: Mission Secretariat,

tial in Viet Nam; The Use of "Technology on the Volga, "PO. BoxConference topics include the current Countertrade as anEffective Sales Tool 1178, Central Islip, New York 11722,situation in the Russian economy and inPRCandSoutheastAsia;TheEffect tel. (516) 582-9102, fax (516) 582-prospects for further reform, relevant ofNAFTA. The kickoffspeaker will be 2159.central bank policies and regulations, a Jan Dauman, president of Intermatrix.look at Russia's banking system, the Information: The Doiubletree Hotel, The Socio-Economic Impact of thecurrent picture in Russia's financial Broad Street at Locust, Philadelphia, Transitionmarkets, direct foreign investment in PA 19107, tel. (215J 893-1600, fax May 19-21, PragueRussia,opportunitiesforhigher-yielding (215) 893-1663.investmentofRussianfimdsintheUnited The CERGE-EI conference is cospon-States, expansion ofcorrespondent re- InternationalWorkshop atthe Uni- sored by the Ford Foundation and thelationships and otherforms ofcoopera- versity of Trento European Community and has impor-tion between American and Russian May 14th, Trento, Italy tantbearing onpublic policy. Anumberbanks, opportunities for U.S. financial Information: Universita degli Studi of economists from the government asinstitutions inthe Russian markets, regu- di 7Tento, Dipartimento di Economia, well as the private sector will attend.lations andlegislationrelatedtobanking Via Inama 5-138100, Thento, teL The conference will begin Thursdayandfinancial activities, andtherealities 39461-822-201. evening with a reception for partici-of doing business in Russia for U.S. pants and members of the CERGE-EIbanks and financial companies. Advisory Board. This will provide an

Volume 5, Number4 19

The World Bank/PRDTE

informal forum for exchanging views This conference, organized under the markets into international markets, thewith economics ministers and otherkey auspices of the European Association role ofthe financial system, the imple-policymakers inthe Czech Republic be- for Comparative Economic Studies at mentation of the rules and culture offore the start of the conference. the Technical University of Freiberg markets, and the route from informal toInformation: CenterforEconomicRe- (Bergakademi), will call for papers that formalmarkets.search and Graduate Education, concentrate on the emergence of mar-Charles University, Politickych veznu ket rules; market culture and market Information: Horst Brezinski or7, PO. Box 882, 111 21 Prague 1, the performance; the history of markets, Michael Fritsch, Technical Univer-Czech Republic, tel. (+422) 26-89- and the rise and fall of markets in capi- sity of Freiberg (Bergakademi),01, fax (+422) 242-27-143. talist and postsocialist, as well as inde- Faculty of Economics and Business

veloping,economies. Proposals are also Administration, Gustav-ZeunerThird Freiberg Symposium on Eco- welcome onthefollowingtopics: spot- Strasse 8-10, D-09596, Freiberg,nomics: The Emergence and Evo- markets andhierarchies, economic and Germany, tel. (+49) 3731-51-20-32lution of Markets social prerequisites for satisfactory or 3731-24-38, fax (+49) 3731-51-September 1-3, Freiberg, Germany marketperformance, the integration of 27-33.

Unsuccessful privatization

~~~~~~/ 2$

From the Budapest journal Hungarian Economy

20 April 1994

Transition

New Books and Working PapersThe PRDTE unit of the World Bank regrets that it is unable to supply the publications listed.

