bull bull

53868

Socialist Economies Reform Unit Country Economics Department The World Bank

The World of Welfare Socialism and the Transition to Capitalism

Essential characteristics of inshycome distribution in socialism are relatively well known among

researchers siflie data for Hungary Czechoslovakia Poland and Yugoslashyvia-comparable in quality to data in market economies--have been availshyable on a regular basis for the past 20 to 25 years It is safe to infer from these data that incomE distribution in those socialist economios hasbeen more equal than thatin capitllist coun tries atsimishylar levels of devillopment mostly beshycause of lower wage differentiation and an absence of hi~hly concentrated inshycomes from privately owned capital With the reappelTance of labor marshykets and the development of private ownership in postsocialist economies income disparitiel are likely toincrease

Legacy of socialist planners

Aparadigrn of the kind ofincomedistrishybution desired by socialist planners was provided in pre-velvet-revolution Czechoslovakia with one of the lowest inequality levels in the world It was the result of bull absolute dominance of state ownershyship in trade and industry with wages relatively equally distributed bull absence of private ownership in agrishyculture tran sforrnmgfarrners into state sector employees md providing correshysponding earnings structure (includshying access to social security) bull an extensive and egalitarian system of redistribution through social transshyfers

bull absence of regional income differshyences

Czechoslovakia exhibited one of the highest levels of socialization of the economy (measured by the share of personal income received through the intermediation ofthe state) state secshytor wages and social transfers acshycounted in 1988-89 for 95 percent of household gross income In Poland Hungary and Bulgaria wages and

Whats inside Mozambique Getting Rid of the War Economy

Demobilizing the military and resetshytling about 3 million civilian refugees in Mozambique are expected to occur sishymultaneously with the next phase of the adjustment program (page 4)

Public Enterprise Restructuring

In Central and Eastern Europe the temporary presence of nonviable state enterprises and the difficulty of their fast liquidation warrant a certain type of industrial policy (page 6)

A Proposal for Strategic Alliances

Loose arrangements between Western and Polish firms could be a possible approach for restructuring state entershyprises (page 8)

social transfers reached about 80 pershycent-and in Yugoslavia 75 percentshyof income (The difference was due mostly to private agriculture)

Hungary has exhibited less equality in income distribution than Czechoslovashykia mostly because of the forrners more developed private sector in urban arshyeas and a more mixed (private-coopshyerative) agricultural structure This was also true of Bulgaria although an

Quotation of the Month Helping theUS to Forge a StrongEconomy

The US economy facing major cuts in defense spending coul d get a boostfi-om a new international aid program to the CIS member states (page 9)

The Russian reform program (page 10)

Milestones of Transition (page 11)

Conference Diary (page 12)

World BankIIMF Agenda (page 13)

Books and Working Papers Briefs (page 14)

New Books and Working Papers (page 15)

Selected Articles (pageI6)

Volume 3 Number 2 February 1992

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Transition The World BankCECSE

egalitarian wage distribui ion and lower share of private sector ncomes preshyvented the more accentuated inequalshyity typical of Hungary Poland in turn has been less egalitarial than Hunshygary because of an almost entirely privatized agriculture Illcome distrishybution in the countries analyzed was the most unequal in the former Yugoshyslavia where wages were significantly dispersed (due to huge reional differshyences rather than to some intrinsic difference in industrial sector wage determination) and agriculture was private Moreover social transfers had almost no redistributive role since soshycial welfare funds as much republishycanized as wages were accumulated and distributed within the boundaries of each republic

The legacy of socialism renders the relationship between wage distribushytion and social transfers particularly important Wages and social transfers are in the process of change

bull Wage differentiation will increase with the emergence ofIabor markets and privatization as professionals with skills that are in demand (accountants financial analysts management speshycialists) begin to command higher wages while workers with obsolete or redundant skills see their earnings plummet or lose their jobs bull An increase in absolute amounts of

social transfers cannot be envisaged because during the economic slowshydown resources are becoming scarcer social transfers must therefore be inshycreasingly focused on the poor to counshyteract a rise in poverty

Poverty and the state

Historically this trend (toward wage differentiation and the related need for targeted social transfers) has emerged whenevermarkets-and labor markets in particular-have supplanted pershysonalized or paternalistic relation ships between lower and upper classes or workers and employers and when the roles of such social buffers as family or guild systems have weakened The present situation is therefore not unshylike the one that existed during the transition from feudalism to early capishytalism An important difference howshyever is that the current transition takes place in conditions of full political deshymocracy

In socialism social support was built into the system Full employment was guaranteed and wages were sufficient to support a modest standard ofIiving Essential commodities were heavily subsidized high participation rates were obtained and pensions were linked to previous earnings Since povshyerty was regarded as an accidental phenomenon an explicit state policy

From the US daily Dayton Daily News

Marchl992 2

toward poverty did not exist Antipovshyerty policy dealt only with extreme cases such as the support of alcoholics the handicapped and so on

Key providers of social support were the state through its employment polishycies subsidies and transfers (none of which were targeted) and the entershyprises which dispensed various in-kind benefits to the work force Direct finanshycial costs of delivering the support were low since it was done at a fairly decenshytralized level-that is through the enshyterprises Social benefits-from mashyternity leave and day-care to housing support and free vacations-were tied to the workplace Widespread provishysion of implicit income through subsishydies and in-kind transfers dispensed at the workplace accompanied by low wage differentiation had a further poshylitical objective to prevent individual accumulation of wealth and thus the creation of islands of political indeshypendence among those rich enough not to depend on state-provided jobs

Although the states interference in the economy was pervasive the state lacked experience in identifying the needy and administering and delivershying targeted support In capitalist economies income transfers are conshycentrated on the less well-offsegnlents of the population with the absolute amount of the transfers declining as the level of income increases but in socialism transfers were broadly neushytral with respect to household income Put differently the probability of reshyceiving cash transfers was indepenshydent of ones income status

Empirical analysis shows that redisshytribution ofincome in socialism as well as in the countries in transition (since the key elements ofthe welfare system are still unchanged) is characterized by almost uniform per capita social transfers and a negligible role for dishyrect taxation Socialism (group S see figure) thus differs from the three worlds (archetypes) of welfare capitalshyism as defined by Esping-Andersen (The Three Worlds ofWelfare Capitalshyism 1990) the liberal world of residual social welfare where transfers are limshyited and means-tested (group A) the conservative corporatist world of sizshyable yet mostly earnings-related transshyfers (group B) and the socio-demo-

Volume 3 Number 3

The World BankCECSETransflfon

Targeting and size of social transfers

Uniformtransfers i-------------t---Mtt-lC5----middot----

A NTH )R

OER

Degreeaf targeting

1 o

POL s

c

10 20 30 40

lransfers as percentage ofhousehold gross income

Nute Market economies data are for 1979-82 socialist economies data are for1988-89 A L1Deral world (Austria Canada Norway Switzerland and the United States) B Conservative world (France Germany the Netherlands and the United Kingdom) C Soci dernocratic world (Sweden) S Socialist world (Bulgaria Czechoslovakia Hungary and Poland) Bouret Branko Milanovic Income DistnDlltion in Late Socialism Poland Hungary Czechoslovakia Yugoelayenia and Bulgaria Compared CECSE RP Series on Income DistnDlltion During the Transition No1 Marcb 1992

~-------------------------------~------------~

cratic world of large social transfers where welfare is treated as a univershysal right (group C)

Theaddition ofsocial transfers to origishynal income (wages plus self-employshyment income plus income from propshyerty and all other incomes before govshyemmentredistributionviasocial transshyfers and taxes) reduces the concentrashytion of income by between 65 and 85 Gini points in Czechoslovakia Hunshygary and Poland trod 4 points in Bulshygaria (The Gini coefficient measures the concentration of income with the maximum being 100 points Most inshydustrial countries have Giois for disshyposable income between 25 and 35) This degree ofincome redistribution is accomplished through cash transfers amountingto about a quarterofhouseshyhold gross income In selected market economies on the other hand the conshycentration of income is reduced by 11 Gini points through cash transfersthat amount to some 18 percent of houseshyhold gross income Thus on average one percent of redistributed gross inshycome lowers the concentration of inshycome in market economies by 06 Gini

points and in socialist economies by only 03 Gini points As a redistribushytion tool transfers are twice as effishycient in capitalism as in socialism

More targeted transfers

In the transition to a market economy a major overhaul ofthe existing redisshytribution policies will be necessary Many of the unemployed in the abshysence of a social safety net will fall below the poverty threshold The postsocialist state needs to support its most destitute citizens but as earlier explained it is singularly ill-equipped to do this Transfers will have to beshycome more targeted and the health education and pension systems unsustainable in their present shape will have to be cut substantially Enshytitlement once considered eternal will have to be scaled down

Overall we can expect poverty to inshycrease in countriesin transition and to become quite pervasive in the Balkan countriesandtheformer Soviet Union The increase in poverty there is due to at leastthreefactors (1) declining overshy

all levels of income (2) increasing inshyequality because oflow social transfers and the importance of the more unmiddot equal agricultural sector (which is alshyready private or is in the process of privatization) and (3) administrative constraints in providing social assisshytance and a lack of experience with macro-related targeting Limited adshyministrative capacity could prove to be the most serious bottleneck as meritocratic bureaucracy has little reo cent tradition in these countries Furmiddot thermore the task of income redistrishybution is particularly difficult because a great percentage of the poor live in rural areas that arehard to reach This argues for retaining simple and reashysonably efficient support schemes that are already in place (such as family allowances) Targeting should be done by identifying the needy by certain easily verifiable characteristics (for example unwedmothers children unshyder a certain age the aged) compli cated means-testing programs should be avoided

Brrmko Milanovic CECSE World Bank

This article is an ooeroiew ofthe paper -Income Distribution in Late Socialism Poland Hunmiddot gary Czechoslovakia Yugoslavia andBulgaria Compared bullpublished in the CECSE RP Series on Income Distribution During the Transition No1 March 1992 To ordu The World Bank CECSE tel (202) 473middot7188

bullbullbull cti~iljg bullbullbull~tl~~amp~~~imiddotmiddotmiddotmiddotmiddotmiddotmiddoti

f~I~~~~~~~f~~~i2ti~9gQPtll~r9naB(dtPft~tmiddotgt street v

~1cent~6u~js~iftamp~poundh~ymiddotmiddotbullmiddotbullmiddot bullbull othfib14tliceiJtt)tyof1cent~1ltstb~

lrlilll~ll~ Volume 3 Number 3 3 March 1992

Transition The World BankCECSE

egalitarian wage distribui ion and lower share of private sector ncomes preshyvented the more accentuated inequalshyity typical of Hungary Poland in turn has been less egalitarial than Hunshygary because of an almost entirely privatized agriculture Illcome distrishybution in the countries analyzed was the most unequal in the former Yugoshyslavia where wages were significantly dispersed (due to huge reional differshyences rather than to some intrinsic difference in industrial sector wage determination) and agriculture was private Moreover social transfers had almost no redistributive role since soshycial welfare funds as much republishycanized as wages were accumulated and distributed within the boundaries of each republic

The legacy of socialism renders the relationship between wage distribushytion and social transfers particularly important Wages and social transfers are in the process of change

bull Wage differentiation will increase with the emergence ofIabor markets and privatization as professionals with skills that are in demand (accountants financial analysts management speshycialists) begin to command higher wages while workers with obsolete or redundant skills see their earnings plummet or lose their jobs bull An increase in absolute amounts of

social transfers cannot be envisaged because during the economic slowshydown resources are becoming scarcer social transfers must therefore be inshycreasingly focused on the poor to counshyteract a rise in poverty

Poverty and the state

Historically this trend (toward wage differentiation and the related need for targeted social transfers) has emerged whenevermarkets-and labor markets in particular-have supplanted pershysonalized or paternalistic relation ships between lower and upper classes or workers and employers and when the roles of such social buffers as family or guild systems have weakened The present situation is therefore not unshylike the one that existed during the transition from feudalism to early capishytalism An important difference howshyever is that the current transition takes place in conditions of full political deshymocracy

In socialism social support was built into the system Full employment was guaranteed and wages were sufficient to support a modest standard ofIiving Essential commodities were heavily subsidized high participation rates were obtained and pensions were linked to previous earnings Since povshyerty was regarded as an accidental phenomenon an explicit state policy

From the US daily Dayton Daily News

Marchl992 2

toward poverty did not exist Antipovshyerty policy dealt only with extreme cases such as the support of alcoholics the handicapped and so on

Key providers of social support were the state through its employment polishycies subsidies and transfers (none of which were targeted) and the entershyprises which dispensed various in-kind benefits to the work force Direct finanshycial costs of delivering the support were low since it was done at a fairly decenshytralized level-that is through the enshyterprises Social benefits-from mashyternity leave and day-care to housing support and free vacations-were tied to the workplace Widespread provishysion of implicit income through subsishydies and in-kind transfers dispensed at the workplace accompanied by low wage differentiation had a further poshylitical objective to prevent individual accumulation of wealth and thus the creation of islands of political indeshypendence among those rich enough not to depend on state-provided jobs

Although the states interference in the economy was pervasive the state lacked experience in identifying the needy and administering and delivershying targeted support In capitalist economies income transfers are conshycentrated on the less well-offsegnlents of the population with the absolute amount of the transfers declining as the level of income increases but in socialism transfers were broadly neushytral with respect to household income Put differently the probability of reshyceiving cash transfers was indepenshydent of ones income status

Empirical analysis shows that redisshytribution ofincome in socialism as well as in the countries in transition (since the key elements ofthe welfare system are still unchanged) is characterized by almost uniform per capita social transfers and a negligible role for dishyrect taxation Socialism (group S see figure) thus differs from the three worlds (archetypes) of welfare capitalshyism as defined by Esping-Andersen (The Three Worlds ofWelfare Capitalshyism 1990) the liberal world of residual social welfare where transfers are limshyited and means-tested (group A) the conservative corporatist world of sizshyable yet mostly earnings-related transshyfers (group B) and the socio-demo-

Volume 3 Number 3

The World BankCECSETransflfon

Targeting and size of social transfers

Uniformtransfers i-------------t---Mtt-lC5----middot----

A NTH )R

OER

Degreeaf targeting

1 o

POL s

c

10 20 30 40

lransfers as percentage ofhousehold gross income

Nute Market economies data are for 1979-82 socialist economies data are for1988-89 A L1Deral world (Austria Canada Norway Switzerland and the United States) B Conservative world (France Germany the Netherlands and the United Kingdom) C Soci dernocratic world (Sweden) S Socialist world (Bulgaria Czechoslovakia Hungary and Poland) Bouret Branko Milanovic Income DistnDlltion in Late Socialism Poland Hungary Czechoslovakia Yugoelayenia and Bulgaria Compared CECSE RP Series on Income DistnDlltion During the Transition No1 Marcb 1992

~-------------------------------~------------~

cratic world of large social transfers where welfare is treated as a univershysal right (group C)

Theaddition ofsocial transfers to origishynal income (wages plus self-employshyment income plus income from propshyerty and all other incomes before govshyemmentredistributionviasocial transshyfers and taxes) reduces the concentrashytion of income by between 65 and 85 Gini points in Czechoslovakia Hunshygary and Poland trod 4 points in Bulshygaria (The Gini coefficient measures the concentration of income with the maximum being 100 points Most inshydustrial countries have Giois for disshyposable income between 25 and 35) This degree ofincome redistribution is accomplished through cash transfers amountingto about a quarterofhouseshyhold gross income In selected market economies on the other hand the conshycentration of income is reduced by 11 Gini points through cash transfersthat amount to some 18 percent of houseshyhold gross income Thus on average one percent of redistributed gross inshycome lowers the concentration of inshycome in market economies by 06 Gini

points and in socialist economies by only 03 Gini points As a redistribushytion tool transfers are twice as effishycient in capitalism as in socialism

More targeted transfers

In the transition to a market economy a major overhaul ofthe existing redisshytribution policies will be necessary Many of the unemployed in the abshysence of a social safety net will fall below the poverty threshold The postsocialist state needs to support its most destitute citizens but as earlier explained it is singularly ill-equipped to do this Transfers will have to beshycome more targeted and the health education and pension systems unsustainable in their present shape will have to be cut substantially Enshytitlement once considered eternal will have to be scaled down

Overall we can expect poverty to inshycrease in countriesin transition and to become quite pervasive in the Balkan countriesandtheformer Soviet Union The increase in poverty there is due to at leastthreefactors (1) declining overshy

all levels of income (2) increasing inshyequality because oflow social transfers and the importance of the more unmiddot equal agricultural sector (which is alshyready private or is in the process of privatization) and (3) administrative constraints in providing social assisshytance and a lack of experience with macro-related targeting Limited adshyministrative capacity could prove to be the most serious bottleneck as meritocratic bureaucracy has little reo cent tradition in these countries Furmiddot thermore the task of income redistrishybution is particularly difficult because a great percentage of the poor live in rural areas that arehard to reach This argues for retaining simple and reashysonably efficient support schemes that are already in place (such as family allowances) Targeting should be done by identifying the needy by certain easily verifiable characteristics (for example unwedmothers children unshyder a certain age the aged) compli cated means-testing programs should be avoided

Brrmko Milanovic CECSE World Bank

This article is an ooeroiew ofthe paper -Income Distribution in Late Socialism Poland Hunmiddot gary Czechoslovakia Yugoslavia andBulgaria Compared bullpublished in the CECSE RP Series on Income Distribution During the Transition No1 March 1992 To ordu The World Bank CECSE tel (202) 473middot7188

bullbullbull cti~iljg bullbullbull~tl~~amp~~~imiddotmiddotmiddotmiddotmiddotmiddotmiddoti

f~I~~~~~~~f~~~i2ti~9gQPtll~r9naB(dtPft~tmiddotgt street v

~1cent~6u~js~iftamp~poundh~ymiddotmiddotbullmiddotbullmiddot bullbull othfib14tliceiJtt)tyof1cent~1ltstb~

lrlilll~ll~ Volume 3 Number 3 3 March 1992

The World BankCECSETransflfon

Targeting and size of social transfers

Uniformtransfers i-------------t---Mtt-lC5----middot----

A NTH )R

OER

Degreeaf targeting

1 o

POL s

c

10 20 30 40

lransfers as percentage ofhousehold gross income

Nute Market economies data are for 1979-82 socialist economies data are for1988-89 A L1Deral world (Austria Canada Norway Switzerland and the United States) B Conservative world (France Germany the Netherlands and the United Kingdom) C Soci dernocratic world (Sweden) S Socialist world (Bulgaria Czechoslovakia Hungary and Poland) Bouret Branko Milanovic Income DistnDlltion in Late Socialism Poland Hungary Czechoslovakia Yugoelayenia and Bulgaria Compared CECSE RP Series on Income DistnDlltion During the Transition No1 Marcb 1992

~-------------------------------~------------~

cratic world of large social transfers where welfare is treated as a univershysal right (group C)

Theaddition ofsocial transfers to origishynal income (wages plus self-employshyment income plus income from propshyerty and all other incomes before govshyemmentredistributionviasocial transshyfers and taxes) reduces the concentrashytion of income by between 65 and 85 Gini points in Czechoslovakia Hunshygary and Poland trod 4 points in Bulshygaria (The Gini coefficient measures the concentration of income with the maximum being 100 points Most inshydustrial countries have Giois for disshyposable income between 25 and 35) This degree ofincome redistribution is accomplished through cash transfers amountingto about a quarterofhouseshyhold gross income In selected market economies on the other hand the conshycentration of income is reduced by 11 Gini points through cash transfersthat amount to some 18 percent of houseshyhold gross income Thus on average one percent of redistributed gross inshycome lowers the concentration of inshycome in market economies by 06 Gini

points and in socialist economies by only 03 Gini points As a redistribushytion tool transfers are twice as effishycient in capitalism as in socialism

More targeted transfers

In the transition to a market economy a major overhaul ofthe existing redisshytribution policies will be necessary Many of the unemployed in the abshysence of a social safety net will fall below the poverty threshold The postsocialist state needs to support its most destitute citizens but as earlier explained it is singularly ill-equipped to do this Transfers will have to beshycome more targeted and the health education and pension systems unsustainable in their present shape will have to be cut substantially Enshytitlement once considered eternal will have to be scaled down

Overall we can expect poverty to inshycrease in countriesin transition and to become quite pervasive in the Balkan countriesandtheformer Soviet Union The increase in poverty there is due to at leastthreefactors (1) declining overshy

all levels of income (2) increasing inshyequality because oflow social transfers and the importance of the more unmiddot equal agricultural sector (which is alshyready private or is in the process of privatization) and (3) administrative constraints in providing social assisshytance and a lack of experience with macro-related targeting Limited adshyministrative capacity could prove to be the most serious bottleneck as meritocratic bureaucracy has little reo cent tradition in these countries Furmiddot thermore the task of income redistrishybution is particularly difficult because a great percentage of the poor live in rural areas that arehard to reach This argues for retaining simple and reashysonably efficient support schemes that are already in place (such as family allowances) Targeting should be done by identifying the needy by certain easily verifiable characteristics (for example unwedmothers children unshyder a certain age the aged) compli cated means-testing programs should be avoided

Brrmko Milanovic CECSE World Bank

This article is an ooeroiew ofthe paper -Income Distribution in Late Socialism Poland Hunmiddot gary Czechoslovakia Yugoslavia andBulgaria Compared bullpublished in the CECSE RP Series on Income Distribution During the Transition No1 March 1992 To ordu The World Bank CECSE tel (202) 473middot7188

bullbullbull cti~iljg bullbullbull~tl~~amp~~~imiddotmiddotmiddotmiddotmiddotmiddotmiddoti

f~I~~~~~~~f~~~i2ti~9gQPtll~r9naB(dtPft~tmiddotgt street v

~1cent~6u~js~iftamp~poundh~ymiddotmiddotbullmiddotbullmiddot bullbull othfib14tliceiJtt)tyof1cent~1ltstb~

lrlilll~ll~ Volume 3 Number 3 3 March 1992

Transition lhe World BankCECSE

Reconstruction in Mozambique Getting Rid of

the War Economy

M ozambique is making progress in its transition from a centrally planned economy

to a market-based one despite its scarce management resources and the conshytinuing civil war The country has reshystored growth and some economic stashybility through a combination of fiscal and monetary restraint gradual ecoshynomic liberalization and substantial external aid since the second halfofthe 1980s The economy after a decline of 30 percent during 1982-85 has been growing at an average annual rate of about 4 percent since 1987 the startshying year of the economic reform The gap between the official and parallel market exchange rates of the metical (the local currency) has narrowed from more than 4000 percent in 1987 to less than 20 percent at present

With all these achievements the preshyceding phase ofthe reform process has not tested the governments rather limshyited administrative capabilities to the extreme implementation of orthodox stabilization packages reduced state intervention in the economy and conshytinued insecurity in the countryside warranted postponingthe development of a multiparty political system In the forthcoming phase ofeconomic adjustshy

ment however the government will need to substantially expand its instishytutional capacity as the agenda inshycludes a privatization progran reform of the financial sector andforI )ign trade and foreign exchange refoml

Furthermore with the prospect of peace in the nearfuture the government will face the additional challenge of demoshybilizingthe military including Renamo insurgents and resettling about 3 milshylion civilian refugees A peace agreeshyment may be reached this year and elections will follow shortly

Encouraging first steps

Mozambiques economic adjustment process is not without some success

bull Stabilization of the economy through restrictive fiscal andmonetary policies was effected at the start of the reform program to neutralize the money machine to avert further monetizashytion of the budget deficit and to halt the provision of bad loans to the ineffishycient public sector With the help of foreign grants the budget deficit-afshyter reaching more than 18 percent of GDP in 1984-was reduced to about 5 percent by 1991 Through the estab-

Comparison of some social indicators of development of former centrally planned economies

exmiddotUSSR ---------- Income per capita (US$) 1780

Hungary

2590

Poland

1790

Romania

1450

Cuba

na

Mozambique

80

Persons per physician 270 307 487 567 530 37949

Persons per nurse na 174 187 277 285 5759

Primary school gross enrol ratio 106 98 101 97 105 82

Secondary school gross enrol ratio 99 70 80 79 89 7

lishment of credit ceilings the money supply (M2)was set to grow more slowly than the inflation rate and the ratio of M2 to GDP fell from about 80 percent in 1983 to about 35 percent in 1991 bull Domesticinflationhasslowedfrom 160 percent in 1987 to around 35 pershycent at present Following substantial price adjustments at the beginning of the reform program prices have been gradually liberalized and most of the money overhang has been eliminated Real money balances declined 43 pershycent in 1987 and an average 5 percent annually since then bull Producers and exporters responded rapidly to price adjustment including drastic devaluation of themetical (The exchange rate moved from about 40 metical to the dollar in 1987 to about 1950 metical at present) Meanwhile the volume of exports mostly nontrashyditional has been rising at an accelershyated rate-4 percent in 1988 12 pershycent in 1990 and 15 percent in 1991 (compared with previous years) bull Inflows of foreign capital (in the form of external aid reaching about $800 million annually) played an esshysential role in the country in increasing competition creating positive extershynalities setting new standardsforboth labor and capital and supporting balshyance of payments stability Official grants rose from about 2 percent of GDPin 1986to more than 22 percent of GDP in 199L bull A minimum social safety net was set up to try to preserve political conshysensus during the transition process Under both the IMF and the World Bank programs food and income subshysidies stilI represent an important comshyponent of the budget (about 7 to 8 percent of current expenditures) This has helped to reinforce political stabilshyity and the governments commitment to the proper set of reforms

Peace economy is needed

na not available Source a For ex-USSR USSR Report 1991 For others World Development Report 1991 (1989 data)

b Social Indicators ofDevelopment 1989 (late 19809 dsta)

Marchl992 4

Despite the progress made so far macshyroeconomic and financial imbalances remain extremely high and continued

Volume 3 Number 3

Transition The World BankCECSE

external assistance will be required over a long period oftime to support the recovery process

MozambiqueS economic reform proshygram has to deal with the following major issues

(1) Ending the civil war is still thehighshyest priority Pervasive hostilities and insecurity in the countryside are a major obstacle to growth they hamper the recovery of family-sector agriculshyture bydisruptingmarketingand transshyportation ofgoods The civil war a classhysical East-West confrontation in the late 1970s has developed into a local political power struggle Since the tershymination ofthe defunct Warsaw Pacts military assistanee to the government disbanded soldie~s have preyed upon civilians and army units have diverted a growing share of the imports proshyvided to the civilian population The incentive structure put in place by the countrys adjustrr ent program (prices exchange rate improved composition of public expenditures cannot be fully operational in an economyat war High maintenance cosb in such an economy distort the price system and make ecoshynomic decisions (fJr domestic and forshyeign investors enrepreneurs looking for privatization and sCIon) extremely difficult

(2) Institutional stengthening andcashypacity building are the main priorities in the immediateurolt future Donor-fishynanced technical assistance has to be tailored accordingly and wage incenshytives must be put m place to prevent the brain-drain of high-level civil sershyvice staff Foreign investment would likely upgrade management in the nongovernment sector thus providing transfer oftechnology and skills This ought to be considered when defining new foreign investment rules

(3) Privatization or large-scale entershyprises should precede or run parallel with the reform of the financial sector in order to save new eommercial banks from providing bad loans to bankrupt companies (Since 1987 120 small and medium-sized enterprises have been privatized) In the past public entershyprises-parastatal 5-enjoyed soft budget constraints through noncomshymercial bank credite and state subsishydies In reforming Mozambiques fi-

Volume 3 Number 3

nancial sector the risk of a credit crunch (with adverse consequences for outshyput) has to be factored in Given the present state of the economy most of the parastatals would probably not be eligible for full commercial lending In addition their long-term financial vishyability is still difficult to assess some are clearly not viable and some have good prospects but most of them are in a grey area where it is hard to detershymine the causes of operating losses (shrinking market tariff policy misshymanagement and so on) This unclear situation calls-at least temporarilyshyfor open budgetary subsidies rather than hidden support through bank lending and a clear policy for dealing with high-risk public enterprises

(4) Economic rationale should set the pace and sequencing of the reform proshygram (including the privatization of large public enterprises) rather than short-term political considerations For example to enable enterprises to funcshytion under market conditions a new regulatory and legal framework has to replace the old one Although this transhysition process has already started it is likely to take time But the need to gain political headway may push the govshyernment into quick privatization deals before a new regulatory framework is put into place

(5) Collection of counterpart funds should not impede fiscal and monetary

5

From the US daily Buffalo News

goals (Counterpart funds are the local currency-equivalent of imports fishynanced by foreign assistance that has to be put up by the importer usually a public enterprise and remitted to the Treasury) Large state enterprises (usushyally the largest loss-makers) scramshyblingto acquire the necessary funds for imports might crowd out efficient comshypanies from domestic credit allocation Also local importers have found creshyative ways to delay the payment of counterpart funds and thus to circumshyvent credit ceilings through the issushyance of promissory notes to the Treashysury

(6) Additional growth and developshyment strategies have to be worked out once the macroeconomic framework is more or less in shape Mozambique will have to consider a number of imporshytant geopolitical changes in the region (for example the birth of a new South Africa) reassess its war-damaged agshyricultural export potential and the role thatmay be played by its service indusshytry (ports railway corridors tourism and so on) and determine its comparashytive advantages in the new world economy Compared with those new challenges the challenges of the adshyjustmentand stabilization process may appear easy

Rocio Castro and Luiz A Pereira da Silva AF6CQ The World Bank

March 1992

Transition The World BankCECSE

Public Enterprise Restructuring Achilles Heel of the Reform Process

s tate enterprises still account for the bulk of industrial acshytivity across Central and

Eastern Europe (CEE) Yet there has been relatively little discussion about indications that a large part of them may not be viable at world market prices and competition In other words the cost of restructuring those entershyprises (in present value terms) may exceed the social benefits The probshylem is likely to be even more acute in the former Soviet republics where the degree of distortion vis-a-vis world prices has been relatively higher and isolation from world markets has been greater

Problem children Nonviable enterprises

Using detailed input-output data from 1988 and 1989 and information on world prices Hughes and Hare (Comshypetitiveness and Industrial Restrucshyturingin Czechoslovakia Hungary and Poland 1991) found that the share of output in manufacturing industry with negative value-added at world prices ranged from 19 percent in Czechosloshyvakia to 236 percent in Poland and 242 percent in Hungary Adjusting

The Hungarian approach The Hungarian experience is instructive As indicated by the results of Hughes and Hare the enterprise viability prob lem in Hungary appears to be ofa magshynitude similar to that in Czechoslovakia andPoland Hungarys approach to sysshytem reforms has been more cautious Trade liberalization has been more gradUCII---some 30percent ofindustrial production remained protected in 1991 through licensing and tariffprotection on liberalized commodities is higher The real exchange rate has undergone relashytively minorgyrations andfull currency convertibility is to be attained at a more gradUCI1 pace The reliance on more trashyditional privatization methods mayhave kept expectations about what is achievshy

these figures for a 25 percent negative quality differential produced negative value-added shares of 34 percent in Czechoslovakia 355 percent in Hunshygary and 389 percent in Poland Though the numbers may be exaggershyated it still means thatfor a significant share ofindustrial output the value of intermediate inputs may exceed the value of output when both are evalushyated at world prices For such prodshyucts output at world prices will be produced at a loss even ifthe en tire cost of labor and capital is shelved These figures are likely to be even higher in Eastern Europe and the former Soviet republics given the relatively greater isolation from world markets

Restructuring industry that has negashytive value-added at world prices usushyaBy is not worthwhile The share of industrial activity for which the costs of restructuring exceed expected benshyefits is presumably far greater than the share that is value-subtracting howshyever Studies by potential foreign inshyvestors suggest that about a third of the industrial sector is not likely to be viable For another third major reshystructuring would be required to the extent that a positive return on the

able more realistic It is at least the first step toward more forceful public entershyprise reform while actual progress on privatization has been more rapid than elsewhere This more gradUCII approach to the transition has certainly not admiddot versely affected theperception offoreign investors as their response has been far more favorable in Hungary than else where in the CEE region Domestic pri vate sector activity also appears robust Clearly Hungary has a difficult task of enterprise reform ahead But the more gradUCII approach to transition policies at the macro level appears to have inshycreased the prospects of sustainability while permitting relatively faster progress in enterprise reform

exercise could not necessarily be exshypected Restructuring would definitely be worthwhile for only about one-third of industrial activities

The presence of a large number of firms that are nonviable under comshypetitive conditions considerably comshyplicates the reform strategy as full implementation of liberalization and stabilization could generate a level of enterprise bankruptcy and unemployshyment that no government could surshyvive The depressed level of demand could undermine even the healthier enterprises and cut into fiscal revshyenues A vicious cycle of recession and inflation could be the result In addishytion private investors whether doshymestic or foreign will be less intershyested in assuming ownership of existshying firms that are insolvent or require costly restructuring and win opt inshystead to start new ventures free ofthe legacies of the past including liability for environmental damage

Some general principles

If the proportion of nonviable entershyprises in a liberalized economy is larger than can be liquidated immediately the government de facto is engaged in a form of industrial policy While the choice of policy intervention will unshydoubtedly depend on individual circumshystances it is possible to specify some general principles that should apply

(1) Price reform Sheltering entershyprises from bearing the full burden of higher prices-by continuing to subsishydize such inputs as energy-complishycates the evaluation oftheir net worth and in addition delays and possibly distorts the adjustment to the permashynent changes in the terms of trade Moreover charging enterprises the unsubsidized price for energy and other raw material inputs would help to enshysure that the reduced level of trade that is transacted is at least economishycally beneficial

March 1 992 6 Volume 3 Number 3

Transition The World BankCECSE

(2) Bankruptcies Immediate liquidashytion is the preferred strategy in the case ofthe weakest enterprises which cannot cover operating costs underany reasonable set of relative prices But the number ofactual shutdowns in the short term is likely to be far less than ideal from a purely economic perspecshytive reflecting the political difficulty of allowing drastic increases in unemshyployment The inadequacy of existing bankrupby legiclation could also slow the liquidation process For large enshyterprises some lines of production would need to be closed while others could continue operation Ifthe output of a firm or line of production is valueshysubtractingundH the liberalized price regime itwould he preferable to termishynate production altogether even while continuingtocompensate workers fully The scope of thi type of cost saving would be substantial

(3) Subsidies Explicit budgetary supshyport is preferablemiddot to support from the banking system where immediate liqshyuidation is not possible This will keep up pressure and Poster closer governshyment supervision of the firms activishyties while it is awaiting liquidation Recourse to the banking system on the other hand would result in an increase in bad loans Banlingresources would be more pTCductively used to finance new investment as well as to restrucshyture potentially vilble companies

Trade curnmC) and macro issues

(4) Trade liberali~ation A policy of graduai trade liberalization appears particularly nppropriate for the former Soviet republics and possibly for other formerly socialist economies as they begin to dismantle barriers to trade with hard currency areas The experishymentofreformingeconomies with shock trade liberalization-the unprecshyedented fast shift from an essentially closed regime to pra(ticallyfree tradeshyis unlikely to be sustainable in a weak enterprise structure Poland and Czechoslovakia initially adopted tariff regimes essentially resembling those of the least protectie industrial counshytries with tariff rates averaging about 5 percent although more recently tarshyiffs for certain import-competing inshydustries have heen raised significantly in both countries Tariff rates in Bul-

Volume 3 Number 3

garia and Romania also averaged less than 10 percent in 1991 while import quotas were largely eliminated Ultishymatelyitisaquestionofjudgment--of weighing the distortive effects on relashytive prices of initially higher tariffs against their potential for providing some breathing space to enable entershyprises to restructure and compete in world markets

(A frequent argument for rapid trade liberalization is that it will break the power of the rent-seeking industrial monopolies But at least in the initial stages of transition the shortage of foreign exchange may force the aushythorities to resort to foreign exchange allocations Even in a liberal exchange rate regime overshooting could occur reflecting political uncertainty or lack of confidence in the sustain ability of transition In these cases competition from imports may not be sufficient to combat monopoly pricing In the inshyterim period before either domestic or foreign competition has become effecshytive restrictions on price increases by monopolists could therefore be warshyranted)

(5) Exchange rate policy Countries attempting the transition to a market economy may be classified into those that have a measure of control over the exchange rate (atleast in the short run) and those that do not due to the exshytreme shortage offoreign exchange The concern here is with the former catshyegory which currently comprises Czechoslovakia Hungary andPoland In each ofthese countries the exchange rate has been used to anchor the stabishy

lization program in Czechoslovakia and Poland the nominal exchange rate has been pegged to the dollar or a basshyket of hard currencies (Poland 1991) while Hungary has adopted a managed float through intervention Duringthe transition however when domestic demand remains depressed and inflashytion rates remain well above Western levels it may be relatively easy to susshytain an appreciation of the real exshychange rate since balance of payments pressures will emerge more slowly than wouldbe the case in a growing economy The temptation to use the exchange rate to fight inflation as well as to force productivityim provements onto entershyprises will also be strong Hence an appreciating real exchange rate can jeopardize the ability of potentially vishyable firms to compete

(6) Sequencing While there is general agreement that most enterprises will have to be restructured to survive there is less consensus on the extent of reshystructuring that is needed prior to privatization In the current unstable economic environment it is generally difficultto determine which firms would ultimately survive under competitive conditions The concern here is that frustration with the slow pace of entershyprise reform may force the pace of macro reform in an ultimately unsustainable manner For example free trade and an appreciating real exchange rate may be used to try to force enterprises to become more effishycient since it is institutionally easierto adopt this stance than to tackle the core problems of enterprise manageshyment such as incentive systems and

My Arthur could never resist a bargain

From the British daily Evening Standard

7 March 1992

Transition lhe World BankCECSE

A Proposal to Solve the Restructuring Dilemma in Poland Maurice Ernst suggests strategic alliances

Many large state firms in Poland have sought but few have found foreign savshyiors Foreign investors have been turned off not only by backward technology poor organization and a changing tax structure but also by the risks created by organized labors opposition to drasshytic change and by the unique functions of large enterprises in former commushynist countries--such as providing social services The current management of state-owned enterprises is not in a posishytion to negotiate such problems with prospective Western investors the censhytral and local governments must be inshyvolved because only they can provide many ofthe solutions

The solution that is advocated by many economists to the obviously sluggish reshysponse of Polish state-owned firms to emerging market conditions is to accelshyerate privatization Unfortunately privatization is as much the end result ofa complex process as it is a means of achieving these desirable results In Poland very little privatization has ocshycurred through sale of enterprises to domestic or foreign buyers either dishyrectly or by issuing and selting shares The overwhelming majority of privatizations of state enterprises has occurred through what the Poles call the liquidation process bull The government breaks up large stated-owned enterprises suchas wholeshysale firms department stores and tourshyist offices and then sells or leases parts ofthese firms to private parties or bull A firms employees in cooperation with its management work out a leasshying or leveraged buy-out arrangement with the government

Sales oflarge industrial firms to foreign investors have been few-the GMagreeshyment with the FSO automobile firm being a recent exampl~nd have inshy

volved complex negotiations lasting many months and including such issues as tax breaks tariffprotection access to the EC market and so forth As the financial conshydition of the state sector has deteriorated the liquidation process has begun more and more to resemble a bankruptcy sale certainly not what was intended To accelshyerate privat-ization Poland likeothercounshytries ofCentral andEastern Europe is also considering the free distribution ofvouchshyers representing ownership shares ina dozen or two investment companies but it is unshycertain whether these companies can make the tough decisions needed for restructurshying

The Polish government has also begun to use foreign firms to assess market opportushynities and competitiveness in a series of34 sectoral studies covering such industries as automobiles machine tools shipping aircraft pharmaceuticals cement meat processing beer and construction The possibilities for contracting out the restrucshyturingofenterprises to groups ofmanagers are also being considered Some industries such as coal and steel may require special treatment-possibly involving a regulated phasing down ofproductive capacity over several years as in the European Commushynity Some heavily affected regions such as the lLJdz region where most ofthe severely ill textile industry is located and Silesia the nexus ofcoal steel and pollution will require assistance for restructuring divershysificotion andcleanup possibly in theform of low-interest loans that could be supshyported by foreign donors