World Bank Publications In Russian cities-given their lack of -Clear and tradable property rights.price signals and economicincentives to -Efficient market-oriented information

Working Papers recyclelandsitesovertime-theadmin- systems.istrative-command process has led to a -A taxation system consistent with effi-

Zeljko Bogetic and Arye Hillman, The startling pattern of land use: cient land use.Tax Base in Transition: The Case of -Publicizedandcontestableurbanplan-Bulgaria, Policy Research WP no. *Population density rises as one leaves ningdecisions.1267,1994,33 p. the city center. (In cities with land mar-To order: Ms. Faithlyn Smith, ECI CO, kets, the reverse is true; but in Moscow, Two critical issues for the transition cit-Rm H5-245, tel. (202) 473-6072. for example, 17 kilometers outside the ies must be considered:

city center, the population is as dense as *Howto release land from state controlWendy Takacs, The Economic Im- in the heart of Paris.) and have it allocated on a competitivepact ofExports Controls: An Appli- *Jobs are highly centralized, as was the basis among prospective efficient us-cation to Mongolian Cashmere and pattern in ninteenth century cities. (In ers.Romanian Wood Products, Policy contrast,modem metropolitanareaswith -Which institutions and processes willResearch WP no. 1280,1994,27 p. land markets have multiple, suburban sustain sound urban land markets.To order: Ms. Minerva Patena, employmentcenters.)PRDTP, Rm Ni0-029, tel. (202) 473- Carolina Harper, Mongolia: An As-794 7. At present, the typical city in theformer sessment of Vulnerable Groups in a

SovietUnionis characterizedbyrusting Transition Economy, DP no. 229,William Easterly, MarthadeMelo, and factories in prime locations and a 1994,70p.GurOfer,ServicesasaMajorSource monocentric pattern of job location,of Growth in Russia and Other coupledwithpopulationconcentrations Karen Brooks and Zvi Lerman, LandFormer Soviet States, Policy Re- in distant suburbs. Such a structure is Reform and Farm Restructuring insearch WP no. 1292, 1994,64 p. highlyinefficientintermsofenergyuse, Russia, DP no. 233,1994, 89 p.To order: Mr Chris Rollison, PRDTE, infrastructure, and commuting require-Rm NJI-029, tel. (202) 478-4768. ments. Industrial zones are often two or Observations fromthe study:

threetimes biggerthaninWestemcities *The agricultural sectoris still predomi-Other World Bank Publications ofcomparablesizeandeconomicfumc- nantly collective. In 1993, 90percentof

tion. Old, decaying industries in urban thearablelandwasstillinthecollectiveTo receive studies, books, and dis- centers are surrounded byhigh-density sector. Ofthe IOpercentinprivatehands,cussionpaperslistedhere, orderfrom: residential areas, a situation entailing lessthanhalfwastitledasprivatefamilyWorld Bank Publications, PO. Box enormous environmental risks. farms, with an average size of43 hect-7247-8619, Philadelphia, PA 19170- ares per family; the rest was small pri-8619, tel. (202) 473-1155, fax (202) InRussia,agoodportionofthestockof vateplotsownedbyworkersotherwise676-0581; or visit the World Bank high-rise suburban mass housing has employed in the nonagricultural sectorbookstores: in the US., 701-18th had a negative asset value for a long or in collective farms, with an averageStreet, N.W, Washington, D.C., or in time because rents, compared with op- size of 0.28 hectares.France, 66 avenue d'Iena, 75116 eratingcosts,havebeenkepttoolow.In *New collective enterprises look andParis. Moscow, the sale of homes is now al- behave much like their predecessors,

lowed, but legal, institutional, and ad- the state and collective farms.Kin Bing Wu, Mongolia: Financing ministrative obstacles to establishing -Entrants into privatefarmingneed ma-Education during Economic Transi- clear property rights remain significant. chinery and small loans. Lack of accesstion, Discussion Paper (DP) no. 226, The price differential between the cen- to machinery services and capital are1994 (forthcoming). ter and the periphery is still relatively reported as the main factors keeping

low, as a way ofstimulating land recy- producers in collectives.Alain Bertaud and Bertrand Renaud, cling. To getmovementin theland mar- -Financial pressure on the collectiveCities without Land Markets: Les- kets,thefollowingcomponentsmustbe sector [cut of state subsidies; workerssons of the Failed Socialist Experi- part of the needed urban land reform leaving the collectives and taking landment, DP no. 227,1994,37 p. program: shares with them] is likely to accelerate

Volume 5, Number4 21

The World Bank/PRDTE

the,shifttoprivatefamingandthetrans- stitutes or for the continued supply of pend mainly on agriculture, timberandformation ofremaining collectives into Chinese goods at higher tariff rates. wood products and recently, garments).associations of private farmers. China could further liberalize its trade *Inadequate resource mobilization re-*Private fanning is not likely to cause by cutting tariffs, replacing import quo- quires sustained foreign assistance.'productivity to fall. Even ifitdid, gains tas and licenses with simplertaxes, and *Lack of skilled manpower and well-from greater growth and faster adjust- removingremainingexportcontrols. [The developed macroeconomic institutionsmentoutofloss-makingactivitieswould United States is reviewing China's MFN limitabsorptivecapacity.compensateforlosteconomies ofscale. status on a yearly basis. The next such

review is slated for June 1994.] To order lMFpublications: IMFPub-Andrew Keck and others, Population lication Services, 700-19th Street,Growth, Shifting Cultivation, and ***** N. W, Washington, D.C. 20431, tel.Unsustainable Agricultural Devel- (202) 623-7430, fax (202) 623-7201.opment: A Case Study of Madagas- IMF Publicationscar, DP no.234,1994,63 p.

Guillermo A. Calvo and Manmohan S.Christine I. Wallich, ed., Russia and Kumar, Money Demand, Bank CEPR Publicationsthe Chiallenge of Fiscal Federalism, Credit, and Economic Performance1994, 300 p. in Former Socialist Economies, IMF Francesca Comelli and David D. Li,

WorkingPaperno. 94/3,1994,32p. Large Shareholders, Private Ben-Dominique van de Walle and others, efitsofControlandOptimalSchemesHow Well Does the Social Safety Dr. Chi Do Pham, An Unforgettable for Privatization, CEPR DiscussionNet Work?-The Incidence of Cash Experience in a "Forgotten" Land: Paperno. 891, London, 1994,36 p.Benefits in Hungary, 1987-89, Liv- Economic Reforms in Laos, IMFing Standards Measurement Study, Working Paperno. 93/14,1993,31 p. When selling large state firms to com-WorkingPaperno. 102,1994, 82 p. peting foreign companies, govemment

Since 1986,Laoshassuccessfullyimple- is required to make certain choices:Adjustment in Africa: Reforms, menteditsNewEconomicMechanism Which is the most appropriate com-Results, and the Road Ahead, World (NEM). Public enterprises arenow able pany?Howmuch ownership inthefirmBank Policy Research Report, 1994, to determinetheir own production lev- shouldgowiththecontrollright?284p. els,outputmix,investment, employment, A govemment's objective is both to

and wages. Under the new system ag- maximize sales revenue and to improveMoldova: Moving to a Market ricultural procurement prices were efficiency(futurevalue)oftheprivatizedEconomy,WorldBankCountryStudy, freed; farmers began to receive pay- firm. A foreign company, on the other1994, 104p. imentsinrcashfortheirproduce; andthe hand, may be interested only in the pri-

state monopoly over the procurement vate benefit of control, which allowsChina ForeignTradeReform,World and distribution of rice ended. Retail early entry to the East European mar-Bank Country Study, 1994,334p. prices, exceptforcertainpublic utilities ket. (For example, recently several

and domestic airtransport, were decon- Westem car manufacturers acquiredAU.S. moveto end preferential (most- trolled. The privatesectorwas allowed majority stakes in East Europeanfavored-nation, or MFN) trade status to participate inthe production and dis- companies.However, companies mayforChinacouldresultinadislocationof tributionofmostgoods and services. A not believe that the acquired factoriestrade flows that "would range from the decree was issued to establish the au- per se have greatpotential value.)dramatic to the disastrous, with the as- tonomy of private firms and to enablesociated costs being high for both par- the retention of after-tax profits. The Butaforeigncompany mightalso striveties."i Triffs onChinese-made clothing, multiple official exchange rates have forgenuineefficiencyimprovement,see-forexample,wouldincreasethreetimes been unified at a level close to the par- ing good opportunities to expand andand ontoys, fivetimes. Chinese exports allel market rate. makeinvestments inviewoffutureprof-to the United States could be cut by 42 its. Anefficientforeigncompanywouldto 96 percent, depending onhowreadily Some of the remaining obstacles to a want to obtain as many shares as pos-these exports can be substiuted by oth- sustainable growth path: sible, since such shares will have ahighers. [In 1992 China had a $15.4 billion -Poverty is widespread in rural andre- value, while afirm interested mainly insurplus in its trade with the United mote areas. theprivatebenefitofcontrolwouldnotStates.]U.S.consumerswouldpayabout *Production base and export base are value owning shares in excess of the$14 billionayearmoreforcostliersub- relatively narrow (export earnings de- minimum.