In my view the most promising approach to the restructuring problem is the use of strategic alliances loose arrangements amongWestern andPolish firms to develop joint ventures other direct investments marketing arrangements RampD and techshynology cooperation On the Western side one firm must take the lead even though

other companies may be brought in for special expertise and funding and to share the risk Participation ofthe Polshyishgovernment is essentiaL Westerngovshyernments could provide encouragement through fiscal and other financial inmiddot centives such as reduced or even no taxes on capital gains

Strategic allia nces can help to assess the Polish firms potential for competitive production and exports identify potenshytial Western investors or partners and negotiatewith all interested parties For example Western investors maycommit themselves to worker retraining proshygrams the central government maygive the locol government a larger share of certain tax receipts to finance the local hospital formerly paid for by the firm specific and limited commitments may be made for environmental cleanup For the Western partner no capital needs to be committed until a clear picture of investment opportunities has emerged and ways have been found to resolve major problems The principal cost to the lead Western partner would be the commitment ofhigh-level executive pershysonnel with a sophisticated knowledge of technology markets and manageshyment In return the Western lead firm would be given the right to develop or buy into any investment opportunities that arise from the cooperation For Poshyland-and other postsocialist counshytries-a network of strategic alliances could greatly accelerate the flow ofWestshyern capital technology and manageshymentk now-how into a criticalpartofthe economy and thereby avoid a severe waste of resources and an unnecessary further decline in economic activity

The authoris a consul tantat the Hudson Institute

reforming the power of workers counshycils There may also have been a tenshydency in the CEE region to postpone the tough enterprise-level reforms in thehope thatmass privatization would relieve the government of having to legislate such reforms The limits of privatization in a situation of substanshytial enterprise nonviability would indishycate that enterprise reforms per se can no longer be postponed

March 1 992

Summing up macroeconomic policy must take account ofthe potential conshyflict between the speed of reforms and the rapidity with which it is possible to liquidate nonviable firms These conshysiderations suggest the need for more careful coordination between the impleshymentation of reforms atthe macro level and that at the enterprise level Given the relative difficulty of the latter a pace of reform that is restrained only

8

by implementation capacity will not necessarily be an optimal or very susshytainable approach to the transition

SanjayDhar World Bank ECAVP Excerpted from the authors paper Enterprise Viability and the Transition to a Market Economy January 1992

Volume 3 Number 3

Transition The World BankCECSE

Quotation of the Month Cutting defense spending will proshyvide the US with its own transition problems Group calls for new $100 billion Marshall Plan to the former Soviet republics

T he United States in conjuncshytion with the European Comshymunity Japan and other

wealthy nations should launch a new economic initiative designed to help the former Soviet republics make the transition from a centrally planned system to a network of democratic and market-oriented economies The curshyrent state ofthe Us economy is propishytious for such a daring venture Deshyfense-related spending has generated many jobs in the US economy and it has increased aggregate demand which has benefited many corporashytions A major cutn defense spending will have a dampEning effect on US job growth and corporate profits unshyless it is offs4~t by other activities

Even if def(lOse spending cuts are matched by equal increases in social welfare spending the net impact on the US economy i~ somewhat diminshyished growth prospects and slightly lower employment totals To cut deshyfense spending inl recessionary or slow-growth period will provide the United States withts own transition problems The macroeconomic stimushylus to the economy that would be genshyerated by a new Marshall Plan for the former Soviet republ ics could be a key ingredientin helping the United States forge a strongpost-Cdd War economy

Roughly 48 percent of the aid and asshysistance that the former Soviet repubshylics have received has been in the form ofexport credits and guarantees Over 60 percent of these export credits and guarantees have been made by Euroshypean nations In contmst only one out ofevery eight dollars in export credits and guarantees to thf~ former Soviet republics have been made by the United States and mostof them were for farm products The United Statescould very easily find itselflocked out of key marshykets in the former Soviet republics The credits and guarantees grantedby European nations will help finance many capital goods ami other related

Volume 3 Number 3

investments Relationships between buyers in the former Soviet republics and Western European corporations are being established To be sure there are successful business ventures and investments between US firms and the former Soviet republics However European activity in this area-parshyticularly from Germany-dwarfs that of the United States

It is in the United States self-interest to have a strong and vibrant commershycial presence in the former Soviet reshypublics Steps taken now to establish and assure growing economies in the former Soviet republics will create new buyers for US agricultural products manufactured goods and services However the United States is curshyrently playing a very small role in aidshying and assisting the former Soviet republics Only about 6 percent of the aid and assistance to the former Soviet republics or under $5 billion is curshyrently coming from the United States The United States is providing less aid and assistance than Italy which has an economy approximately one tenth the size ofthat of the United States

It is useful to remember some of the features and lessons of the original Marshall Plan George C Marshall presented the general outline of what became known as theMarshall Plan on June 5 1947 The independent Ecoshynomic Cooperation Administration (ECA) was established to administer the program which provided $133 bilshylion in assistance to Europe from 1948 to 1952 In 1992 dollars this total is equal to approximately $100 billion The ECA extended into many other areas besides providing grants andfosshytering investment Ithad a very active technical assistance program which introduced American management and production practices to Western Euroshypean businesses It promoted peopleshyto-people diplomacy And it encourshyaged theformation offree andindepenshydent trade unions as an institutional foundation for democracy and labor market cooperation to spur productivshyity and distribute its fruits for the benshyefit of all

The roughly $100 billion total of the original Marshall Plan is a realistic starting point for a new economic inishy

~ ---~----------------------~----~----

Never too late Western aid package for Russia The Group of Seven industrialized nashytions announced a $24 billion one-year aid program for Russia on April 1 The program establishes a $6 billion fund to maintain the value ofthe ruble while it becomes a convertible currency Another $18 billion is the sum total of bull credits from the IMF the World Bank and the EBRD ($45 billion) bull debt rescheduling ($25 billion) bull export credit guarantees food credits and humanitarian aid ($11 billion)

According to Horst Kohler Germanys chief negotiator in the G-7 the package would cover this years deficit in Russia8

balanreof payments Headded that agreeshyment on the adjustment program beshytween the Russian government and the

IMF could be finalized in May with the first credit tranches coming in June beshyfore the G-7 Munich Summit in July World Bank credits should also be availshyable by June or July Kohler said The United States would take a 20 to 25 I

percent share of the G-7 package Presi- dent Bush will ask the Congress to apshyprove a $12 billion US quota increase for the IMFan additional$ll billion in agricultural credit guarantees (since January 1991 the United States has extended $37 billion in such credits) and the announced $620 million in ecoshynomic and humanitarian aid Congress also is called on to repeal legal provisions limiting trade and to expand Peace Corps presence USIA programs and democshyracy corps programs in Russia

9 March 1992

Transition The World BankCECSE

tiative for the former Soviet republics Thisplan should be multinational One possible funding formula might be for the United States the European Comshymunity Japan and other wealthy nashytions each to contribute a portion of the needed resources Such a multiyear funding level divided between several donors is realistic and doable

This new economic initiative needs a multinational organization equivalent to the ECA of the Marshall Plan Such an organization would of course work cooperatively with the International Monetary Fund the World Bank and the United Nations We recognize that the former Soviet republics of the 1990s are different in many important reshyspects from post-World War II Westshyern Europe and the aid delivery sysshytems need to reflect these differences This multinational ECA should be dishyrected by private sector business and labor leaders as much as possible

The new ECA should organize along the lines of key industries and ecoshynomic sectors We strongly suggest that representatives from business labor and agriculture sit on these varishyous industry and sectoral committees The former Soviet republics will also require a great deal of technical assisshytance and basic institution-building Price decontrol is an important part of establishing a free-market system However a modem free market also requires a highly developed system of commercial laws an efficient banking system and stock markets In addishytion worker transition mechanisms that supply economic safety nets and the ladders to reach them are particushylarly important It is especially critical that the outstanding scientific talent that supported the former Soviet milishytary machine be redeployed to producshytive peaceful pursuits that benefit the world community (such as energy enshyvironmental and health care priorishyties)

Excerpts from the policy statement of the Nashytional Planning Associa tion Washington D C (dated March 18 1992) NPA is a nonpartisan economic and social research institution its trustees are prominent leaders from business labor agriculture and academia

The Russian reform program

The Russian governments economic reshyform program for 1992 published in early March has been drawn up with requirements for joining the IMF and the World Bank in mind At the same time it also reflects the governments

I commitment to stabilizing and liberalizshying the economy over a two-year period Its priorities are eliminating the budget deficit controlling the money supply and implementing privatization_

Prices The program looks forward to the eventual liberalization ofprices from all administrative restrictions By April prices ofall consumergoods and services (except rent social services and public transport) will be freed Russian Presimiddot dent Boris Yeltsin asserted that deregushylation ofmostenergy prices will beputoff untilate Mayor early June The origishynal plans expressed an intention to free prices for fuel and other goods for proshyduction purposes byApril 20 while temshyporarily retaining theregulation ofprices for gas and electricity

Safety net Social protection will be dishyrected above all to pensioners largefamishylies and the unemployed This will enshytail cash compensation ofpensioners for price rises and social security payments to the other two groups Unemployment benefits will come in two forms-stanshydard and raised Standard benefits will not exceed 75 percent of the minimum wage while raised benefits will not exshyceed90percentofthe a verage wage earned by the recipient at the last place ofwork Raised benefits will be given only when the workplace has been closed or reorgashynized

Budget As a result ofprice liberalizashytion only some 5 percentofpublic spendshying will be devoted to subsidizing goods and services The austere social policy will permit further reductions in the general level ofgrants and subsidies In the course ofthis year defense spending will be cut further By mid-year the number ofcivil servants will have been cut by 5 percent The government sees its task as eliminating the budget deficit by the beginning of1993

Exchange rate In order to improve forshyeign trade performance and integrate Russia into the warldeconomyassoonas possible a single exchange rate will be introduced As a first step the governshyment intends to abandon the present

system by April 20 The several current rates will be merged into two undershypinned by a single floating rate One rate will apply to all current transacmiddot tions while the other will apply to the movement ofcapital At the same time free access to foreign currency will be granted to importers ofgoods and sershyvices as well as to foreign investors for the conversion ofdividends and profits

Foreign trade_ By July 1 all export quotas and licenses will be abolished Only the export ofenergy resources will still be subject to regulation although these quotas will be abolished by the end of 1993 No significant limitations on imports will remain

Monetary policy The Russian governmiddot ment will attempt to the best of its ability to coordinate monetary policy with the other CIS member states in the context of a ruble-denominated zone The Central Bank ofRussia claims it is ready to agree with the central banks of the other former Soviet republics on the rate and scale of money emissions on the general guidelines for unifying the ruble exchange rate and on the fine details ofpayments and accounting beshytween the CIS member states Should anyofthe former Soviet republics decide to introduce alternative currencies the Central Bank ofRussia is prepared to discuss the orderly withdrawalofrubles from circulation in the given republics

Privatization In the initial stage the emphasis will be placed on the swift sale by auction of small enterprises and retail outlets The privatization of large enterprises will be based on the following principles bull Employees will be offered shares in their own enterprises although not a controlling share bull Restrictions on the sale ofseparate enterprises and branches within large groups will be lifted bull Restrictions on the participation of foreign investors will be lifted bull Privatization will include the land on which the given enterprise stands bull Privatization ofincomplete construcshytion wark will be encouraged through a special tax regime

Based on Oxford Analytica London and Commersant a Russian weekly (March 2 1992)

March1 992 10 Volume 3 Number 3

Transition The World BankCECSE

Milestones of Transition

In Czechoslovakia inflation would be 12 percent in 1992 with GDP conshytracting by about 5 to 8 percent preshydicted Czechoslovakias State Bank GovernorJ osefTosovsky Inflation last year was almost 58 percent

Germany will transfer a net 180 bilshylion marks to thE eastern part of the country this year up from 139 billion in 1991 The forecast came in the Bundesbanks latest monthly report which cautioned against a continuashytion of transfers that are used primashyrily tofinance consumption (Atpresen t 134 million peoplE are unemployed in eastern Germany representing 165 percent of the tota I work force)

The Ukrainian parliament approved in principle an economic reform proshygram in late Mard which scraps the ruble in Ukraine and extends the use of the current coupons until the Ukraishynian currency is introduced (within three months) All trade with former Soviet republics will b(~ on a hardshycurrency basis imp(rts from them will be subject to tariff and exports to them will be subject to VAT

The new Ukrainian foreign investshyment law which came into effect on March 12afterparliarnentary approval allows foreigners to buy interests in Ukrainian businessemiddot or property of up to 100 percent guara ntees the righ t of foreign investors to repatriate revenues and profits and provides for compenshysation in the event of nationalization All current joint ventures are exempted from taxation until five years after they start to make a profit New joint ventures will be exempted from taxashytion on their profits for three years

A draft privatization program ofRusshysian state and municipal properties approved by the joint session of the presidium of the Rmsian Supreme Soviet and the government emphasizshying reliance on auctions calls for the sale of 70 billion to 80 hill ion rubles of state property this year and the free transfer to workersofstlte enterprises worth 150 billion to 20Ci billion rubles Ifthe Russian Supreme Soviet approves the proposal by the end of 1992 an estimated 12 to 20 percllnt of the total

Volume 3 Number 3

value offixed and worki ng capital could be privatized

The Russian Finance Ministry has informed the government that the first quarter budget revenue of 190 billion rubles is 250 billion short of the proshyjected figure Revenues from foreign economic activity amount to 9 billion rubles compared with a planned budshygetaryincome of228 billion rubles due to the steepfallin exports the financial status of exporters the paralysis ofthe oil-refining industry and the lifting of export duties on much of the fuel shipshyments The Russian industrial output in January and February was 135 percent below its level a year ago

Tajikistans new law on foreign inshyvestment (valid from March 11) gives foreign investors the right to set up enterprises purchase stock and parshyticipate in the privatization of state enterprises The law also establishes legal guarantees for foreign investshyments Tajikistan has lagged behind neighboring Uzbekistan in the matter of foreign investment Uzbekistan passed a similar law last July

The European Bank for ReconshystructionandDevelopment(EBRD) opened an office in Budapest-its secshyond in Eastern Europe its first was opened in Warsaw recently The Banks President Jacques Attali said that Russia would have 4 percent ofEBRD assistance noting that the former USSR had a 6 percent share Attali also announced the creation offunds to modernize agriculture convert defense industries and improve oil production in Russia Current limits to the Banks lending to members of the CIS would end after the EBRDs annual meeting in April he added

Premier Li Peng said that China needed to accelerate economic reform adding that maintaining a healthy economy would keep the countrys poshylitical system unchanged Li also anshynounced at the National Peoples Conshygress that a three-year period of ecoshynomic austerity was over (The austershyity program brought the more than 30 percent inflation rate at the beginning of 1989 down to 29 percent last year)

11

China would stick to its target of 6 percent GNP growth and try to keep inflation below 6 percent this year

More than 125 million people in Viet Nam 18 percent ofits population lack full-time employment Viet Nam will try to cutunemployment in three years by increasing jobs for youth and reloshycating more than 12 million people to farm virgin land Severe joblessness in Viet Nam worsened when the governshyment slashed the size of the army and lost significant amounts of aid from the former CMEA countries

The Polish government has approved the 1992 budget halving the planned deficit to 655 trillion zlotys ($49 bilshylion) or about 5 percent ofGDP in an attempt to curtail inflation Besides huge cuts in education health and welfare remaining state subsidies will be virtually eliminated The draft budshyget calls for coal prices to go up by 5 percent monthly except in the summer months natural gas to increase by 5 percent quarterly and central heating and hot water to go up 33 percent by October Rents for public housingwould be doubled in April and train fares would climb by 28 percent Gasoline taxes and the price of medicine would also rise sharply The Sejm win debate the proposed budget in April

Nicaraguas President Violeta Chamorro announced plans to restore economic growth of3 percent this year with a 400 percent increase in public spending to $280 million and credits and tax incentives to boost investment

The Romanian parliament approved the 1992 austerity budget which stresses low inflation at the expense of economic growth The state expects to collect revenues of about $521 billion in 1992 with estimated expenditures of $566 billion-a planned deficit of some $450 million Accordingto official figures the share of the private sector in the gross domestic product-which stood at 2100 million lei (the leu is currently quoted at 198 per dollar)shyrose to 21 percent compared with only 15 percent in 1990

March 1992

Transition lhe World BankjCECSE

Conference Diary

A Common Migration Policy for Europe March 24 Brussels

K1aus F Zimmermann at ajoint lunchshytime meeting of CEPR (Centre for Ecoshynomic Policy for Europe) and ECARE (European Centre for Advanced Reshysearch in Economics) presented results of recent research on European migrashytion and migration policy He predicts 5 million to 15 million potential East-West migrants while the western press often quotes a less plausible figure of 20 milshylion to 40 million Austria France Geurorshymany Italy and the Benelux countries are the most likely receiving countries The key issue is the speed ofinflow (and its composi tion) Past experience shows that immigration usually provides net benefits from an economic perspective In a world offree labor movement labor moves from low-productivity(low-wage) to high-productivity (high-wage) counshytries and it removes relative scarcities Some inflow of labor migrants would balance demographic losses of western populations that are aging and stagnatshying However immigration restrictions could apply ifincreased guest workers lead to a decline in domestic wages orshyifwages are inflexible--increases in unshyemployment With free labor and prodshyuctmarkets a Common Migration Policy is essen tial for the EC A Geuroneral Agreeshyment on Migration Policy (GAMP) parshyallel to the GATT is also recommended Klaus F Zimmermann Economics Professhysor at the Munich University together with Thomas Straubhaar published his findings in Toward a European Migration Policy CEPR Discussion Paper No_ 641 (CEPR 6 Duke of York St London SW1Y6LA)

Public Management Development in Centrally Planned Economies April 1-3 London

Colloquium under the auspices of the UNDP and the om (Overseas Developshyment Institute) International experts government officials and representashytives of donor agencies discussed manshyagement development in socialist and postsocialist economies(inc1uding China Cuba Mongolia Viet Nam Lao PDR Cambodia Mozambique Angola Myanmar Central and Eastern Euroshy

countries and the CIS states) in

the new global environment The confershyence focused on public sector management improvement comparing reform efforts in the Asian African and Caribbean nations with recent experiences of Central and Eastern Europe Information Mallika Henry Management Deshyvelopment Programme Bureau for Program PolicyandEvaluation UNDPNew YorkNY tel (212) 906-6840 fax (212) 986-6280

NewDimensions in Regional Integrashytion April 2-3 The World Bank Washington DC

Sponsored by the World Banks CECTP (Jaime de Melo and Arvind Panagariya) Topics included desirability of and prosshypects for successful integration in Mrica Latin America and Eastern Europe and the likelihood ofsuccessful integration beshytween developing anddeveloped countries The issue of whether regional integration can serve as a stepping stone to multilateralism or is a barrier to the latter was also addressed

[ ForthcomingJ

EnergyProspects Post-SovietRepubshylies and Eastern Europe April 7-8 London

Business Prospects Post-Soviet Reshypublics and Eastern Europe April 8-9 London

Both events (Seventh Annual Conference) are organized by PlanEcon Inc the Washshyington-based economic research institute Topics ofthe energy conference include oil and gas geology exploration Western inshyvestment petroleum refining prospects in the former USSR and Eastern Europe EBRDs role in the regions energy sector and EC experience with energy assistance to the CEE and the ex-USSR The second conference will provide an overview ofreshycent macroeconomic development in the region Speakers inc1ude JanVanous Keith Crane Marvin Jackson Ronald Freeman Information Ms Mary Hogan Washington DC tel (202) 898-0471 fax (202) 898-0445 or Corinne Redonnet London tel (4481) 545shy6212 fax (4481) 545-6248

First Annual Meeting on~BRD Governors April 13-14 Budapest Hungary

Europe Business Outlook 1992 Conshyference April 26-29 Knoxville Tennessee

Organized by the US Commerce Deshypartmentand the University ofTennesshysee Presentations by Senior Commershycial Officers of the US and Foreign Commercial Service from 23 Eastern and Western European countries and US missions to international organizashytions together with business leaders from Pizza Hut Coca-Cola Delta Air Proctor and Gamble Martin Marietta Topics include New Business Realities in the CIS Defense Industry Convershysion-Opportunities in the Former Soshyviet Union Eastern Europe Perspecshytives and Privatization Issues and Inshyvesting in Hungaryand Czechoslovakia A Lawyers View Information Ms Elaine Keener Co the UT Conference Center tel (615) 974-0250 fax (615) 974-0264 or UTConferences PO Box 2648 Knoxville Tennessee 37901

World Bank Annual Conference on Development Economics April30-May 1 Washington DC

Topics include Theories of Growth and Development Technology Labor MarshyketsandDevelopmentand International Capital Flows Information Mrs Jean Gray Ponchamni Rm 83-032 tel (202) 473-6850

Privatization and Market Mechashynisms A Comparative Approach May 14middot15 Budapest Hungary

Organized by the Association Intershynationale de Droit Economique (Intershynational Association for Economic Law) in collaboration with the Hungarian Asshysociation for the Protection ofIndustrial Property The discussion aims at bringshying together leading academics and polishycymakers from the public and private sector in different countries Four workshyshops will discuss legal requirements in a functioning market economy techshyniques ofprivatization social rights and privatization and sectoral aspects of privatization (telecommunications fishynancial system) Information General Secretariat ofAIDE Place Montesquieu 3 1348 LovrainLaNeuve Belgium tel 32-10-47middot39-70 fax 32-10middot47shy39-45

MarchI992 12 Volume 3 Number 3

Transition The World BankCECSE

World Bank IMF Agenda

New World Bank offices in Sofia and Bucharest

The World Bank is establishing resishydent offices in Bulgaria and Romania at the request of the governments of these countries John Wilton a British national will head the Sofia office and Arntraud Hartmann a German nashytional win be in charge of the Bucharest office

IMF recommends 3 percent quota to Russia

The IMF could support with its finanshycial resources the implementation of Russias economic reform program once Russia becomes a member of the instishytution said Michel Camdessus Manshyaging Director ofth(~ Fund following a meeting of the IMF executive board on March 31 attendedfor the first time by the representatives of the Russian Government The ex~cutive board will decide on a recommEndation to allot a quota share of 3 penent for Russia It would give the country a larger quota than China and the largest quota in the Fund after the G-7 industrial nashytions and Saudi Arabia

All ex-Soviet republic have applied to join the IMF and the World Bank with Georgia the last applying for memshybership on March 12 1992 Camdessus hinted that Russia and the other reshypublics of the former Soviet Union might become IMF mpmbers as early as May Noting that the IMF helped provide $20 billion to Central and Eastshyern Europe last year Camdessus said he expected that a similar flow of assisshytance would be needed in 1992

Reconstructing Cambodia

Japan will host an international conshyference in late June on the reconstrucshytion ofCambodia Twenty or more proshyspective donor countriefgt and internashytional organizations including the World Bank and the IMF are expected to attend

Donors pledge aid forLao Peoples Democratic Republic

In a Geneva meeting major internashytional donors pledged $500 million for infrastructure development in Lao Peoples Democratic Republic The pledge was made at a meeting held under the auspices of the United Nashytions Development Fund Donors inshyclude the United States Germany the United Kingdom Japan Kuwait the Republic of Korea India the Asian Development Bank the World Bank and the IMF

Olechowski in Washington

Poland took the first steps toward putshytingits economic reform program back on track by winning the IMFs approval of its budget We have reached an agreement with the IMF that the budshyget as prepared by the government is a reasonable one Polish Finance Minisshyter Andrzej Olechowski is quoted as saying after two days of talks in Washshyington with the Fund the World Bank and US government officials Accordshying to international monetary sources the Fund believes that Polands latest budget plans (see page 11) can form the basis for a credible reform program if they are passed by parliament in April Olechowski also said that he discussed loans worth $1 billion from the World Bank and the chances of gaining access to $15 billion in IMF support if the proposed budget is approved

IDA credit to Chinas education

To support Chinas effort to improve the quality of education in the six poorshyestprovinces the IDA approved a credit of $130 million The IDA credit will finance improvements in primary and some secondary schools in rural areas It will also support restructuring of higher education to make the system more efficient (In 1986 China introshyduced a compulsory nine-year basic education system)

and World Bankloan to develop cement production

China will meet growing domestic deshymand for cement through a $265 milshylion project supported by an $872 milshylion World Bank loan China is the worlds largestproducer and consumer of cement but demand is expected to exceed supply before the end of the century The loan will partially finance the developmentofproduction and disshytribution facilities atTongling Ningbo and Nanjing The loan will also assist cement agencies to improve pollution prevention

CIS Reforming education and training

Education and training have a vital role to play in the transition process of the former Soviet republics stressed World Bank Vice President Wilfried Thalwitz at a March seminar for CIS ministers of education The countries of the region need to retrain adults unemployed by the restructuring proshycess refocus higher education and scishyence toward the needs of a market economy develop skills in modern busishyness management economics engishyneering and agriculture and adjust the pre-university education system so that the students who emerge are flexible andareprepared forthe change to a market economy where their fushytures will be determined by their own ingenuity and their own initiative

Massive aid to Ethiopia

International aid organizations led by the World Bank have put together a $6574 million program to help the new government in Ethiopia rebuild after nearly two decades of civil war and mismanagement ofthe economy The IDA a World Bank affiliate will provide the largest share of the proshygram with $150 million The other major donors are the African Developshyment Bank ($126 million) the EC ($1164 million) and the USAID ($87 million)

Volume 3 Number 3 13 March 1992

Transition lhe Wor1d BankCECSE

Books and Working Papers Briefs The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Richard Bird and Christine Wallich Financing Local Government in Hungary World Bank Washington DC Policy Research WPS 869 1992 87 p

The new Hungarian system of local government finance tries to free local authorities spending from the heavy hand of central control and make the localities more responsible by providshying additional sources of locally conshytrolled revenues Local governments still depend for some 82 percentoftheir receiptson central transfers New local taxes are inadequate and some local authorities are unable to provide even the basic social services to the poor Localities feel increased pressure to raise revenues and use proceeds from asset sales to finance current operashytions Their entrepreneurial activity could work against the privatization drive therefore the golden rule should apply on the local level too The busishyness of government is not business

Normative grants of the central govshyernment are largely discretionary disshytributed according to a formula geared to both per capita equalization and needThis policy creates uncertainty therefore some criteria should be apshyplied suggest the authors Grants could befixed-for example to some national tax source (personal income or valueshyadded tax)

In dividing its grant among local aushythorities the central government should also consider the diverse revshyenue-raising capacities of the recipishyents and change the distribution forshymula for the normative grant accordshyingly As a result grant funds will be shifted from local governments with a high-tax capacity to localities with a low-tax capacity Ifrecipients are unshyable to impose and collect taxes at the assumed rate they have to acquiesce to a proportionally reduced grant later On the other hand recipients can keep all those tax revenues that exceed the anticipated level Available from Ann Bhalla The World Bank Room N10-053 tel (202) 473-7699

Marchl992

Cheryl W Gray Rebecca J Hanson and Peter G Ianachkov Romanias Evolving Legal Frameshywork for Private Sector Developshyment World Bank Washington DC Policy Research WPS 872 1992 27 p

Romania started virtually from scratch in 1990 to build a market economy and the legal framework required for it It has adopted a new constitution and extensive new legislation covering real and intellectual property companies and foreign investment Romania has revived the pre-war civil code as a basis for contract law and is moving to modshyernize its bankruptcy code Little progress has been made however in regulatinganticompetititive monopoly behavior

At present no judicial institutions in the country-whether courts arbitrashytion panels lawyers or law schools-shyare fully prepared to take on the chalshylenges inherent in their roles in the market economy Administrative and judicial apparatus for implementing new laws and educating the public about them are lagging behind Forshyeign technical assistance if properly designed can accelerate the institushytional development Availablefrom CECSE The World Bank Room N6-035 tel (202) 473-7188

Ross Levine and David Scott Old Debts and New BeginningsshyA Policy Choice in Transitional Socialist Economies World Bank Washington DC Policy Research WPS 876 1992 27 p

The authors scrutinize the dilemma of the decision-makers in postsocialist countries how to define the asset and liability structure of state-owned enshyterprises and banks as they are privatized Heavy stocks of enterprise debts (loans issued by state-owned banks to state-owned companies durshying socialist management) are hindershying the effective operation of both the business sector and the financial secshytor They also risk institutionalizing ad

14

hocgovern ment intervention (bailouts subsidized loans etc) on behalf of heavily indebted enterprises before putting them on the block Those intershyventions in turn may reduce governshymentcredibility The paper argues that governmentshouldassumetheresponshysibility for a large part of bank claims on enterprises as it would (1) improve the operation and restructuring of stateshyowned banks (2) facilitate the privatshyization of major banks (regarded as a desirable goal by the authors who pershyceive it as a gradual process) and (3) keep fiscal costs relatively low

It is feasible to preserve all enterprise debt obligations to banks that are of unquestioned quality rated as pass at detailed loan reviews (such loans might comprise 10 to 20 percent of outstanding loan portfolios) Another way of replacing bad assets is to preshyserve only those claims that either banks or enterprises themselves agree to preserve Global experience demonshystrates that whenever banks particushylarly state-owned banks are severely insolvent the replacementofbad loans with government bonds is the primary way to resolve the banking problem

Other recent PRWorkingPapers of the World Bank

Silvia B Sagari and Loic Chiquier Copingwith the Legacies ofSubsimiddot dized Mortgage CreditinHungary WPS 847199226 p Available from Melakou Guirbo The World Bank Room J9middot235 tel (202) 473middot5015

Roy Bahl and Christine Wallich Intergovernmental Fiscal Relashytions in China WPS 863 1992 58 p Available from Ann Bhalla The World Bank Room NlO-053 tel (202) 473-7699

Gary Jefferson and Wenyi Xu Assessing Gains in Efficient Promiddot duction Among Chinas Industrial Enterprises WPS 877199221 p AvailablefromCECSE The WorldBankRoom N6-044 tel (202) 471-7188

Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

Transition The World BankCECSE

external assistance will be required over a long period oftime to support the recovery process

MozambiqueS economic reform proshygram has to deal with the following major issues

(1) Ending the civil war is still thehighshyest priority Pervasive hostilities and insecurity in the countryside are a major obstacle to growth they hamper the recovery of family-sector agriculshyture bydisruptingmarketingand transshyportation ofgoods The civil war a classhysical East-West confrontation in the late 1970s has developed into a local political power struggle Since the tershymination ofthe defunct Warsaw Pacts military assistanee to the government disbanded soldie~s have preyed upon civilians and army units have diverted a growing share of the imports proshyvided to the civilian population The incentive structure put in place by the countrys adjustrr ent program (prices exchange rate improved composition of public expenditures cannot be fully operational in an economyat war High maintenance cosb in such an economy distort the price system and make ecoshynomic decisions (fJr domestic and forshyeign investors enrepreneurs looking for privatization and sCIon) extremely difficult

(2) Institutional stengthening andcashypacity building are the main priorities in the immediateurolt future Donor-fishynanced technical assistance has to be tailored accordingly and wage incenshytives must be put m place to prevent the brain-drain of high-level civil sershyvice staff Foreign investment would likely upgrade management in the nongovernment sector thus providing transfer oftechnology and skills This ought to be considered when defining new foreign investment rules

(3) Privatization or large-scale entershyprises should precede or run parallel with the reform of the financial sector in order to save new eommercial banks from providing bad loans to bankrupt companies (Since 1987 120 small and medium-sized enterprises have been privatized) In the past public entershyprises-parastatal 5-enjoyed soft budget constraints through noncomshymercial bank credite and state subsishydies In reforming Mozambiques fi-

Volume 3 Number 3

nancial sector the risk of a credit crunch (with adverse consequences for outshyput) has to be factored in Given the present state of the economy most of the parastatals would probably not be eligible for full commercial lending In addition their long-term financial vishyability is still difficult to assess some are clearly not viable and some have good prospects but most of them are in a grey area where it is hard to detershymine the causes of operating losses (shrinking market tariff policy misshymanagement and so on) This unclear situation calls-at least temporarilyshyfor open budgetary subsidies rather than hidden support through bank lending and a clear policy for dealing with high-risk public enterprises

(4) Economic rationale should set the pace and sequencing of the reform proshygram (including the privatization of large public enterprises) rather than short-term political considerations For example to enable enterprises to funcshytion under market conditions a new regulatory and legal framework has to replace the old one Although this transhysition process has already started it is likely to take time But the need to gain political headway may push the govshyernment into quick privatization deals before a new regulatory framework is put into place

(5) Collection of counterpart funds should not impede fiscal and monetary

5

From the US daily Buffalo News

goals (Counterpart funds are the local currency-equivalent of imports fishynanced by foreign assistance that has to be put up by the importer usually a public enterprise and remitted to the Treasury) Large state enterprises (usushyally the largest loss-makers) scramshyblingto acquire the necessary funds for imports might crowd out efficient comshypanies from domestic credit allocation Also local importers have found creshyative ways to delay the payment of counterpart funds and thus to circumshyvent credit ceilings through the issushyance of promissory notes to the Treashysury

(6) Additional growth and developshyment strategies have to be worked out once the macroeconomic framework is more or less in shape Mozambique will have to consider a number of imporshytant geopolitical changes in the region (for example the birth of a new South Africa) reassess its war-damaged agshyricultural export potential and the role thatmay be played by its service indusshytry (ports railway corridors tourism and so on) and determine its comparashytive advantages in the new world economy Compared with those new challenges the challenges of the adshyjustmentand stabilization process may appear easy

Rocio Castro and Luiz A Pereira da Silva AF6CQ The World Bank

March 1992

Transition The World BankCECSE

Public Enterprise Restructuring Achilles Heel of the Reform Process

s tate enterprises still account for the bulk of industrial acshytivity across Central and

Eastern Europe (CEE) Yet there has been relatively little discussion about indications that a large part of them may not be viable at world market prices and competition In other words the cost of restructuring those entershyprises (in present value terms) may exceed the social benefits The probshylem is likely to be even more acute in the former Soviet republics where the degree of distortion vis-a-vis world prices has been relatively higher and isolation from world markets has been greater

Problem children Nonviable enterprises

Using detailed input-output data from 1988 and 1989 and information on world prices Hughes and Hare (Comshypetitiveness and Industrial Restrucshyturingin Czechoslovakia Hungary and Poland 1991) found that the share of output in manufacturing industry with negative value-added at world prices ranged from 19 percent in Czechosloshyvakia to 236 percent in Poland and 242 percent in Hungary Adjusting

The Hungarian approach The Hungarian experience is instructive As indicated by the results of Hughes and Hare the enterprise viability prob lem in Hungary appears to be ofa magshynitude similar to that in Czechoslovakia andPoland Hungarys approach to sysshytem reforms has been more cautious Trade liberalization has been more gradUCII---some 30percent ofindustrial production remained protected in 1991 through licensing and tariffprotection on liberalized commodities is higher The real exchange rate has undergone relashytively minorgyrations andfull currency convertibility is to be attained at a more gradUCI1 pace The reliance on more trashyditional privatization methods mayhave kept expectations about what is achievshy

these figures for a 25 percent negative quality differential produced negative value-added shares of 34 percent in Czechoslovakia 355 percent in Hunshygary and 389 percent in Poland Though the numbers may be exaggershyated it still means thatfor a significant share ofindustrial output the value of intermediate inputs may exceed the value of output when both are evalushyated at world prices For such prodshyucts output at world prices will be produced at a loss even ifthe en tire cost of labor and capital is shelved These figures are likely to be even higher in Eastern Europe and the former Soviet republics given the relatively greater isolation from world markets

Restructuring industry that has negashytive value-added at world prices usushyaBy is not worthwhile The share of industrial activity for which the costs of restructuring exceed expected benshyefits is presumably far greater than the share that is value-subtracting howshyever Studies by potential foreign inshyvestors suggest that about a third of the industrial sector is not likely to be viable For another third major reshystructuring would be required to the extent that a positive return on the

able more realistic It is at least the first step toward more forceful public entershyprise reform while actual progress on privatization has been more rapid than elsewhere This more gradUCII approach to the transition has certainly not admiddot versely affected theperception offoreign investors as their response has been far more favorable in Hungary than else where in the CEE region Domestic pri vate sector activity also appears robust Clearly Hungary has a difficult task of enterprise reform ahead But the more gradUCII approach to transition policies at the macro level appears to have inshycreased the prospects of sustainability while permitting relatively faster progress in enterprise reform

exercise could not necessarily be exshypected Restructuring would definitely be worthwhile for only about one-third of industrial activities

The presence of a large number of firms that are nonviable under comshypetitive conditions considerably comshyplicates the reform strategy as full implementation of liberalization and stabilization could generate a level of enterprise bankruptcy and unemployshyment that no government could surshyvive The depressed level of demand could undermine even the healthier enterprises and cut into fiscal revshyenues A vicious cycle of recession and inflation could be the result In addishytion private investors whether doshymestic or foreign will be less intershyested in assuming ownership of existshying firms that are insolvent or require costly restructuring and win opt inshystead to start new ventures free ofthe legacies of the past including liability for environmental damage

Some general principles

If the proportion of nonviable entershyprises in a liberalized economy is larger than can be liquidated immediately the government de facto is engaged in a form of industrial policy While the choice of policy intervention will unshydoubtedly depend on individual circumshystances it is possible to specify some general principles that should apply

(1) Price reform Sheltering entershyprises from bearing the full burden of higher prices-by continuing to subsishydize such inputs as energy-complishycates the evaluation oftheir net worth and in addition delays and possibly distorts the adjustment to the permashynent changes in the terms of trade Moreover charging enterprises the unsubsidized price for energy and other raw material inputs would help to enshysure that the reduced level of trade that is transacted is at least economishycally beneficial

March 1 992 6 Volume 3 Number 3

Transition The World BankCECSE

(2) Bankruptcies Immediate liquidashytion is the preferred strategy in the case ofthe weakest enterprises which cannot cover operating costs underany reasonable set of relative prices But the number ofactual shutdowns in the short term is likely to be far less than ideal from a purely economic perspecshytive reflecting the political difficulty of allowing drastic increases in unemshyployment The inadequacy of existing bankrupby legiclation could also slow the liquidation process For large enshyterprises some lines of production would need to be closed while others could continue operation Ifthe output of a firm or line of production is valueshysubtractingundH the liberalized price regime itwould he preferable to termishynate production altogether even while continuingtocompensate workers fully The scope of thi type of cost saving would be substantial

(3) Subsidies Explicit budgetary supshyport is preferablemiddot to support from the banking system where immediate liqshyuidation is not possible This will keep up pressure and Poster closer governshyment supervision of the firms activishyties while it is awaiting liquidation Recourse to the banking system on the other hand would result in an increase in bad loans Banlingresources would be more pTCductively used to finance new investment as well as to restrucshyture potentially vilble companies

Trade curnmC) and macro issues

(4) Trade liberali~ation A policy of graduai trade liberalization appears particularly nppropriate for the former Soviet republics and possibly for other formerly socialist economies as they begin to dismantle barriers to trade with hard currency areas The experishymentofreformingeconomies with shock trade liberalization-the unprecshyedented fast shift from an essentially closed regime to pra(ticallyfree tradeshyis unlikely to be sustainable in a weak enterprise structure Poland and Czechoslovakia initially adopted tariff regimes essentially resembling those of the least protectie industrial counshytries with tariff rates averaging about 5 percent although more recently tarshyiffs for certain import-competing inshydustries have heen raised significantly in both countries Tariff rates in Bul-

Volume 3 Number 3

garia and Romania also averaged less than 10 percent in 1991 while import quotas were largely eliminated Ultishymatelyitisaquestionofjudgment--of weighing the distortive effects on relashytive prices of initially higher tariffs against their potential for providing some breathing space to enable entershyprises to restructure and compete in world markets

(A frequent argument for rapid trade liberalization is that it will break the power of the rent-seeking industrial monopolies But at least in the initial stages of transition the shortage of foreign exchange may force the aushythorities to resort to foreign exchange allocations Even in a liberal exchange rate regime overshooting could occur reflecting political uncertainty or lack of confidence in the sustain ability of transition In these cases competition from imports may not be sufficient to combat monopoly pricing In the inshyterim period before either domestic or foreign competition has become effecshytive restrictions on price increases by monopolists could therefore be warshyranted)