22 April 1994

Transition

Sweder van Wijnbergen, On the Role jointly. Adecentralized,nongovernment UnemploymentinTransitionEcono-of Banks in Enterprise Restructur- app'roach to dealing with loss-making mies: Transient or Permanent?ing: ThePolishExample, CEPRDis- state-owned enterprises has a chance OECD-CCEET,Paris, 1994,350p.cussion Paper no. 898, London, Febru- of success.aiy 1994,26 p. Employmentand Unemploymentin

tva Voszka, Centralization, Economies in Transition: Concep-Governments throughout Eastern Eu- Renationalization, Redistribution: tual and Measurement Issues,rope have not been successful so far in The Role of the Government in OECD-CCEET, Paris, 1993,129 p.dealing with loss-making state-owned Changing the Ownership Structureenterprises. The author argues that in in Hungary, 1989-93, CEPR Discus- The Labor Market in Poland,Eastem Europe, past and current losses sion Paper no. 916, London, February OECD-CCEET, Paris, 1993,155 p.may have been due to distorted incen- 1994,19 p.tives ratherthanto bad managementor Review of Agricultural Policies:outright insolvency. Furthermore, the The Economics of New Currencies HungaryOECD-CCEET,Paris, 1994,court system has limited capacity, and it [Report of a conference organized by 222 p.is nearly impossible to remove liquida- the CEPR and hosted by thetion bias from the bankruptcy code. LandeszentralbankinHessen, Frank- Iixtegrating Emerging MarketTherefore, alaissez-faire alternative-a furt am Main, June 28-29, 1993], Economies into the Internationalwholesaleapplicationofthebankruptcy November 1993, London, 226 p. Trading System, OECD-CCEET,proceedings-isnotjustified. Paris, 1994,99p.

Istvan P. Szekely and David M. G.Instead, major nongovemment credi- Newbery, Hungary: An Economy in To order: in the U.S., OECD Publica-tors of state-owned enterprises, that is, Transition, Cambridge University tions and Information Center, 2001 Lcommercial banks, can take the lead in Press, United Kingdom, 1993,349 p. Street, N. W, Suite 700, Washington,initiatingrestructuringandthedesignof D.C. 20036, tel. (202) 785-6323, faxanew, viable capital structure. A stan- The economic transformation of Hun- (202) 785-0350; or OECD Publica-dardreplytoacallforcommercialbank gary has reached a critical stage. This tions, 2 rue Andre-Pascal, 75775involvementinenterpriserestructuring, volumepresentssomeofthelocalargu- Paris CEDEX 16, France.in a manner similar to Western invest- ments and perceptions that are inform-mnentbank's involvement in periods prior ing the current debate, along with criti-to bankruptcy, is that East European cal examination of these ideas by anbanksdonotpossessthenecessaryskldls. international panel of scholars. Chap- WIIWPublicationsBut the issue is: Is there anyone else ters address the privatizationprogram;who is better? the reform of financial, tax, and legal FriedrichLevcik,DieTransfonnation

systems; integration into "the interna- der Wirtschaft im Osten, WIIW no.Given the dismal record of governmnent tional financial and monetary systems; 151, Vienna Institute for Comparativeinvolvement in large-scale enterprises labor markets, unemployment, and the Economic Studies, January 1994,13 p.under communism, and long-standing social safety net;l and the politicalproblems of regulatory capture in the economyofthecurrenteconomictrans- FriedrichLevcik, Milos Pick, OtaTurek,West, thegovernmentitselfis notagood formation. and others, The Czech Economy:candidate. Successful restructuring Internal and External Develop-should be part of a privatization exer- To order: CEPR Discussion Papers, ments since 1989 and Future Op-cise; the more influence goes to future 25-28 Old Burlington Street, London tions, WIIW no. 203, Vienna Instituteowners, and the less influence to past W1X 1LB, tel. (4471) 734-9110. for Comparative Economic Studies,owners, the better the odds that the Januay 1994,44p.restructuring exercise will not need tobe repeated. Assigning such an impor- To order: Vienna Institute for Com-tant role to commercial banks makes OECD Publications parative Economic Studies, PO. Boxfinancial sectorreform commensurately 87, A-1103 Vienna, tel. (431) 782-more urgent. Ifeither enterprise reform The Czech and Slovak Republics, 567, fax (431) 787-120.or bank reform is to have any chance of 1994-OECD Economic Surveys,success, they had better be undertaken OECD-CCEET(CentreforCoopera- ** * **

tion with the Economies in Transition)Paris, 1994, 168 p.