(5) Exchange rate policy Countries attempting the transition to a market economy may be classified into those that have a measure of control over the exchange rate (atleast in the short run) and those that do not due to the exshytreme shortage offoreign exchange The concern here is with the former catshyegory which currently comprises Czechoslovakia Hungary andPoland In each ofthese countries the exchange rate has been used to anchor the stabishy

lization program in Czechoslovakia and Poland the nominal exchange rate has been pegged to the dollar or a basshyket of hard currencies (Poland 1991) while Hungary has adopted a managed float through intervention Duringthe transition however when domestic demand remains depressed and inflashytion rates remain well above Western levels it may be relatively easy to susshytain an appreciation of the real exshychange rate since balance of payments pressures will emerge more slowly than wouldbe the case in a growing economy The temptation to use the exchange rate to fight inflation as well as to force productivityim provements onto entershyprises will also be strong Hence an appreciating real exchange rate can jeopardize the ability of potentially vishyable firms to compete

(6) Sequencing While there is general agreement that most enterprises will have to be restructured to survive there is less consensus on the extent of reshystructuring that is needed prior to privatization In the current unstable economic environment it is generally difficultto determine which firms would ultimately survive under competitive conditions The concern here is that frustration with the slow pace of entershyprise reform may force the pace of macro reform in an ultimately unsustainable manner For example free trade and an appreciating real exchange rate may be used to try to force enterprises to become more effishycient since it is institutionally easierto adopt this stance than to tackle the core problems of enterprise manageshyment such as incentive systems and

My Arthur could never resist a bargain

From the British daily Evening Standard

7 March 1992

Transition lhe World BankCECSE

A Proposal to Solve the Restructuring Dilemma in Poland Maurice Ernst suggests strategic alliances

Many large state firms in Poland have sought but few have found foreign savshyiors Foreign investors have been turned off not only by backward technology poor organization and a changing tax structure but also by the risks created by organized labors opposition to drasshytic change and by the unique functions of large enterprises in former commushynist countries--such as providing social services The current management of state-owned enterprises is not in a posishytion to negotiate such problems with prospective Western investors the censhytral and local governments must be inshyvolved because only they can provide many ofthe solutions

The solution that is advocated by many economists to the obviously sluggish reshysponse of Polish state-owned firms to emerging market conditions is to accelshyerate privatization Unfortunately privatization is as much the end result ofa complex process as it is a means of achieving these desirable results In Poland very little privatization has ocshycurred through sale of enterprises to domestic or foreign buyers either dishyrectly or by issuing and selting shares The overwhelming majority of privatizations of state enterprises has occurred through what the Poles call the liquidation process bull The government breaks up large stated-owned enterprises suchas wholeshysale firms department stores and tourshyist offices and then sells or leases parts ofthese firms to private parties or bull A firms employees in cooperation with its management work out a leasshying or leveraged buy-out arrangement with the government

Sales oflarge industrial firms to foreign investors have been few-the GMagreeshyment with the FSO automobile firm being a recent exampl~nd have inshy

volved complex negotiations lasting many months and including such issues as tax breaks tariffprotection access to the EC market and so forth As the financial conshydition of the state sector has deteriorated the liquidation process has begun more and more to resemble a bankruptcy sale certainly not what was intended To accelshyerate privat-ization Poland likeothercounshytries ofCentral andEastern Europe is also considering the free distribution ofvouchshyers representing ownership shares ina dozen or two investment companies but it is unshycertain whether these companies can make the tough decisions needed for restructurshying

The Polish government has also begun to use foreign firms to assess market opportushynities and competitiveness in a series of34 sectoral studies covering such industries as automobiles machine tools shipping aircraft pharmaceuticals cement meat processing beer and construction The possibilities for contracting out the restrucshyturingofenterprises to groups ofmanagers are also being considered Some industries such as coal and steel may require special treatment-possibly involving a regulated phasing down ofproductive capacity over several years as in the European Commushynity Some heavily affected regions such as the lLJdz region where most ofthe severely ill textile industry is located and Silesia the nexus ofcoal steel and pollution will require assistance for restructuring divershysificotion andcleanup possibly in theform of low-interest loans that could be supshyported by foreign donors

In my view the most promising approach to the restructuring problem is the use of strategic alliances loose arrangements amongWestern andPolish firms to develop joint ventures other direct investments marketing arrangements RampD and techshynology cooperation On the Western side one firm must take the lead even though

other companies may be brought in for special expertise and funding and to share the risk Participation ofthe Polshyishgovernment is essentiaL Westerngovshyernments could provide encouragement through fiscal and other financial inmiddot centives such as reduced or even no taxes on capital gains

Strategic allia nces can help to assess the Polish firms potential for competitive production and exports identify potenshytial Western investors or partners and negotiatewith all interested parties For example Western investors maycommit themselves to worker retraining proshygrams the central government maygive the locol government a larger share of certain tax receipts to finance the local hospital formerly paid for by the firm specific and limited commitments may be made for environmental cleanup For the Western partner no capital needs to be committed until a clear picture of investment opportunities has emerged and ways have been found to resolve major problems The principal cost to the lead Western partner would be the commitment ofhigh-level executive pershysonnel with a sophisticated knowledge of technology markets and manageshyment In return the Western lead firm would be given the right to develop or buy into any investment opportunities that arise from the cooperation For Poshyland-and other postsocialist counshytries-a network of strategic alliances could greatly accelerate the flow ofWestshyern capital technology and manageshymentk now-how into a criticalpartofthe economy and thereby avoid a severe waste of resources and an unnecessary further decline in economic activity

The authoris a consul tantat the Hudson Institute

reforming the power of workers counshycils There may also have been a tenshydency in the CEE region to postpone the tough enterprise-level reforms in thehope thatmass privatization would relieve the government of having to legislate such reforms The limits of privatization in a situation of substanshytial enterprise nonviability would indishycate that enterprise reforms per se can no longer be postponed

March 1 992

Summing up macroeconomic policy must take account ofthe potential conshyflict between the speed of reforms and the rapidity with which it is possible to liquidate nonviable firms These conshysiderations suggest the need for more careful coordination between the impleshymentation of reforms atthe macro level and that at the enterprise level Given the relative difficulty of the latter a pace of reform that is restrained only

8

by implementation capacity will not necessarily be an optimal or very susshytainable approach to the transition

SanjayDhar World Bank ECAVP Excerpted from the authors paper Enterprise Viability and the Transition to a Market Economy January 1992

Volume 3 Number 3

Transition The World BankCECSE

Quotation of the Month Cutting defense spending will proshyvide the US with its own transition problems Group calls for new $100 billion Marshall Plan to the former Soviet republics

T he United States in conjuncshytion with the European Comshymunity Japan and other

wealthy nations should launch a new economic initiative designed to help the former Soviet republics make the transition from a centrally planned system to a network of democratic and market-oriented economies The curshyrent state ofthe Us economy is propishytious for such a daring venture Deshyfense-related spending has generated many jobs in the US economy and it has increased aggregate demand which has benefited many corporashytions A major cutn defense spending will have a dampEning effect on US job growth and corporate profits unshyless it is offs4~t by other activities

Even if def(lOse spending cuts are matched by equal increases in social welfare spending the net impact on the US economy i~ somewhat diminshyished growth prospects and slightly lower employment totals To cut deshyfense spending inl recessionary or slow-growth period will provide the United States withts own transition problems The macroeconomic stimushylus to the economy that would be genshyerated by a new Marshall Plan for the former Soviet republ ics could be a key ingredientin helping the United States forge a strongpost-Cdd War economy

Roughly 48 percent of the aid and asshysistance that the former Soviet repubshylics have received has been in the form ofexport credits and guarantees Over 60 percent of these export credits and guarantees have been made by Euroshypean nations In contmst only one out ofevery eight dollars in export credits and guarantees to thf~ former Soviet republics have been made by the United States and mostof them were for farm products The United Statescould very easily find itselflocked out of key marshykets in the former Soviet republics The credits and guarantees grantedby European nations will help finance many capital goods ami other related

Volume 3 Number 3

investments Relationships between buyers in the former Soviet republics and Western European corporations are being established To be sure there are successful business ventures and investments between US firms and the former Soviet republics However European activity in this area-parshyticularly from Germany-dwarfs that of the United States

It is in the United States self-interest to have a strong and vibrant commershycial presence in the former Soviet reshypublics Steps taken now to establish and assure growing economies in the former Soviet republics will create new buyers for US agricultural products manufactured goods and services However the United States is curshyrently playing a very small role in aidshying and assisting the former Soviet republics Only about 6 percent of the aid and assistance to the former Soviet republics or under $5 billion is curshyrently coming from the United States The United States is providing less aid and assistance than Italy which has an economy approximately one tenth the size ofthat of the United States

It is useful to remember some of the features and lessons of the original Marshall Plan George C Marshall presented the general outline of what became known as theMarshall Plan on June 5 1947 The independent Ecoshynomic Cooperation Administration (ECA) was established to administer the program which provided $133 bilshylion in assistance to Europe from 1948 to 1952 In 1992 dollars this total is equal to approximately $100 billion The ECA extended into many other areas besides providing grants andfosshytering investment Ithad a very active technical assistance program which introduced American management and production practices to Western Euroshypean businesses It promoted peopleshyto-people diplomacy And it encourshyaged theformation offree andindepenshydent trade unions as an institutional foundation for democracy and labor market cooperation to spur productivshyity and distribute its fruits for the benshyefit of all

The roughly $100 billion total of the original Marshall Plan is a realistic starting point for a new economic inishy

~ ---~----------------------~----~----

Never too late Western aid package for Russia The Group of Seven industrialized nashytions announced a $24 billion one-year aid program for Russia on April 1 The program establishes a $6 billion fund to maintain the value ofthe ruble while it becomes a convertible currency Another $18 billion is the sum total of bull credits from the IMF the World Bank and the EBRD ($45 billion) bull debt rescheduling ($25 billion) bull export credit guarantees food credits and humanitarian aid ($11 billion)

According to Horst Kohler Germanys chief negotiator in the G-7 the package would cover this years deficit in Russia8

balanreof payments Headded that agreeshyment on the adjustment program beshytween the Russian government and the

IMF could be finalized in May with the first credit tranches coming in June beshyfore the G-7 Munich Summit in July World Bank credits should also be availshyable by June or July Kohler said The United States would take a 20 to 25 I

percent share of the G-7 package Presi- dent Bush will ask the Congress to apshyprove a $12 billion US quota increase for the IMFan additional$ll billion in agricultural credit guarantees (since January 1991 the United States has extended $37 billion in such credits) and the announced $620 million in ecoshynomic and humanitarian aid Congress also is called on to repeal legal provisions limiting trade and to expand Peace Corps presence USIA programs and democshyracy corps programs in Russia

9 March 1992

Transition The World BankCECSE

tiative for the former Soviet republics Thisplan should be multinational One possible funding formula might be for the United States the European Comshymunity Japan and other wealthy nashytions each to contribute a portion of the needed resources Such a multiyear funding level divided between several donors is realistic and doable

This new economic initiative needs a multinational organization equivalent to the ECA of the Marshall Plan Such an organization would of course work cooperatively with the International Monetary Fund the World Bank and the United Nations We recognize that the former Soviet republics of the 1990s are different in many important reshyspects from post-World War II Westshyern Europe and the aid delivery sysshytems need to reflect these differences This multinational ECA should be dishyrected by private sector business and labor leaders as much as possible

The new ECA should organize along the lines of key industries and ecoshynomic sectors We strongly suggest that representatives from business labor and agriculture sit on these varishyous industry and sectoral committees The former Soviet republics will also require a great deal of technical assisshytance and basic institution-building Price decontrol is an important part of establishing a free-market system However a modem free market also requires a highly developed system of commercial laws an efficient banking system and stock markets In addishytion worker transition mechanisms that supply economic safety nets and the ladders to reach them are particushylarly important It is especially critical that the outstanding scientific talent that supported the former Soviet milishytary machine be redeployed to producshytive peaceful pursuits that benefit the world community (such as energy enshyvironmental and health care priorishyties)

Excerpts from the policy statement of the Nashytional Planning Associa tion Washington D C (dated March 18 1992) NPA is a nonpartisan economic and social research institution its trustees are prominent leaders from business labor agriculture and academia

The Russian reform program

The Russian governments economic reshyform program for 1992 published in early March has been drawn up with requirements for joining the IMF and the World Bank in mind At the same time it also reflects the governments

I commitment to stabilizing and liberalizshying the economy over a two-year period Its priorities are eliminating the budget deficit controlling the money supply and implementing privatization_

Prices The program looks forward to the eventual liberalization ofprices from all administrative restrictions By April prices ofall consumergoods and services (except rent social services and public transport) will be freed Russian Presimiddot dent Boris Yeltsin asserted that deregushylation ofmostenergy prices will beputoff untilate Mayor early June The origishynal plans expressed an intention to free prices for fuel and other goods for proshyduction purposes byApril 20 while temshyporarily retaining theregulation ofprices for gas and electricity

Safety net Social protection will be dishyrected above all to pensioners largefamishylies and the unemployed This will enshytail cash compensation ofpensioners for price rises and social security payments to the other two groups Unemployment benefits will come in two forms-stanshydard and raised Standard benefits will not exceed 75 percent of the minimum wage while raised benefits will not exshyceed90percentofthe a verage wage earned by the recipient at the last place ofwork Raised benefits will be given only when the workplace has been closed or reorgashynized

Budget As a result ofprice liberalizashytion only some 5 percentofpublic spendshying will be devoted to subsidizing goods and services The austere social policy will permit further reductions in the general level ofgrants and subsidies In the course ofthis year defense spending will be cut further By mid-year the number ofcivil servants will have been cut by 5 percent The government sees its task as eliminating the budget deficit by the beginning of1993

Exchange rate In order to improve forshyeign trade performance and integrate Russia into the warldeconomyassoonas possible a single exchange rate will be introduced As a first step the governshyment intends to abandon the present

system by April 20 The several current rates will be merged into two undershypinned by a single floating rate One rate will apply to all current transacmiddot tions while the other will apply to the movement ofcapital At the same time free access to foreign currency will be granted to importers ofgoods and sershyvices as well as to foreign investors for the conversion ofdividends and profits

Foreign trade_ By July 1 all export quotas and licenses will be abolished Only the export ofenergy resources will still be subject to regulation although these quotas will be abolished by the end of 1993 No significant limitations on imports will remain

Monetary policy The Russian governmiddot ment will attempt to the best of its ability to coordinate monetary policy with the other CIS member states in the context of a ruble-denominated zone The Central Bank ofRussia claims it is ready to agree with the central banks of the other former Soviet republics on the rate and scale of money emissions on the general guidelines for unifying the ruble exchange rate and on the fine details ofpayments and accounting beshytween the CIS member states Should anyofthe former Soviet republics decide to introduce alternative currencies the Central Bank ofRussia is prepared to discuss the orderly withdrawalofrubles from circulation in the given republics

Privatization In the initial stage the emphasis will be placed on the swift sale by auction of small enterprises and retail outlets The privatization of large enterprises will be based on the following principles bull Employees will be offered shares in their own enterprises although not a controlling share bull Restrictions on the sale ofseparate enterprises and branches within large groups will be lifted bull Restrictions on the participation of foreign investors will be lifted bull Privatization will include the land on which the given enterprise stands bull Privatization ofincomplete construcshytion wark will be encouraged through a special tax regime

Based on Oxford Analytica London and Commersant a Russian weekly (March 2 1992)

March1 992 10 Volume 3 Number 3

Transition The World BankCECSE

Milestones of Transition

In Czechoslovakia inflation would be 12 percent in 1992 with GDP conshytracting by about 5 to 8 percent preshydicted Czechoslovakias State Bank GovernorJ osefTosovsky Inflation last year was almost 58 percent

Germany will transfer a net 180 bilshylion marks to thE eastern part of the country this year up from 139 billion in 1991 The forecast came in the Bundesbanks latest monthly report which cautioned against a continuashytion of transfers that are used primashyrily tofinance consumption (Atpresen t 134 million peoplE are unemployed in eastern Germany representing 165 percent of the tota I work force)

The Ukrainian parliament approved in principle an economic reform proshygram in late Mard which scraps the ruble in Ukraine and extends the use of the current coupons until the Ukraishynian currency is introduced (within three months) All trade with former Soviet republics will b(~ on a hardshycurrency basis imp(rts from them will be subject to tariff and exports to them will be subject to VAT

The new Ukrainian foreign investshyment law which came into effect on March 12afterparliarnentary approval allows foreigners to buy interests in Ukrainian businessemiddot or property of up to 100 percent guara ntees the righ t of foreign investors to repatriate revenues and profits and provides for compenshysation in the event of nationalization All current joint ventures are exempted from taxation until five years after they start to make a profit New joint ventures will be exempted from taxashytion on their profits for three years

A draft privatization program ofRusshysian state and municipal properties approved by the joint session of the presidium of the Rmsian Supreme Soviet and the government emphasizshying reliance on auctions calls for the sale of 70 billion to 80 hill ion rubles of state property this year and the free transfer to workersofstlte enterprises worth 150 billion to 20Ci billion rubles Ifthe Russian Supreme Soviet approves the proposal by the end of 1992 an estimated 12 to 20 percllnt of the total

Volume 3 Number 3

value offixed and worki ng capital could be privatized

The Russian Finance Ministry has informed the government that the first quarter budget revenue of 190 billion rubles is 250 billion short of the proshyjected figure Revenues from foreign economic activity amount to 9 billion rubles compared with a planned budshygetaryincome of228 billion rubles due to the steepfallin exports the financial status of exporters the paralysis ofthe oil-refining industry and the lifting of export duties on much of the fuel shipshyments The Russian industrial output in January and February was 135 percent below its level a year ago

Tajikistans new law on foreign inshyvestment (valid from March 11) gives foreign investors the right to set up enterprises purchase stock and parshyticipate in the privatization of state enterprises The law also establishes legal guarantees for foreign investshyments Tajikistan has lagged behind neighboring Uzbekistan in the matter of foreign investment Uzbekistan passed a similar law last July

The European Bank for ReconshystructionandDevelopment(EBRD) opened an office in Budapest-its secshyond in Eastern Europe its first was opened in Warsaw recently The Banks President Jacques Attali said that Russia would have 4 percent ofEBRD assistance noting that the former USSR had a 6 percent share Attali also announced the creation offunds to modernize agriculture convert defense industries and improve oil production in Russia Current limits to the Banks lending to members of the CIS would end after the EBRDs annual meeting in April he added

Premier Li Peng said that China needed to accelerate economic reform adding that maintaining a healthy economy would keep the countrys poshylitical system unchanged Li also anshynounced at the National Peoples Conshygress that a three-year period of ecoshynomic austerity was over (The austershyity program brought the more than 30 percent inflation rate at the beginning of 1989 down to 29 percent last year)

11

China would stick to its target of 6 percent GNP growth and try to keep inflation below 6 percent this year

More than 125 million people in Viet Nam 18 percent ofits population lack full-time employment Viet Nam will try to cutunemployment in three years by increasing jobs for youth and reloshycating more than 12 million people to farm virgin land Severe joblessness in Viet Nam worsened when the governshyment slashed the size of the army and lost significant amounts of aid from the former CMEA countries

The Polish government has approved the 1992 budget halving the planned deficit to 655 trillion zlotys ($49 bilshylion) or about 5 percent ofGDP in an attempt to curtail inflation Besides huge cuts in education health and welfare remaining state subsidies will be virtually eliminated The draft budshyget calls for coal prices to go up by 5 percent monthly except in the summer months natural gas to increase by 5 percent quarterly and central heating and hot water to go up 33 percent by October Rents for public housingwould be doubled in April and train fares would climb by 28 percent Gasoline taxes and the price of medicine would also rise sharply The Sejm win debate the proposed budget in April

Nicaraguas President Violeta Chamorro announced plans to restore economic growth of3 percent this year with a 400 percent increase in public spending to $280 million and credits and tax incentives to boost investment

The Romanian parliament approved the 1992 austerity budget which stresses low inflation at the expense of economic growth The state expects to collect revenues of about $521 billion in 1992 with estimated expenditures of $566 billion-a planned deficit of some $450 million Accordingto official figures the share of the private sector in the gross domestic product-which stood at 2100 million lei (the leu is currently quoted at 198 per dollar)shyrose to 21 percent compared with only 15 percent in 1990

March 1992

Transition lhe World BankjCECSE

Conference Diary

A Common Migration Policy for Europe March 24 Brussels

K1aus F Zimmermann at ajoint lunchshytime meeting of CEPR (Centre for Ecoshynomic Policy for Europe) and ECARE (European Centre for Advanced Reshysearch in Economics) presented results of recent research on European migrashytion and migration policy He predicts 5 million to 15 million potential East-West migrants while the western press often quotes a less plausible figure of 20 milshylion to 40 million Austria France Geurorshymany Italy and the Benelux countries are the most likely receiving countries The key issue is the speed ofinflow (and its composi tion) Past experience shows that immigration usually provides net benefits from an economic perspective In a world offree labor movement labor moves from low-productivity(low-wage) to high-productivity (high-wage) counshytries and it removes relative scarcities Some inflow of labor migrants would balance demographic losses of western populations that are aging and stagnatshying However immigration restrictions could apply ifincreased guest workers lead to a decline in domestic wages orshyifwages are inflexible--increases in unshyemployment With free labor and prodshyuctmarkets a Common Migration Policy is essen tial for the EC A Geuroneral Agreeshyment on Migration Policy (GAMP) parshyallel to the GATT is also recommended Klaus F Zimmermann Economics Professhysor at the Munich University together with Thomas Straubhaar published his findings in Toward a European Migration Policy CEPR Discussion Paper No_ 641 (CEPR 6 Duke of York St London SW1Y6LA)

Public Management Development in Centrally Planned Economies April 1-3 London

Colloquium under the auspices of the UNDP and the om (Overseas Developshyment Institute) International experts government officials and representashytives of donor agencies discussed manshyagement development in socialist and postsocialist economies(inc1uding China Cuba Mongolia Viet Nam Lao PDR Cambodia Mozambique Angola Myanmar Central and Eastern Euroshy

countries and the CIS states) in

the new global environment The confershyence focused on public sector management improvement comparing reform efforts in the Asian African and Caribbean nations with recent experiences of Central and Eastern Europe Information Mallika Henry Management Deshyvelopment Programme Bureau for Program PolicyandEvaluation UNDPNew YorkNY tel (212) 906-6840 fax (212) 986-6280

NewDimensions in Regional Integrashytion April 2-3 The World Bank Washington DC

Sponsored by the World Banks CECTP (Jaime de Melo and Arvind Panagariya) Topics included desirability of and prosshypects for successful integration in Mrica Latin America and Eastern Europe and the likelihood ofsuccessful integration beshytween developing anddeveloped countries The issue of whether regional integration can serve as a stepping stone to multilateralism or is a barrier to the latter was also addressed

[ ForthcomingJ

EnergyProspects Post-SovietRepubshylies and Eastern Europe April 7-8 London

Business Prospects Post-Soviet Reshypublics and Eastern Europe April 8-9 London

Both events (Seventh Annual Conference) are organized by PlanEcon Inc the Washshyington-based economic research institute Topics ofthe energy conference include oil and gas geology exploration Western inshyvestment petroleum refining prospects in the former USSR and Eastern Europe EBRDs role in the regions energy sector and EC experience with energy assistance to the CEE and the ex-USSR The second conference will provide an overview ofreshycent macroeconomic development in the region Speakers inc1ude JanVanous Keith Crane Marvin Jackson Ronald Freeman Information Ms Mary Hogan Washington DC tel (202) 898-0471 fax (202) 898-0445 or Corinne Redonnet London tel (4481) 545shy6212 fax (4481) 545-6248

First Annual Meeting on~BRD Governors April 13-14 Budapest Hungary

Europe Business Outlook 1992 Conshyference April 26-29 Knoxville Tennessee

Organized by the US Commerce Deshypartmentand the University ofTennesshysee Presentations by Senior Commershycial Officers of the US and Foreign Commercial Service from 23 Eastern and Western European countries and US missions to international organizashytions together with business leaders from Pizza Hut Coca-Cola Delta Air Proctor and Gamble Martin Marietta Topics include New Business Realities in the CIS Defense Industry Convershysion-Opportunities in the Former Soshyviet Union Eastern Europe Perspecshytives and Privatization Issues and Inshyvesting in Hungaryand Czechoslovakia A Lawyers View Information Ms Elaine Keener Co the UT Conference Center tel (615) 974-0250 fax (615) 974-0264 or UTConferences PO Box 2648 Knoxville Tennessee 37901

World Bank Annual Conference on Development Economics April30-May 1 Washington DC

Topics include Theories of Growth and Development Technology Labor MarshyketsandDevelopmentand International Capital Flows Information Mrs Jean Gray Ponchamni Rm 83-032 tel (202) 473-6850

Privatization and Market Mechashynisms A Comparative Approach May 14middot15 Budapest Hungary

Organized by the Association Intershynationale de Droit Economique (Intershynational Association for Economic Law) in collaboration with the Hungarian Asshysociation for the Protection ofIndustrial Property The discussion aims at bringshying together leading academics and polishycymakers from the public and private sector in different countries Four workshyshops will discuss legal requirements in a functioning market economy techshyniques ofprivatization social rights and privatization and sectoral aspects of privatization (telecommunications fishynancial system) Information General Secretariat ofAIDE Place Montesquieu 3 1348 LovrainLaNeuve Belgium tel 32-10-47middot39-70 fax 32-10middot47shy39-45

MarchI992 12 Volume 3 Number 3

Transition The World BankCECSE

World Bank IMF Agenda

New World Bank offices in Sofia and Bucharest

The World Bank is establishing resishydent offices in Bulgaria and Romania at the request of the governments of these countries John Wilton a British national will head the Sofia office and Arntraud Hartmann a German nashytional win be in charge of the Bucharest office

IMF recommends 3 percent quota to Russia

The IMF could support with its finanshycial resources the implementation of Russias economic reform program once Russia becomes a member of the instishytution said Michel Camdessus Manshyaging Director ofth(~ Fund following a meeting of the IMF executive board on March 31 attendedfor the first time by the representatives of the Russian Government The ex~cutive board will decide on a recommEndation to allot a quota share of 3 penent for Russia It would give the country a larger quota than China and the largest quota in the Fund after the G-7 industrial nashytions and Saudi Arabia

All ex-Soviet republic have applied to join the IMF and the World Bank with Georgia the last applying for memshybership on March 12 1992 Camdessus hinted that Russia and the other reshypublics of the former Soviet Union might become IMF mpmbers as early as May Noting that the IMF helped provide $20 billion to Central and Eastshyern Europe last year Camdessus said he expected that a similar flow of assisshytance would be needed in 1992

Reconstructing Cambodia

Japan will host an international conshyference in late June on the reconstrucshytion ofCambodia Twenty or more proshyspective donor countriefgt and internashytional organizations including the World Bank and the IMF are expected to attend

Donors pledge aid forLao Peoples Democratic Republic

In a Geneva meeting major internashytional donors pledged $500 million for infrastructure development in Lao Peoples Democratic Republic The pledge was made at a meeting held under the auspices of the United Nashytions Development Fund Donors inshyclude the United States Germany the United Kingdom Japan Kuwait the Republic of Korea India the Asian Development Bank the World Bank and the IMF

Olechowski in Washington

Poland took the first steps toward putshytingits economic reform program back on track by winning the IMFs approval of its budget We have reached an agreement with the IMF that the budshyget as prepared by the government is a reasonable one Polish Finance Minisshyter Andrzej Olechowski is quoted as saying after two days of talks in Washshyington with the Fund the World Bank and US government officials Accordshying to international monetary sources the Fund believes that Polands latest budget plans (see page 11) can form the basis for a credible reform program if they are passed by parliament in April Olechowski also said that he discussed loans worth $1 billion from the World Bank and the chances of gaining access to $15 billion in IMF support if the proposed budget is approved

IDA credit to Chinas education

To support Chinas effort to improve the quality of education in the six poorshyestprovinces the IDA approved a credit of $130 million The IDA credit will finance improvements in primary and some secondary schools in rural areas It will also support restructuring of higher education to make the system more efficient (In 1986 China introshyduced a compulsory nine-year basic education system)

and World Bankloan to develop cement production

China will meet growing domestic deshymand for cement through a $265 milshylion project supported by an $872 milshylion World Bank loan China is the worlds largestproducer and consumer of cement but demand is expected to exceed supply before the end of the century The loan will partially finance the developmentofproduction and disshytribution facilities atTongling Ningbo and Nanjing The loan will also assist cement agencies to improve pollution prevention

CIS Reforming education and training

Education and training have a vital role to play in the transition process of the former Soviet republics stressed World Bank Vice President Wilfried Thalwitz at a March seminar for CIS ministers of education The countries of the region need to retrain adults unemployed by the restructuring proshycess refocus higher education and scishyence toward the needs of a market economy develop skills in modern busishyness management economics engishyneering and agriculture and adjust the pre-university education system so that the students who emerge are flexible andareprepared forthe change to a market economy where their fushytures will be determined by their own ingenuity and their own initiative

Massive aid to Ethiopia

International aid organizations led by the World Bank have put together a $6574 million program to help the new government in Ethiopia rebuild after nearly two decades of civil war and mismanagement ofthe economy The IDA a World Bank affiliate will provide the largest share of the proshygram with $150 million The other major donors are the African Developshyment Bank ($126 million) the EC ($1164 million) and the USAID ($87 million)

Volume 3 Number 3 13 March 1992

Transition lhe Wor1d BankCECSE

Books and Working Papers Briefs The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Richard Bird and Christine Wallich Financing Local Government in Hungary World Bank Washington DC Policy Research WPS 869 1992 87 p

The new Hungarian system of local government finance tries to free local authorities spending from the heavy hand of central control and make the localities more responsible by providshying additional sources of locally conshytrolled revenues Local governments still depend for some 82 percentoftheir receiptson central transfers New local taxes are inadequate and some local authorities are unable to provide even the basic social services to the poor Localities feel increased pressure to raise revenues and use proceeds from asset sales to finance current operashytions Their entrepreneurial activity could work against the privatization drive therefore the golden rule should apply on the local level too The busishyness of government is not business

Normative grants of the central govshyernment are largely discretionary disshytributed according to a formula geared to both per capita equalization and needThis policy creates uncertainty therefore some criteria should be apshyplied suggest the authors Grants could befixed-for example to some national tax source (personal income or valueshyadded tax)

In dividing its grant among local aushythorities the central government should also consider the diverse revshyenue-raising capacities of the recipishyents and change the distribution forshymula for the normative grant accordshyingly As a result grant funds will be shifted from local governments with a high-tax capacity to localities with a low-tax capacity Ifrecipients are unshyable to impose and collect taxes at the assumed rate they have to acquiesce to a proportionally reduced grant later On the other hand recipients can keep all those tax revenues that exceed the anticipated level Available from Ann Bhalla The World Bank Room N10-053 tel (202) 473-7699

Marchl992

Cheryl W Gray Rebecca J Hanson and Peter G Ianachkov Romanias Evolving Legal Frameshywork for Private Sector Developshyment World Bank Washington DC Policy Research WPS 872 1992 27 p

Romania started virtually from scratch in 1990 to build a market economy and the legal framework required for it It has adopted a new constitution and extensive new legislation covering real and intellectual property companies and foreign investment Romania has revived the pre-war civil code as a basis for contract law and is moving to modshyernize its bankruptcy code Little progress has been made however in regulatinganticompetititive monopoly behavior

At present no judicial institutions in the country-whether courts arbitrashytion panels lawyers or law schools-shyare fully prepared to take on the chalshylenges inherent in their roles in the market economy Administrative and judicial apparatus for implementing new laws and educating the public about them are lagging behind Forshyeign technical assistance if properly designed can accelerate the institushytional development Availablefrom CECSE The World Bank Room N6-035 tel (202) 473-7188

Ross Levine and David Scott Old Debts and New BeginningsshyA Policy Choice in Transitional Socialist Economies World Bank Washington DC Policy Research WPS 876 1992 27 p

The authors scrutinize the dilemma of the decision-makers in postsocialist countries how to define the asset and liability structure of state-owned enshyterprises and banks as they are privatized Heavy stocks of enterprise debts (loans issued by state-owned banks to state-owned companies durshying socialist management) are hindershying the effective operation of both the business sector and the financial secshytor They also risk institutionalizing ad

14

hocgovern ment intervention (bailouts subsidized loans etc) on behalf of heavily indebted enterprises before putting them on the block Those intershyventions in turn may reduce governshymentcredibility The paper argues that governmentshouldassumetheresponshysibility for a large part of bank claims on enterprises as it would (1) improve the operation and restructuring of stateshyowned banks (2) facilitate the privatshyization of major banks (regarded as a desirable goal by the authors who pershyceive it as a gradual process) and (3) keep fiscal costs relatively low

It is feasible to preserve all enterprise debt obligations to banks that are of unquestioned quality rated as pass at detailed loan reviews (such loans might comprise 10 to 20 percent of outstanding loan portfolios) Another way of replacing bad assets is to preshyserve only those claims that either banks or enterprises themselves agree to preserve Global experience demonshystrates that whenever banks particushylarly state-owned banks are severely insolvent the replacementofbad loans with government bonds is the primary way to resolve the banking problem

Other recent PRWorkingPapers of the World Bank

Silvia B Sagari and Loic Chiquier Copingwith the Legacies ofSubsimiddot dized Mortgage CreditinHungary WPS 847199226 p Available from Melakou Guirbo The World Bank Room J9middot235 tel (202) 473middot5015

Roy Bahl and Christine Wallich Intergovernmental Fiscal Relashytions in China WPS 863 1992 58 p Available from Ann Bhalla The World Bank Room NlO-053 tel (202) 473-7699

Gary Jefferson and Wenyi Xu Assessing Gains in Efficient Promiddot duction Among Chinas Industrial Enterprises WPS 877199221 p AvailablefromCECSE The WorldBankRoom N6-044 tel (202) 471-7188

Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

Transition The World BankCECSE

Public Enterprise Restructuring Achilles Heel of the Reform Process

s tate enterprises still account for the bulk of industrial acshytivity across Central and

Eastern Europe (CEE) Yet there has been relatively little discussion about indications that a large part of them may not be viable at world market prices and competition In other words the cost of restructuring those entershyprises (in present value terms) may exceed the social benefits The probshylem is likely to be even more acute in the former Soviet republics where the degree of distortion vis-a-vis world prices has been relatively higher and isolation from world markets has been greater

Problem children Nonviable enterprises

Using detailed input-output data from 1988 and 1989 and information on world prices Hughes and Hare (Comshypetitiveness and Industrial Restrucshyturingin Czechoslovakia Hungary and Poland 1991) found that the share of output in manufacturing industry with negative value-added at world prices ranged from 19 percent in Czechosloshyvakia to 236 percent in Poland and 242 percent in Hungary Adjusting

The Hungarian approach The Hungarian experience is instructive As indicated by the results of Hughes and Hare the enterprise viability prob lem in Hungary appears to be ofa magshynitude similar to that in Czechoslovakia andPoland Hungarys approach to sysshytem reforms has been more cautious Trade liberalization has been more gradUCII---some 30percent ofindustrial production remained protected in 1991 through licensing and tariffprotection on liberalized commodities is higher The real exchange rate has undergone relashytively minorgyrations andfull currency convertibility is to be attained at a more gradUCI1 pace The reliance on more trashyditional privatization methods mayhave kept expectations about what is achievshy

these figures for a 25 percent negative quality differential produced negative value-added shares of 34 percent in Czechoslovakia 355 percent in Hunshygary and 389 percent in Poland Though the numbers may be exaggershyated it still means thatfor a significant share ofindustrial output the value of intermediate inputs may exceed the value of output when both are evalushyated at world prices For such prodshyucts output at world prices will be produced at a loss even ifthe en tire cost of labor and capital is shelved These figures are likely to be even higher in Eastern Europe and the former Soviet republics given the relatively greater isolation from world markets

Restructuring industry that has negashytive value-added at world prices usushyaBy is not worthwhile The share of industrial activity for which the costs of restructuring exceed expected benshyefits is presumably far greater than the share that is value-subtracting howshyever Studies by potential foreign inshyvestors suggest that about a third of the industrial sector is not likely to be viable For another third major reshystructuring would be required to the extent that a positive return on the

able more realistic It is at least the first step toward more forceful public entershyprise reform while actual progress on privatization has been more rapid than elsewhere This more gradUCII approach to the transition has certainly not admiddot versely affected theperception offoreign investors as their response has been far more favorable in Hungary than else where in the CEE region Domestic pri vate sector activity also appears robust Clearly Hungary has a difficult task of enterprise reform ahead But the more gradUCII approach to transition policies at the macro level appears to have inshycreased the prospects of sustainability while permitting relatively faster progress in enterprise reform

exercise could not necessarily be exshypected Restructuring would definitely be worthwhile for only about one-third of industrial activities

The presence of a large number of firms that are nonviable under comshypetitive conditions considerably comshyplicates the reform strategy as full implementation of liberalization and stabilization could generate a level of enterprise bankruptcy and unemployshyment that no government could surshyvive The depressed level of demand could undermine even the healthier enterprises and cut into fiscal revshyenues A vicious cycle of recession and inflation could be the result In addishytion private investors whether doshymestic or foreign will be less intershyested in assuming ownership of existshying firms that are insolvent or require costly restructuring and win opt inshystead to start new ventures free ofthe legacies of the past including liability for environmental damage

Some general principles

If the proportion of nonviable entershyprises in a liberalized economy is larger than can be liquidated immediately the government de facto is engaged in a form of industrial policy While the choice of policy intervention will unshydoubtedly depend on individual circumshystances it is possible to specify some general principles that should apply

(1) Price reform Sheltering entershyprises from bearing the full burden of higher prices-by continuing to subsishydize such inputs as energy-complishycates the evaluation oftheir net worth and in addition delays and possibly distorts the adjustment to the permashynent changes in the terms of trade Moreover charging enterprises the unsubsidized price for energy and other raw material inputs would help to enshysure that the reduced level of trade that is transacted is at least economishycally beneficial

March 1 992 6 Volume 3 Number 3

Transition The World BankCECSE

(2) Bankruptcies Immediate liquidashytion is the preferred strategy in the case ofthe weakest enterprises which cannot cover operating costs underany reasonable set of relative prices But the number ofactual shutdowns in the short term is likely to be far less than ideal from a purely economic perspecshytive reflecting the political difficulty of allowing drastic increases in unemshyployment The inadequacy of existing bankrupby legiclation could also slow the liquidation process For large enshyterprises some lines of production would need to be closed while others could continue operation Ifthe output of a firm or line of production is valueshysubtractingundH the liberalized price regime itwould he preferable to termishynate production altogether even while continuingtocompensate workers fully The scope of thi type of cost saving would be substantial

(3) Subsidies Explicit budgetary supshyport is preferablemiddot to support from the banking system where immediate liqshyuidation is not possible This will keep up pressure and Poster closer governshyment supervision of the firms activishyties while it is awaiting liquidation Recourse to the banking system on the other hand would result in an increase in bad loans Banlingresources would be more pTCductively used to finance new investment as well as to restrucshyture potentially vilble companies

Trade curnmC) and macro issues

(4) Trade liberali~ation A policy of graduai trade liberalization appears particularly nppropriate for the former Soviet republics and possibly for other formerly socialist economies as they begin to dismantle barriers to trade with hard currency areas The experishymentofreformingeconomies with shock trade liberalization-the unprecshyedented fast shift from an essentially closed regime to pra(ticallyfree tradeshyis unlikely to be sustainable in a weak enterprise structure Poland and Czechoslovakia initially adopted tariff regimes essentially resembling those of the least protectie industrial counshytries with tariff rates averaging about 5 percent although more recently tarshyiffs for certain import-competing inshydustries have heen raised significantly in both countries Tariff rates in Bul-

Volume 3 Number 3

garia and Romania also averaged less than 10 percent in 1991 while import quotas were largely eliminated Ultishymatelyitisaquestionofjudgment--of weighing the distortive effects on relashytive prices of initially higher tariffs against their potential for providing some breathing space to enable entershyprises to restructure and compete in world markets

(A frequent argument for rapid trade liberalization is that it will break the power of the rent-seeking industrial monopolies But at least in the initial stages of transition the shortage of foreign exchange may force the aushythorities to resort to foreign exchange allocations Even in a liberal exchange rate regime overshooting could occur reflecting political uncertainty or lack of confidence in the sustain ability of transition In these cases competition from imports may not be sufficient to combat monopoly pricing In the inshyterim period before either domestic or foreign competition has become effecshytive restrictions on price increases by monopolists could therefore be warshyranted)

(5) Exchange rate policy Countries attempting the transition to a market economy may be classified into those that have a measure of control over the exchange rate (atleast in the short run) and those that do not due to the exshytreme shortage offoreign exchange The concern here is with the former catshyegory which currently comprises Czechoslovakia Hungary andPoland In each ofthese countries the exchange rate has been used to anchor the stabishy

lization program in Czechoslovakia and Poland the nominal exchange rate has been pegged to the dollar or a basshyket of hard currencies (Poland 1991) while Hungary has adopted a managed float through intervention Duringthe transition however when domestic demand remains depressed and inflashytion rates remain well above Western levels it may be relatively easy to susshytain an appreciation of the real exshychange rate since balance of payments pressures will emerge more slowly than wouldbe the case in a growing economy The temptation to use the exchange rate to fight inflation as well as to force productivityim provements onto entershyprises will also be strong Hence an appreciating real exchange rate can jeopardize the ability of potentially vishyable firms to compete

(6) Sequencing While there is general agreement that most enterprises will have to be restructured to survive there is less consensus on the extent of reshystructuring that is needed prior to privatization In the current unstable economic environment it is generally difficultto determine which firms would ultimately survive under competitive conditions The concern here is that frustration with the slow pace of entershyprise reform may force the pace of macro reform in an ultimately unsustainable manner For example free trade and an appreciating real exchange rate may be used to try to force enterprises to become more effishycient since it is institutionally easierto adopt this stance than to tackle the core problems of enterprise manageshyment such as incentive systems and

My Arthur could never resist a bargain

From the British daily Evening Standard

7 March 1992

Transition lhe World BankCECSE

A Proposal to Solve the Restructuring Dilemma in Poland Maurice Ernst suggests strategic alliances

Many large state firms in Poland have sought but few have found foreign savshyiors Foreign investors have been turned off not only by backward technology poor organization and a changing tax structure but also by the risks created by organized labors opposition to drasshytic change and by the unique functions of large enterprises in former commushynist countries--such as providing social services The current management of state-owned enterprises is not in a posishytion to negotiate such problems with prospective Western investors the censhytral and local governments must be inshyvolved because only they can provide many ofthe solutions

The solution that is advocated by many economists to the obviously sluggish reshysponse of Polish state-owned firms to emerging market conditions is to accelshyerate privatization Unfortunately privatization is as much the end result ofa complex process as it is a means of achieving these desirable results In Poland very little privatization has ocshycurred through sale of enterprises to domestic or foreign buyers either dishyrectly or by issuing and selting shares The overwhelming majority of privatizations of state enterprises has occurred through what the Poles call the liquidation process bull The government breaks up large stated-owned enterprises suchas wholeshysale firms department stores and tourshyist offices and then sells or leases parts ofthese firms to private parties or bull A firms employees in cooperation with its management work out a leasshying or leveraged buy-out arrangement with the government

Sales oflarge industrial firms to foreign investors have been few-the GMagreeshyment with the FSO automobile firm being a recent exampl~nd have inshy

volved complex negotiations lasting many months and including such issues as tax breaks tariffprotection access to the EC market and so forth As the financial conshydition of the state sector has deteriorated the liquidation process has begun more and more to resemble a bankruptcy sale certainly not what was intended To accelshyerate privat-ization Poland likeothercounshytries ofCentral andEastern Europe is also considering the free distribution ofvouchshyers representing ownership shares ina dozen or two investment companies but it is unshycertain whether these companies can make the tough decisions needed for restructurshying

The Polish government has also begun to use foreign firms to assess market opportushynities and competitiveness in a series of34 sectoral studies covering such industries as automobiles machine tools shipping aircraft pharmaceuticals cement meat processing beer and construction The possibilities for contracting out the restrucshyturingofenterprises to groups ofmanagers are also being considered Some industries such as coal and steel may require special treatment-possibly involving a regulated phasing down ofproductive capacity over several years as in the European Commushynity Some heavily affected regions such as the lLJdz region where most ofthe severely ill textile industry is located and Silesia the nexus ofcoal steel and pollution will require assistance for restructuring divershysificotion andcleanup possibly in theform of low-interest loans that could be supshyported by foreign donors

In my view the most promising approach to the restructuring problem is the use of strategic alliances loose arrangements amongWestern andPolish firms to develop joint ventures other direct investments marketing arrangements RampD and techshynology cooperation On the Western side one firm must take the lead even though

other companies may be brought in for special expertise and funding and to share the risk Participation ofthe Polshyishgovernment is essentiaL Westerngovshyernments could provide encouragement through fiscal and other financial inmiddot centives such as reduced or even no taxes on capital gains

Strategic allia nces can help to assess the Polish firms potential for competitive production and exports identify potenshytial Western investors or partners and negotiatewith all interested parties For example Western investors maycommit themselves to worker retraining proshygrams the central government maygive the locol government a larger share of certain tax receipts to finance the local hospital formerly paid for by the firm specific and limited commitments may be made for environmental cleanup For the Western partner no capital needs to be committed until a clear picture of investment opportunities has emerged and ways have been found to resolve major problems The principal cost to the lead Western partner would be the commitment ofhigh-level executive pershysonnel with a sophisticated knowledge of technology markets and manageshyment In return the Western lead firm would be given the right to develop or buy into any investment opportunities that arise from the cooperation For Poshyland-and other postsocialist counshytries-a network of strategic alliances could greatly accelerate the flow ofWestshyern capital technology and manageshymentk now-how into a criticalpartofthe economy and thereby avoid a severe waste of resources and an unnecessary further decline in economic activity

The authoris a consul tantat the Hudson Institute

reforming the power of workers counshycils There may also have been a tenshydency in the CEE region to postpone the tough enterprise-level reforms in thehope thatmass privatization would relieve the government of having to legislate such reforms The limits of privatization in a situation of substanshytial enterprise nonviability would indishycate that enterprise reforms per se can no longer be postponed

March 1 992

Summing up macroeconomic policy must take account ofthe potential conshyflict between the speed of reforms and the rapidity with which it is possible to liquidate nonviable firms These conshysiderations suggest the need for more careful coordination between the impleshymentation of reforms atthe macro level and that at the enterprise level Given the relative difficulty of the latter a pace of reform that is restrained only

8

by implementation capacity will not necessarily be an optimal or very susshytainable approach to the transition

SanjayDhar World Bank ECAVP Excerpted from the authors paper Enterprise Viability and the Transition to a Market Economy January 1992

Volume 3 Number 3

Transition The World BankCECSE

Quotation of the Month Cutting defense spending will proshyvide the US with its own transition problems Group calls for new $100 billion Marshall Plan to the former Soviet republics

T he United States in conjuncshytion with the European Comshymunity Japan and other

wealthy nations should launch a new economic initiative designed to help the former Soviet republics make the transition from a centrally planned system to a network of democratic and market-oriented economies The curshyrent state ofthe Us economy is propishytious for such a daring venture Deshyfense-related spending has generated many jobs in the US economy and it has increased aggregate demand which has benefited many corporashytions A major cutn defense spending will have a dampEning effect on US job growth and corporate profits unshyless it is offs4~t by other activities

Even if def(lOse spending cuts are matched by equal increases in social welfare spending the net impact on the US economy i~ somewhat diminshyished growth prospects and slightly lower employment totals To cut deshyfense spending inl recessionary or slow-growth period will provide the United States withts own transition problems The macroeconomic stimushylus to the economy that would be genshyerated by a new Marshall Plan for the former Soviet republ ics could be a key ingredientin helping the United States forge a strongpost-Cdd War economy

Roughly 48 percent of the aid and asshysistance that the former Soviet repubshylics have received has been in the form ofexport credits and guarantees Over 60 percent of these export credits and guarantees have been made by Euroshypean nations In contmst only one out ofevery eight dollars in export credits and guarantees to thf~ former Soviet republics have been made by the United States and mostof them were for farm products The United Statescould very easily find itselflocked out of key marshykets in the former Soviet republics The credits and guarantees grantedby European nations will help finance many capital goods ami other related

Volume 3 Number 3

investments Relationships between buyers in the former Soviet republics and Western European corporations are being established To be sure there are successful business ventures and investments between US firms and the former Soviet republics However European activity in this area-parshyticularly from Germany-dwarfs that of the United States

It is in the United States self-interest to have a strong and vibrant commershycial presence in the former Soviet reshypublics Steps taken now to establish and assure growing economies in the former Soviet republics will create new buyers for US agricultural products manufactured goods and services However the United States is curshyrently playing a very small role in aidshying and assisting the former Soviet republics Only about 6 percent of the aid and assistance to the former Soviet republics or under $5 billion is curshyrently coming from the United States The United States is providing less aid and assistance than Italy which has an economy approximately one tenth the size ofthat of the United States

It is useful to remember some of the features and lessons of the original Marshall Plan George C Marshall presented the general outline of what became known as theMarshall Plan on June 5 1947 The independent Ecoshynomic Cooperation Administration (ECA) was established to administer the program which provided $133 bilshylion in assistance to Europe from 1948 to 1952 In 1992 dollars this total is equal to approximately $100 billion The ECA extended into many other areas besides providing grants andfosshytering investment Ithad a very active technical assistance program which introduced American management and production practices to Western Euroshypean businesses It promoted peopleshyto-people diplomacy And it encourshyaged theformation offree andindepenshydent trade unions as an institutional foundation for democracy and labor market cooperation to spur productivshyity and distribute its fruits for the benshyefit of all

The roughly $100 billion total of the original Marshall Plan is a realistic starting point for a new economic inishy

~ ---~----------------------~----~----

Never too late Western aid package for Russia The Group of Seven industrialized nashytions announced a $24 billion one-year aid program for Russia on April 1 The program establishes a $6 billion fund to maintain the value ofthe ruble while it becomes a convertible currency Another $18 billion is the sum total of bull credits from the IMF the World Bank and the EBRD ($45 billion) bull debt rescheduling ($25 billion) bull export credit guarantees food credits and humanitarian aid ($11 billion)

According to Horst Kohler Germanys chief negotiator in the G-7 the package would cover this years deficit in Russia8

balanreof payments Headded that agreeshyment on the adjustment program beshytween the Russian government and the

IMF could be finalized in May with the first credit tranches coming in June beshyfore the G-7 Munich Summit in July World Bank credits should also be availshyable by June or July Kohler said The United States would take a 20 to 25 I

percent share of the G-7 package Presi- dent Bush will ask the Congress to apshyprove a $12 billion US quota increase for the IMFan additional$ll billion in agricultural credit guarantees (since January 1991 the United States has extended $37 billion in such credits) and the announced $620 million in ecoshynomic and humanitarian aid Congress also is called on to repeal legal provisions limiting trade and to expand Peace Corps presence USIA programs and democshyracy corps programs in Russia

9 March 1992

Transition The World BankCECSE

tiative for the former Soviet republics Thisplan should be multinational One possible funding formula might be for the United States the European Comshymunity Japan and other wealthy nashytions each to contribute a portion of the needed resources Such a multiyear funding level divided between several donors is realistic and doable

This new economic initiative needs a multinational organization equivalent to the ECA of the Marshall Plan Such an organization would of course work cooperatively with the International Monetary Fund the World Bank and the United Nations We recognize that the former Soviet republics of the 1990s are different in many important reshyspects from post-World War II Westshyern Europe and the aid delivery sysshytems need to reflect these differences This multinational ECA should be dishyrected by private sector business and labor leaders as much as possible

The new ECA should organize along the lines of key industries and ecoshynomic sectors We strongly suggest that representatives from business labor and agriculture sit on these varishyous industry and sectoral committees The former Soviet republics will also require a great deal of technical assisshytance and basic institution-building Price decontrol is an important part of establishing a free-market system However a modem free market also requires a highly developed system of commercial laws an efficient banking system and stock markets In addishytion worker transition mechanisms that supply economic safety nets and the ladders to reach them are particushylarly important It is especially critical that the outstanding scientific talent that supported the former Soviet milishytary machine be redeployed to producshytive peaceful pursuits that benefit the world community (such as energy enshyvironmental and health care priorishyties)

Excerpts from the policy statement of the Nashytional Planning Associa tion Washington D C (dated March 18 1992) NPA is a nonpartisan economic and social research institution its trustees are prominent leaders from business labor agriculture and academia

The Russian reform program

The Russian governments economic reshyform program for 1992 published in early March has been drawn up with requirements for joining the IMF and the World Bank in mind At the same time it also reflects the governments

I commitment to stabilizing and liberalizshying the economy over a two-year period Its priorities are eliminating the budget deficit controlling the money supply and implementing privatization_

Prices The program looks forward to the eventual liberalization ofprices from all administrative restrictions By April prices ofall consumergoods and services (except rent social services and public transport) will be freed Russian Presimiddot dent Boris Yeltsin asserted that deregushylation ofmostenergy prices will beputoff untilate Mayor early June The origishynal plans expressed an intention to free prices for fuel and other goods for proshyduction purposes byApril 20 while temshyporarily retaining theregulation ofprices for gas and electricity

Safety net Social protection will be dishyrected above all to pensioners largefamishylies and the unemployed This will enshytail cash compensation ofpensioners for price rises and social security payments to the other two groups Unemployment benefits will come in two forms-stanshydard and raised Standard benefits will not exceed 75 percent of the minimum wage while raised benefits will not exshyceed90percentofthe a verage wage earned by the recipient at the last place ofwork Raised benefits will be given only when the workplace has been closed or reorgashynized

Budget As a result ofprice liberalizashytion only some 5 percentofpublic spendshying will be devoted to subsidizing goods and services The austere social policy will permit further reductions in the general level ofgrants and subsidies In the course ofthis year defense spending will be cut further By mid-year the number ofcivil servants will have been cut by 5 percent The government sees its task as eliminating the budget deficit by the beginning of1993

Exchange rate In order to improve forshyeign trade performance and integrate Russia into the warldeconomyassoonas possible a single exchange rate will be introduced As a first step the governshyment intends to abandon the present

system by April 20 The several current rates will be merged into two undershypinned by a single floating rate One rate will apply to all current transacmiddot tions while the other will apply to the movement ofcapital At the same time free access to foreign currency will be granted to importers ofgoods and sershyvices as well as to foreign investors for the conversion ofdividends and profits

Foreign trade_ By July 1 all export quotas and licenses will be abolished Only the export ofenergy resources will still be subject to regulation although these quotas will be abolished by the end of 1993 No significant limitations on imports will remain

Monetary policy The Russian governmiddot ment will attempt to the best of its ability to coordinate monetary policy with the other CIS member states in the context of a ruble-denominated zone The Central Bank ofRussia claims it is ready to agree with the central banks of the other former Soviet republics on the rate and scale of money emissions on the general guidelines for unifying the ruble exchange rate and on the fine details ofpayments and accounting beshytween the CIS member states Should anyofthe former Soviet republics decide to introduce alternative currencies the Central Bank ofRussia is prepared to discuss the orderly withdrawalofrubles from circulation in the given republics

Privatization In the initial stage the emphasis will be placed on the swift sale by auction of small enterprises and retail outlets The privatization of large enterprises will be based on the following principles bull Employees will be offered shares in their own enterprises although not a controlling share bull Restrictions on the sale ofseparate enterprises and branches within large groups will be lifted bull Restrictions on the participation of foreign investors will be lifted bull Privatization will include the land on which the given enterprise stands bull Privatization ofincomplete construcshytion wark will be encouraged through a special tax regime

Based on Oxford Analytica London and Commersant a Russian weekly (March 2 1992)

March1 992 10 Volume 3 Number 3

Transition The World BankCECSE

Milestones of Transition

In Czechoslovakia inflation would be 12 percent in 1992 with GDP conshytracting by about 5 to 8 percent preshydicted Czechoslovakias State Bank GovernorJ osefTosovsky Inflation last year was almost 58 percent

Germany will transfer a net 180 bilshylion marks to thE eastern part of the country this year up from 139 billion in 1991 The forecast came in the Bundesbanks latest monthly report which cautioned against a continuashytion of transfers that are used primashyrily tofinance consumption (Atpresen t 134 million peoplE are unemployed in eastern Germany representing 165 percent of the tota I work force)

The Ukrainian parliament approved in principle an economic reform proshygram in late Mard which scraps the ruble in Ukraine and extends the use of the current coupons until the Ukraishynian currency is introduced (within three months) All trade with former Soviet republics will b(~ on a hardshycurrency basis imp(rts from them will be subject to tariff and exports to them will be subject to VAT

The new Ukrainian foreign investshyment law which came into effect on March 12afterparliarnentary approval allows foreigners to buy interests in Ukrainian businessemiddot or property of up to 100 percent guara ntees the righ t of foreign investors to repatriate revenues and profits and provides for compenshysation in the event of nationalization All current joint ventures are exempted from taxation until five years after they start to make a profit New joint ventures will be exempted from taxashytion on their profits for three years

A draft privatization program ofRusshysian state and municipal properties approved by the joint session of the presidium of the Rmsian Supreme Soviet and the government emphasizshying reliance on auctions calls for the sale of 70 billion to 80 hill ion rubles of state property this year and the free transfer to workersofstlte enterprises worth 150 billion to 20Ci billion rubles Ifthe Russian Supreme Soviet approves the proposal by the end of 1992 an estimated 12 to 20 percllnt of the total

Volume 3 Number 3

value offixed and worki ng capital could be privatized

The Russian Finance Ministry has informed the government that the first quarter budget revenue of 190 billion rubles is 250 billion short of the proshyjected figure Revenues from foreign economic activity amount to 9 billion rubles compared with a planned budshygetaryincome of228 billion rubles due to the steepfallin exports the financial status of exporters the paralysis ofthe oil-refining industry and the lifting of export duties on much of the fuel shipshyments The Russian industrial output in January and February was 135 percent below its level a year ago

Tajikistans new law on foreign inshyvestment (valid from March 11) gives foreign investors the right to set up enterprises purchase stock and parshyticipate in the privatization of state enterprises The law also establishes legal guarantees for foreign investshyments Tajikistan has lagged behind neighboring Uzbekistan in the matter of foreign investment Uzbekistan passed a similar law last July

The European Bank for ReconshystructionandDevelopment(EBRD) opened an office in Budapest-its secshyond in Eastern Europe its first was opened in Warsaw recently The Banks President Jacques Attali said that Russia would have 4 percent ofEBRD assistance noting that the former USSR had a 6 percent share Attali also announced the creation offunds to modernize agriculture convert defense industries and improve oil production in Russia Current limits to the Banks lending to members of the CIS would end after the EBRDs annual meeting in April he added

Premier Li Peng said that China needed to accelerate economic reform adding that maintaining a healthy economy would keep the countrys poshylitical system unchanged Li also anshynounced at the National Peoples Conshygress that a three-year period of ecoshynomic austerity was over (The austershyity program brought the more than 30 percent inflation rate at the beginning of 1989 down to 29 percent last year)

11

China would stick to its target of 6 percent GNP growth and try to keep inflation below 6 percent this year

More than 125 million people in Viet Nam 18 percent ofits population lack full-time employment Viet Nam will try to cutunemployment in three years by increasing jobs for youth and reloshycating more than 12 million people to farm virgin land Severe joblessness in Viet Nam worsened when the governshyment slashed the size of the army and lost significant amounts of aid from the former CMEA countries

The Polish government has approved the 1992 budget halving the planned deficit to 655 trillion zlotys ($49 bilshylion) or about 5 percent ofGDP in an attempt to curtail inflation Besides huge cuts in education health and welfare remaining state subsidies will be virtually eliminated The draft budshyget calls for coal prices to go up by 5 percent monthly except in the summer months natural gas to increase by 5 percent quarterly and central heating and hot water to go up 33 percent by October Rents for public housingwould be doubled in April and train fares would climb by 28 percent Gasoline taxes and the price of medicine would also rise sharply The Sejm win debate the proposed budget in April

Nicaraguas President Violeta Chamorro announced plans to restore economic growth of3 percent this year with a 400 percent increase in public spending to $280 million and credits and tax incentives to boost investment

The Romanian parliament approved the 1992 austerity budget which stresses low inflation at the expense of economic growth The state expects to collect revenues of about $521 billion in 1992 with estimated expenditures of $566 billion-a planned deficit of some $450 million Accordingto official figures the share of the private sector in the gross domestic product-which stood at 2100 million lei (the leu is currently quoted at 198 per dollar)shyrose to 21 percent compared with only 15 percent in 1990

March 1992

Transition lhe World BankjCECSE

Conference Diary

A Common Migration Policy for Europe March 24 Brussels

K1aus F Zimmermann at ajoint lunchshytime meeting of CEPR (Centre for Ecoshynomic Policy for Europe) and ECARE (European Centre for Advanced Reshysearch in Economics) presented results of recent research on European migrashytion and migration policy He predicts 5 million to 15 million potential East-West migrants while the western press often quotes a less plausible figure of 20 milshylion to 40 million Austria France Geurorshymany Italy and the Benelux countries are the most likely receiving countries The key issue is the speed ofinflow (and its composi tion) Past experience shows that immigration usually provides net benefits from an economic perspective In a world offree labor movement labor moves from low-productivity(low-wage) to high-productivity (high-wage) counshytries and it removes relative scarcities Some inflow of labor migrants would balance demographic losses of western populations that are aging and stagnatshying However immigration restrictions could apply ifincreased guest workers lead to a decline in domestic wages orshyifwages are inflexible--increases in unshyemployment With free labor and prodshyuctmarkets a Common Migration Policy is essen tial for the EC A Geuroneral Agreeshyment on Migration Policy (GAMP) parshyallel to the GATT is also recommended Klaus F Zimmermann Economics Professhysor at the Munich University together with Thomas Straubhaar published his findings in Toward a European Migration Policy CEPR Discussion Paper No_ 641 (CEPR 6 Duke of York St London SW1Y6LA)

Public Management Development in Centrally Planned Economies April 1-3 London

Colloquium under the auspices of the UNDP and the om (Overseas Developshyment Institute) International experts government officials and representashytives of donor agencies discussed manshyagement development in socialist and postsocialist economies(inc1uding China Cuba Mongolia Viet Nam Lao PDR Cambodia Mozambique Angola Myanmar Central and Eastern Euroshy

countries and the CIS states) in

the new global environment The confershyence focused on public sector management improvement comparing reform efforts in the Asian African and Caribbean nations with recent experiences of Central and Eastern Europe Information Mallika Henry Management Deshyvelopment Programme Bureau for Program PolicyandEvaluation UNDPNew YorkNY tel (212) 906-6840 fax (212) 986-6280

NewDimensions in Regional Integrashytion April 2-3 The World Bank Washington DC

Sponsored by the World Banks CECTP (Jaime de Melo and Arvind Panagariya) Topics included desirability of and prosshypects for successful integration in Mrica Latin America and Eastern Europe and the likelihood ofsuccessful integration beshytween developing anddeveloped countries The issue of whether regional integration can serve as a stepping stone to multilateralism or is a barrier to the latter was also addressed

[ ForthcomingJ

EnergyProspects Post-SovietRepubshylies and Eastern Europe April 7-8 London

Business Prospects Post-Soviet Reshypublics and Eastern Europe April 8-9 London

Both events (Seventh Annual Conference) are organized by PlanEcon Inc the Washshyington-based economic research institute Topics ofthe energy conference include oil and gas geology exploration Western inshyvestment petroleum refining prospects in the former USSR and Eastern Europe EBRDs role in the regions energy sector and EC experience with energy assistance to the CEE and the ex-USSR The second conference will provide an overview ofreshycent macroeconomic development in the region Speakers inc1ude JanVanous Keith Crane Marvin Jackson Ronald Freeman Information Ms Mary Hogan Washington DC tel (202) 898-0471 fax (202) 898-0445 or Corinne Redonnet London tel (4481) 545shy6212 fax (4481) 545-6248

First Annual Meeting on~BRD Governors April 13-14 Budapest Hungary

Europe Business Outlook 1992 Conshyference April 26-29 Knoxville Tennessee

Organized by the US Commerce Deshypartmentand the University ofTennesshysee Presentations by Senior Commershycial Officers of the US and Foreign Commercial Service from 23 Eastern and Western European countries and US missions to international organizashytions together with business leaders from Pizza Hut Coca-Cola Delta Air Proctor and Gamble Martin Marietta Topics include New Business Realities in the CIS Defense Industry Convershysion-Opportunities in the Former Soshyviet Union Eastern Europe Perspecshytives and Privatization Issues and Inshyvesting in Hungaryand Czechoslovakia A Lawyers View Information Ms Elaine Keener Co the UT Conference Center tel (615) 974-0250 fax (615) 974-0264 or UTConferences PO Box 2648 Knoxville Tennessee 37901

World Bank Annual Conference on Development Economics April30-May 1 Washington DC

Topics include Theories of Growth and Development Technology Labor MarshyketsandDevelopmentand International Capital Flows Information Mrs Jean Gray Ponchamni Rm 83-032 tel (202) 473-6850

Privatization and Market Mechashynisms A Comparative Approach May 14middot15 Budapest Hungary

Organized by the Association Intershynationale de Droit Economique (Intershynational Association for Economic Law) in collaboration with the Hungarian Asshysociation for the Protection ofIndustrial Property The discussion aims at bringshying together leading academics and polishycymakers from the public and private sector in different countries Four workshyshops will discuss legal requirements in a functioning market economy techshyniques ofprivatization social rights and privatization and sectoral aspects of privatization (telecommunications fishynancial system) Information General Secretariat ofAIDE Place Montesquieu 3 1348 LovrainLaNeuve Belgium tel 32-10-47middot39-70 fax 32-10middot47shy39-45

MarchI992 12 Volume 3 Number 3

Transition The World BankCECSE

World Bank IMF Agenda

New World Bank offices in Sofia and Bucharest

The World Bank is establishing resishydent offices in Bulgaria and Romania at the request of the governments of these countries John Wilton a British national will head the Sofia office and Arntraud Hartmann a German nashytional win be in charge of the Bucharest office

IMF recommends 3 percent quota to Russia

The IMF could support with its finanshycial resources the implementation of Russias economic reform program once Russia becomes a member of the instishytution said Michel Camdessus Manshyaging Director ofth(~ Fund following a meeting of the IMF executive board on March 31 attendedfor the first time by the representatives of the Russian Government The ex~cutive board will decide on a recommEndation to allot a quota share of 3 penent for Russia It would give the country a larger quota than China and the largest quota in the Fund after the G-7 industrial nashytions and Saudi Arabia

All ex-Soviet republic have applied to join the IMF and the World Bank with Georgia the last applying for memshybership on March 12 1992 Camdessus hinted that Russia and the other reshypublics of the former Soviet Union might become IMF mpmbers as early as May Noting that the IMF helped provide $20 billion to Central and Eastshyern Europe last year Camdessus said he expected that a similar flow of assisshytance would be needed in 1992

Reconstructing Cambodia

Japan will host an international conshyference in late June on the reconstrucshytion ofCambodia Twenty or more proshyspective donor countriefgt and internashytional organizations including the World Bank and the IMF are expected to attend

Donors pledge aid forLao Peoples Democratic Republic

In a Geneva meeting major internashytional donors pledged $500 million for infrastructure development in Lao Peoples Democratic Republic The pledge was made at a meeting held under the auspices of the United Nashytions Development Fund Donors inshyclude the United States Germany the United Kingdom Japan Kuwait the Republic of Korea India the Asian Development Bank the World Bank and the IMF

Olechowski in Washington

Poland took the first steps toward putshytingits economic reform program back on track by winning the IMFs approval of its budget We have reached an agreement with the IMF that the budshyget as prepared by the government is a reasonable one Polish Finance Minisshyter Andrzej Olechowski is quoted as saying after two days of talks in Washshyington with the Fund the World Bank and US government officials Accordshying to international monetary sources the Fund believes that Polands latest budget plans (see page 11) can form the basis for a credible reform program if they are passed by parliament in April Olechowski also said that he discussed loans worth $1 billion from the World Bank and the chances of gaining access to $15 billion in IMF support if the proposed budget is approved

IDA credit to Chinas education

To support Chinas effort to improve the quality of education in the six poorshyestprovinces the IDA approved a credit of $130 million The IDA credit will finance improvements in primary and some secondary schools in rural areas It will also support restructuring of higher education to make the system more efficient (In 1986 China introshyduced a compulsory nine-year basic education system)

and World Bankloan to develop cement production

China will meet growing domestic deshymand for cement through a $265 milshylion project supported by an $872 milshylion World Bank loan China is the worlds largestproducer and consumer of cement but demand is expected to exceed supply before the end of the century The loan will partially finance the developmentofproduction and disshytribution facilities atTongling Ningbo and Nanjing The loan will also assist cement agencies to improve pollution prevention

CIS Reforming education and training

Education and training have a vital role to play in the transition process of the former Soviet republics stressed World Bank Vice President Wilfried Thalwitz at a March seminar for CIS ministers of education The countries of the region need to retrain adults unemployed by the restructuring proshycess refocus higher education and scishyence toward the needs of a market economy develop skills in modern busishyness management economics engishyneering and agriculture and adjust the pre-university education system so that the students who emerge are flexible andareprepared forthe change to a market economy where their fushytures will be determined by their own ingenuity and their own initiative

Massive aid to Ethiopia

International aid organizations led by the World Bank have put together a $6574 million program to help the new government in Ethiopia rebuild after nearly two decades of civil war and mismanagement ofthe economy The IDA a World Bank affiliate will provide the largest share of the proshygram with $150 million The other major donors are the African Developshyment Bank ($126 million) the EC ($1164 million) and the USAID ($87 million)

Volume 3 Number 3 13 March 1992

Transition lhe Wor1d BankCECSE

Books and Working Papers Briefs The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Richard Bird and Christine Wallich Financing Local Government in Hungary World Bank Washington DC Policy Research WPS 869 1992 87 p

The new Hungarian system of local government finance tries to free local authorities spending from the heavy hand of central control and make the localities more responsible by providshying additional sources of locally conshytrolled revenues Local governments still depend for some 82 percentoftheir receiptson central transfers New local taxes are inadequate and some local authorities are unable to provide even the basic social services to the poor Localities feel increased pressure to raise revenues and use proceeds from asset sales to finance current operashytions Their entrepreneurial activity could work against the privatization drive therefore the golden rule should apply on the local level too The busishyness of government is not business

Normative grants of the central govshyernment are largely discretionary disshytributed according to a formula geared to both per capita equalization and needThis policy creates uncertainty therefore some criteria should be apshyplied suggest the authors Grants could befixed-for example to some national tax source (personal income or valueshyadded tax)

In dividing its grant among local aushythorities the central government should also consider the diverse revshyenue-raising capacities of the recipishyents and change the distribution forshymula for the normative grant accordshyingly As a result grant funds will be shifted from local governments with a high-tax capacity to localities with a low-tax capacity Ifrecipients are unshyable to impose and collect taxes at the assumed rate they have to acquiesce to a proportionally reduced grant later On the other hand recipients can keep all those tax revenues that exceed the anticipated level Available from Ann Bhalla The World Bank Room N10-053 tel (202) 473-7699

Marchl992

Cheryl W Gray Rebecca J Hanson and Peter G Ianachkov Romanias Evolving Legal Frameshywork for Private Sector Developshyment World Bank Washington DC Policy Research WPS 872 1992 27 p

Romania started virtually from scratch in 1990 to build a market economy and the legal framework required for it It has adopted a new constitution and extensive new legislation covering real and intellectual property companies and foreign investment Romania has revived the pre-war civil code as a basis for contract law and is moving to modshyernize its bankruptcy code Little progress has been made however in regulatinganticompetititive monopoly behavior

At present no judicial institutions in the country-whether courts arbitrashytion panels lawyers or law schools-shyare fully prepared to take on the chalshylenges inherent in their roles in the market economy Administrative and judicial apparatus for implementing new laws and educating the public about them are lagging behind Forshyeign technical assistance if properly designed can accelerate the institushytional development Availablefrom CECSE The World Bank Room N6-035 tel (202) 473-7188

Ross Levine and David Scott Old Debts and New BeginningsshyA Policy Choice in Transitional Socialist Economies World Bank Washington DC Policy Research WPS 876 1992 27 p

The authors scrutinize the dilemma of the decision-makers in postsocialist countries how to define the asset and liability structure of state-owned enshyterprises and banks as they are privatized Heavy stocks of enterprise debts (loans issued by state-owned banks to state-owned companies durshying socialist management) are hindershying the effective operation of both the business sector and the financial secshytor They also risk institutionalizing ad

14

hocgovern ment intervention (bailouts subsidized loans etc) on behalf of heavily indebted enterprises before putting them on the block Those intershyventions in turn may reduce governshymentcredibility The paper argues that governmentshouldassumetheresponshysibility for a large part of bank claims on enterprises as it would (1) improve the operation and restructuring of stateshyowned banks (2) facilitate the privatshyization of major banks (regarded as a desirable goal by the authors who pershyceive it as a gradual process) and (3) keep fiscal costs relatively low

It is feasible to preserve all enterprise debt obligations to banks that are of unquestioned quality rated as pass at detailed loan reviews (such loans might comprise 10 to 20 percent of outstanding loan portfolios) Another way of replacing bad assets is to preshyserve only those claims that either banks or enterprises themselves agree to preserve Global experience demonshystrates that whenever banks particushylarly state-owned banks are severely insolvent the replacementofbad loans with government bonds is the primary way to resolve the banking problem

Other recent PRWorkingPapers of the World Bank

Silvia B Sagari and Loic Chiquier Copingwith the Legacies ofSubsimiddot dized Mortgage CreditinHungary WPS 847199226 p Available from Melakou Guirbo The World Bank Room J9middot235 tel (202) 473middot5015

Roy Bahl and Christine Wallich Intergovernmental Fiscal Relashytions in China WPS 863 1992 58 p Available from Ann Bhalla The World Bank Room NlO-053 tel (202) 473-7699

Gary Jefferson and Wenyi Xu Assessing Gains in Efficient Promiddot duction Among Chinas Industrial Enterprises WPS 877199221 p AvailablefromCECSE The WorldBankRoom N6-044 tel (202) 471-7188

Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

Transition The World BankCECSE

(2) Bankruptcies Immediate liquidashytion is the preferred strategy in the case ofthe weakest enterprises which cannot cover operating costs underany reasonable set of relative prices But the number ofactual shutdowns in the short term is likely to be far less than ideal from a purely economic perspecshytive reflecting the political difficulty of allowing drastic increases in unemshyployment The inadequacy of existing bankrupby legiclation could also slow the liquidation process For large enshyterprises some lines of production would need to be closed while others could continue operation Ifthe output of a firm or line of production is valueshysubtractingundH the liberalized price regime itwould he preferable to termishynate production altogether even while continuingtocompensate workers fully The scope of thi type of cost saving would be substantial

(3) Subsidies Explicit budgetary supshyport is preferablemiddot to support from the banking system where immediate liqshyuidation is not possible This will keep up pressure and Poster closer governshyment supervision of the firms activishyties while it is awaiting liquidation Recourse to the banking system on the other hand would result in an increase in bad loans Banlingresources would be more pTCductively used to finance new investment as well as to restrucshyture potentially vilble companies

Trade curnmC) and macro issues

(4) Trade liberali~ation A policy of graduai trade liberalization appears particularly nppropriate for the former Soviet republics and possibly for other formerly socialist economies as they begin to dismantle barriers to trade with hard currency areas The experishymentofreformingeconomies with shock trade liberalization-the unprecshyedented fast shift from an essentially closed regime to pra(ticallyfree tradeshyis unlikely to be sustainable in a weak enterprise structure Poland and Czechoslovakia initially adopted tariff regimes essentially resembling those of the least protectie industrial counshytries with tariff rates averaging about 5 percent although more recently tarshyiffs for certain import-competing inshydustries have heen raised significantly in both countries Tariff rates in Bul-

Volume 3 Number 3

garia and Romania also averaged less than 10 percent in 1991 while import quotas were largely eliminated Ultishymatelyitisaquestionofjudgment--of weighing the distortive effects on relashytive prices of initially higher tariffs against their potential for providing some breathing space to enable entershyprises to restructure and compete in world markets

(A frequent argument for rapid trade liberalization is that it will break the power of the rent-seeking industrial monopolies But at least in the initial stages of transition the shortage of foreign exchange may force the aushythorities to resort to foreign exchange allocations Even in a liberal exchange rate regime overshooting could occur reflecting political uncertainty or lack of confidence in the sustain ability of transition In these cases competition from imports may not be sufficient to combat monopoly pricing In the inshyterim period before either domestic or foreign competition has become effecshytive restrictions on price increases by monopolists could therefore be warshyranted)

(5) Exchange rate policy Countries attempting the transition to a market economy may be classified into those that have a measure of control over the exchange rate (atleast in the short run) and those that do not due to the exshytreme shortage offoreign exchange The concern here is with the former catshyegory which currently comprises Czechoslovakia Hungary andPoland In each ofthese countries the exchange rate has been used to anchor the stabishy

lization program in Czechoslovakia and Poland the nominal exchange rate has been pegged to the dollar or a basshyket of hard currencies (Poland 1991) while Hungary has adopted a managed float through intervention Duringthe transition however when domestic demand remains depressed and inflashytion rates remain well above Western levels it may be relatively easy to susshytain an appreciation of the real exshychange rate since balance of payments pressures will emerge more slowly than wouldbe the case in a growing economy The temptation to use the exchange rate to fight inflation as well as to force productivityim provements onto entershyprises will also be strong Hence an appreciating real exchange rate can jeopardize the ability of potentially vishyable firms to compete

(6) Sequencing While there is general agreement that most enterprises will have to be restructured to survive there is less consensus on the extent of reshystructuring that is needed prior to privatization In the current unstable economic environment it is generally difficultto determine which firms would ultimately survive under competitive conditions The concern here is that frustration with the slow pace of entershyprise reform may force the pace of macro reform in an ultimately unsustainable manner For example free trade and an appreciating real exchange rate may be used to try to force enterprises to become more effishycient since it is institutionally easierto adopt this stance than to tackle the core problems of enterprise manageshyment such as incentive systems and

My Arthur could never resist a bargain

From the British daily Evening Standard

7 March 1992

Transition lhe World BankCECSE

A Proposal to Solve the Restructuring Dilemma in Poland Maurice Ernst suggests strategic alliances

Many large state firms in Poland have sought but few have found foreign savshyiors Foreign investors have been turned off not only by backward technology poor organization and a changing tax structure but also by the risks created by organized labors opposition to drasshytic change and by the unique functions of large enterprises in former commushynist countries--such as providing social services The current management of state-owned enterprises is not in a posishytion to negotiate such problems with prospective Western investors the censhytral and local governments must be inshyvolved because only they can provide many ofthe solutions

The solution that is advocated by many economists to the obviously sluggish reshysponse of Polish state-owned firms to emerging market conditions is to accelshyerate privatization Unfortunately privatization is as much the end result ofa complex process as it is a means of achieving these desirable results In Poland very little privatization has ocshycurred through sale of enterprises to domestic or foreign buyers either dishyrectly or by issuing and selting shares The overwhelming majority of privatizations of state enterprises has occurred through what the Poles call the liquidation process bull The government breaks up large stated-owned enterprises suchas wholeshysale firms department stores and tourshyist offices and then sells or leases parts ofthese firms to private parties or bull A firms employees in cooperation with its management work out a leasshying or leveraged buy-out arrangement with the government

Sales oflarge industrial firms to foreign investors have been few-the GMagreeshyment with the FSO automobile firm being a recent exampl~nd have inshy

volved complex negotiations lasting many months and including such issues as tax breaks tariffprotection access to the EC market and so forth As the financial conshydition of the state sector has deteriorated the liquidation process has begun more and more to resemble a bankruptcy sale certainly not what was intended To accelshyerate privat-ization Poland likeothercounshytries ofCentral andEastern Europe is also considering the free distribution ofvouchshyers representing ownership shares ina dozen or two investment companies but it is unshycertain whether these companies can make the tough decisions needed for restructurshying