Volume 5, Number 4 23

The World Bank/PRDTE

Other Working Papers Edmund Pietrzak, The Development Wladimir Andreff, The West's Expe-of the Market-oriented Financial rience and the East, Westview Press,

A Foreign Economic Policy and Currency Systems in Hungary Colorado, 1993.Programme: Statements and Pro- and Poland, 1989-1993, Economicposals, Public Policy Institute no. 4, Thansformationno. 40, Gdansklnstitute To order: Westview Press, for the In-Budapest, 1993,21 p. forMarketEconomics, Warsaw, 1993, stitute for EastWest Security Studies,

41 p. 5500 Central Avenue, Boulder, COTo order: Public Policy Institute, 80301, tel. (800) 456-1995.Budapest V., Szechenyi Rkp. 19, To order: Gdansk Institute for Mar-H-1358, tel./fax (361) 268-59-51. ket Economics, 80-227 Gdansk, ul. Colin Mayer and Xavier Vives, eds.,

Do Studzienki 63, tel./fax 41-15-35, Capital Markets and Financial In-An Agenda for the New Russian 41-06-20. termediation, Cambridge UniversityParliament, Parts I and II: Economic Press, Cambridge, 1993.Issues; and Political and Legal Is- P. Stanovnik and I. Banic, The Role ofsues, Working Papers no. 975 and no. FDIs in Slovenia's Economic De- L. Csaba, After the Shock: Some976, The Heritage Foundation, Wash- velopment,ReformRoundTableWork- Lessons from Transition Policies inington, D.C., 1994,15 p. and 12p. ingPaperno. 5,InternationalCenterfor Eastern Europe, E. ElgarPublishing,

Economnic Growth, SanFrancisco, De- Vermont, 1993.Russia and Her Neighbors: Creat- cember 1993,13 p.ing a U.S. Policy Toward Eurasia, L. Csaba, The Capitalist RevolutionWorking Paper no. 966, The Heritage Other Publications in Eastern Europe, E. Elgar Publish-Foundation, Washington,D.C., 1993, ing, Vermont, 1994 (forthcoming).20 p. Andrzej Rudka and Kalman Mizsei,

Central and Eastern Europe be- To order: E. Elgar Publishing, Im-To order: The Heritage Foundation, tween Disintegration and Re-inte- print ofAshgate Publishing Company,214 Massachusetts Avenue, N.E., gration: Is CEFTA the Solution?- OldPostRoad, Brookfield, VT05036,Washington, D.C. 20002-4999, tel. XiituteforEastWestStudies,NewYork tel. (802) 276-3162.(202) 546-4400. and Prague, 1994,44 p.

Communicating to and from thePietro Genco, SiriaTaurelli, and Claudio To order: Institutefor EastWest Stud- Russian Far East, Russian Far EastViezzoli, Private Investment in Cen- ies, 360 Lexington Avenue, New York, Update, Washington, January 1994,tral and Eastern Europe: Survey M' 10017, tel. (212) 557-2570, fax 11p.Results, EBRD Working Paper no. 7, (212) 2949-8043.London, 1993,43 p. Russian Far East: A Business

OhivierJ. Blanchard, Kenneth A. Froot, Guide, [pocket handbook], RussianTo order: Publications Unit, Eu- and Jeffrey D. Sachs, The Transition Far East Update, Washington, Mayropean Bank for Reconstruction in Eastern Europe, Volume 1, Coun- 1994.and Development, One Exchange tryStudies,TheUniversityofChicagoSquare, London EC2A 2EH, tel. Press,,Chicago/London, 1994,275 p. Russian Far East: An Economic(4471) 338-6541, fax (4471) Review [two volumes; in Russian338-7544. BenEklof,JohnBushnell,andLarissa only]: volume 1, 157 p; volume 2,

Zakharova, eds., Russia's Great Re- 117 p.; Russian Far East Update,J. M. Dabrowski, M. Federowicz, T. forms, 1855-1881,IndianaUniversity Washington, 1993.Kaminski, and others, Privatization of Press, June 1994 (forthcoming), 320 p.Polish State-owned Enterprises: To order: Russian Far East Update,Progress, Barriers, Initial Effects, Wlliarn G. Rosenberg and Lewis H. P0. Box 22126, Seattle, WA 98122,Economic Transformation no. 33, Siegelbaum, eds., Social Dimensions tel. (206) 447-2668, fax (206) 628-Gdansk Institute for Market Econom- of Soviet Industrialization, Indiana 0979.ics, Warsaw, 1993. University Press, 1993,320 p.

J. M. Dabrowski, M. Federowicz, K Inna Dovladbekova and TatyanaKloc, and others, Banks and Enter- To order: Indiana University Press, Muravskaya, Development of theprises, Economic Transformation no. 601 North Morton Street, NewBankSysterninLatvia,Institute38, Gdansk Institute for Market Eco- Bloomington, IN 47404-3937, tel of Economics, Latvia, December 1993,nomics, Warsaw, 1993. (800) 842-6796. 17 p.