The Polish government has also begun to use foreign firms to assess market opportushynities and competitiveness in a series of34 sectoral studies covering such industries as automobiles machine tools shipping aircraft pharmaceuticals cement meat processing beer and construction The possibilities for contracting out the restrucshyturingofenterprises to groups ofmanagers are also being considered Some industries such as coal and steel may require special treatment-possibly involving a regulated phasing down ofproductive capacity over several years as in the European Commushynity Some heavily affected regions such as the lLJdz region where most ofthe severely ill textile industry is located and Silesia the nexus ofcoal steel and pollution will require assistance for restructuring divershysificotion andcleanup possibly in theform of low-interest loans that could be supshyported by foreign donors

In my view the most promising approach to the restructuring problem is the use of strategic alliances loose arrangements amongWestern andPolish firms to develop joint ventures other direct investments marketing arrangements RampD and techshynology cooperation On the Western side one firm must take the lead even though

other companies may be brought in for special expertise and funding and to share the risk Participation ofthe Polshyishgovernment is essentiaL Westerngovshyernments could provide encouragement through fiscal and other financial inmiddot centives such as reduced or even no taxes on capital gains

Strategic allia nces can help to assess the Polish firms potential for competitive production and exports identify potenshytial Western investors or partners and negotiatewith all interested parties For example Western investors maycommit themselves to worker retraining proshygrams the central government maygive the locol government a larger share of certain tax receipts to finance the local hospital formerly paid for by the firm specific and limited commitments may be made for environmental cleanup For the Western partner no capital needs to be committed until a clear picture of investment opportunities has emerged and ways have been found to resolve major problems The principal cost to the lead Western partner would be the commitment ofhigh-level executive pershysonnel with a sophisticated knowledge of technology markets and manageshyment In return the Western lead firm would be given the right to develop or buy into any investment opportunities that arise from the cooperation For Poshyland-and other postsocialist counshytries-a network of strategic alliances could greatly accelerate the flow ofWestshyern capital technology and manageshymentk now-how into a criticalpartofthe economy and thereby avoid a severe waste of resources and an unnecessary further decline in economic activity

The authoris a consul tantat the Hudson Institute

reforming the power of workers counshycils There may also have been a tenshydency in the CEE region to postpone the tough enterprise-level reforms in thehope thatmass privatization would relieve the government of having to legislate such reforms The limits of privatization in a situation of substanshytial enterprise nonviability would indishycate that enterprise reforms per se can no longer be postponed

March 1 992

Summing up macroeconomic policy must take account ofthe potential conshyflict between the speed of reforms and the rapidity with which it is possible to liquidate nonviable firms These conshysiderations suggest the need for more careful coordination between the impleshymentation of reforms atthe macro level and that at the enterprise level Given the relative difficulty of the latter a pace of reform that is restrained only

8

by implementation capacity will not necessarily be an optimal or very susshytainable approach to the transition

SanjayDhar World Bank ECAVP Excerpted from the authors paper Enterprise Viability and the Transition to a Market Economy January 1992

Volume 3 Number 3

Transition The World BankCECSE

Quotation of the Month Cutting defense spending will proshyvide the US with its own transition problems Group calls for new $100 billion Marshall Plan to the former Soviet republics

T he United States in conjuncshytion with the European Comshymunity Japan and other

wealthy nations should launch a new economic initiative designed to help the former Soviet republics make the transition from a centrally planned system to a network of democratic and market-oriented economies The curshyrent state ofthe Us economy is propishytious for such a daring venture Deshyfense-related spending has generated many jobs in the US economy and it has increased aggregate demand which has benefited many corporashytions A major cutn defense spending will have a dampEning effect on US job growth and corporate profits unshyless it is offs4~t by other activities

Even if def(lOse spending cuts are matched by equal increases in social welfare spending the net impact on the US economy i~ somewhat diminshyished growth prospects and slightly lower employment totals To cut deshyfense spending inl recessionary or slow-growth period will provide the United States withts own transition problems The macroeconomic stimushylus to the economy that would be genshyerated by a new Marshall Plan for the former Soviet republ ics could be a key ingredientin helping the United States forge a strongpost-Cdd War economy

Roughly 48 percent of the aid and asshysistance that the former Soviet repubshylics have received has been in the form ofexport credits and guarantees Over 60 percent of these export credits and guarantees have been made by Euroshypean nations In contmst only one out ofevery eight dollars in export credits and guarantees to thf~ former Soviet republics have been made by the United States and mostof them were for farm products The United Statescould very easily find itselflocked out of key marshykets in the former Soviet republics The credits and guarantees grantedby European nations will help finance many capital goods ami other related

Volume 3 Number 3

investments Relationships between buyers in the former Soviet republics and Western European corporations are being established To be sure there are successful business ventures and investments between US firms and the former Soviet republics However European activity in this area-parshyticularly from Germany-dwarfs that of the United States

It is in the United States self-interest to have a strong and vibrant commershycial presence in the former Soviet reshypublics Steps taken now to establish and assure growing economies in the former Soviet republics will create new buyers for US agricultural products manufactured goods and services However the United States is curshyrently playing a very small role in aidshying and assisting the former Soviet republics Only about 6 percent of the aid and assistance to the former Soviet republics or under $5 billion is curshyrently coming from the United States The United States is providing less aid and assistance than Italy which has an economy approximately one tenth the size ofthat of the United States

It is useful to remember some of the features and lessons of the original Marshall Plan George C Marshall presented the general outline of what became known as theMarshall Plan on June 5 1947 The independent Ecoshynomic Cooperation Administration (ECA) was established to administer the program which provided $133 bilshylion in assistance to Europe from 1948 to 1952 In 1992 dollars this total is equal to approximately $100 billion The ECA extended into many other areas besides providing grants andfosshytering investment Ithad a very active technical assistance program which introduced American management and production practices to Western Euroshypean businesses It promoted peopleshyto-people diplomacy And it encourshyaged theformation offree andindepenshydent trade unions as an institutional foundation for democracy and labor market cooperation to spur productivshyity and distribute its fruits for the benshyefit of all

The roughly $100 billion total of the original Marshall Plan is a realistic starting point for a new economic inishy

~ ---~----------------------~----~----

Never too late Western aid package for Russia The Group of Seven industrialized nashytions announced a $24 billion one-year aid program for Russia on April 1 The program establishes a $6 billion fund to maintain the value ofthe ruble while it becomes a convertible currency Another $18 billion is the sum total of bull credits from the IMF the World Bank and the EBRD ($45 billion) bull debt rescheduling ($25 billion) bull export credit guarantees food credits and humanitarian aid ($11 billion)

According to Horst Kohler Germanys chief negotiator in the G-7 the package would cover this years deficit in Russia8

balanreof payments Headded that agreeshyment on the adjustment program beshytween the Russian government and the

IMF could be finalized in May with the first credit tranches coming in June beshyfore the G-7 Munich Summit in July World Bank credits should also be availshyable by June or July Kohler said The United States would take a 20 to 25 I

percent share of the G-7 package Presi- dent Bush will ask the Congress to apshyprove a $12 billion US quota increase for the IMFan additional$ll billion in agricultural credit guarantees (since January 1991 the United States has extended $37 billion in such credits) and the announced $620 million in ecoshynomic and humanitarian aid Congress also is called on to repeal legal provisions limiting trade and to expand Peace Corps presence USIA programs and democshyracy corps programs in Russia

9 March 1992

Transition The World BankCECSE

tiative for the former Soviet republics Thisplan should be multinational One possible funding formula might be for the United States the European Comshymunity Japan and other wealthy nashytions each to contribute a portion of the needed resources Such a multiyear funding level divided between several donors is realistic and doable

This new economic initiative needs a multinational organization equivalent to the ECA of the Marshall Plan Such an organization would of course work cooperatively with the International Monetary Fund the World Bank and the United Nations We recognize that the former Soviet republics of the 1990s are different in many important reshyspects from post-World War II Westshyern Europe and the aid delivery sysshytems need to reflect these differences This multinational ECA should be dishyrected by private sector business and labor leaders as much as possible

The new ECA should organize along the lines of key industries and ecoshynomic sectors We strongly suggest that representatives from business labor and agriculture sit on these varishyous industry and sectoral committees The former Soviet republics will also require a great deal of technical assisshytance and basic institution-building Price decontrol is an important part of establishing a free-market system However a modem free market also requires a highly developed system of commercial laws an efficient banking system and stock markets In addishytion worker transition mechanisms that supply economic safety nets and the ladders to reach them are particushylarly important It is especially critical that the outstanding scientific talent that supported the former Soviet milishytary machine be redeployed to producshytive peaceful pursuits that benefit the world community (such as energy enshyvironmental and health care priorishyties)

Excerpts from the policy statement of the Nashytional Planning Associa tion Washington D C (dated March 18 1992) NPA is a nonpartisan economic and social research institution its trustees are prominent leaders from business labor agriculture and academia

The Russian reform program

The Russian governments economic reshyform program for 1992 published in early March has been drawn up with requirements for joining the IMF and the World Bank in mind At the same time it also reflects the governments

I commitment to stabilizing and liberalizshying the economy over a two-year period Its priorities are eliminating the budget deficit controlling the money supply and implementing privatization_

Prices The program looks forward to the eventual liberalization ofprices from all administrative restrictions By April prices ofall consumergoods and services (except rent social services and public transport) will be freed Russian Presimiddot dent Boris Yeltsin asserted that deregushylation ofmostenergy prices will beputoff untilate Mayor early June The origishynal plans expressed an intention to free prices for fuel and other goods for proshyduction purposes byApril 20 while temshyporarily retaining theregulation ofprices for gas and electricity

Safety net Social protection will be dishyrected above all to pensioners largefamishylies and the unemployed This will enshytail cash compensation ofpensioners for price rises and social security payments to the other two groups Unemployment benefits will come in two forms-stanshydard and raised Standard benefits will not exceed 75 percent of the minimum wage while raised benefits will not exshyceed90percentofthe a verage wage earned by the recipient at the last place ofwork Raised benefits will be given only when the workplace has been closed or reorgashynized

Budget As a result ofprice liberalizashytion only some 5 percentofpublic spendshying will be devoted to subsidizing goods and services The austere social policy will permit further reductions in the general level ofgrants and subsidies In the course ofthis year defense spending will be cut further By mid-year the number ofcivil servants will have been cut by 5 percent The government sees its task as eliminating the budget deficit by the beginning of1993

Exchange rate In order to improve forshyeign trade performance and integrate Russia into the warldeconomyassoonas possible a single exchange rate will be introduced As a first step the governshyment intends to abandon the present

system by April 20 The several current rates will be merged into two undershypinned by a single floating rate One rate will apply to all current transacmiddot tions while the other will apply to the movement ofcapital At the same time free access to foreign currency will be granted to importers ofgoods and sershyvices as well as to foreign investors for the conversion ofdividends and profits

Foreign trade_ By July 1 all export quotas and licenses will be abolished Only the export ofenergy resources will still be subject to regulation although these quotas will be abolished by the end of 1993 No significant limitations on imports will remain

Monetary policy The Russian governmiddot ment will attempt to the best of its ability to coordinate monetary policy with the other CIS member states in the context of a ruble-denominated zone The Central Bank ofRussia claims it is ready to agree with the central banks of the other former Soviet republics on the rate and scale of money emissions on the general guidelines for unifying the ruble exchange rate and on the fine details ofpayments and accounting beshytween the CIS member states Should anyofthe former Soviet republics decide to introduce alternative currencies the Central Bank ofRussia is prepared to discuss the orderly withdrawalofrubles from circulation in the given republics

Privatization In the initial stage the emphasis will be placed on the swift sale by auction of small enterprises and retail outlets The privatization of large enterprises will be based on the following principles bull Employees will be offered shares in their own enterprises although not a controlling share bull Restrictions on the sale ofseparate enterprises and branches within large groups will be lifted bull Restrictions on the participation of foreign investors will be lifted bull Privatization will include the land on which the given enterprise stands bull Privatization ofincomplete construcshytion wark will be encouraged through a special tax regime

Based on Oxford Analytica London and Commersant a Russian weekly (March 2 1992)

March1 992 10 Volume 3 Number 3

Transition The World BankCECSE

Milestones of Transition

In Czechoslovakia inflation would be 12 percent in 1992 with GDP conshytracting by about 5 to 8 percent preshydicted Czechoslovakias State Bank GovernorJ osefTosovsky Inflation last year was almost 58 percent

Germany will transfer a net 180 bilshylion marks to thE eastern part of the country this year up from 139 billion in 1991 The forecast came in the Bundesbanks latest monthly report which cautioned against a continuashytion of transfers that are used primashyrily tofinance consumption (Atpresen t 134 million peoplE are unemployed in eastern Germany representing 165 percent of the tota I work force)

The Ukrainian parliament approved in principle an economic reform proshygram in late Mard which scraps the ruble in Ukraine and extends the use of the current coupons until the Ukraishynian currency is introduced (within three months) All trade with former Soviet republics will b(~ on a hardshycurrency basis imp(rts from them will be subject to tariff and exports to them will be subject to VAT

The new Ukrainian foreign investshyment law which came into effect on March 12afterparliarnentary approval allows foreigners to buy interests in Ukrainian businessemiddot or property of up to 100 percent guara ntees the righ t of foreign investors to repatriate revenues and profits and provides for compenshysation in the event of nationalization All current joint ventures are exempted from taxation until five years after they start to make a profit New joint ventures will be exempted from taxashytion on their profits for three years

A draft privatization program ofRusshysian state and municipal properties approved by the joint session of the presidium of the Rmsian Supreme Soviet and the government emphasizshying reliance on auctions calls for the sale of 70 billion to 80 hill ion rubles of state property this year and the free transfer to workersofstlte enterprises worth 150 billion to 20Ci billion rubles Ifthe Russian Supreme Soviet approves the proposal by the end of 1992 an estimated 12 to 20 percllnt of the total

Volume 3 Number 3

value offixed and worki ng capital could be privatized

The Russian Finance Ministry has informed the government that the first quarter budget revenue of 190 billion rubles is 250 billion short of the proshyjected figure Revenues from foreign economic activity amount to 9 billion rubles compared with a planned budshygetaryincome of228 billion rubles due to the steepfallin exports the financial status of exporters the paralysis ofthe oil-refining industry and the lifting of export duties on much of the fuel shipshyments The Russian industrial output in January and February was 135 percent below its level a year ago

Tajikistans new law on foreign inshyvestment (valid from March 11) gives foreign investors the right to set up enterprises purchase stock and parshyticipate in the privatization of state enterprises The law also establishes legal guarantees for foreign investshyments Tajikistan has lagged behind neighboring Uzbekistan in the matter of foreign investment Uzbekistan passed a similar law last July

The European Bank for ReconshystructionandDevelopment(EBRD) opened an office in Budapest-its secshyond in Eastern Europe its first was opened in Warsaw recently The Banks President Jacques Attali said that Russia would have 4 percent ofEBRD assistance noting that the former USSR had a 6 percent share Attali also announced the creation offunds to modernize agriculture convert defense industries and improve oil production in Russia Current limits to the Banks lending to members of the CIS would end after the EBRDs annual meeting in April he added

Premier Li Peng said that China needed to accelerate economic reform adding that maintaining a healthy economy would keep the countrys poshylitical system unchanged Li also anshynounced at the National Peoples Conshygress that a three-year period of ecoshynomic austerity was over (The austershyity program brought the more than 30 percent inflation rate at the beginning of 1989 down to 29 percent last year)

11

China would stick to its target of 6 percent GNP growth and try to keep inflation below 6 percent this year

More than 125 million people in Viet Nam 18 percent ofits population lack full-time employment Viet Nam will try to cutunemployment in three years by increasing jobs for youth and reloshycating more than 12 million people to farm virgin land Severe joblessness in Viet Nam worsened when the governshyment slashed the size of the army and lost significant amounts of aid from the former CMEA countries

The Polish government has approved the 1992 budget halving the planned deficit to 655 trillion zlotys ($49 bilshylion) or about 5 percent ofGDP in an attempt to curtail inflation Besides huge cuts in education health and welfare remaining state subsidies will be virtually eliminated The draft budshyget calls for coal prices to go up by 5 percent monthly except in the summer months natural gas to increase by 5 percent quarterly and central heating and hot water to go up 33 percent by October Rents for public housingwould be doubled in April and train fares would climb by 28 percent Gasoline taxes and the price of medicine would also rise sharply The Sejm win debate the proposed budget in April

Nicaraguas President Violeta Chamorro announced plans to restore economic growth of3 percent this year with a 400 percent increase in public spending to $280 million and credits and tax incentives to boost investment

The Romanian parliament approved the 1992 austerity budget which stresses low inflation at the expense of economic growth The state expects to collect revenues of about $521 billion in 1992 with estimated expenditures of $566 billion-a planned deficit of some $450 million Accordingto official figures the share of the private sector in the gross domestic product-which stood at 2100 million lei (the leu is currently quoted at 198 per dollar)shyrose to 21 percent compared with only 15 percent in 1990

March 1992

Transition lhe World BankjCECSE

Conference Diary

A Common Migration Policy for Europe March 24 Brussels

K1aus F Zimmermann at ajoint lunchshytime meeting of CEPR (Centre for Ecoshynomic Policy for Europe) and ECARE (European Centre for Advanced Reshysearch in Economics) presented results of recent research on European migrashytion and migration policy He predicts 5 million to 15 million potential East-West migrants while the western press often quotes a less plausible figure of 20 milshylion to 40 million Austria France Geurorshymany Italy and the Benelux countries are the most likely receiving countries The key issue is the speed ofinflow (and its composi tion) Past experience shows that immigration usually provides net benefits from an economic perspective In a world offree labor movement labor moves from low-productivity(low-wage) to high-productivity (high-wage) counshytries and it removes relative scarcities Some inflow of labor migrants would balance demographic losses of western populations that are aging and stagnatshying However immigration restrictions could apply ifincreased guest workers lead to a decline in domestic wages orshyifwages are inflexible--increases in unshyemployment With free labor and prodshyuctmarkets a Common Migration Policy is essen tial for the EC A Geuroneral Agreeshyment on Migration Policy (GAMP) parshyallel to the GATT is also recommended Klaus F Zimmermann Economics Professhysor at the Munich University together with Thomas Straubhaar published his findings in Toward a European Migration Policy CEPR Discussion Paper No_ 641 (CEPR 6 Duke of York St London SW1Y6LA)

Public Management Development in Centrally Planned Economies April 1-3 London

Colloquium under the auspices of the UNDP and the om (Overseas Developshyment Institute) International experts government officials and representashytives of donor agencies discussed manshyagement development in socialist and postsocialist economies(inc1uding China Cuba Mongolia Viet Nam Lao PDR Cambodia Mozambique Angola Myanmar Central and Eastern Euroshy

countries and the CIS states) in

the new global environment The confershyence focused on public sector management improvement comparing reform efforts in the Asian African and Caribbean nations with recent experiences of Central and Eastern Europe Information Mallika Henry Management Deshyvelopment Programme Bureau for Program PolicyandEvaluation UNDPNew YorkNY tel (212) 906-6840 fax (212) 986-6280

NewDimensions in Regional Integrashytion April 2-3 The World Bank Washington DC

Sponsored by the World Banks CECTP (Jaime de Melo and Arvind Panagariya) Topics included desirability of and prosshypects for successful integration in Mrica Latin America and Eastern Europe and the likelihood ofsuccessful integration beshytween developing anddeveloped countries The issue of whether regional integration can serve as a stepping stone to multilateralism or is a barrier to the latter was also addressed

[ ForthcomingJ

EnergyProspects Post-SovietRepubshylies and Eastern Europe April 7-8 London

Business Prospects Post-Soviet Reshypublics and Eastern Europe April 8-9 London

Both events (Seventh Annual Conference) are organized by PlanEcon Inc the Washshyington-based economic research institute Topics ofthe energy conference include oil and gas geology exploration Western inshyvestment petroleum refining prospects in the former USSR and Eastern Europe EBRDs role in the regions energy sector and EC experience with energy assistance to the CEE and the ex-USSR The second conference will provide an overview ofreshycent macroeconomic development in the region Speakers inc1ude JanVanous Keith Crane Marvin Jackson Ronald Freeman Information Ms Mary Hogan Washington DC tel (202) 898-0471 fax (202) 898-0445 or Corinne Redonnet London tel (4481) 545shy6212 fax (4481) 545-6248

First Annual Meeting on~BRD Governors April 13-14 Budapest Hungary

Europe Business Outlook 1992 Conshyference April 26-29 Knoxville Tennessee

Organized by the US Commerce Deshypartmentand the University ofTennesshysee Presentations by Senior Commershycial Officers of the US and Foreign Commercial Service from 23 Eastern and Western European countries and US missions to international organizashytions together with business leaders from Pizza Hut Coca-Cola Delta Air Proctor and Gamble Martin Marietta Topics include New Business Realities in the CIS Defense Industry Convershysion-Opportunities in the Former Soshyviet Union Eastern Europe Perspecshytives and Privatization Issues and Inshyvesting in Hungaryand Czechoslovakia A Lawyers View Information Ms Elaine Keener Co the UT Conference Center tel (615) 974-0250 fax (615) 974-0264 or UTConferences PO Box 2648 Knoxville Tennessee 37901

World Bank Annual Conference on Development Economics April30-May 1 Washington DC

Topics include Theories of Growth and Development Technology Labor MarshyketsandDevelopmentand International Capital Flows Information Mrs Jean Gray Ponchamni Rm 83-032 tel (202) 473-6850

Privatization and Market Mechashynisms A Comparative Approach May 14middot15 Budapest Hungary

Organized by the Association Intershynationale de Droit Economique (Intershynational Association for Economic Law) in collaboration with the Hungarian Asshysociation for the Protection ofIndustrial Property The discussion aims at bringshying together leading academics and polishycymakers from the public and private sector in different countries Four workshyshops will discuss legal requirements in a functioning market economy techshyniques ofprivatization social rights and privatization and sectoral aspects of privatization (telecommunications fishynancial system) Information General Secretariat ofAIDE Place Montesquieu 3 1348 LovrainLaNeuve Belgium tel 32-10-47middot39-70 fax 32-10middot47shy39-45

MarchI992 12 Volume 3 Number 3

Transition The World BankCECSE

World Bank IMF Agenda

New World Bank offices in Sofia and Bucharest

The World Bank is establishing resishydent offices in Bulgaria and Romania at the request of the governments of these countries John Wilton a British national will head the Sofia office and Arntraud Hartmann a German nashytional win be in charge of the Bucharest office

IMF recommends 3 percent quota to Russia

The IMF could support with its finanshycial resources the implementation of Russias economic reform program once Russia becomes a member of the instishytution said Michel Camdessus Manshyaging Director ofth(~ Fund following a meeting of the IMF executive board on March 31 attendedfor the first time by the representatives of the Russian Government The ex~cutive board will decide on a recommEndation to allot a quota share of 3 penent for Russia It would give the country a larger quota than China and the largest quota in the Fund after the G-7 industrial nashytions and Saudi Arabia

All ex-Soviet republic have applied to join the IMF and the World Bank with Georgia the last applying for memshybership on March 12 1992 Camdessus hinted that Russia and the other reshypublics of the former Soviet Union might become IMF mpmbers as early as May Noting that the IMF helped provide $20 billion to Central and Eastshyern Europe last year Camdessus said he expected that a similar flow of assisshytance would be needed in 1992

Reconstructing Cambodia

Japan will host an international conshyference in late June on the reconstrucshytion ofCambodia Twenty or more proshyspective donor countriefgt and internashytional organizations including the World Bank and the IMF are expected to attend

Donors pledge aid forLao Peoples Democratic Republic

In a Geneva meeting major internashytional donors pledged $500 million for infrastructure development in Lao Peoples Democratic Republic The pledge was made at a meeting held under the auspices of the United Nashytions Development Fund Donors inshyclude the United States Germany the United Kingdom Japan Kuwait the Republic of Korea India the Asian Development Bank the World Bank and the IMF

Olechowski in Washington

Poland took the first steps toward putshytingits economic reform program back on track by winning the IMFs approval of its budget We have reached an agreement with the IMF that the budshyget as prepared by the government is a reasonable one Polish Finance Minisshyter Andrzej Olechowski is quoted as saying after two days of talks in Washshyington with the Fund the World Bank and US government officials Accordshying to international monetary sources the Fund believes that Polands latest budget plans (see page 11) can form the basis for a credible reform program if they are passed by parliament in April Olechowski also said that he discussed loans worth $1 billion from the World Bank and the chances of gaining access to $15 billion in IMF support if the proposed budget is approved

IDA credit to Chinas education

To support Chinas effort to improve the quality of education in the six poorshyestprovinces the IDA approved a credit of $130 million The IDA credit will finance improvements in primary and some secondary schools in rural areas It will also support restructuring of higher education to make the system more efficient (In 1986 China introshyduced a compulsory nine-year basic education system)

and World Bankloan to develop cement production

China will meet growing domestic deshymand for cement through a $265 milshylion project supported by an $872 milshylion World Bank loan China is the worlds largestproducer and consumer of cement but demand is expected to exceed supply before the end of the century The loan will partially finance the developmentofproduction and disshytribution facilities atTongling Ningbo and Nanjing The loan will also assist cement agencies to improve pollution prevention

CIS Reforming education and training

Education and training have a vital role to play in the transition process of the former Soviet republics stressed World Bank Vice President Wilfried Thalwitz at a March seminar for CIS ministers of education The countries of the region need to retrain adults unemployed by the restructuring proshycess refocus higher education and scishyence toward the needs of a market economy develop skills in modern busishyness management economics engishyneering and agriculture and adjust the pre-university education system so that the students who emerge are flexible andareprepared forthe change to a market economy where their fushytures will be determined by their own ingenuity and their own initiative

Massive aid to Ethiopia

International aid organizations led by the World Bank have put together a $6574 million program to help the new government in Ethiopia rebuild after nearly two decades of civil war and mismanagement ofthe economy The IDA a World Bank affiliate will provide the largest share of the proshygram with $150 million The other major donors are the African Developshyment Bank ($126 million) the EC ($1164 million) and the USAID ($87 million)

Volume 3 Number 3 13 March 1992

Transition lhe Wor1d BankCECSE

Books and Working Papers Briefs The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Richard Bird and Christine Wallich Financing Local Government in Hungary World Bank Washington DC Policy Research WPS 869 1992 87 p

The new Hungarian system of local government finance tries to free local authorities spending from the heavy hand of central control and make the localities more responsible by providshying additional sources of locally conshytrolled revenues Local governments still depend for some 82 percentoftheir receiptson central transfers New local taxes are inadequate and some local authorities are unable to provide even the basic social services to the poor Localities feel increased pressure to raise revenues and use proceeds from asset sales to finance current operashytions Their entrepreneurial activity could work against the privatization drive therefore the golden rule should apply on the local level too The busishyness of government is not business

Normative grants of the central govshyernment are largely discretionary disshytributed according to a formula geared to both per capita equalization and needThis policy creates uncertainty therefore some criteria should be apshyplied suggest the authors Grants could befixed-for example to some national tax source (personal income or valueshyadded tax)

In dividing its grant among local aushythorities the central government should also consider the diverse revshyenue-raising capacities of the recipishyents and change the distribution forshymula for the normative grant accordshyingly As a result grant funds will be shifted from local governments with a high-tax capacity to localities with a low-tax capacity Ifrecipients are unshyable to impose and collect taxes at the assumed rate they have to acquiesce to a proportionally reduced grant later On the other hand recipients can keep all those tax revenues that exceed the anticipated level Available from Ann Bhalla The World Bank Room N10-053 tel (202) 473-7699

Marchl992

Cheryl W Gray Rebecca J Hanson and Peter G Ianachkov Romanias Evolving Legal Frameshywork for Private Sector Developshyment World Bank Washington DC Policy Research WPS 872 1992 27 p

Romania started virtually from scratch in 1990 to build a market economy and the legal framework required for it It has adopted a new constitution and extensive new legislation covering real and intellectual property companies and foreign investment Romania has revived the pre-war civil code as a basis for contract law and is moving to modshyernize its bankruptcy code Little progress has been made however in regulatinganticompetititive monopoly behavior

At present no judicial institutions in the country-whether courts arbitrashytion panels lawyers or law schools-shyare fully prepared to take on the chalshylenges inherent in their roles in the market economy Administrative and judicial apparatus for implementing new laws and educating the public about them are lagging behind Forshyeign technical assistance if properly designed can accelerate the institushytional development Availablefrom CECSE The World Bank Room N6-035 tel (202) 473-7188

Ross Levine and David Scott Old Debts and New BeginningsshyA Policy Choice in Transitional Socialist Economies World Bank Washington DC Policy Research WPS 876 1992 27 p

The authors scrutinize the dilemma of the decision-makers in postsocialist countries how to define the asset and liability structure of state-owned enshyterprises and banks as they are privatized Heavy stocks of enterprise debts (loans issued by state-owned banks to state-owned companies durshying socialist management) are hindershying the effective operation of both the business sector and the financial secshytor They also risk institutionalizing ad

14

hocgovern ment intervention (bailouts subsidized loans etc) on behalf of heavily indebted enterprises before putting them on the block Those intershyventions in turn may reduce governshymentcredibility The paper argues that governmentshouldassumetheresponshysibility for a large part of bank claims on enterprises as it would (1) improve the operation and restructuring of stateshyowned banks (2) facilitate the privatshyization of major banks (regarded as a desirable goal by the authors who pershyceive it as a gradual process) and (3) keep fiscal costs relatively low

It is feasible to preserve all enterprise debt obligations to banks that are of unquestioned quality rated as pass at detailed loan reviews (such loans might comprise 10 to 20 percent of outstanding loan portfolios) Another way of replacing bad assets is to preshyserve only those claims that either banks or enterprises themselves agree to preserve Global experience demonshystrates that whenever banks particushylarly state-owned banks are severely insolvent the replacementofbad loans with government bonds is the primary way to resolve the banking problem

Other recent PRWorkingPapers of the World Bank

Silvia B Sagari and Loic Chiquier Copingwith the Legacies ofSubsimiddot dized Mortgage CreditinHungary WPS 847199226 p Available from Melakou Guirbo The World Bank Room J9middot235 tel (202) 473middot5015

Roy Bahl and Christine Wallich Intergovernmental Fiscal Relashytions in China WPS 863 1992 58 p Available from Ann Bhalla The World Bank Room NlO-053 tel (202) 473-7699

Gary Jefferson and Wenyi Xu Assessing Gains in Efficient Promiddot duction Among Chinas Industrial Enterprises WPS 877199221 p AvailablefromCECSE The WorldBankRoom N6-044 tel (202) 471-7188

Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

Transition lhe World BankCECSE

A Proposal to Solve the Restructuring Dilemma in Poland Maurice Ernst suggests strategic alliances

Many large state firms in Poland have sought but few have found foreign savshyiors Foreign investors have been turned off not only by backward technology poor organization and a changing tax structure but also by the risks created by organized labors opposition to drasshytic change and by the unique functions of large enterprises in former commushynist countries--such as providing social services The current management of state-owned enterprises is not in a posishytion to negotiate such problems with prospective Western investors the censhytral and local governments must be inshyvolved because only they can provide many ofthe solutions

The solution that is advocated by many economists to the obviously sluggish reshysponse of Polish state-owned firms to emerging market conditions is to accelshyerate privatization Unfortunately privatization is as much the end result ofa complex process as it is a means of achieving these desirable results In Poland very little privatization has ocshycurred through sale of enterprises to domestic or foreign buyers either dishyrectly or by issuing and selting shares The overwhelming majority of privatizations of state enterprises has occurred through what the Poles call the liquidation process bull The government breaks up large stated-owned enterprises suchas wholeshysale firms department stores and tourshyist offices and then sells or leases parts ofthese firms to private parties or bull A firms employees in cooperation with its management work out a leasshying or leveraged buy-out arrangement with the government

Sales oflarge industrial firms to foreign investors have been few-the GMagreeshyment with the FSO automobile firm being a recent exampl~nd have inshy

volved complex negotiations lasting many months and including such issues as tax breaks tariffprotection access to the EC market and so forth As the financial conshydition of the state sector has deteriorated the liquidation process has begun more and more to resemble a bankruptcy sale certainly not what was intended To accelshyerate privat-ization Poland likeothercounshytries ofCentral andEastern Europe is also considering the free distribution ofvouchshyers representing ownership shares ina dozen or two investment companies but it is unshycertain whether these companies can make the tough decisions needed for restructurshying

The Polish government has also begun to use foreign firms to assess market opportushynities and competitiveness in a series of34 sectoral studies covering such industries as automobiles machine tools shipping aircraft pharmaceuticals cement meat processing beer and construction The possibilities for contracting out the restrucshyturingofenterprises to groups ofmanagers are also being considered Some industries such as coal and steel may require special treatment-possibly involving a regulated phasing down ofproductive capacity over several years as in the European Commushynity Some heavily affected regions such as the lLJdz region where most ofthe severely ill textile industry is located and Silesia the nexus ofcoal steel and pollution will require assistance for restructuring divershysificotion andcleanup possibly in theform of low-interest loans that could be supshyported by foreign donors

In my view the most promising approach to the restructuring problem is the use of strategic alliances loose arrangements amongWestern andPolish firms to develop joint ventures other direct investments marketing arrangements RampD and techshynology cooperation On the Western side one firm must take the lead even though

other companies may be brought in for special expertise and funding and to share the risk Participation ofthe Polshyishgovernment is essentiaL Westerngovshyernments could provide encouragement through fiscal and other financial inmiddot centives such as reduced or even no taxes on capital gains

Strategic allia nces can help to assess the Polish firms potential for competitive production and exports identify potenshytial Western investors or partners and negotiatewith all interested parties For example Western investors maycommit themselves to worker retraining proshygrams the central government maygive the locol government a larger share of certain tax receipts to finance the local hospital formerly paid for by the firm specific and limited commitments may be made for environmental cleanup For the Western partner no capital needs to be committed until a clear picture of investment opportunities has emerged and ways have been found to resolve major problems The principal cost to the lead Western partner would be the commitment ofhigh-level executive pershysonnel with a sophisticated knowledge of technology markets and manageshyment In return the Western lead firm would be given the right to develop or buy into any investment opportunities that arise from the cooperation For Poshyland-and other postsocialist counshytries-a network of strategic alliances could greatly accelerate the flow ofWestshyern capital technology and manageshymentk now-how into a criticalpartofthe economy and thereby avoid a severe waste of resources and an unnecessary further decline in economic activity

The authoris a consul tantat the Hudson Institute

reforming the power of workers counshycils There may also have been a tenshydency in the CEE region to postpone the tough enterprise-level reforms in thehope thatmass privatization would relieve the government of having to legislate such reforms The limits of privatization in a situation of substanshytial enterprise nonviability would indishycate that enterprise reforms per se can no longer be postponed

March 1 992

Summing up macroeconomic policy must take account ofthe potential conshyflict between the speed of reforms and the rapidity with which it is possible to liquidate nonviable firms These conshysiderations suggest the need for more careful coordination between the impleshymentation of reforms atthe macro level and that at the enterprise level Given the relative difficulty of the latter a pace of reform that is restrained only

8

by implementation capacity will not necessarily be an optimal or very susshytainable approach to the transition

SanjayDhar World Bank ECAVP Excerpted from the authors paper Enterprise Viability and the Transition to a Market Economy January 1992

Volume 3 Number 3

Transition The World BankCECSE

Quotation of the Month Cutting defense spending will proshyvide the US with its own transition problems Group calls for new $100 billion Marshall Plan to the former Soviet republics

T he United States in conjuncshytion with the European Comshymunity Japan and other

wealthy nations should launch a new economic initiative designed to help the former Soviet republics make the transition from a centrally planned system to a network of democratic and market-oriented economies The curshyrent state ofthe Us economy is propishytious for such a daring venture Deshyfense-related spending has generated many jobs in the US economy and it has increased aggregate demand which has benefited many corporashytions A major cutn defense spending will have a dampEning effect on US job growth and corporate profits unshyless it is offs4~t by other activities

Even if def(lOse spending cuts are matched by equal increases in social welfare spending the net impact on the US economy i~ somewhat diminshyished growth prospects and slightly lower employment totals To cut deshyfense spending inl recessionary or slow-growth period will provide the United States withts own transition problems The macroeconomic stimushylus to the economy that would be genshyerated by a new Marshall Plan for the former Soviet republ ics could be a key ingredientin helping the United States forge a strongpost-Cdd War economy

Roughly 48 percent of the aid and asshysistance that the former Soviet repubshylics have received has been in the form ofexport credits and guarantees Over 60 percent of these export credits and guarantees have been made by Euroshypean nations In contmst only one out ofevery eight dollars in export credits and guarantees to thf~ former Soviet republics have been made by the United States and mostof them were for farm products The United Statescould very easily find itselflocked out of key marshykets in the former Soviet republics The credits and guarantees grantedby European nations will help finance many capital goods ami other related

Volume 3 Number 3

investments Relationships between buyers in the former Soviet republics and Western European corporations are being established To be sure there are successful business ventures and investments between US firms and the former Soviet republics However European activity in this area-parshyticularly from Germany-dwarfs that of the United States

It is in the United States self-interest to have a strong and vibrant commershycial presence in the former Soviet reshypublics Steps taken now to establish and assure growing economies in the former Soviet republics will create new buyers for US agricultural products manufactured goods and services However the United States is curshyrently playing a very small role in aidshying and assisting the former Soviet republics Only about 6 percent of the aid and assistance to the former Soviet republics or under $5 billion is curshyrently coming from the United States The United States is providing less aid and assistance than Italy which has an economy approximately one tenth the size ofthat of the United States

It is useful to remember some of the features and lessons of the original Marshall Plan George C Marshall presented the general outline of what became known as theMarshall Plan on June 5 1947 The independent Ecoshynomic Cooperation Administration (ECA) was established to administer the program which provided $133 bilshylion in assistance to Europe from 1948 to 1952 In 1992 dollars this total is equal to approximately $100 billion The ECA extended into many other areas besides providing grants andfosshytering investment Ithad a very active technical assistance program which introduced American management and production practices to Western Euroshypean businesses It promoted peopleshyto-people diplomacy And it encourshyaged theformation offree andindepenshydent trade unions as an institutional foundation for democracy and labor market cooperation to spur productivshyity and distribute its fruits for the benshyefit of all

The roughly $100 billion total of the original Marshall Plan is a realistic starting point for a new economic inishy

~ ---~----------------------~----~----

Never too late Western aid package for Russia The Group of Seven industrialized nashytions announced a $24 billion one-year aid program for Russia on April 1 The program establishes a $6 billion fund to maintain the value ofthe ruble while it becomes a convertible currency Another $18 billion is the sum total of bull credits from the IMF the World Bank and the EBRD ($45 billion) bull debt rescheduling ($25 billion) bull export credit guarantees food credits and humanitarian aid ($11 billion)

According to Horst Kohler Germanys chief negotiator in the G-7 the package would cover this years deficit in Russia8

balanreof payments Headded that agreeshyment on the adjustment program beshytween the Russian government and the

IMF could be finalized in May with the first credit tranches coming in June beshyfore the G-7 Munich Summit in July World Bank credits should also be availshyable by June or July Kohler said The United States would take a 20 to 25 I

percent share of the G-7 package Presi- dent Bush will ask the Congress to apshyprove a $12 billion US quota increase for the IMFan additional$ll billion in agricultural credit guarantees (since January 1991 the United States has extended $37 billion in such credits) and the announced $620 million in ecoshynomic and humanitarian aid Congress also is called on to repeal legal provisions limiting trade and to expand Peace Corps presence USIA programs and democshyracy corps programs in Russia

9 March 1992

Transition The World BankCECSE

tiative for the former Soviet republics Thisplan should be multinational One possible funding formula might be for the United States the European Comshymunity Japan and other wealthy nashytions each to contribute a portion of the needed resources Such a multiyear funding level divided between several donors is realistic and doable

This new economic initiative needs a multinational organization equivalent to the ECA of the Marshall Plan Such an organization would of course work cooperatively with the International Monetary Fund the World Bank and the United Nations We recognize that the former Soviet republics of the 1990s are different in many important reshyspects from post-World War II Westshyern Europe and the aid delivery sysshytems need to reflect these differences This multinational ECA should be dishyrected by private sector business and labor leaders as much as possible

The new ECA should organize along the lines of key industries and ecoshynomic sectors We strongly suggest that representatives from business labor and agriculture sit on these varishyous industry and sectoral committees The former Soviet republics will also require a great deal of technical assisshytance and basic institution-building Price decontrol is an important part of establishing a free-market system However a modem free market also requires a highly developed system of commercial laws an efficient banking system and stock markets In addishytion worker transition mechanisms that supply economic safety nets and the ladders to reach them are particushylarly important It is especially critical that the outstanding scientific talent that supported the former Soviet milishytary machine be redeployed to producshytive peaceful pursuits that benefit the world community (such as energy enshyvironmental and health care priorishyties)

Excerpts from the policy statement of the Nashytional Planning Associa tion Washington D C (dated March 18 1992) NPA is a nonpartisan economic and social research institution its trustees are prominent leaders from business labor agriculture and academia

The Russian reform program

The Russian governments economic reshyform program for 1992 published in early March has been drawn up with requirements for joining the IMF and the World Bank in mind At the same time it also reflects the governments

I commitment to stabilizing and liberalizshying the economy over a two-year period Its priorities are eliminating the budget deficit controlling the money supply and implementing privatization_

Prices The program looks forward to the eventual liberalization ofprices from all administrative restrictions By April prices ofall consumergoods and services (except rent social services and public transport) will be freed Russian Presimiddot dent Boris Yeltsin asserted that deregushylation ofmostenergy prices will beputoff untilate Mayor early June The origishynal plans expressed an intention to free prices for fuel and other goods for proshyduction purposes byApril 20 while temshyporarily retaining theregulation ofprices for gas and electricity

Safety net Social protection will be dishyrected above all to pensioners largefamishylies and the unemployed This will enshytail cash compensation ofpensioners for price rises and social security payments to the other two groups Unemployment benefits will come in two forms-stanshydard and raised Standard benefits will not exceed 75 percent of the minimum wage while raised benefits will not exshyceed90percentofthe a verage wage earned by the recipient at the last place ofwork Raised benefits will be given only when the workplace has been closed or reorgashynized

Budget As a result ofprice liberalizashytion only some 5 percentofpublic spendshying will be devoted to subsidizing goods and services The austere social policy will permit further reductions in the general level ofgrants and subsidies In the course ofthis year defense spending will be cut further By mid-year the number ofcivil servants will have been cut by 5 percent The government sees its task as eliminating the budget deficit by the beginning of1993

Exchange rate In order to improve forshyeign trade performance and integrate Russia into the warldeconomyassoonas possible a single exchange rate will be introduced As a first step the governshyment intends to abandon the present

system by April 20 The several current rates will be merged into two undershypinned by a single floating rate One rate will apply to all current transacmiddot tions while the other will apply to the movement ofcapital At the same time free access to foreign currency will be granted to importers ofgoods and sershyvices as well as to foreign investors for the conversion ofdividends and profits

Foreign trade_ By July 1 all export quotas and licenses will be abolished Only the export ofenergy resources will still be subject to regulation although these quotas will be abolished by the end of 1993 No significant limitations on imports will remain

Monetary policy The Russian governmiddot ment will attempt to the best of its ability to coordinate monetary policy with the other CIS member states in the context of a ruble-denominated zone The Central Bank ofRussia claims it is ready to agree with the central banks of the other former Soviet republics on the rate and scale of money emissions on the general guidelines for unifying the ruble exchange rate and on the fine details ofpayments and accounting beshytween the CIS member states Should anyofthe former Soviet republics decide to introduce alternative currencies the Central Bank ofRussia is prepared to discuss the orderly withdrawalofrubles from circulation in the given republics

Privatization In the initial stage the emphasis will be placed on the swift sale by auction of small enterprises and retail outlets The privatization of large enterprises will be based on the following principles bull Employees will be offered shares in their own enterprises although not a controlling share bull Restrictions on the sale ofseparate enterprises and branches within large groups will be lifted bull Restrictions on the participation of foreign investors will be lifted bull Privatization will include the land on which the given enterprise stands bull Privatization ofincomplete construcshytion wark will be encouraged through a special tax regime

Based on Oxford Analytica London and Commersant a Russian weekly (March 2 1992)

March1 992 10 Volume 3 Number 3

Transition The World BankCECSE

Milestones of Transition

In Czechoslovakia inflation would be 12 percent in 1992 with GDP conshytracting by about 5 to 8 percent preshydicted Czechoslovakias State Bank GovernorJ osefTosovsky Inflation last year was almost 58 percent

Germany will transfer a net 180 bilshylion marks to thE eastern part of the country this year up from 139 billion in 1991 The forecast came in the Bundesbanks latest monthly report which cautioned against a continuashytion of transfers that are used primashyrily tofinance consumption (Atpresen t 134 million peoplE are unemployed in eastern Germany representing 165 percent of the tota I work force)

The Ukrainian parliament approved in principle an economic reform proshygram in late Mard which scraps the ruble in Ukraine and extends the use of the current coupons until the Ukraishynian currency is introduced (within three months) All trade with former Soviet republics will b(~ on a hardshycurrency basis imp(rts from them will be subject to tariff and exports to them will be subject to VAT

The new Ukrainian foreign investshyment law which came into effect on March 12afterparliarnentary approval allows foreigners to buy interests in Ukrainian businessemiddot or property of up to 100 percent guara ntees the righ t of foreign investors to repatriate revenues and profits and provides for compenshysation in the event of nationalization All current joint ventures are exempted from taxation until five years after they start to make a profit New joint ventures will be exempted from taxashytion on their profits for three years

A draft privatization program ofRusshysian state and municipal properties approved by the joint session of the presidium of the Rmsian Supreme Soviet and the government emphasizshying reliance on auctions calls for the sale of 70 billion to 80 hill ion rubles of state property this year and the free transfer to workersofstlte enterprises worth 150 billion to 20Ci billion rubles Ifthe Russian Supreme Soviet approves the proposal by the end of 1992 an estimated 12 to 20 percllnt of the total

Volume 3 Number 3

value offixed and worki ng capital could be privatized

The Russian Finance Ministry has informed the government that the first quarter budget revenue of 190 billion rubles is 250 billion short of the proshyjected figure Revenues from foreign economic activity amount to 9 billion rubles compared with a planned budshygetaryincome of228 billion rubles due to the steepfallin exports the financial status of exporters the paralysis ofthe oil-refining industry and the lifting of export duties on much of the fuel shipshyments The Russian industrial output in January and February was 135 percent below its level a year ago

Tajikistans new law on foreign inshyvestment (valid from March 11) gives foreign investors the right to set up enterprises purchase stock and parshyticipate in the privatization of state enterprises The law also establishes legal guarantees for foreign investshyments Tajikistan has lagged behind neighboring Uzbekistan in the matter of foreign investment Uzbekistan passed a similar law last July

The European Bank for ReconshystructionandDevelopment(EBRD) opened an office in Budapest-its secshyond in Eastern Europe its first was opened in Warsaw recently The Banks President Jacques Attali said that Russia would have 4 percent ofEBRD assistance noting that the former USSR had a 6 percent share Attali also announced the creation offunds to modernize agriculture convert defense industries and improve oil production in Russia Current limits to the Banks lending to members of the CIS would end after the EBRDs annual meeting in April he added

Premier Li Peng said that China needed to accelerate economic reform adding that maintaining a healthy economy would keep the countrys poshylitical system unchanged Li also anshynounced at the National Peoples Conshygress that a three-year period of ecoshynomic austerity was over (The austershyity program brought the more than 30 percent inflation rate at the beginning of 1989 down to 29 percent last year)

11

China would stick to its target of 6 percent GNP growth and try to keep inflation below 6 percent this year

More than 125 million people in Viet Nam 18 percent ofits population lack full-time employment Viet Nam will try to cutunemployment in three years by increasing jobs for youth and reloshycating more than 12 million people to farm virgin land Severe joblessness in Viet Nam worsened when the governshyment slashed the size of the army and lost significant amounts of aid from the former CMEA countries

The Polish government has approved the 1992 budget halving the planned deficit to 655 trillion zlotys ($49 bilshylion) or about 5 percent ofGDP in an attempt to curtail inflation Besides huge cuts in education health and welfare remaining state subsidies will be virtually eliminated The draft budshyget calls for coal prices to go up by 5 percent monthly except in the summer months natural gas to increase by 5 percent quarterly and central heating and hot water to go up 33 percent by October Rents for public housingwould be doubled in April and train fares would climb by 28 percent Gasoline taxes and the price of medicine would also rise sharply The Sejm win debate the proposed budget in April

Nicaraguas President Violeta Chamorro announced plans to restore economic growth of3 percent this year with a 400 percent increase in public spending to $280 million and credits and tax incentives to boost investment

The Romanian parliament approved the 1992 austerity budget which stresses low inflation at the expense of economic growth The state expects to collect revenues of about $521 billion in 1992 with estimated expenditures of $566 billion-a planned deficit of some $450 million Accordingto official figures the share of the private sector in the gross domestic product-which stood at 2100 million lei (the leu is currently quoted at 198 per dollar)shyrose to 21 percent compared with only 15 percent in 1990

March 1992

Transition lhe World BankjCECSE

Conference Diary

A Common Migration Policy for Europe March 24 Brussels

K1aus F Zimmermann at ajoint lunchshytime meeting of CEPR (Centre for Ecoshynomic Policy for Europe) and ECARE (European Centre for Advanced Reshysearch in Economics) presented results of recent research on European migrashytion and migration policy He predicts 5 million to 15 million potential East-West migrants while the western press often quotes a less plausible figure of 20 milshylion to 40 million Austria France Geurorshymany Italy and the Benelux countries are the most likely receiving countries The key issue is the speed ofinflow (and its composi tion) Past experience shows that immigration usually provides net benefits from an economic perspective In a world offree labor movement labor moves from low-productivity(low-wage) to high-productivity (high-wage) counshytries and it removes relative scarcities Some inflow of labor migrants would balance demographic losses of western populations that are aging and stagnatshying However immigration restrictions could apply ifincreased guest workers lead to a decline in domestic wages orshyifwages are inflexible--increases in unshyemployment With free labor and prodshyuctmarkets a Common Migration Policy is essen tial for the EC A Geuroneral Agreeshyment on Migration Policy (GAMP) parshyallel to the GATT is also recommended Klaus F Zimmermann Economics Professhysor at the Munich University together with Thomas Straubhaar published his findings in Toward a European Migration Policy CEPR Discussion Paper No_ 641 (CEPR 6 Duke of York St London SW1Y6LA)

Public Management Development in Centrally Planned Economies April 1-3 London

Colloquium under the auspices of the UNDP and the om (Overseas Developshyment Institute) International experts government officials and representashytives of donor agencies discussed manshyagement development in socialist and postsocialist economies(inc1uding China Cuba Mongolia Viet Nam Lao PDR Cambodia Mozambique Angola Myanmar Central and Eastern Euroshy

countries and the CIS states) in

the new global environment The confershyence focused on public sector management improvement comparing reform efforts in the Asian African and Caribbean nations with recent experiences of Central and Eastern Europe Information Mallika Henry Management Deshyvelopment Programme Bureau for Program PolicyandEvaluation UNDPNew YorkNY tel (212) 906-6840 fax (212) 986-6280

NewDimensions in Regional Integrashytion April 2-3 The World Bank Washington DC

Sponsored by the World Banks CECTP (Jaime de Melo and Arvind Panagariya) Topics included desirability of and prosshypects for successful integration in Mrica Latin America and Eastern Europe and the likelihood ofsuccessful integration beshytween developing anddeveloped countries The issue of whether regional integration can serve as a stepping stone to multilateralism or is a barrier to the latter was also addressed

[ ForthcomingJ

EnergyProspects Post-SovietRepubshylies and Eastern Europe April 7-8 London

Business Prospects Post-Soviet Reshypublics and Eastern Europe April 8-9 London

Both events (Seventh Annual Conference) are organized by PlanEcon Inc the Washshyington-based economic research institute Topics ofthe energy conference include oil and gas geology exploration Western inshyvestment petroleum refining prospects in the former USSR and Eastern Europe EBRDs role in the regions energy sector and EC experience with energy assistance to the CEE and the ex-USSR The second conference will provide an overview ofreshycent macroeconomic development in the region Speakers inc1ude JanVanous Keith Crane Marvin Jackson Ronald Freeman Information Ms Mary Hogan Washington DC tel (202) 898-0471 fax (202) 898-0445 or Corinne Redonnet London tel (4481) 545shy6212 fax (4481) 545-6248

First Annual Meeting on~BRD Governors April 13-14 Budapest Hungary

Europe Business Outlook 1992 Conshyference April 26-29 Knoxville Tennessee

Organized by the US Commerce Deshypartmentand the University ofTennesshysee Presentations by Senior Commershycial Officers of the US and Foreign Commercial Service from 23 Eastern and Western European countries and US missions to international organizashytions together with business leaders from Pizza Hut Coca-Cola Delta Air Proctor and Gamble Martin Marietta Topics include New Business Realities in the CIS Defense Industry Convershysion-Opportunities in the Former Soshyviet Union Eastern Europe Perspecshytives and Privatization Issues and Inshyvesting in Hungaryand Czechoslovakia A Lawyers View Information Ms Elaine Keener Co the UT Conference Center tel (615) 974-0250 fax (615) 974-0264 or UTConferences PO Box 2648 Knoxville Tennessee 37901

World Bank Annual Conference on Development Economics April30-May 1 Washington DC

Topics include Theories of Growth and Development Technology Labor MarshyketsandDevelopmentand International Capital Flows Information Mrs Jean Gray Ponchamni Rm 83-032 tel (202) 473-6850

Privatization and Market Mechashynisms A Comparative Approach May 14middot15 Budapest Hungary

Organized by the Association Intershynationale de Droit Economique (Intershynational Association for Economic Law) in collaboration with the Hungarian Asshysociation for the Protection ofIndustrial Property The discussion aims at bringshying together leading academics and polishycymakers from the public and private sector in different countries Four workshyshops will discuss legal requirements in a functioning market economy techshyniques ofprivatization social rights and privatization and sectoral aspects of privatization (telecommunications fishynancial system) Information General Secretariat ofAIDE Place Montesquieu 3 1348 LovrainLaNeuve Belgium tel 32-10-47middot39-70 fax 32-10middot47shy39-45

MarchI992 12 Volume 3 Number 3

Transition The World BankCECSE

World Bank IMF Agenda

New World Bank offices in Sofia and Bucharest

The World Bank is establishing resishydent offices in Bulgaria and Romania at the request of the governments of these countries John Wilton a British national will head the Sofia office and Arntraud Hartmann a German nashytional win be in charge of the Bucharest office

IMF recommends 3 percent quota to Russia

The IMF could support with its finanshycial resources the implementation of Russias economic reform program once Russia becomes a member of the instishytution said Michel Camdessus Manshyaging Director ofth(~ Fund following a meeting of the IMF executive board on March 31 attendedfor the first time by the representatives of the Russian Government The ex~cutive board will decide on a recommEndation to allot a quota share of 3 penent for Russia It would give the country a larger quota than China and the largest quota in the Fund after the G-7 industrial nashytions and Saudi Arabia

All ex-Soviet republic have applied to join the IMF and the World Bank with Georgia the last applying for memshybership on March 12 1992 Camdessus hinted that Russia and the other reshypublics of the former Soviet Union might become IMF mpmbers as early as May Noting that the IMF helped provide $20 billion to Central and Eastshyern Europe last year Camdessus said he expected that a similar flow of assisshytance would be needed in 1992

Reconstructing Cambodia

Japan will host an international conshyference in late June on the reconstrucshytion ofCambodia Twenty or more proshyspective donor countriefgt and internashytional organizations including the World Bank and the IMF are expected to attend

Donors pledge aid forLao Peoples Democratic Republic

In a Geneva meeting major internashytional donors pledged $500 million for infrastructure development in Lao Peoples Democratic Republic The pledge was made at a meeting held under the auspices of the United Nashytions Development Fund Donors inshyclude the United States Germany the United Kingdom Japan Kuwait the Republic of Korea India the Asian Development Bank the World Bank and the IMF

Olechowski in Washington

Poland took the first steps toward putshytingits economic reform program back on track by winning the IMFs approval of its budget We have reached an agreement with the IMF that the budshyget as prepared by the government is a reasonable one Polish Finance Minisshyter Andrzej Olechowski is quoted as saying after two days of talks in Washshyington with the Fund the World Bank and US government officials Accordshying to international monetary sources the Fund believes that Polands latest budget plans (see page 11) can form the basis for a credible reform program if they are passed by parliament in April Olechowski also said that he discussed loans worth $1 billion from the World Bank and the chances of gaining access to $15 billion in IMF support if the proposed budget is approved

IDA credit to Chinas education

To support Chinas effort to improve the quality of education in the six poorshyestprovinces the IDA approved a credit of $130 million The IDA credit will finance improvements in primary and some secondary schools in rural areas It will also support restructuring of higher education to make the system more efficient (In 1986 China introshyduced a compulsory nine-year basic education system)

and World Bankloan to develop cement production

China will meet growing domestic deshymand for cement through a $265 milshylion project supported by an $872 milshylion World Bank loan China is the worlds largestproducer and consumer of cement but demand is expected to exceed supply before the end of the century The loan will partially finance the developmentofproduction and disshytribution facilities atTongling Ningbo and Nanjing The loan will also assist cement agencies to improve pollution prevention

CIS Reforming education and training

Education and training have a vital role to play in the transition process of the former Soviet republics stressed World Bank Vice President Wilfried Thalwitz at a March seminar for CIS ministers of education The countries of the region need to retrain adults unemployed by the restructuring proshycess refocus higher education and scishyence toward the needs of a market economy develop skills in modern busishyness management economics engishyneering and agriculture and adjust the pre-university education system so that the students who emerge are flexible andareprepared forthe change to a market economy where their fushytures will be determined by their own ingenuity and their own initiative

Massive aid to Ethiopia

International aid organizations led by the World Bank have put together a $6574 million program to help the new government in Ethiopia rebuild after nearly two decades of civil war and mismanagement ofthe economy The IDA a World Bank affiliate will provide the largest share of the proshygram with $150 million The other major donors are the African Developshyment Bank ($126 million) the EC ($1164 million) and the USAID ($87 million)

Volume 3 Number 3 13 March 1992

Transition lhe Wor1d BankCECSE

Books and Working Papers Briefs The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Richard Bird and Christine Wallich Financing Local Government in Hungary World Bank Washington DC Policy Research WPS 869 1992 87 p

The new Hungarian system of local government finance tries to free local authorities spending from the heavy hand of central control and make the localities more responsible by providshying additional sources of locally conshytrolled revenues Local governments still depend for some 82 percentoftheir receiptson central transfers New local taxes are inadequate and some local authorities are unable to provide even the basic social services to the poor Localities feel increased pressure to raise revenues and use proceeds from asset sales to finance current operashytions Their entrepreneurial activity could work against the privatization drive therefore the golden rule should apply on the local level too The busishyness of government is not business

Normative grants of the central govshyernment are largely discretionary disshytributed according to a formula geared to both per capita equalization and needThis policy creates uncertainty therefore some criteria should be apshyplied suggest the authors Grants could befixed-for example to some national tax source (personal income or valueshyadded tax)

In dividing its grant among local aushythorities the central government should also consider the diverse revshyenue-raising capacities of the recipishyents and change the distribution forshymula for the normative grant accordshyingly As a result grant funds will be shifted from local governments with a high-tax capacity to localities with a low-tax capacity Ifrecipients are unshyable to impose and collect taxes at the assumed rate they have to acquiesce to a proportionally reduced grant later On the other hand recipients can keep all those tax revenues that exceed the anticipated level Available from Ann Bhalla The World Bank Room N10-053 tel (202) 473-7699

Marchl992

Cheryl W Gray Rebecca J Hanson and Peter G Ianachkov Romanias Evolving Legal Frameshywork for Private Sector Developshyment World Bank Washington DC Policy Research WPS 872 1992 27 p

Romania started virtually from scratch in 1990 to build a market economy and the legal framework required for it It has adopted a new constitution and extensive new legislation covering real and intellectual property companies and foreign investment Romania has revived the pre-war civil code as a basis for contract law and is moving to modshyernize its bankruptcy code Little progress has been made however in regulatinganticompetititive monopoly behavior

At present no judicial institutions in the country-whether courts arbitrashytion panels lawyers or law schools-shyare fully prepared to take on the chalshylenges inherent in their roles in the market economy Administrative and judicial apparatus for implementing new laws and educating the public about them are lagging behind Forshyeign technical assistance if properly designed can accelerate the institushytional development Availablefrom CECSE The World Bank Room N6-035 tel (202) 473-7188

Ross Levine and David Scott Old Debts and New BeginningsshyA Policy Choice in Transitional Socialist Economies World Bank Washington DC Policy Research WPS 876 1992 27 p

The authors scrutinize the dilemma of the decision-makers in postsocialist countries how to define the asset and liability structure of state-owned enshyterprises and banks as they are privatized Heavy stocks of enterprise debts (loans issued by state-owned banks to state-owned companies durshying socialist management) are hindershying the effective operation of both the business sector and the financial secshytor They also risk institutionalizing ad

14

hocgovern ment intervention (bailouts subsidized loans etc) on behalf of heavily indebted enterprises before putting them on the block Those intershyventions in turn may reduce governshymentcredibility The paper argues that governmentshouldassumetheresponshysibility for a large part of bank claims on enterprises as it would (1) improve the operation and restructuring of stateshyowned banks (2) facilitate the privatshyization of major banks (regarded as a desirable goal by the authors who pershyceive it as a gradual process) and (3) keep fiscal costs relatively low

It is feasible to preserve all enterprise debt obligations to banks that are of unquestioned quality rated as pass at detailed loan reviews (such loans might comprise 10 to 20 percent of outstanding loan portfolios) Another way of replacing bad assets is to preshyserve only those claims that either banks or enterprises themselves agree to preserve Global experience demonshystrates that whenever banks particushylarly state-owned banks are severely insolvent the replacementofbad loans with government bonds is the primary way to resolve the banking problem

Other recent PRWorkingPapers of the World Bank

Silvia B Sagari and Loic Chiquier Copingwith the Legacies ofSubsimiddot dized Mortgage CreditinHungary WPS 847199226 p Available from Melakou Guirbo The World Bank Room J9middot235 tel (202) 473middot5015

Roy Bahl and Christine Wallich Intergovernmental Fiscal Relashytions in China WPS 863 1992 58 p Available from Ann Bhalla The World Bank Room NlO-053 tel (202) 473-7699

Gary Jefferson and Wenyi Xu Assessing Gains in Efficient Promiddot duction Among Chinas Industrial Enterprises WPS 877199221 p AvailablefromCECSE The WorldBankRoom N6-044 tel (202) 471-7188

Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

Transition The World BankCECSE

Quotation of the Month Cutting defense spending will proshyvide the US with its own transition problems Group calls for new $100 billion Marshall Plan to the former Soviet republics

T he United States in conjuncshytion with the European Comshymunity Japan and other

wealthy nations should launch a new economic initiative designed to help the former Soviet republics make the transition from a centrally planned system to a network of democratic and market-oriented economies The curshyrent state ofthe Us economy is propishytious for such a daring venture Deshyfense-related spending has generated many jobs in the US economy and it has increased aggregate demand which has benefited many corporashytions A major cutn defense spending will have a dampEning effect on US job growth and corporate profits unshyless it is offs4~t by other activities

Even if def(lOse spending cuts are matched by equal increases in social welfare spending the net impact on the US economy i~ somewhat diminshyished growth prospects and slightly lower employment totals To cut deshyfense spending inl recessionary or slow-growth period will provide the United States withts own transition problems The macroeconomic stimushylus to the economy that would be genshyerated by a new Marshall Plan for the former Soviet republ ics could be a key ingredientin helping the United States forge a strongpost-Cdd War economy

Roughly 48 percent of the aid and asshysistance that the former Soviet repubshylics have received has been in the form ofexport credits and guarantees Over 60 percent of these export credits and guarantees have been made by Euroshypean nations In contmst only one out ofevery eight dollars in export credits and guarantees to thf~ former Soviet republics have been made by the United States and mostof them were for farm products The United Statescould very easily find itselflocked out of key marshykets in the former Soviet republics The credits and guarantees grantedby European nations will help finance many capital goods ami other related

Volume 3 Number 3

investments Relationships between buyers in the former Soviet republics and Western European corporations are being established To be sure there are successful business ventures and investments between US firms and the former Soviet republics However European activity in this area-parshyticularly from Germany-dwarfs that of the United States

It is in the United States self-interest to have a strong and vibrant commershycial presence in the former Soviet reshypublics Steps taken now to establish and assure growing economies in the former Soviet republics will create new buyers for US agricultural products manufactured goods and services However the United States is curshyrently playing a very small role in aidshying and assisting the former Soviet republics Only about 6 percent of the aid and assistance to the former Soviet republics or under $5 billion is curshyrently coming from the United States The United States is providing less aid and assistance than Italy which has an economy approximately one tenth the size ofthat of the United States

It is useful to remember some of the features and lessons of the original Marshall Plan George C Marshall presented the general outline of what became known as theMarshall Plan on June 5 1947 The independent Ecoshynomic Cooperation Administration (ECA) was established to administer the program which provided $133 bilshylion in assistance to Europe from 1948 to 1952 In 1992 dollars this total is equal to approximately $100 billion The ECA extended into many other areas besides providing grants andfosshytering investment Ithad a very active technical assistance program which introduced American management and production practices to Western Euroshypean businesses It promoted peopleshyto-people diplomacy And it encourshyaged theformation offree andindepenshydent trade unions as an institutional foundation for democracy and labor market cooperation to spur productivshyity and distribute its fruits for the benshyefit of all

The roughly $100 billion total of the original Marshall Plan is a realistic starting point for a new economic inishy

~ ---~----------------------~----~----

Never too late Western aid package for Russia The Group of Seven industrialized nashytions announced a $24 billion one-year aid program for Russia on April 1 The program establishes a $6 billion fund to maintain the value ofthe ruble while it becomes a convertible currency Another $18 billion is the sum total of bull credits from the IMF the World Bank and the EBRD ($45 billion) bull debt rescheduling ($25 billion) bull export credit guarantees food credits and humanitarian aid ($11 billion)

According to Horst Kohler Germanys chief negotiator in the G-7 the package would cover this years deficit in Russia8

balanreof payments Headded that agreeshyment on the adjustment program beshytween the Russian government and the

IMF could be finalized in May with the first credit tranches coming in June beshyfore the G-7 Munich Summit in July World Bank credits should also be availshyable by June or July Kohler said The United States would take a 20 to 25 I

percent share of the G-7 package Presi- dent Bush will ask the Congress to apshyprove a $12 billion US quota increase for the IMFan additional$ll billion in agricultural credit guarantees (since January 1991 the United States has extended $37 billion in such credits) and the announced $620 million in ecoshynomic and humanitarian aid Congress also is called on to repeal legal provisions limiting trade and to expand Peace Corps presence USIA programs and democshyracy corps programs in Russia

9 March 1992

Transition The World BankCECSE

tiative for the former Soviet republics Thisplan should be multinational One possible funding formula might be for the United States the European Comshymunity Japan and other wealthy nashytions each to contribute a portion of the needed resources Such a multiyear funding level divided between several donors is realistic and doable

This new economic initiative needs a multinational organization equivalent to the ECA of the Marshall Plan Such an organization would of course work cooperatively with the International Monetary Fund the World Bank and the United Nations We recognize that the former Soviet republics of the 1990s are different in many important reshyspects from post-World War II Westshyern Europe and the aid delivery sysshytems need to reflect these differences This multinational ECA should be dishyrected by private sector business and labor leaders as much as possible

The new ECA should organize along the lines of key industries and ecoshynomic sectors We strongly suggest that representatives from business labor and agriculture sit on these varishyous industry and sectoral committees The former Soviet republics will also require a great deal of technical assisshytance and basic institution-building Price decontrol is an important part of establishing a free-market system However a modem free market also requires a highly developed system of commercial laws an efficient banking system and stock markets In addishytion worker transition mechanisms that supply economic safety nets and the ladders to reach them are particushylarly important It is especially critical that the outstanding scientific talent that supported the former Soviet milishytary machine be redeployed to producshytive peaceful pursuits that benefit the world community (such as energy enshyvironmental and health care priorishyties)

Excerpts from the policy statement of the Nashytional Planning Associa tion Washington D C (dated March 18 1992) NPA is a nonpartisan economic and social research institution its trustees are prominent leaders from business labor agriculture and academia

The Russian reform program

The Russian governments economic reshyform program for 1992 published in early March has been drawn up with requirements for joining the IMF and the World Bank in mind At the same time it also reflects the governments

I commitment to stabilizing and liberalizshying the economy over a two-year period Its priorities are eliminating the budget deficit controlling the money supply and implementing privatization_

Prices The program looks forward to the eventual liberalization ofprices from all administrative restrictions By April prices ofall consumergoods and services (except rent social services and public transport) will be freed Russian Presimiddot dent Boris Yeltsin asserted that deregushylation ofmostenergy prices will beputoff untilate Mayor early June The origishynal plans expressed an intention to free prices for fuel and other goods for proshyduction purposes byApril 20 while temshyporarily retaining theregulation ofprices for gas and electricity

Safety net Social protection will be dishyrected above all to pensioners largefamishylies and the unemployed This will enshytail cash compensation ofpensioners for price rises and social security payments to the other two groups Unemployment benefits will come in two forms-stanshydard and raised Standard benefits will not exceed 75 percent of the minimum wage while raised benefits will not exshyceed90percentofthe a verage wage earned by the recipient at the last place ofwork Raised benefits will be given only when the workplace has been closed or reorgashynized

Budget As a result ofprice liberalizashytion only some 5 percentofpublic spendshying will be devoted to subsidizing goods and services The austere social policy will permit further reductions in the general level ofgrants and subsidies In the course ofthis year defense spending will be cut further By mid-year the number ofcivil servants will have been cut by 5 percent The government sees its task as eliminating the budget deficit by the beginning of1993

Exchange rate In order to improve forshyeign trade performance and integrate Russia into the warldeconomyassoonas possible a single exchange rate will be introduced As a first step the governshyment intends to abandon the present

system by April 20 The several current rates will be merged into two undershypinned by a single floating rate One rate will apply to all current transacmiddot tions while the other will apply to the movement ofcapital At the same time free access to foreign currency will be granted to importers ofgoods and sershyvices as well as to foreign investors for the conversion ofdividends and profits

Foreign trade_ By July 1 all export quotas and licenses will be abolished Only the export ofenergy resources will still be subject to regulation although these quotas will be abolished by the end of 1993 No significant limitations on imports will remain

Monetary policy The Russian governmiddot ment will attempt to the best of its ability to coordinate monetary policy with the other CIS member states in the context of a ruble-denominated zone The Central Bank ofRussia claims it is ready to agree with the central banks of the other former Soviet republics on the rate and scale of money emissions on the general guidelines for unifying the ruble exchange rate and on the fine details ofpayments and accounting beshytween the CIS member states Should anyofthe former Soviet republics decide to introduce alternative currencies the Central Bank ofRussia is prepared to discuss the orderly withdrawalofrubles from circulation in the given republics

Privatization In the initial stage the emphasis will be placed on the swift sale by auction of small enterprises and retail outlets The privatization of large enterprises will be based on the following principles bull Employees will be offered shares in their own enterprises although not a controlling share bull Restrictions on the sale ofseparate enterprises and branches within large groups will be lifted bull Restrictions on the participation of foreign investors will be lifted bull Privatization will include the land on which the given enterprise stands bull Privatization ofincomplete construcshytion wark will be encouraged through a special tax regime

Based on Oxford Analytica London and Commersant a Russian weekly (March 2 1992)

March1 992 10 Volume 3 Number 3

Transition The World BankCECSE

Milestones of Transition

In Czechoslovakia inflation would be 12 percent in 1992 with GDP conshytracting by about 5 to 8 percent preshydicted Czechoslovakias State Bank GovernorJ osefTosovsky Inflation last year was almost 58 percent

Germany will transfer a net 180 bilshylion marks to thE eastern part of the country this year up from 139 billion in 1991 The forecast came in the Bundesbanks latest monthly report which cautioned against a continuashytion of transfers that are used primashyrily tofinance consumption (Atpresen t 134 million peoplE are unemployed in eastern Germany representing 165 percent of the tota I work force)

The Ukrainian parliament approved in principle an economic reform proshygram in late Mard which scraps the ruble in Ukraine and extends the use of the current coupons until the Ukraishynian currency is introduced (within three months) All trade with former Soviet republics will b(~ on a hardshycurrency basis imp(rts from them will be subject to tariff and exports to them will be subject to VAT

The new Ukrainian foreign investshyment law which came into effect on March 12afterparliarnentary approval allows foreigners to buy interests in Ukrainian businessemiddot or property of up to 100 percent guara ntees the righ t of foreign investors to repatriate revenues and profits and provides for compenshysation in the event of nationalization All current joint ventures are exempted from taxation until five years after they start to make a profit New joint ventures will be exempted from taxashytion on their profits for three years

A draft privatization program ofRusshysian state and municipal properties approved by the joint session of the presidium of the Rmsian Supreme Soviet and the government emphasizshying reliance on auctions calls for the sale of 70 billion to 80 hill ion rubles of state property this year and the free transfer to workersofstlte enterprises worth 150 billion to 20Ci billion rubles Ifthe Russian Supreme Soviet approves the proposal by the end of 1992 an estimated 12 to 20 percllnt of the total

Volume 3 Number 3

value offixed and worki ng capital could be privatized

The Russian Finance Ministry has informed the government that the first quarter budget revenue of 190 billion rubles is 250 billion short of the proshyjected figure Revenues from foreign economic activity amount to 9 billion rubles compared with a planned budshygetaryincome of228 billion rubles due to the steepfallin exports the financial status of exporters the paralysis ofthe oil-refining industry and the lifting of export duties on much of the fuel shipshyments The Russian industrial output in January and February was 135 percent below its level a year ago

Tajikistans new law on foreign inshyvestment (valid from March 11) gives foreign investors the right to set up enterprises purchase stock and parshyticipate in the privatization of state enterprises The law also establishes legal guarantees for foreign investshyments Tajikistan has lagged behind neighboring Uzbekistan in the matter of foreign investment Uzbekistan passed a similar law last July

The European Bank for ReconshystructionandDevelopment(EBRD) opened an office in Budapest-its secshyond in Eastern Europe its first was opened in Warsaw recently The Banks President Jacques Attali said that Russia would have 4 percent ofEBRD assistance noting that the former USSR had a 6 percent share Attali also announced the creation offunds to modernize agriculture convert defense industries and improve oil production in Russia Current limits to the Banks lending to members of the CIS would end after the EBRDs annual meeting in April he added

Premier Li Peng said that China needed to accelerate economic reform adding that maintaining a healthy economy would keep the countrys poshylitical system unchanged Li also anshynounced at the National Peoples Conshygress that a three-year period of ecoshynomic austerity was over (The austershyity program brought the more than 30 percent inflation rate at the beginning of 1989 down to 29 percent last year)

11

China would stick to its target of 6 percent GNP growth and try to keep inflation below 6 percent this year

More than 125 million people in Viet Nam 18 percent ofits population lack full-time employment Viet Nam will try to cutunemployment in three years by increasing jobs for youth and reloshycating more than 12 million people to farm virgin land Severe joblessness in Viet Nam worsened when the governshyment slashed the size of the army and lost significant amounts of aid from the former CMEA countries

The Polish government has approved the 1992 budget halving the planned deficit to 655 trillion zlotys ($49 bilshylion) or about 5 percent ofGDP in an attempt to curtail inflation Besides huge cuts in education health and welfare remaining state subsidies will be virtually eliminated The draft budshyget calls for coal prices to go up by 5 percent monthly except in the summer months natural gas to increase by 5 percent quarterly and central heating and hot water to go up 33 percent by October Rents for public housingwould be doubled in April and train fares would climb by 28 percent Gasoline taxes and the price of medicine would also rise sharply The Sejm win debate the proposed budget in April

Nicaraguas President Violeta Chamorro announced plans to restore economic growth of3 percent this year with a 400 percent increase in public spending to $280 million and credits and tax incentives to boost investment

The Romanian parliament approved the 1992 austerity budget which stresses low inflation at the expense of economic growth The state expects to collect revenues of about $521 billion in 1992 with estimated expenditures of $566 billion-a planned deficit of some $450 million Accordingto official figures the share of the private sector in the gross domestic product-which stood at 2100 million lei (the leu is currently quoted at 198 per dollar)shyrose to 21 percent compared with only 15 percent in 1990

March 1992

Transition lhe World BankjCECSE

Conference Diary

A Common Migration Policy for Europe March 24 Brussels

K1aus F Zimmermann at ajoint lunchshytime meeting of CEPR (Centre for Ecoshynomic Policy for Europe) and ECARE (European Centre for Advanced Reshysearch in Economics) presented results of recent research on European migrashytion and migration policy He predicts 5 million to 15 million potential East-West migrants while the western press often quotes a less plausible figure of 20 milshylion to 40 million Austria France Geurorshymany Italy and the Benelux countries are the most likely receiving countries The key issue is the speed ofinflow (and its composi tion) Past experience shows that immigration usually provides net benefits from an economic perspective In a world offree labor movement labor moves from low-productivity(low-wage) to high-productivity (high-wage) counshytries and it removes relative scarcities Some inflow of labor migrants would balance demographic losses of western populations that are aging and stagnatshying However immigration restrictions could apply ifincreased guest workers lead to a decline in domestic wages orshyifwages are inflexible--increases in unshyemployment With free labor and prodshyuctmarkets a Common Migration Policy is essen tial for the EC A Geuroneral Agreeshyment on Migration Policy (GAMP) parshyallel to the GATT is also recommended Klaus F Zimmermann Economics Professhysor at the Munich University together with Thomas Straubhaar published his findings in Toward a European Migration Policy CEPR Discussion Paper No_ 641 (CEPR 6 Duke of York St London SW1Y6LA)

Public Management Development in Centrally Planned Economies April 1-3 London

Colloquium under the auspices of the UNDP and the om (Overseas Developshyment Institute) International experts government officials and representashytives of donor agencies discussed manshyagement development in socialist and postsocialist economies(inc1uding China Cuba Mongolia Viet Nam Lao PDR Cambodia Mozambique Angola Myanmar Central and Eastern Euroshy

countries and the CIS states) in

the new global environment The confershyence focused on public sector management improvement comparing reform efforts in the Asian African and Caribbean nations with recent experiences of Central and Eastern Europe Information Mallika Henry Management Deshyvelopment Programme Bureau for Program PolicyandEvaluation UNDPNew YorkNY tel (212) 906-6840 fax (212) 986-6280

NewDimensions in Regional Integrashytion April 2-3 The World Bank Washington DC

Sponsored by the World Banks CECTP (Jaime de Melo and Arvind Panagariya) Topics included desirability of and prosshypects for successful integration in Mrica Latin America and Eastern Europe and the likelihood ofsuccessful integration beshytween developing anddeveloped countries The issue of whether regional integration can serve as a stepping stone to multilateralism or is a barrier to the latter was also addressed

[ ForthcomingJ

EnergyProspects Post-SovietRepubshylies and Eastern Europe April 7-8 London

Business Prospects Post-Soviet Reshypublics and Eastern Europe April 8-9 London

Both events (Seventh Annual Conference) are organized by PlanEcon Inc the Washshyington-based economic research institute Topics ofthe energy conference include oil and gas geology exploration Western inshyvestment petroleum refining prospects in the former USSR and Eastern Europe EBRDs role in the regions energy sector and EC experience with energy assistance to the CEE and the ex-USSR The second conference will provide an overview ofreshycent macroeconomic development in the region Speakers inc1ude JanVanous Keith Crane Marvin Jackson Ronald Freeman Information Ms Mary Hogan Washington DC tel (202) 898-0471 fax (202) 898-0445 or Corinne Redonnet London tel (4481) 545shy6212 fax (4481) 545-6248