24 April 1994

Transition

To order: Institute of Economics, yieldpositiveresultsandthustobecome viding economic, trade, andlegalinfor-Latvian Academy of Sciences, self-sustaining. mationtothoseinterestedindoingbusi-Turgeneva 19, Riga LV-1524, Latvia, ness in Poland.tel. (+3712) 222-830, fax (+3712) Theconclusionsofthisstudy,coauthored228-784. by editor John Williamson and political To order: Embassy of the Republic of

scientist Stephan Haggard, also reject Poland, Commercial Counsellor 'sEast Europe and the Republics, 2nd widely held views on the politics ofre- Office, 820 Second Avenue, 17thedition, Political Risk Services, New form. It is not true that reform can be Floor, New York, NY 10017, teL (212)York, June1993. achievedonlybyauthoritarianregimes; 370-5300, fax (212) 818-9623.

even newly established democraciesTo order: Political Risk Services, 222 (Spain and Poland) have succeeded. HungaryBulletin, amonthlynewslet-Teall Avenue, Suite 200, PO. Box Noris ittruethatreformshavetypically ter published byPrice Waterhouse.6482, Syracuse, NY 13217-6482, tel. been introduced by conservative gov-(315) 472-1224, fax (315) 472-1235. ernments-most of the successful re- Public Administration and Devel-

forms were engineered by left-of-cen- opment, an intemationaljoumal oftrain-Russian Employee Compensation ter or centrist govemments. ing, research, and practice, edited by P.Report, Russian Information Services, Collins and published byRIPA Intema-Vermont, 1993,72 p. To order: Longman Group UK, Ltd., tionalLirnited.To order: Russian Information Ser- PO. Box 88, Harlow, Essex CM 19vices, 89 Main Street, #2, Montpelier, 5SR, UK, tel. (44279) 623-925, fax To order: Sarah Stevens, John WileyVT 05602, tel. (800) 639-4301, fax (44279) 453-450, or Institute for In- & Sons, Ltd., Baffins Lane,(802) 223-6105. ternational Economics, 11 Dupont Chichester, West Sussex, PO19 1UD,

Circle, N. W, Washington, D.C. UnitedKingdom, tel. (071)580-7138,Jeffrey Sachs, Poland's Jump to the 20036-1207, tel. (202) 328-9000, fax fax (071) 580-7140.Market Economy, MIT Press, Cam- (202) 328-5432.bridge, March 1994,122p. U.S.-Czech Business News, a quar-

* * * * * terly publication of ARA-Praha/NewJan Svejnar, The Past and the Present Yorkof Czechoslovak Privatization, NewslettersCharles University, Prague, January To order: Martin Holub, ARA-Prahal1993, 24 p. Business Update, a news source on New York, 116 West 72nd Street, 16E,

Russia, Hungary, Poland, and Czech- New York, NY 10023, tel. (212) 787-John Williamson, ed., The Political Slovakia,publishedbyBroadfax,S.A., 7644, fax (212) 787-3146.Ingredients of Successful Economic Geneva, Switzerland.Reform, Institute forlntemational Eco-nomics,Washington,D.C.,January 1994, To order: Christopher H Lake, Vice624 p. President & CFO, Dean & Lake Con-

sulting, Inc., Atlanta, GA, tel. (800)Key political ingredients for a success- 308-1245, fax (800) 308-1246. Corrections:ful economnic reforn program-drawinglessonsfromelevendifferentcountries- East/West Executive Guide, a Jn ourFebruary-March 194issue, onpage 4, in the table "Financial Charac--are as follows: monthly legal and strategic guide cover- teristics of Public Pension Schemes in*Overcomingtraditionalvestedinterests ing East/Central Europe, Russia, and Transition Economies, 1992" the head-byswiftexploitationoftheopportunities theCommonwealthRepublics. ing of the 4th column reads conretly:provided by the economic mayhem. "Pension contribution rate as a share of*Exercisingdeterminedleadership,with To order: World 7Yade Executive, Inc., payroll." The heading ofthe 5thcolumnavisionforthefutureand awillingness PO. Box 761, Concord, MA 01742, tel. reads: "Socialsecuritycontributionrateto acceptshort-rununpopularity. (508) 287-0301, fax (508) 287-0302. as a share of payroll."'Setting up a competent and coherent On page 8, of the same issue, the loca-economicteam, possibly entrustingthe Economic and Legal Information tion of Brandeis University is inteamleaderwithpolitical responsibility. from Poland, anewsletterpublished by Waltham, Massachusetts.*Buildingasupportivecoalitionthatper- theEmbassyoftheRepublic ofPoland,mits the reforms to last long enough to Commercial Counsellor's Office, pro-

Volume5, Number 4 25

The World Bank/PRDTE

Bibliography of Selected Articles

Transition Issues Comerford, M. Hungary Hopes to Mejstrik, M. The Second and LastSubsidize Conservation Measures. Wave of Czech Voucher

Balcerowicz, L. Transition to a Mar- The Budapest Sun (Hungary) p. 5, Privatization. Privatization Newslet-ket Economy: CEE Countries in March31-April6,1994. To order: The ter(U.S.) 19:1-2,October 1993.Comparative Perspective. British Budapest Sun, 1068 Budapest, Dozsa To order: CIPE, 1615 H Street, N. W,Review of Economic Issues (U.K.) Gyorgy ut 84/a, Hungary, teL (361) Washington, D.C. 20062, fax (202)15:3-41,Octoberl993. 268-1101/1102, fax (361) 268-1103. 887-3447.