First Annual Meeting on~BRD Governors April 13-14 Budapest Hungary

Europe Business Outlook 1992 Conshyference April 26-29 Knoxville Tennessee

Organized by the US Commerce Deshypartmentand the University ofTennesshysee Presentations by Senior Commershycial Officers of the US and Foreign Commercial Service from 23 Eastern and Western European countries and US missions to international organizashytions together with business leaders from Pizza Hut Coca-Cola Delta Air Proctor and Gamble Martin Marietta Topics include New Business Realities in the CIS Defense Industry Convershysion-Opportunities in the Former Soshyviet Union Eastern Europe Perspecshytives and Privatization Issues and Inshyvesting in Hungaryand Czechoslovakia A Lawyers View Information Ms Elaine Keener Co the UT Conference Center tel (615) 974-0250 fax (615) 974-0264 or UTConferences PO Box 2648 Knoxville Tennessee 37901

World Bank Annual Conference on Development Economics April30-May 1 Washington DC

Topics include Theories of Growth and Development Technology Labor MarshyketsandDevelopmentand International Capital Flows Information Mrs Jean Gray Ponchamni Rm 83-032 tel (202) 473-6850

Privatization and Market Mechashynisms A Comparative Approach May 14middot15 Budapest Hungary

Organized by the Association Intershynationale de Droit Economique (Intershynational Association for Economic Law) in collaboration with the Hungarian Asshysociation for the Protection ofIndustrial Property The discussion aims at bringshying together leading academics and polishycymakers from the public and private sector in different countries Four workshyshops will discuss legal requirements in a functioning market economy techshyniques ofprivatization social rights and privatization and sectoral aspects of privatization (telecommunications fishynancial system) Information General Secretariat ofAIDE Place Montesquieu 3 1348 LovrainLaNeuve Belgium tel 32-10-47middot39-70 fax 32-10middot47shy39-45

MarchI992 12 Volume 3 Number 3

Transition The World BankCECSE

World Bank IMF Agenda

New World Bank offices in Sofia and Bucharest

The World Bank is establishing resishydent offices in Bulgaria and Romania at the request of the governments of these countries John Wilton a British national will head the Sofia office and Arntraud Hartmann a German nashytional win be in charge of the Bucharest office

IMF recommends 3 percent quota to Russia

The IMF could support with its finanshycial resources the implementation of Russias economic reform program once Russia becomes a member of the instishytution said Michel Camdessus Manshyaging Director ofth(~ Fund following a meeting of the IMF executive board on March 31 attendedfor the first time by the representatives of the Russian Government The ex~cutive board will decide on a recommEndation to allot a quota share of 3 penent for Russia It would give the country a larger quota than China and the largest quota in the Fund after the G-7 industrial nashytions and Saudi Arabia

All ex-Soviet republic have applied to join the IMF and the World Bank with Georgia the last applying for memshybership on March 12 1992 Camdessus hinted that Russia and the other reshypublics of the former Soviet Union might become IMF mpmbers as early as May Noting that the IMF helped provide $20 billion to Central and Eastshyern Europe last year Camdessus said he expected that a similar flow of assisshytance would be needed in 1992

Reconstructing Cambodia

Japan will host an international conshyference in late June on the reconstrucshytion ofCambodia Twenty or more proshyspective donor countriefgt and internashytional organizations including the World Bank and the IMF are expected to attend

Donors pledge aid forLao Peoples Democratic Republic

In a Geneva meeting major internashytional donors pledged $500 million for infrastructure development in Lao Peoples Democratic Republic The pledge was made at a meeting held under the auspices of the United Nashytions Development Fund Donors inshyclude the United States Germany the United Kingdom Japan Kuwait the Republic of Korea India the Asian Development Bank the World Bank and the IMF

Olechowski in Washington

Poland took the first steps toward putshytingits economic reform program back on track by winning the IMFs approval of its budget We have reached an agreement with the IMF that the budshyget as prepared by the government is a reasonable one Polish Finance Minisshyter Andrzej Olechowski is quoted as saying after two days of talks in Washshyington with the Fund the World Bank and US government officials Accordshying to international monetary sources the Fund believes that Polands latest budget plans (see page 11) can form the basis for a credible reform program if they are passed by parliament in April Olechowski also said that he discussed loans worth $1 billion from the World Bank and the chances of gaining access to $15 billion in IMF support if the proposed budget is approved

IDA credit to Chinas education

To support Chinas effort to improve the quality of education in the six poorshyestprovinces the IDA approved a credit of $130 million The IDA credit will finance improvements in primary and some secondary schools in rural areas It will also support restructuring of higher education to make the system more efficient (In 1986 China introshyduced a compulsory nine-year basic education system)

and World Bankloan to develop cement production

China will meet growing domestic deshymand for cement through a $265 milshylion project supported by an $872 milshylion World Bank loan China is the worlds largestproducer and consumer of cement but demand is expected to exceed supply before the end of the century The loan will partially finance the developmentofproduction and disshytribution facilities atTongling Ningbo and Nanjing The loan will also assist cement agencies to improve pollution prevention

CIS Reforming education and training

Education and training have a vital role to play in the transition process of the former Soviet republics stressed World Bank Vice President Wilfried Thalwitz at a March seminar for CIS ministers of education The countries of the region need to retrain adults unemployed by the restructuring proshycess refocus higher education and scishyence toward the needs of a market economy develop skills in modern busishyness management economics engishyneering and agriculture and adjust the pre-university education system so that the students who emerge are flexible andareprepared forthe change to a market economy where their fushytures will be determined by their own ingenuity and their own initiative

Massive aid to Ethiopia

International aid organizations led by the World Bank have put together a $6574 million program to help the new government in Ethiopia rebuild after nearly two decades of civil war and mismanagement ofthe economy The IDA a World Bank affiliate will provide the largest share of the proshygram with $150 million The other major donors are the African Developshyment Bank ($126 million) the EC ($1164 million) and the USAID ($87 million)

Volume 3 Number 3 13 March 1992

Transition lhe Wor1d BankCECSE

Books and Working Papers Briefs The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Richard Bird and Christine Wallich Financing Local Government in Hungary World Bank Washington DC Policy Research WPS 869 1992 87 p

The new Hungarian system of local government finance tries to free local authorities spending from the heavy hand of central control and make the localities more responsible by providshying additional sources of locally conshytrolled revenues Local governments still depend for some 82 percentoftheir receiptson central transfers New local taxes are inadequate and some local authorities are unable to provide even the basic social services to the poor Localities feel increased pressure to raise revenues and use proceeds from asset sales to finance current operashytions Their entrepreneurial activity could work against the privatization drive therefore the golden rule should apply on the local level too The busishyness of government is not business

Normative grants of the central govshyernment are largely discretionary disshytributed according to a formula geared to both per capita equalization and needThis policy creates uncertainty therefore some criteria should be apshyplied suggest the authors Grants could befixed-for example to some national tax source (personal income or valueshyadded tax)

In dividing its grant among local aushythorities the central government should also consider the diverse revshyenue-raising capacities of the recipishyents and change the distribution forshymula for the normative grant accordshyingly As a result grant funds will be shifted from local governments with a high-tax capacity to localities with a low-tax capacity Ifrecipients are unshyable to impose and collect taxes at the assumed rate they have to acquiesce to a proportionally reduced grant later On the other hand recipients can keep all those tax revenues that exceed the anticipated level Available from Ann Bhalla The World Bank Room N10-053 tel (202) 473-7699

Marchl992

Cheryl W Gray Rebecca J Hanson and Peter G Ianachkov Romanias Evolving Legal Frameshywork for Private Sector Developshyment World Bank Washington DC Policy Research WPS 872 1992 27 p

Romania started virtually from scratch in 1990 to build a market economy and the legal framework required for it It has adopted a new constitution and extensive new legislation covering real and intellectual property companies and foreign investment Romania has revived the pre-war civil code as a basis for contract law and is moving to modshyernize its bankruptcy code Little progress has been made however in regulatinganticompetititive monopoly behavior

At present no judicial institutions in the country-whether courts arbitrashytion panels lawyers or law schools-shyare fully prepared to take on the chalshylenges inherent in their roles in the market economy Administrative and judicial apparatus for implementing new laws and educating the public about them are lagging behind Forshyeign technical assistance if properly designed can accelerate the institushytional development Availablefrom CECSE The World Bank Room N6-035 tel (202) 473-7188

Ross Levine and David Scott Old Debts and New BeginningsshyA Policy Choice in Transitional Socialist Economies World Bank Washington DC Policy Research WPS 876 1992 27 p

The authors scrutinize the dilemma of the decision-makers in postsocialist countries how to define the asset and liability structure of state-owned enshyterprises and banks as they are privatized Heavy stocks of enterprise debts (loans issued by state-owned banks to state-owned companies durshying socialist management) are hindershying the effective operation of both the business sector and the financial secshytor They also risk institutionalizing ad

14

hocgovern ment intervention (bailouts subsidized loans etc) on behalf of heavily indebted enterprises before putting them on the block Those intershyventions in turn may reduce governshymentcredibility The paper argues that governmentshouldassumetheresponshysibility for a large part of bank claims on enterprises as it would (1) improve the operation and restructuring of stateshyowned banks (2) facilitate the privatshyization of major banks (regarded as a desirable goal by the authors who pershyceive it as a gradual process) and (3) keep fiscal costs relatively low

It is feasible to preserve all enterprise debt obligations to banks that are of unquestioned quality rated as pass at detailed loan reviews (such loans might comprise 10 to 20 percent of outstanding loan portfolios) Another way of replacing bad assets is to preshyserve only those claims that either banks or enterprises themselves agree to preserve Global experience demonshystrates that whenever banks particushylarly state-owned banks are severely insolvent the replacementofbad loans with government bonds is the primary way to resolve the banking problem

Other recent PRWorkingPapers of the World Bank

Silvia B Sagari and Loic Chiquier Copingwith the Legacies ofSubsimiddot dized Mortgage CreditinHungary WPS 847199226 p Available from Melakou Guirbo The World Bank Room J9middot235 tel (202) 473middot5015

Roy Bahl and Christine Wallich Intergovernmental Fiscal Relashytions in China WPS 863 1992 58 p Available from Ann Bhalla The World Bank Room NlO-053 tel (202) 473-7699

Gary Jefferson and Wenyi Xu Assessing Gains in Efficient Promiddot duction Among Chinas Industrial Enterprises WPS 877199221 p AvailablefromCECSE The WorldBankRoom N6-044 tel (202) 471-7188

Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

Transition The World BankCECSE

tiative for the former Soviet republics Thisplan should be multinational One possible funding formula might be for the United States the European Comshymunity Japan and other wealthy nashytions each to contribute a portion of the needed resources Such a multiyear funding level divided between several donors is realistic and doable

This new economic initiative needs a multinational organization equivalent to the ECA of the Marshall Plan Such an organization would of course work cooperatively with the International Monetary Fund the World Bank and the United Nations We recognize that the former Soviet republics of the 1990s are different in many important reshyspects from post-World War II Westshyern Europe and the aid delivery sysshytems need to reflect these differences This multinational ECA should be dishyrected by private sector business and labor leaders as much as possible

The new ECA should organize along the lines of key industries and ecoshynomic sectors We strongly suggest that representatives from business labor and agriculture sit on these varishyous industry and sectoral committees The former Soviet republics will also require a great deal of technical assisshytance and basic institution-building Price decontrol is an important part of establishing a free-market system However a modem free market also requires a highly developed system of commercial laws an efficient banking system and stock markets In addishytion worker transition mechanisms that supply economic safety nets and the ladders to reach them are particushylarly important It is especially critical that the outstanding scientific talent that supported the former Soviet milishytary machine be redeployed to producshytive peaceful pursuits that benefit the world community (such as energy enshyvironmental and health care priorishyties)

Excerpts from the policy statement of the Nashytional Planning Associa tion Washington D C (dated March 18 1992) NPA is a nonpartisan economic and social research institution its trustees are prominent leaders from business labor agriculture and academia

The Russian reform program

The Russian governments economic reshyform program for 1992 published in early March has been drawn up with requirements for joining the IMF and the World Bank in mind At the same time it also reflects the governments

I commitment to stabilizing and liberalizshying the economy over a two-year period Its priorities are eliminating the budget deficit controlling the money supply and implementing privatization_

Prices The program looks forward to the eventual liberalization ofprices from all administrative restrictions By April prices ofall consumergoods and services (except rent social services and public transport) will be freed Russian Presimiddot dent Boris Yeltsin asserted that deregushylation ofmostenergy prices will beputoff untilate Mayor early June The origishynal plans expressed an intention to free prices for fuel and other goods for proshyduction purposes byApril 20 while temshyporarily retaining theregulation ofprices for gas and electricity

Safety net Social protection will be dishyrected above all to pensioners largefamishylies and the unemployed This will enshytail cash compensation ofpensioners for price rises and social security payments to the other two groups Unemployment benefits will come in two forms-stanshydard and raised Standard benefits will not exceed 75 percent of the minimum wage while raised benefits will not exshyceed90percentofthe a verage wage earned by the recipient at the last place ofwork Raised benefits will be given only when the workplace has been closed or reorgashynized

Budget As a result ofprice liberalizashytion only some 5 percentofpublic spendshying will be devoted to subsidizing goods and services The austere social policy will permit further reductions in the general level ofgrants and subsidies In the course ofthis year defense spending will be cut further By mid-year the number ofcivil servants will have been cut by 5 percent The government sees its task as eliminating the budget deficit by the beginning of1993

Exchange rate In order to improve forshyeign trade performance and integrate Russia into the warldeconomyassoonas possible a single exchange rate will be introduced As a first step the governshyment intends to abandon the present

system by April 20 The several current rates will be merged into two undershypinned by a single floating rate One rate will apply to all current transacmiddot tions while the other will apply to the movement ofcapital At the same time free access to foreign currency will be granted to importers ofgoods and sershyvices as well as to foreign investors for the conversion ofdividends and profits

Foreign trade_ By July 1 all export quotas and licenses will be abolished Only the export ofenergy resources will still be subject to regulation although these quotas will be abolished by the end of 1993 No significant limitations on imports will remain

Monetary policy The Russian governmiddot ment will attempt to the best of its ability to coordinate monetary policy with the other CIS member states in the context of a ruble-denominated zone The Central Bank ofRussia claims it is ready to agree with the central banks of the other former Soviet republics on the rate and scale of money emissions on the general guidelines for unifying the ruble exchange rate and on the fine details ofpayments and accounting beshytween the CIS member states Should anyofthe former Soviet republics decide to introduce alternative currencies the Central Bank ofRussia is prepared to discuss the orderly withdrawalofrubles from circulation in the given republics

Privatization In the initial stage the emphasis will be placed on the swift sale by auction of small enterprises and retail outlets The privatization of large enterprises will be based on the following principles bull Employees will be offered shares in their own enterprises although not a controlling share bull Restrictions on the sale ofseparate enterprises and branches within large groups will be lifted bull Restrictions on the participation of foreign investors will be lifted bull Privatization will include the land on which the given enterprise stands bull Privatization ofincomplete construcshytion wark will be encouraged through a special tax regime

Based on Oxford Analytica London and Commersant a Russian weekly (March 2 1992)

March1 992 10 Volume 3 Number 3

Transition The World BankCECSE

Milestones of Transition

In Czechoslovakia inflation would be 12 percent in 1992 with GDP conshytracting by about 5 to 8 percent preshydicted Czechoslovakias State Bank GovernorJ osefTosovsky Inflation last year was almost 58 percent

Germany will transfer a net 180 bilshylion marks to thE eastern part of the country this year up from 139 billion in 1991 The forecast came in the Bundesbanks latest monthly report which cautioned against a continuashytion of transfers that are used primashyrily tofinance consumption (Atpresen t 134 million peoplE are unemployed in eastern Germany representing 165 percent of the tota I work force)

The Ukrainian parliament approved in principle an economic reform proshygram in late Mard which scraps the ruble in Ukraine and extends the use of the current coupons until the Ukraishynian currency is introduced (within three months) All trade with former Soviet republics will b(~ on a hardshycurrency basis imp(rts from them will be subject to tariff and exports to them will be subject to VAT

The new Ukrainian foreign investshyment law which came into effect on March 12afterparliarnentary approval allows foreigners to buy interests in Ukrainian businessemiddot or property of up to 100 percent guara ntees the righ t of foreign investors to repatriate revenues and profits and provides for compenshysation in the event of nationalization All current joint ventures are exempted from taxation until five years after they start to make a profit New joint ventures will be exempted from taxashytion on their profits for three years

A draft privatization program ofRusshysian state and municipal properties approved by the joint session of the presidium of the Rmsian Supreme Soviet and the government emphasizshying reliance on auctions calls for the sale of 70 billion to 80 hill ion rubles of state property this year and the free transfer to workersofstlte enterprises worth 150 billion to 20Ci billion rubles Ifthe Russian Supreme Soviet approves the proposal by the end of 1992 an estimated 12 to 20 percllnt of the total

Volume 3 Number 3

value offixed and worki ng capital could be privatized

The Russian Finance Ministry has informed the government that the first quarter budget revenue of 190 billion rubles is 250 billion short of the proshyjected figure Revenues from foreign economic activity amount to 9 billion rubles compared with a planned budshygetaryincome of228 billion rubles due to the steepfallin exports the financial status of exporters the paralysis ofthe oil-refining industry and the lifting of export duties on much of the fuel shipshyments The Russian industrial output in January and February was 135 percent below its level a year ago

Tajikistans new law on foreign inshyvestment (valid from March 11) gives foreign investors the right to set up enterprises purchase stock and parshyticipate in the privatization of state enterprises The law also establishes legal guarantees for foreign investshyments Tajikistan has lagged behind neighboring Uzbekistan in the matter of foreign investment Uzbekistan passed a similar law last July

The European Bank for ReconshystructionandDevelopment(EBRD) opened an office in Budapest-its secshyond in Eastern Europe its first was opened in Warsaw recently The Banks President Jacques Attali said that Russia would have 4 percent ofEBRD assistance noting that the former USSR had a 6 percent share Attali also announced the creation offunds to modernize agriculture convert defense industries and improve oil production in Russia Current limits to the Banks lending to members of the CIS would end after the EBRDs annual meeting in April he added

Premier Li Peng said that China needed to accelerate economic reform adding that maintaining a healthy economy would keep the countrys poshylitical system unchanged Li also anshynounced at the National Peoples Conshygress that a three-year period of ecoshynomic austerity was over (The austershyity program brought the more than 30 percent inflation rate at the beginning of 1989 down to 29 percent last year)

11

China would stick to its target of 6 percent GNP growth and try to keep inflation below 6 percent this year

More than 125 million people in Viet Nam 18 percent ofits population lack full-time employment Viet Nam will try to cutunemployment in three years by increasing jobs for youth and reloshycating more than 12 million people to farm virgin land Severe joblessness in Viet Nam worsened when the governshyment slashed the size of the army and lost significant amounts of aid from the former CMEA countries

The Polish government has approved the 1992 budget halving the planned deficit to 655 trillion zlotys ($49 bilshylion) or about 5 percent ofGDP in an attempt to curtail inflation Besides huge cuts in education health and welfare remaining state subsidies will be virtually eliminated The draft budshyget calls for coal prices to go up by 5 percent monthly except in the summer months natural gas to increase by 5 percent quarterly and central heating and hot water to go up 33 percent by October Rents for public housingwould be doubled in April and train fares would climb by 28 percent Gasoline taxes and the price of medicine would also rise sharply The Sejm win debate the proposed budget in April

Nicaraguas President Violeta Chamorro announced plans to restore economic growth of3 percent this year with a 400 percent increase in public spending to $280 million and credits and tax incentives to boost investment

The Romanian parliament approved the 1992 austerity budget which stresses low inflation at the expense of economic growth The state expects to collect revenues of about $521 billion in 1992 with estimated expenditures of $566 billion-a planned deficit of some $450 million Accordingto official figures the share of the private sector in the gross domestic product-which stood at 2100 million lei (the leu is currently quoted at 198 per dollar)shyrose to 21 percent compared with only 15 percent in 1990

March 1992

Transition lhe World BankjCECSE

Conference Diary

A Common Migration Policy for Europe March 24 Brussels

K1aus F Zimmermann at ajoint lunchshytime meeting of CEPR (Centre for Ecoshynomic Policy for Europe) and ECARE (European Centre for Advanced Reshysearch in Economics) presented results of recent research on European migrashytion and migration policy He predicts 5 million to 15 million potential East-West migrants while the western press often quotes a less plausible figure of 20 milshylion to 40 million Austria France Geurorshymany Italy and the Benelux countries are the most likely receiving countries The key issue is the speed ofinflow (and its composi tion) Past experience shows that immigration usually provides net benefits from an economic perspective In a world offree labor movement labor moves from low-productivity(low-wage) to high-productivity (high-wage) counshytries and it removes relative scarcities Some inflow of labor migrants would balance demographic losses of western populations that are aging and stagnatshying However immigration restrictions could apply ifincreased guest workers lead to a decline in domestic wages orshyifwages are inflexible--increases in unshyemployment With free labor and prodshyuctmarkets a Common Migration Policy is essen tial for the EC A Geuroneral Agreeshyment on Migration Policy (GAMP) parshyallel to the GATT is also recommended Klaus F Zimmermann Economics Professhysor at the Munich University together with Thomas Straubhaar published his findings in Toward a European Migration Policy CEPR Discussion Paper No_ 641 (CEPR 6 Duke of York St London SW1Y6LA)

Public Management Development in Centrally Planned Economies April 1-3 London

Colloquium under the auspices of the UNDP and the om (Overseas Developshyment Institute) International experts government officials and representashytives of donor agencies discussed manshyagement development in socialist and postsocialist economies(inc1uding China Cuba Mongolia Viet Nam Lao PDR Cambodia Mozambique Angola Myanmar Central and Eastern Euroshy

countries and the CIS states) in

the new global environment The confershyence focused on public sector management improvement comparing reform efforts in the Asian African and Caribbean nations with recent experiences of Central and Eastern Europe Information Mallika Henry Management Deshyvelopment Programme Bureau for Program PolicyandEvaluation UNDPNew YorkNY tel (212) 906-6840 fax (212) 986-6280

NewDimensions in Regional Integrashytion April 2-3 The World Bank Washington DC

Sponsored by the World Banks CECTP (Jaime de Melo and Arvind Panagariya) Topics included desirability of and prosshypects for successful integration in Mrica Latin America and Eastern Europe and the likelihood ofsuccessful integration beshytween developing anddeveloped countries The issue of whether regional integration can serve as a stepping stone to multilateralism or is a barrier to the latter was also addressed

[ ForthcomingJ

EnergyProspects Post-SovietRepubshylies and Eastern Europe April 7-8 London

Business Prospects Post-Soviet Reshypublics and Eastern Europe April 8-9 London

Both events (Seventh Annual Conference) are organized by PlanEcon Inc the Washshyington-based economic research institute Topics ofthe energy conference include oil and gas geology exploration Western inshyvestment petroleum refining prospects in the former USSR and Eastern Europe EBRDs role in the regions energy sector and EC experience with energy assistance to the CEE and the ex-USSR The second conference will provide an overview ofreshycent macroeconomic development in the region Speakers inc1ude JanVanous Keith Crane Marvin Jackson Ronald Freeman Information Ms Mary Hogan Washington DC tel (202) 898-0471 fax (202) 898-0445 or Corinne Redonnet London tel (4481) 545shy6212 fax (4481) 545-6248

First Annual Meeting on~BRD Governors April 13-14 Budapest Hungary

Europe Business Outlook 1992 Conshyference April 26-29 Knoxville Tennessee

Organized by the US Commerce Deshypartmentand the University ofTennesshysee Presentations by Senior Commershycial Officers of the US and Foreign Commercial Service from 23 Eastern and Western European countries and US missions to international organizashytions together with business leaders from Pizza Hut Coca-Cola Delta Air Proctor and Gamble Martin Marietta Topics include New Business Realities in the CIS Defense Industry Convershysion-Opportunities in the Former Soshyviet Union Eastern Europe Perspecshytives and Privatization Issues and Inshyvesting in Hungaryand Czechoslovakia A Lawyers View Information Ms Elaine Keener Co the UT Conference Center tel (615) 974-0250 fax (615) 974-0264 or UTConferences PO Box 2648 Knoxville Tennessee 37901

World Bank Annual Conference on Development Economics April30-May 1 Washington DC

Topics include Theories of Growth and Development Technology Labor MarshyketsandDevelopmentand International Capital Flows Information Mrs Jean Gray Ponchamni Rm 83-032 tel (202) 473-6850

Privatization and Market Mechashynisms A Comparative Approach May 14middot15 Budapest Hungary

Organized by the Association Intershynationale de Droit Economique (Intershynational Association for Economic Law) in collaboration with the Hungarian Asshysociation for the Protection ofIndustrial Property The discussion aims at bringshying together leading academics and polishycymakers from the public and private sector in different countries Four workshyshops will discuss legal requirements in a functioning market economy techshyniques ofprivatization social rights and privatization and sectoral aspects of privatization (telecommunications fishynancial system) Information General Secretariat ofAIDE Place Montesquieu 3 1348 LovrainLaNeuve Belgium tel 32-10-47middot39-70 fax 32-10middot47shy39-45

MarchI992 12 Volume 3 Number 3

Transition The World BankCECSE

World Bank IMF Agenda

New World Bank offices in Sofia and Bucharest

The World Bank is establishing resishydent offices in Bulgaria and Romania at the request of the governments of these countries John Wilton a British national will head the Sofia office and Arntraud Hartmann a German nashytional win be in charge of the Bucharest office

IMF recommends 3 percent quota to Russia

The IMF could support with its finanshycial resources the implementation of Russias economic reform program once Russia becomes a member of the instishytution said Michel Camdessus Manshyaging Director ofth(~ Fund following a meeting of the IMF executive board on March 31 attendedfor the first time by the representatives of the Russian Government The ex~cutive board will decide on a recommEndation to allot a quota share of 3 penent for Russia It would give the country a larger quota than China and the largest quota in the Fund after the G-7 industrial nashytions and Saudi Arabia

All ex-Soviet republic have applied to join the IMF and the World Bank with Georgia the last applying for memshybership on March 12 1992 Camdessus hinted that Russia and the other reshypublics of the former Soviet Union might become IMF mpmbers as early as May Noting that the IMF helped provide $20 billion to Central and Eastshyern Europe last year Camdessus said he expected that a similar flow of assisshytance would be needed in 1992

Reconstructing Cambodia

Japan will host an international conshyference in late June on the reconstrucshytion ofCambodia Twenty or more proshyspective donor countriefgt and internashytional organizations including the World Bank and the IMF are expected to attend

Donors pledge aid forLao Peoples Democratic Republic

In a Geneva meeting major internashytional donors pledged $500 million for infrastructure development in Lao Peoples Democratic Republic The pledge was made at a meeting held under the auspices of the United Nashytions Development Fund Donors inshyclude the United States Germany the United Kingdom Japan Kuwait the Republic of Korea India the Asian Development Bank the World Bank and the IMF

Olechowski in Washington

Poland took the first steps toward putshytingits economic reform program back on track by winning the IMFs approval of its budget We have reached an agreement with the IMF that the budshyget as prepared by the government is a reasonable one Polish Finance Minisshyter Andrzej Olechowski is quoted as saying after two days of talks in Washshyington with the Fund the World Bank and US government officials Accordshying to international monetary sources the Fund believes that Polands latest budget plans (see page 11) can form the basis for a credible reform program if they are passed by parliament in April Olechowski also said that he discussed loans worth $1 billion from the World Bank and the chances of gaining access to $15 billion in IMF support if the proposed budget is approved

IDA credit to Chinas education

To support Chinas effort to improve the quality of education in the six poorshyestprovinces the IDA approved a credit of $130 million The IDA credit will finance improvements in primary and some secondary schools in rural areas It will also support restructuring of higher education to make the system more efficient (In 1986 China introshyduced a compulsory nine-year basic education system)

and World Bankloan to develop cement production

China will meet growing domestic deshymand for cement through a $265 milshylion project supported by an $872 milshylion World Bank loan China is the worlds largestproducer and consumer of cement but demand is expected to exceed supply before the end of the century The loan will partially finance the developmentofproduction and disshytribution facilities atTongling Ningbo and Nanjing The loan will also assist cement agencies to improve pollution prevention

CIS Reforming education and training

Education and training have a vital role to play in the transition process of the former Soviet republics stressed World Bank Vice President Wilfried Thalwitz at a March seminar for CIS ministers of education The countries of the region need to retrain adults unemployed by the restructuring proshycess refocus higher education and scishyence toward the needs of a market economy develop skills in modern busishyness management economics engishyneering and agriculture and adjust the pre-university education system so that the students who emerge are flexible andareprepared forthe change to a market economy where their fushytures will be determined by their own ingenuity and their own initiative

Massive aid to Ethiopia

International aid organizations led by the World Bank have put together a $6574 million program to help the new government in Ethiopia rebuild after nearly two decades of civil war and mismanagement ofthe economy The IDA a World Bank affiliate will provide the largest share of the proshygram with $150 million The other major donors are the African Developshyment Bank ($126 million) the EC ($1164 million) and the USAID ($87 million)

Volume 3 Number 3 13 March 1992

Transition lhe Wor1d BankCECSE

Books and Working Papers Briefs The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Richard Bird and Christine Wallich Financing Local Government in Hungary World Bank Washington DC Policy Research WPS 869 1992 87 p

The new Hungarian system of local government finance tries to free local authorities spending from the heavy hand of central control and make the localities more responsible by providshying additional sources of locally conshytrolled revenues Local governments still depend for some 82 percentoftheir receiptson central transfers New local taxes are inadequate and some local authorities are unable to provide even the basic social services to the poor Localities feel increased pressure to raise revenues and use proceeds from asset sales to finance current operashytions Their entrepreneurial activity could work against the privatization drive therefore the golden rule should apply on the local level too The busishyness of government is not business

Normative grants of the central govshyernment are largely discretionary disshytributed according to a formula geared to both per capita equalization and needThis policy creates uncertainty therefore some criteria should be apshyplied suggest the authors Grants could befixed-for example to some national tax source (personal income or valueshyadded tax)

In dividing its grant among local aushythorities the central government should also consider the diverse revshyenue-raising capacities of the recipishyents and change the distribution forshymula for the normative grant accordshyingly As a result grant funds will be shifted from local governments with a high-tax capacity to localities with a low-tax capacity Ifrecipients are unshyable to impose and collect taxes at the assumed rate they have to acquiesce to a proportionally reduced grant later On the other hand recipients can keep all those tax revenues that exceed the anticipated level Available from Ann Bhalla The World Bank Room N10-053 tel (202) 473-7699

Marchl992

Cheryl W Gray Rebecca J Hanson and Peter G Ianachkov Romanias Evolving Legal Frameshywork for Private Sector Developshyment World Bank Washington DC Policy Research WPS 872 1992 27 p

Romania started virtually from scratch in 1990 to build a market economy and the legal framework required for it It has adopted a new constitution and extensive new legislation covering real and intellectual property companies and foreign investment Romania has revived the pre-war civil code as a basis for contract law and is moving to modshyernize its bankruptcy code Little progress has been made however in regulatinganticompetititive monopoly behavior

At present no judicial institutions in the country-whether courts arbitrashytion panels lawyers or law schools-shyare fully prepared to take on the chalshylenges inherent in their roles in the market economy Administrative and judicial apparatus for implementing new laws and educating the public about them are lagging behind Forshyeign technical assistance if properly designed can accelerate the institushytional development Availablefrom CECSE The World Bank Room N6-035 tel (202) 473-7188

Ross Levine and David Scott Old Debts and New BeginningsshyA Policy Choice in Transitional Socialist Economies World Bank Washington DC Policy Research WPS 876 1992 27 p

The authors scrutinize the dilemma of the decision-makers in postsocialist countries how to define the asset and liability structure of state-owned enshyterprises and banks as they are privatized Heavy stocks of enterprise debts (loans issued by state-owned banks to state-owned companies durshying socialist management) are hindershying the effective operation of both the business sector and the financial secshytor They also risk institutionalizing ad

14

hocgovern ment intervention (bailouts subsidized loans etc) on behalf of heavily indebted enterprises before putting them on the block Those intershyventions in turn may reduce governshymentcredibility The paper argues that governmentshouldassumetheresponshysibility for a large part of bank claims on enterprises as it would (1) improve the operation and restructuring of stateshyowned banks (2) facilitate the privatshyization of major banks (regarded as a desirable goal by the authors who pershyceive it as a gradual process) and (3) keep fiscal costs relatively low

It is feasible to preserve all enterprise debt obligations to banks that are of unquestioned quality rated as pass at detailed loan reviews (such loans might comprise 10 to 20 percent of outstanding loan portfolios) Another way of replacing bad assets is to preshyserve only those claims that either banks or enterprises themselves agree to preserve Global experience demonshystrates that whenever banks particushylarly state-owned banks are severely insolvent the replacementofbad loans with government bonds is the primary way to resolve the banking problem

Other recent PRWorkingPapers of the World Bank

Silvia B Sagari and Loic Chiquier Copingwith the Legacies ofSubsimiddot dized Mortgage CreditinHungary WPS 847199226 p Available from Melakou Guirbo The World Bank Room J9middot235 tel (202) 473middot5015

Roy Bahl and Christine Wallich Intergovernmental Fiscal Relashytions in China WPS 863 1992 58 p Available from Ann Bhalla The World Bank Room NlO-053 tel (202) 473-7699

Gary Jefferson and Wenyi Xu Assessing Gains in Efficient Promiddot duction Among Chinas Industrial Enterprises WPS 877199221 p AvailablefromCECSE The WorldBankRoom N6-044 tel (202) 471-7188

Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

Transition The World BankCECSE

Milestones of Transition

In Czechoslovakia inflation would be 12 percent in 1992 with GDP conshytracting by about 5 to 8 percent preshydicted Czechoslovakias State Bank GovernorJ osefTosovsky Inflation last year was almost 58 percent

Germany will transfer a net 180 bilshylion marks to thE eastern part of the country this year up from 139 billion in 1991 The forecast came in the Bundesbanks latest monthly report which cautioned against a continuashytion of transfers that are used primashyrily tofinance consumption (Atpresen t 134 million peoplE are unemployed in eastern Germany representing 165 percent of the tota I work force)

The Ukrainian parliament approved in principle an economic reform proshygram in late Mard which scraps the ruble in Ukraine and extends the use of the current coupons until the Ukraishynian currency is introduced (within three months) All trade with former Soviet republics will b(~ on a hardshycurrency basis imp(rts from them will be subject to tariff and exports to them will be subject to VAT

The new Ukrainian foreign investshyment law which came into effect on March 12afterparliarnentary approval allows foreigners to buy interests in Ukrainian businessemiddot or property of up to 100 percent guara ntees the righ t of foreign investors to repatriate revenues and profits and provides for compenshysation in the event of nationalization All current joint ventures are exempted from taxation until five years after they start to make a profit New joint ventures will be exempted from taxashytion on their profits for three years

A draft privatization program ofRusshysian state and municipal properties approved by the joint session of the presidium of the Rmsian Supreme Soviet and the government emphasizshying reliance on auctions calls for the sale of 70 billion to 80 hill ion rubles of state property this year and the free transfer to workersofstlte enterprises worth 150 billion to 20Ci billion rubles Ifthe Russian Supreme Soviet approves the proposal by the end of 1992 an estimated 12 to 20 percllnt of the total

Volume 3 Number 3

value offixed and worki ng capital could be privatized

The Russian Finance Ministry has informed the government that the first quarter budget revenue of 190 billion rubles is 250 billion short of the proshyjected figure Revenues from foreign economic activity amount to 9 billion rubles compared with a planned budshygetaryincome of228 billion rubles due to the steepfallin exports the financial status of exporters the paralysis ofthe oil-refining industry and the lifting of export duties on much of the fuel shipshyments The Russian industrial output in January and February was 135 percent below its level a year ago

Tajikistans new law on foreign inshyvestment (valid from March 11) gives foreign investors the right to set up enterprises purchase stock and parshyticipate in the privatization of state enterprises The law also establishes legal guarantees for foreign investshyments Tajikistan has lagged behind neighboring Uzbekistan in the matter of foreign investment Uzbekistan passed a similar law last July

The European Bank for ReconshystructionandDevelopment(EBRD) opened an office in Budapest-its secshyond in Eastern Europe its first was opened in Warsaw recently The Banks President Jacques Attali said that Russia would have 4 percent ofEBRD assistance noting that the former USSR had a 6 percent share Attali also announced the creation offunds to modernize agriculture convert defense industries and improve oil production in Russia Current limits to the Banks lending to members of the CIS would end after the EBRDs annual meeting in April he added

Premier Li Peng said that China needed to accelerate economic reform adding that maintaining a healthy economy would keep the countrys poshylitical system unchanged Li also anshynounced at the National Peoples Conshygress that a three-year period of ecoshynomic austerity was over (The austershyity program brought the more than 30 percent inflation rate at the beginning of 1989 down to 29 percent last year)

11

China would stick to its target of 6 percent GNP growth and try to keep inflation below 6 percent this year

More than 125 million people in Viet Nam 18 percent ofits population lack full-time employment Viet Nam will try to cutunemployment in three years by increasing jobs for youth and reloshycating more than 12 million people to farm virgin land Severe joblessness in Viet Nam worsened when the governshyment slashed the size of the army and lost significant amounts of aid from the former CMEA countries

The Polish government has approved the 1992 budget halving the planned deficit to 655 trillion zlotys ($49 bilshylion) or about 5 percent ofGDP in an attempt to curtail inflation Besides huge cuts in education health and welfare remaining state subsidies will be virtually eliminated The draft budshyget calls for coal prices to go up by 5 percent monthly except in the summer months natural gas to increase by 5 percent quarterly and central heating and hot water to go up 33 percent by October Rents for public housingwould be doubled in April and train fares would climb by 28 percent Gasoline taxes and the price of medicine would also rise sharply The Sejm win debate the proposed budget in April

Nicaraguas President Violeta Chamorro announced plans to restore economic growth of3 percent this year with a 400 percent increase in public spending to $280 million and credits and tax incentives to boost investment

The Romanian parliament approved the 1992 austerity budget which stresses low inflation at the expense of economic growth The state expects to collect revenues of about $521 billion in 1992 with estimated expenditures of $566 billion-a planned deficit of some $450 million Accordingto official figures the share of the private sector in the gross domestic product-which stood at 2100 million lei (the leu is currently quoted at 198 per dollar)shyrose to 21 percent compared with only 15 percent in 1990

March 1992

Transition lhe World BankjCECSE

Conference Diary

A Common Migration Policy for Europe March 24 Brussels

K1aus F Zimmermann at ajoint lunchshytime meeting of CEPR (Centre for Ecoshynomic Policy for Europe) and ECARE (European Centre for Advanced Reshysearch in Economics) presented results of recent research on European migrashytion and migration policy He predicts 5 million to 15 million potential East-West migrants while the western press often quotes a less plausible figure of 20 milshylion to 40 million Austria France Geurorshymany Italy and the Benelux countries are the most likely receiving countries The key issue is the speed ofinflow (and its composi tion) Past experience shows that immigration usually provides net benefits from an economic perspective In a world offree labor movement labor moves from low-productivity(low-wage) to high-productivity (high-wage) counshytries and it removes relative scarcities Some inflow of labor migrants would balance demographic losses of western populations that are aging and stagnatshying However immigration restrictions could apply ifincreased guest workers lead to a decline in domestic wages orshyifwages are inflexible--increases in unshyemployment With free labor and prodshyuctmarkets a Common Migration Policy is essen tial for the EC A Geuroneral Agreeshyment on Migration Policy (GAMP) parshyallel to the GATT is also recommended Klaus F Zimmermann Economics Professhysor at the Munich University together with Thomas Straubhaar published his findings in Toward a European Migration Policy CEPR Discussion Paper No_ 641 (CEPR 6 Duke of York St London SW1Y6LA)