Classen, E. Cleaning the Balance Csaba, L. End ofthe Tunnel in Sight: Menl, G., and M. Maurel. Protection-Sheets of Commercial Banks in EE The State of the Economy. Hungar- ism and Openness: Foreign Eco-and their Role in Corporate Gover- ian Quarterly (Hungary) 34:107-12, nomic Strategies in the Formernance. Weltwirtschaftliches Archiv winter 1993. -Austro-Hungarian States (1919-(Germany) 129(3):600-09,1993. 1929). Studies on Russian Economic

Czech & Slovak American Enter- Development (Russia) 4:464-67, Sep-Moore, P. Export Credit Agencies: prise Fund Investments and Loans tember-October 1993.Financial Ambassadors. Central in 1993. Eastern Europe FinanceEuropean (U.K.) 26:27-31, October (U.S.) 4(5):16, March 1994. To order: Okolicsanyi, K HungarianAgricul-1993. ; P0. Box 7188, Fairfax Station, VA tural Production Declines. RFE/RL

22039, tel. (703) 425-1322, fax (703) Research Report (U.S.) 2(44):46-49,Silberman, J., and others; Jump-start- 425-7911. November 1993.ing Ex-Communist Economies: ALeaf from 'the Marshall Plan. For- Emerging Capital Markets in Po- Okolicsanyi, K., and J. J. Oklicsanyi.eignAffairs(U.S.) 73:21-26,January- land, The Central European (U.K.), Highway Construction in theFebruary 1994. April1994, pp. 29-40. Visegrad Countries. RFE/RL Re-

searchReport(U.S.) 3(2):39-46, Janu-Central and Eastern Europe Have We Touched Bottom Yet? The ary 1994.

Hungarian Economy (Hungary)Bakos,G.AfterCOMECON:AFree 21(4):5-6,1993. Owsiak, S. Financial Crisis of theTrade Area in Central Europe? Eu- Postsocialist State: Appearancesrope-Asia Studies (U.K.) 45(6):1025- Havel, V A Call for Sacrifice. For- and Mechanisms of Development.44,1993. eign Affairs (U.S.) 73(2):2-8, March- International Journal of Political

April 1994. Economy:AJournal of JanslationsBibo, I. Alleged Opposition between (U.S.)23:35-73, summer 1993.Capitalist Liberalism and Socialist Kayal, M. Projects on the Czech List.Communism. Hungarian Quarterly Worldwide Projects (U.S.) 1:39-41, Poland: A Financial Times Survey.(Hungary)34:41-53, winter 1993. autumn 1993. The Financial 11mes (U.K), March

18,1994, pp. I-XII.Chesler, C. World Bank Pushes for Kiss, J. Lost Illusions? Defence In-Lending Reforms. The BudapestSun dustry Conversion in Czechoslova- Restructuring ofEastern Gernany,(Hungary),March31-April6,1994, kia, 1989-92. Europe-Asia Studies AFinancial7lmesSurvey(U.K.),Mayp.5. (U.K)45(6):1045-69,1993. 4,1994, pp. I-IX.

Clarke, D. L. Eastern Europe's Mailet, L. Reform Speeds Up in East Romania Country Focus, The Cen-Troubled Arms Industries: Part I. Europe. East/West Letter (U.S.), tral European (U.K), April 1994, pp.RFE/RL Research Report (U.S.) 3(1):1 January-February 1994. 13-18.3(14):35-43,April 1994.

Marsh, V, and otiers. Industrial Con- Salzmann, R Changing'Role of theComerford, M. Commodities Trad- version. Central European: Finance Banking System in the Czech Eco-ers Eye Reforms. The Budapest Sun and Business in Central and Eastern nomic Reform. Bank Archiv (Aus-(Hungary), March24-30,1994, p. 5. Europe(U.K.)26: 16-20, October 1993. tria)41(9):673-78,1993.

26 April 1994

Transition

TransformationinCentralandEast- Papers (Czechoslovakia) 1:151-59, Ickes, B. W., and R. Ryterman. Road-ern Europe: Economic Theory June 1992. block to Economic Reform: Inter-and Practice. British Review of Eco- Enterprise Debt and the TransitionnomicIssues (U.K.) 15:1-168, October Dienes, L. Economic Geographic to Markets. Post-Soviet Affairs1993. Relations in the Post-Soviet Repub. (U.S.) 9:231-52, July-September 1993.

lics. Post-Soviet Geography (U.S.)Turek, 0. Convertibility: Blessing 34:497-529, October 1993. Karp, A. Trade and Nahodka's Spe-or Illusion? Prague Economic Pa- cial Economic Zone. Russian Far Eastpers (Czechoslovakia) 1:127-42, June Grossman, G. Underground Economy Update (U.S.) 4(4):6-7, April 1994. To1992. in Russia. International Economic order: PO. Box 22126, Seattle, WA

Insights (U.S.) 4:14-17, November- 98122, tel. (206) 447-2668, fax (206)CIS and the Baltics December1993. 628-0979.

Academy Critique Asks Policy Handelman, S. TheRussian"Mafya." Kux, E. Breakdown and Change inChange, Is Rebutted. The Current Foreign Affairs (U.S.) 73(2):83-96, East Siberia. Swiss Review of WorldDigest (Russia) 56(6):12-16, March March-April 1994. Affairs (Switzerland) 11:20-21,Novem-1994. ber1993.

Harold, J. Why Russia Is Not a Spe-Analysis of American Investments cial Case. Financial 71mes (U.K.), McFaul, M. Russian Centrism andin Russia. East European Invest- February 10, 1994,p. 15. RevolutionaryTransitions.Post-So-ment Magazine (U.S.), January 21,1994. To order: Wendy Steavensonor Max Jonson, New York, tel. (212)388-1500, fax (212) 254-3386

Aron, L. A Russian ScenaRio. TheInternational Economy (Intemnational)8(2):6-8, March-April 1994.

Belarus Telecom Development:Slow but Steady. East European So-vietTelecomReport(U.S.) 5(3) 10-15,March 1994. To order: ITC, 1724Kalorama Road, Suite 21 0, Washing- 1ton, D.C. 20009, tel. (202) 234-2138,fax (202) 483-7922.

Bird, C. Down but Not Out in,Sibe-ria? NVew Scientist (U.K.) 141:12-13,Februaiy 1994.

Borisov, V. N., M. L. Shukhgal'ter,and G. 0. Tarakanov. Russia's Engi- neering Complex: Some Resultsand Prospects. Studies on Russi'anEconomic Development (Russia)4:381-86, September-October 1993.

Brzezinski, Z. The Premature Part-nership. Foreign Affairs (U. S.)73(2):67-82, March-April 1994.

Capek, A. Specific Features of theSlovak Economy. Prague Economic From the Hungarian magazine Hocipo

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Guo, Z., J. Lu, and B. Ding. Trans- Gates, C. L. Vietnam's Private Sec- Febprual 3. N994 A4 (.S.),formationa and Revitalization of tor ataCrifical Juncture. Singapore ry 3 p. A4.TRANSITION is a regular publication of the World Bank's Transition Economies Division, Policy Research Departnent. The findings,views, and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliatedorganizations. Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its ExecutiveDirectors orthe countries theyrepresent. RichardHirschler is the editor andproduction manager, tel: (202) 473-6982. Jennifer Prochnow-Walker is the research assistant and desktop publisher. If you wish to receive Transition, send name and address to Jennifer Prochnow-Walker, room N- I 1023X, the World Bank, 1818 H Street NW, Washington, D.C. 20433, or call (202) 473-7466, or fax (202) 522-1152.Information on upcoming conferences on transforming economies, indication of subjects of special interest to our readers, letters to theeditor, and any other reader contributions are appreciated.

28 April 1994