Public Management Development in Centrally Planned Economies April 1-3 London

Colloquium under the auspices of the UNDP and the om (Overseas Developshyment Institute) International experts government officials and representashytives of donor agencies discussed manshyagement development in socialist and postsocialist economies(inc1uding China Cuba Mongolia Viet Nam Lao PDR Cambodia Mozambique Angola Myanmar Central and Eastern Euroshy

countries and the CIS states) in

the new global environment The confershyence focused on public sector management improvement comparing reform efforts in the Asian African and Caribbean nations with recent experiences of Central and Eastern Europe Information Mallika Henry Management Deshyvelopment Programme Bureau for Program PolicyandEvaluation UNDPNew YorkNY tel (212) 906-6840 fax (212) 986-6280

NewDimensions in Regional Integrashytion April 2-3 The World Bank Washington DC

Sponsored by the World Banks CECTP (Jaime de Melo and Arvind Panagariya) Topics included desirability of and prosshypects for successful integration in Mrica Latin America and Eastern Europe and the likelihood ofsuccessful integration beshytween developing anddeveloped countries The issue of whether regional integration can serve as a stepping stone to multilateralism or is a barrier to the latter was also addressed

[ ForthcomingJ

EnergyProspects Post-SovietRepubshylies and Eastern Europe April 7-8 London

Business Prospects Post-Soviet Reshypublics and Eastern Europe April 8-9 London

Both events (Seventh Annual Conference) are organized by PlanEcon Inc the Washshyington-based economic research institute Topics ofthe energy conference include oil and gas geology exploration Western inshyvestment petroleum refining prospects in the former USSR and Eastern Europe EBRDs role in the regions energy sector and EC experience with energy assistance to the CEE and the ex-USSR The second conference will provide an overview ofreshycent macroeconomic development in the region Speakers inc1ude JanVanous Keith Crane Marvin Jackson Ronald Freeman Information Ms Mary Hogan Washington DC tel (202) 898-0471 fax (202) 898-0445 or Corinne Redonnet London tel (4481) 545shy6212 fax (4481) 545-6248

First Annual Meeting on~BRD Governors April 13-14 Budapest Hungary

Europe Business Outlook 1992 Conshyference April 26-29 Knoxville Tennessee

Organized by the US Commerce Deshypartmentand the University ofTennesshysee Presentations by Senior Commershycial Officers of the US and Foreign Commercial Service from 23 Eastern and Western European countries and US missions to international organizashytions together with business leaders from Pizza Hut Coca-Cola Delta Air Proctor and Gamble Martin Marietta Topics include New Business Realities in the CIS Defense Industry Convershysion-Opportunities in the Former Soshyviet Union Eastern Europe Perspecshytives and Privatization Issues and Inshyvesting in Hungaryand Czechoslovakia A Lawyers View Information Ms Elaine Keener Co the UT Conference Center tel (615) 974-0250 fax (615) 974-0264 or UTConferences PO Box 2648 Knoxville Tennessee 37901

World Bank Annual Conference on Development Economics April30-May 1 Washington DC

Topics include Theories of Growth and Development Technology Labor MarshyketsandDevelopmentand International Capital Flows Information Mrs Jean Gray Ponchamni Rm 83-032 tel (202) 473-6850

Privatization and Market Mechashynisms A Comparative Approach May 14middot15 Budapest Hungary

Organized by the Association Intershynationale de Droit Economique (Intershynational Association for Economic Law) in collaboration with the Hungarian Asshysociation for the Protection ofIndustrial Property The discussion aims at bringshying together leading academics and polishycymakers from the public and private sector in different countries Four workshyshops will discuss legal requirements in a functioning market economy techshyniques ofprivatization social rights and privatization and sectoral aspects of privatization (telecommunications fishynancial system) Information General Secretariat ofAIDE Place Montesquieu 3 1348 LovrainLaNeuve Belgium tel 32-10-47middot39-70 fax 32-10middot47shy39-45

MarchI992 12 Volume 3 Number 3

Transition The World BankCECSE

World Bank IMF Agenda

New World Bank offices in Sofia and Bucharest

The World Bank is establishing resishydent offices in Bulgaria and Romania at the request of the governments of these countries John Wilton a British national will head the Sofia office and Arntraud Hartmann a German nashytional win be in charge of the Bucharest office

IMF recommends 3 percent quota to Russia

The IMF could support with its finanshycial resources the implementation of Russias economic reform program once Russia becomes a member of the instishytution said Michel Camdessus Manshyaging Director ofth(~ Fund following a meeting of the IMF executive board on March 31 attendedfor the first time by the representatives of the Russian Government The ex~cutive board will decide on a recommEndation to allot a quota share of 3 penent for Russia It would give the country a larger quota than China and the largest quota in the Fund after the G-7 industrial nashytions and Saudi Arabia

All ex-Soviet republic have applied to join the IMF and the World Bank with Georgia the last applying for memshybership on March 12 1992 Camdessus hinted that Russia and the other reshypublics of the former Soviet Union might become IMF mpmbers as early as May Noting that the IMF helped provide $20 billion to Central and Eastshyern Europe last year Camdessus said he expected that a similar flow of assisshytance would be needed in 1992

Reconstructing Cambodia

Japan will host an international conshyference in late June on the reconstrucshytion ofCambodia Twenty or more proshyspective donor countriefgt and internashytional organizations including the World Bank and the IMF are expected to attend

Donors pledge aid forLao Peoples Democratic Republic

In a Geneva meeting major internashytional donors pledged $500 million for infrastructure development in Lao Peoples Democratic Republic The pledge was made at a meeting held under the auspices of the United Nashytions Development Fund Donors inshyclude the United States Germany the United Kingdom Japan Kuwait the Republic of Korea India the Asian Development Bank the World Bank and the IMF

Olechowski in Washington

Poland took the first steps toward putshytingits economic reform program back on track by winning the IMFs approval of its budget We have reached an agreement with the IMF that the budshyget as prepared by the government is a reasonable one Polish Finance Minisshyter Andrzej Olechowski is quoted as saying after two days of talks in Washshyington with the Fund the World Bank and US government officials Accordshying to international monetary sources the Fund believes that Polands latest budget plans (see page 11) can form the basis for a credible reform program if they are passed by parliament in April Olechowski also said that he discussed loans worth $1 billion from the World Bank and the chances of gaining access to $15 billion in IMF support if the proposed budget is approved

IDA credit to Chinas education

To support Chinas effort to improve the quality of education in the six poorshyestprovinces the IDA approved a credit of $130 million The IDA credit will finance improvements in primary and some secondary schools in rural areas It will also support restructuring of higher education to make the system more efficient (In 1986 China introshyduced a compulsory nine-year basic education system)

and World Bankloan to develop cement production

China will meet growing domestic deshymand for cement through a $265 milshylion project supported by an $872 milshylion World Bank loan China is the worlds largestproducer and consumer of cement but demand is expected to exceed supply before the end of the century The loan will partially finance the developmentofproduction and disshytribution facilities atTongling Ningbo and Nanjing The loan will also assist cement agencies to improve pollution prevention

CIS Reforming education and training

Education and training have a vital role to play in the transition process of the former Soviet republics stressed World Bank Vice President Wilfried Thalwitz at a March seminar for CIS ministers of education The countries of the region need to retrain adults unemployed by the restructuring proshycess refocus higher education and scishyence toward the needs of a market economy develop skills in modern busishyness management economics engishyneering and agriculture and adjust the pre-university education system so that the students who emerge are flexible andareprepared forthe change to a market economy where their fushytures will be determined by their own ingenuity and their own initiative

Massive aid to Ethiopia

International aid organizations led by the World Bank have put together a $6574 million program to help the new government in Ethiopia rebuild after nearly two decades of civil war and mismanagement ofthe economy The IDA a World Bank affiliate will provide the largest share of the proshygram with $150 million The other major donors are the African Developshyment Bank ($126 million) the EC ($1164 million) and the USAID ($87 million)

Volume 3 Number 3 13 March 1992

Transition lhe Wor1d BankCECSE

Books and Working Papers Briefs The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Richard Bird and Christine Wallich Financing Local Government in Hungary World Bank Washington DC Policy Research WPS 869 1992 87 p

The new Hungarian system of local government finance tries to free local authorities spending from the heavy hand of central control and make the localities more responsible by providshying additional sources of locally conshytrolled revenues Local governments still depend for some 82 percentoftheir receiptson central transfers New local taxes are inadequate and some local authorities are unable to provide even the basic social services to the poor Localities feel increased pressure to raise revenues and use proceeds from asset sales to finance current operashytions Their entrepreneurial activity could work against the privatization drive therefore the golden rule should apply on the local level too The busishyness of government is not business

Normative grants of the central govshyernment are largely discretionary disshytributed according to a formula geared to both per capita equalization and needThis policy creates uncertainty therefore some criteria should be apshyplied suggest the authors Grants could befixed-for example to some national tax source (personal income or valueshyadded tax)

In dividing its grant among local aushythorities the central government should also consider the diverse revshyenue-raising capacities of the recipishyents and change the distribution forshymula for the normative grant accordshyingly As a result grant funds will be shifted from local governments with a high-tax capacity to localities with a low-tax capacity Ifrecipients are unshyable to impose and collect taxes at the assumed rate they have to acquiesce to a proportionally reduced grant later On the other hand recipients can keep all those tax revenues that exceed the anticipated level Available from Ann Bhalla The World Bank Room N10-053 tel (202) 473-7699

Marchl992

Cheryl W Gray Rebecca J Hanson and Peter G Ianachkov Romanias Evolving Legal Frameshywork for Private Sector Developshyment World Bank Washington DC Policy Research WPS 872 1992 27 p

Romania started virtually from scratch in 1990 to build a market economy and the legal framework required for it It has adopted a new constitution and extensive new legislation covering real and intellectual property companies and foreign investment Romania has revived the pre-war civil code as a basis for contract law and is moving to modshyernize its bankruptcy code Little progress has been made however in regulatinganticompetititive monopoly behavior

At present no judicial institutions in the country-whether courts arbitrashytion panels lawyers or law schools-shyare fully prepared to take on the chalshylenges inherent in their roles in the market economy Administrative and judicial apparatus for implementing new laws and educating the public about them are lagging behind Forshyeign technical assistance if properly designed can accelerate the institushytional development Availablefrom CECSE The World Bank Room N6-035 tel (202) 473-7188

Ross Levine and David Scott Old Debts and New BeginningsshyA Policy Choice in Transitional Socialist Economies World Bank Washington DC Policy Research WPS 876 1992 27 p

The authors scrutinize the dilemma of the decision-makers in postsocialist countries how to define the asset and liability structure of state-owned enshyterprises and banks as they are privatized Heavy stocks of enterprise debts (loans issued by state-owned banks to state-owned companies durshying socialist management) are hindershying the effective operation of both the business sector and the financial secshytor They also risk institutionalizing ad

14

hocgovern ment intervention (bailouts subsidized loans etc) on behalf of heavily indebted enterprises before putting them on the block Those intershyventions in turn may reduce governshymentcredibility The paper argues that governmentshouldassumetheresponshysibility for a large part of bank claims on enterprises as it would (1) improve the operation and restructuring of stateshyowned banks (2) facilitate the privatshyization of major banks (regarded as a desirable goal by the authors who pershyceive it as a gradual process) and (3) keep fiscal costs relatively low

It is feasible to preserve all enterprise debt obligations to banks that are of unquestioned quality rated as pass at detailed loan reviews (such loans might comprise 10 to 20 percent of outstanding loan portfolios) Another way of replacing bad assets is to preshyserve only those claims that either banks or enterprises themselves agree to preserve Global experience demonshystrates that whenever banks particushylarly state-owned banks are severely insolvent the replacementofbad loans with government bonds is the primary way to resolve the banking problem

Other recent PRWorkingPapers of the World Bank

Silvia B Sagari and Loic Chiquier Copingwith the Legacies ofSubsimiddot dized Mortgage CreditinHungary WPS 847199226 p Available from Melakou Guirbo The World Bank Room J9middot235 tel (202) 473middot5015

Roy Bahl and Christine Wallich Intergovernmental Fiscal Relashytions in China WPS 863 1992 58 p Available from Ann Bhalla The World Bank Room NlO-053 tel (202) 473-7699

Gary Jefferson and Wenyi Xu Assessing Gains in Efficient Promiddot duction Among Chinas Industrial Enterprises WPS 877199221 p AvailablefromCECSE The WorldBankRoom N6-044 tel (202) 471-7188

Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

Transition lhe World BankjCECSE

Conference Diary

A Common Migration Policy for Europe March 24 Brussels

K1aus F Zimmermann at ajoint lunchshytime meeting of CEPR (Centre for Ecoshynomic Policy for Europe) and ECARE (European Centre for Advanced Reshysearch in Economics) presented results of recent research on European migrashytion and migration policy He predicts 5 million to 15 million potential East-West migrants while the western press often quotes a less plausible figure of 20 milshylion to 40 million Austria France Geurorshymany Italy and the Benelux countries are the most likely receiving countries The key issue is the speed ofinflow (and its composi tion) Past experience shows that immigration usually provides net benefits from an economic perspective In a world offree labor movement labor moves from low-productivity(low-wage) to high-productivity (high-wage) counshytries and it removes relative scarcities Some inflow of labor migrants would balance demographic losses of western populations that are aging and stagnatshying However immigration restrictions could apply ifincreased guest workers lead to a decline in domestic wages orshyifwages are inflexible--increases in unshyemployment With free labor and prodshyuctmarkets a Common Migration Policy is essen tial for the EC A Geuroneral Agreeshyment on Migration Policy (GAMP) parshyallel to the GATT is also recommended Klaus F Zimmermann Economics Professhysor at the Munich University together with Thomas Straubhaar published his findings in Toward a European Migration Policy CEPR Discussion Paper No_ 641 (CEPR 6 Duke of York St London SW1Y6LA)

Public Management Development in Centrally Planned Economies April 1-3 London

Colloquium under the auspices of the UNDP and the om (Overseas Developshyment Institute) International experts government officials and representashytives of donor agencies discussed manshyagement development in socialist and postsocialist economies(inc1uding China Cuba Mongolia Viet Nam Lao PDR Cambodia Mozambique Angola Myanmar Central and Eastern Euroshy

countries and the CIS states) in

the new global environment The confershyence focused on public sector management improvement comparing reform efforts in the Asian African and Caribbean nations with recent experiences of Central and Eastern Europe Information Mallika Henry Management Deshyvelopment Programme Bureau for Program PolicyandEvaluation UNDPNew YorkNY tel (212) 906-6840 fax (212) 986-6280

NewDimensions in Regional Integrashytion April 2-3 The World Bank Washington DC

Sponsored by the World Banks CECTP (Jaime de Melo and Arvind Panagariya) Topics included desirability of and prosshypects for successful integration in Mrica Latin America and Eastern Europe and the likelihood ofsuccessful integration beshytween developing anddeveloped countries The issue of whether regional integration can serve as a stepping stone to multilateralism or is a barrier to the latter was also addressed

[ ForthcomingJ

EnergyProspects Post-SovietRepubshylies and Eastern Europe April 7-8 London

Business Prospects Post-Soviet Reshypublics and Eastern Europe April 8-9 London

Both events (Seventh Annual Conference) are organized by PlanEcon Inc the Washshyington-based economic research institute Topics ofthe energy conference include oil and gas geology exploration Western inshyvestment petroleum refining prospects in the former USSR and Eastern Europe EBRDs role in the regions energy sector and EC experience with energy assistance to the CEE and the ex-USSR The second conference will provide an overview ofreshycent macroeconomic development in the region Speakers inc1ude JanVanous Keith Crane Marvin Jackson Ronald Freeman Information Ms Mary Hogan Washington DC tel (202) 898-0471 fax (202) 898-0445 or Corinne Redonnet London tel (4481) 545shy6212 fax (4481) 545-6248

First Annual Meeting on~BRD Governors April 13-14 Budapest Hungary

Europe Business Outlook 1992 Conshyference April 26-29 Knoxville Tennessee

Organized by the US Commerce Deshypartmentand the University ofTennesshysee Presentations by Senior Commershycial Officers of the US and Foreign Commercial Service from 23 Eastern and Western European countries and US missions to international organizashytions together with business leaders from Pizza Hut Coca-Cola Delta Air Proctor and Gamble Martin Marietta Topics include New Business Realities in the CIS Defense Industry Convershysion-Opportunities in the Former Soshyviet Union Eastern Europe Perspecshytives and Privatization Issues and Inshyvesting in Hungaryand Czechoslovakia A Lawyers View Information Ms Elaine Keener Co the UT Conference Center tel (615) 974-0250 fax (615) 974-0264 or UTConferences PO Box 2648 Knoxville Tennessee 37901

World Bank Annual Conference on Development Economics April30-May 1 Washington DC

Topics include Theories of Growth and Development Technology Labor MarshyketsandDevelopmentand International Capital Flows Information Mrs Jean Gray Ponchamni Rm 83-032 tel (202) 473-6850

Privatization and Market Mechashynisms A Comparative Approach May 14middot15 Budapest Hungary

Organized by the Association Intershynationale de Droit Economique (Intershynational Association for Economic Law) in collaboration with the Hungarian Asshysociation for the Protection ofIndustrial Property The discussion aims at bringshying together leading academics and polishycymakers from the public and private sector in different countries Four workshyshops will discuss legal requirements in a functioning market economy techshyniques ofprivatization social rights and privatization and sectoral aspects of privatization (telecommunications fishynancial system) Information General Secretariat ofAIDE Place Montesquieu 3 1348 LovrainLaNeuve Belgium tel 32-10-47middot39-70 fax 32-10middot47shy39-45

MarchI992 12 Volume 3 Number 3

Transition The World BankCECSE

World Bank IMF Agenda

New World Bank offices in Sofia and Bucharest

The World Bank is establishing resishydent offices in Bulgaria and Romania at the request of the governments of these countries John Wilton a British national will head the Sofia office and Arntraud Hartmann a German nashytional win be in charge of the Bucharest office

IMF recommends 3 percent quota to Russia

The IMF could support with its finanshycial resources the implementation of Russias economic reform program once Russia becomes a member of the instishytution said Michel Camdessus Manshyaging Director ofth(~ Fund following a meeting of the IMF executive board on March 31 attendedfor the first time by the representatives of the Russian Government The ex~cutive board will decide on a recommEndation to allot a quota share of 3 penent for Russia It would give the country a larger quota than China and the largest quota in the Fund after the G-7 industrial nashytions and Saudi Arabia

All ex-Soviet republic have applied to join the IMF and the World Bank with Georgia the last applying for memshybership on March 12 1992 Camdessus hinted that Russia and the other reshypublics of the former Soviet Union might become IMF mpmbers as early as May Noting that the IMF helped provide $20 billion to Central and Eastshyern Europe last year Camdessus said he expected that a similar flow of assisshytance would be needed in 1992

Reconstructing Cambodia

Japan will host an international conshyference in late June on the reconstrucshytion ofCambodia Twenty or more proshyspective donor countriefgt and internashytional organizations including the World Bank and the IMF are expected to attend

Donors pledge aid forLao Peoples Democratic Republic

In a Geneva meeting major internashytional donors pledged $500 million for infrastructure development in Lao Peoples Democratic Republic The pledge was made at a meeting held under the auspices of the United Nashytions Development Fund Donors inshyclude the United States Germany the United Kingdom Japan Kuwait the Republic of Korea India the Asian Development Bank the World Bank and the IMF

Olechowski in Washington

Poland took the first steps toward putshytingits economic reform program back on track by winning the IMFs approval of its budget We have reached an agreement with the IMF that the budshyget as prepared by the government is a reasonable one Polish Finance Minisshyter Andrzej Olechowski is quoted as saying after two days of talks in Washshyington with the Fund the World Bank and US government officials Accordshying to international monetary sources the Fund believes that Polands latest budget plans (see page 11) can form the basis for a credible reform program if they are passed by parliament in April Olechowski also said that he discussed loans worth $1 billion from the World Bank and the chances of gaining access to $15 billion in IMF support if the proposed budget is approved

IDA credit to Chinas education

To support Chinas effort to improve the quality of education in the six poorshyestprovinces the IDA approved a credit of $130 million The IDA credit will finance improvements in primary and some secondary schools in rural areas It will also support restructuring of higher education to make the system more efficient (In 1986 China introshyduced a compulsory nine-year basic education system)

and World Bankloan to develop cement production

China will meet growing domestic deshymand for cement through a $265 milshylion project supported by an $872 milshylion World Bank loan China is the worlds largestproducer and consumer of cement but demand is expected to exceed supply before the end of the century The loan will partially finance the developmentofproduction and disshytribution facilities atTongling Ningbo and Nanjing The loan will also assist cement agencies to improve pollution prevention

CIS Reforming education and training

Education and training have a vital role to play in the transition process of the former Soviet republics stressed World Bank Vice President Wilfried Thalwitz at a March seminar for CIS ministers of education The countries of the region need to retrain adults unemployed by the restructuring proshycess refocus higher education and scishyence toward the needs of a market economy develop skills in modern busishyness management economics engishyneering and agriculture and adjust the pre-university education system so that the students who emerge are flexible andareprepared forthe change to a market economy where their fushytures will be determined by their own ingenuity and their own initiative

Massive aid to Ethiopia

International aid organizations led by the World Bank have put together a $6574 million program to help the new government in Ethiopia rebuild after nearly two decades of civil war and mismanagement ofthe economy The IDA a World Bank affiliate will provide the largest share of the proshygram with $150 million The other major donors are the African Developshyment Bank ($126 million) the EC ($1164 million) and the USAID ($87 million)

Volume 3 Number 3 13 March 1992

Transition lhe Wor1d BankCECSE

Books and Working Papers Briefs The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Richard Bird and Christine Wallich Financing Local Government in Hungary World Bank Washington DC Policy Research WPS 869 1992 87 p

The new Hungarian system of local government finance tries to free local authorities spending from the heavy hand of central control and make the localities more responsible by providshying additional sources of locally conshytrolled revenues Local governments still depend for some 82 percentoftheir receiptson central transfers New local taxes are inadequate and some local authorities are unable to provide even the basic social services to the poor Localities feel increased pressure to raise revenues and use proceeds from asset sales to finance current operashytions Their entrepreneurial activity could work against the privatization drive therefore the golden rule should apply on the local level too The busishyness of government is not business

Normative grants of the central govshyernment are largely discretionary disshytributed according to a formula geared to both per capita equalization and needThis policy creates uncertainty therefore some criteria should be apshyplied suggest the authors Grants could befixed-for example to some national tax source (personal income or valueshyadded tax)

In dividing its grant among local aushythorities the central government should also consider the diverse revshyenue-raising capacities of the recipishyents and change the distribution forshymula for the normative grant accordshyingly As a result grant funds will be shifted from local governments with a high-tax capacity to localities with a low-tax capacity Ifrecipients are unshyable to impose and collect taxes at the assumed rate they have to acquiesce to a proportionally reduced grant later On the other hand recipients can keep all those tax revenues that exceed the anticipated level Available from Ann Bhalla The World Bank Room N10-053 tel (202) 473-7699

Marchl992

Cheryl W Gray Rebecca J Hanson and Peter G Ianachkov Romanias Evolving Legal Frameshywork for Private Sector Developshyment World Bank Washington DC Policy Research WPS 872 1992 27 p

Romania started virtually from scratch in 1990 to build a market economy and the legal framework required for it It has adopted a new constitution and extensive new legislation covering real and intellectual property companies and foreign investment Romania has revived the pre-war civil code as a basis for contract law and is moving to modshyernize its bankruptcy code Little progress has been made however in regulatinganticompetititive monopoly behavior

At present no judicial institutions in the country-whether courts arbitrashytion panels lawyers or law schools-shyare fully prepared to take on the chalshylenges inherent in their roles in the market economy Administrative and judicial apparatus for implementing new laws and educating the public about them are lagging behind Forshyeign technical assistance if properly designed can accelerate the institushytional development Availablefrom CECSE The World Bank Room N6-035 tel (202) 473-7188

Ross Levine and David Scott Old Debts and New BeginningsshyA Policy Choice in Transitional Socialist Economies World Bank Washington DC Policy Research WPS 876 1992 27 p

The authors scrutinize the dilemma of the decision-makers in postsocialist countries how to define the asset and liability structure of state-owned enshyterprises and banks as they are privatized Heavy stocks of enterprise debts (loans issued by state-owned banks to state-owned companies durshying socialist management) are hindershying the effective operation of both the business sector and the financial secshytor They also risk institutionalizing ad

14

hocgovern ment intervention (bailouts subsidized loans etc) on behalf of heavily indebted enterprises before putting them on the block Those intershyventions in turn may reduce governshymentcredibility The paper argues that governmentshouldassumetheresponshysibility for a large part of bank claims on enterprises as it would (1) improve the operation and restructuring of stateshyowned banks (2) facilitate the privatshyization of major banks (regarded as a desirable goal by the authors who pershyceive it as a gradual process) and (3) keep fiscal costs relatively low

It is feasible to preserve all enterprise debt obligations to banks that are of unquestioned quality rated as pass at detailed loan reviews (such loans might comprise 10 to 20 percent of outstanding loan portfolios) Another way of replacing bad assets is to preshyserve only those claims that either banks or enterprises themselves agree to preserve Global experience demonshystrates that whenever banks particushylarly state-owned banks are severely insolvent the replacementofbad loans with government bonds is the primary way to resolve the banking problem

Other recent PRWorkingPapers of the World Bank

Silvia B Sagari and Loic Chiquier Copingwith the Legacies ofSubsimiddot dized Mortgage CreditinHungary WPS 847199226 p Available from Melakou Guirbo The World Bank Room J9middot235 tel (202) 473middot5015

Roy Bahl and Christine Wallich Intergovernmental Fiscal Relashytions in China WPS 863 1992 58 p Available from Ann Bhalla The World Bank Room NlO-053 tel (202) 473-7699

Gary Jefferson and Wenyi Xu Assessing Gains in Efficient Promiddot duction Among Chinas Industrial Enterprises WPS 877199221 p AvailablefromCECSE The WorldBankRoom N6-044 tel (202) 471-7188

Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

Transition The World BankCECSE

World Bank IMF Agenda

New World Bank offices in Sofia and Bucharest

The World Bank is establishing resishydent offices in Bulgaria and Romania at the request of the governments of these countries John Wilton a British national will head the Sofia office and Arntraud Hartmann a German nashytional win be in charge of the Bucharest office

IMF recommends 3 percent quota to Russia

The IMF could support with its finanshycial resources the implementation of Russias economic reform program once Russia becomes a member of the instishytution said Michel Camdessus Manshyaging Director ofth(~ Fund following a meeting of the IMF executive board on March 31 attendedfor the first time by the representatives of the Russian Government The ex~cutive board will decide on a recommEndation to allot a quota share of 3 penent for Russia It would give the country a larger quota than China and the largest quota in the Fund after the G-7 industrial nashytions and Saudi Arabia

All ex-Soviet republic have applied to join the IMF and the World Bank with Georgia the last applying for memshybership on March 12 1992 Camdessus hinted that Russia and the other reshypublics of the former Soviet Union might become IMF mpmbers as early as May Noting that the IMF helped provide $20 billion to Central and Eastshyern Europe last year Camdessus said he expected that a similar flow of assisshytance would be needed in 1992

Reconstructing Cambodia

Japan will host an international conshyference in late June on the reconstrucshytion ofCambodia Twenty or more proshyspective donor countriefgt and internashytional organizations including the World Bank and the IMF are expected to attend

Donors pledge aid forLao Peoples Democratic Republic

In a Geneva meeting major internashytional donors pledged $500 million for infrastructure development in Lao Peoples Democratic Republic The pledge was made at a meeting held under the auspices of the United Nashytions Development Fund Donors inshyclude the United States Germany the United Kingdom Japan Kuwait the Republic of Korea India the Asian Development Bank the World Bank and the IMF

Olechowski in Washington

Poland took the first steps toward putshytingits economic reform program back on track by winning the IMFs approval of its budget We have reached an agreement with the IMF that the budshyget as prepared by the government is a reasonable one Polish Finance Minisshyter Andrzej Olechowski is quoted as saying after two days of talks in Washshyington with the Fund the World Bank and US government officials Accordshying to international monetary sources the Fund believes that Polands latest budget plans (see page 11) can form the basis for a credible reform program if they are passed by parliament in April Olechowski also said that he discussed loans worth $1 billion from the World Bank and the chances of gaining access to $15 billion in IMF support if the proposed budget is approved

IDA credit to Chinas education

To support Chinas effort to improve the quality of education in the six poorshyestprovinces the IDA approved a credit of $130 million The IDA credit will finance improvements in primary and some secondary schools in rural areas It will also support restructuring of higher education to make the system more efficient (In 1986 China introshyduced a compulsory nine-year basic education system)

and World Bankloan to develop cement production

China will meet growing domestic deshymand for cement through a $265 milshylion project supported by an $872 milshylion World Bank loan China is the worlds largestproducer and consumer of cement but demand is expected to exceed supply before the end of the century The loan will partially finance the developmentofproduction and disshytribution facilities atTongling Ningbo and Nanjing The loan will also assist cement agencies to improve pollution prevention

CIS Reforming education and training

Education and training have a vital role to play in the transition process of the former Soviet republics stressed World Bank Vice President Wilfried Thalwitz at a March seminar for CIS ministers of education The countries of the region need to retrain adults unemployed by the restructuring proshycess refocus higher education and scishyence toward the needs of a market economy develop skills in modern busishyness management economics engishyneering and agriculture and adjust the pre-university education system so that the students who emerge are flexible andareprepared forthe change to a market economy where their fushytures will be determined by their own ingenuity and their own initiative

Massive aid to Ethiopia

International aid organizations led by the World Bank have put together a $6574 million program to help the new government in Ethiopia rebuild after nearly two decades of civil war and mismanagement ofthe economy The IDA a World Bank affiliate will provide the largest share of the proshygram with $150 million The other major donors are the African Developshyment Bank ($126 million) the EC ($1164 million) and the USAID ($87 million)

Volume 3 Number 3 13 March 1992

Transition lhe Wor1d BankCECSE

Books and Working Papers Briefs The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Richard Bird and Christine Wallich Financing Local Government in Hungary World Bank Washington DC Policy Research WPS 869 1992 87 p

The new Hungarian system of local government finance tries to free local authorities spending from the heavy hand of central control and make the localities more responsible by providshying additional sources of locally conshytrolled revenues Local governments still depend for some 82 percentoftheir receiptson central transfers New local taxes are inadequate and some local authorities are unable to provide even the basic social services to the poor Localities feel increased pressure to raise revenues and use proceeds from asset sales to finance current operashytions Their entrepreneurial activity could work against the privatization drive therefore the golden rule should apply on the local level too The busishyness of government is not business

Normative grants of the central govshyernment are largely discretionary disshytributed according to a formula geared to both per capita equalization and needThis policy creates uncertainty therefore some criteria should be apshyplied suggest the authors Grants could befixed-for example to some national tax source (personal income or valueshyadded tax)

In dividing its grant among local aushythorities the central government should also consider the diverse revshyenue-raising capacities of the recipishyents and change the distribution forshymula for the normative grant accordshyingly As a result grant funds will be shifted from local governments with a high-tax capacity to localities with a low-tax capacity Ifrecipients are unshyable to impose and collect taxes at the assumed rate they have to acquiesce to a proportionally reduced grant later On the other hand recipients can keep all those tax revenues that exceed the anticipated level Available from Ann Bhalla The World Bank Room N10-053 tel (202) 473-7699

Marchl992

Cheryl W Gray Rebecca J Hanson and Peter G Ianachkov Romanias Evolving Legal Frameshywork for Private Sector Developshyment World Bank Washington DC Policy Research WPS 872 1992 27 p

Romania started virtually from scratch in 1990 to build a market economy and the legal framework required for it It has adopted a new constitution and extensive new legislation covering real and intellectual property companies and foreign investment Romania has revived the pre-war civil code as a basis for contract law and is moving to modshyernize its bankruptcy code Little progress has been made however in regulatinganticompetititive monopoly behavior

At present no judicial institutions in the country-whether courts arbitrashytion panels lawyers or law schools-shyare fully prepared to take on the chalshylenges inherent in their roles in the market economy Administrative and judicial apparatus for implementing new laws and educating the public about them are lagging behind Forshyeign technical assistance if properly designed can accelerate the institushytional development Availablefrom CECSE The World Bank Room N6-035 tel (202) 473-7188

Ross Levine and David Scott Old Debts and New BeginningsshyA Policy Choice in Transitional Socialist Economies World Bank Washington DC Policy Research WPS 876 1992 27 p

The authors scrutinize the dilemma of the decision-makers in postsocialist countries how to define the asset and liability structure of state-owned enshyterprises and banks as they are privatized Heavy stocks of enterprise debts (loans issued by state-owned banks to state-owned companies durshying socialist management) are hindershying the effective operation of both the business sector and the financial secshytor They also risk institutionalizing ad

14

hocgovern ment intervention (bailouts subsidized loans etc) on behalf of heavily indebted enterprises before putting them on the block Those intershyventions in turn may reduce governshymentcredibility The paper argues that governmentshouldassumetheresponshysibility for a large part of bank claims on enterprises as it would (1) improve the operation and restructuring of stateshyowned banks (2) facilitate the privatshyization of major banks (regarded as a desirable goal by the authors who pershyceive it as a gradual process) and (3) keep fiscal costs relatively low

It is feasible to preserve all enterprise debt obligations to banks that are of unquestioned quality rated as pass at detailed loan reviews (such loans might comprise 10 to 20 percent of outstanding loan portfolios) Another way of replacing bad assets is to preshyserve only those claims that either banks or enterprises themselves agree to preserve Global experience demonshystrates that whenever banks particushylarly state-owned banks are severely insolvent the replacementofbad loans with government bonds is the primary way to resolve the banking problem

Other recent PRWorkingPapers of the World Bank

Silvia B Sagari and Loic Chiquier Copingwith the Legacies ofSubsimiddot dized Mortgage CreditinHungary WPS 847199226 p Available from Melakou Guirbo The World Bank Room J9middot235 tel (202) 473middot5015

Roy Bahl and Christine Wallich Intergovernmental Fiscal Relashytions in China WPS 863 1992 58 p Available from Ann Bhalla The World Bank Room NlO-053 tel (202) 473-7699

Gary Jefferson and Wenyi Xu Assessing Gains in Efficient Promiddot duction Among Chinas Industrial Enterprises WPS 877199221 p AvailablefromCECSE The WorldBankRoom N6-044 tel (202) 471-7188

Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

Transition lhe Wor1d BankCECSE

Books and Working Papers Briefs The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Richard Bird and Christine Wallich Financing Local Government in Hungary World Bank Washington DC Policy Research WPS 869 1992 87 p

The new Hungarian system of local government finance tries to free local authorities spending from the heavy hand of central control and make the localities more responsible by providshying additional sources of locally conshytrolled revenues Local governments still depend for some 82 percentoftheir receiptson central transfers New local taxes are inadequate and some local authorities are unable to provide even the basic social services to the poor Localities feel increased pressure to raise revenues and use proceeds from asset sales to finance current operashytions Their entrepreneurial activity could work against the privatization drive therefore the golden rule should apply on the local level too The busishyness of government is not business

Normative grants of the central govshyernment are largely discretionary disshytributed according to a formula geared to both per capita equalization and needThis policy creates uncertainty therefore some criteria should be apshyplied suggest the authors Grants could befixed-for example to some national tax source (personal income or valueshyadded tax)

In dividing its grant among local aushythorities the central government should also consider the diverse revshyenue-raising capacities of the recipishyents and change the distribution forshymula for the normative grant accordshyingly As a result grant funds will be shifted from local governments with a high-tax capacity to localities with a low-tax capacity Ifrecipients are unshyable to impose and collect taxes at the assumed rate they have to acquiesce to a proportionally reduced grant later On the other hand recipients can keep all those tax revenues that exceed the anticipated level Available from Ann Bhalla The World Bank Room N10-053 tel (202) 473-7699

Marchl992

Cheryl W Gray Rebecca J Hanson and Peter G Ianachkov Romanias Evolving Legal Frameshywork for Private Sector Developshyment World Bank Washington DC Policy Research WPS 872 1992 27 p

Romania started virtually from scratch in 1990 to build a market economy and the legal framework required for it It has adopted a new constitution and extensive new legislation covering real and intellectual property companies and foreign investment Romania has revived the pre-war civil code as a basis for contract law and is moving to modshyernize its bankruptcy code Little progress has been made however in regulatinganticompetititive monopoly behavior

At present no judicial institutions in the country-whether courts arbitrashytion panels lawyers or law schools-shyare fully prepared to take on the chalshylenges inherent in their roles in the market economy Administrative and judicial apparatus for implementing new laws and educating the public about them are lagging behind Forshyeign technical assistance if properly designed can accelerate the institushytional development Availablefrom CECSE The World Bank Room N6-035 tel (202) 473-7188

Ross Levine and David Scott Old Debts and New BeginningsshyA Policy Choice in Transitional Socialist Economies World Bank Washington DC Policy Research WPS 876 1992 27 p

The authors scrutinize the dilemma of the decision-makers in postsocialist countries how to define the asset and liability structure of state-owned enshyterprises and banks as they are privatized Heavy stocks of enterprise debts (loans issued by state-owned banks to state-owned companies durshying socialist management) are hindershying the effective operation of both the business sector and the financial secshytor They also risk institutionalizing ad

14

hocgovern ment intervention (bailouts subsidized loans etc) on behalf of heavily indebted enterprises before putting them on the block Those intershyventions in turn may reduce governshymentcredibility The paper argues that governmentshouldassumetheresponshysibility for a large part of bank claims on enterprises as it would (1) improve the operation and restructuring of stateshyowned banks (2) facilitate the privatshyization of major banks (regarded as a desirable goal by the authors who pershyceive it as a gradual process) and (3) keep fiscal costs relatively low

It is feasible to preserve all enterprise debt obligations to banks that are of unquestioned quality rated as pass at detailed loan reviews (such loans might comprise 10 to 20 percent of outstanding loan portfolios) Another way of replacing bad assets is to preshyserve only those claims that either banks or enterprises themselves agree to preserve Global experience demonshystrates that whenever banks particushylarly state-owned banks are severely insolvent the replacementofbad loans with government bonds is the primary way to resolve the banking problem

Other recent PRWorkingPapers of the World Bank

Silvia B Sagari and Loic Chiquier Copingwith the Legacies ofSubsimiddot dized Mortgage CreditinHungary WPS 847199226 p Available from Melakou Guirbo The World Bank Room J9middot235 tel (202) 473middot5015

Roy Bahl and Christine Wallich Intergovernmental Fiscal Relashytions in China WPS 863 1992 58 p Available from Ann Bhalla The World Bank Room NlO-053 tel (202) 473-7699

Gary Jefferson and Wenyi Xu Assessing Gains in Efficient Promiddot duction Among Chinas Industrial Enterprises WPS 877199221 p AvailablefromCECSE The WorldBankRoom N6-044 tel (202) 471-7188

Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

bull bull bull

Transition The World BankCECSE

New Books and Working Papers The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Some recent Discussion Papers of CEPR London (To order Centre for Economic Policy Research 6 Duke ofYork Street London SW1Y6LA 1 Tel 4471middot9302963)

Michael Burda and Charles Wyplosz Labor Mobility and German Integrashytion Some Vignettes DPS No 615 1991 33 p

Istvan Abel and 1stan P Szekely HouseholdPorifolios inHungary 1970shy1990 DPS No 619 1992 11 p

Larry Karp and Spiro Stefanou PolishAgriculture in Transition Does It Hurt to be Slapped by an Invisible Hand DPS No 622 1992 78 p

Andrew J Hughes Hallett and Yue Ma East Germany WHst Germany and their Mezzogiomo Problem An Emshypirical Investigation DPS No 623 1992 4middott p

Istvan Abel and John P Bonin Debt Service ForeIgn Direct Investshyment and Transfonnation to Market A Simple Model DPS No 625 H192 37 p

Istvan Abel and John P Bonin TheBigBangversusSlowbutSteady A Comparison of Hungarian and Polshyish Transformation DPS No 626199232 p

Gerard Roland The Political Econolny of Transition in the [Former Soviot Union DPS No 628 199236 p

Polish Policy Research Group Discussion Papers [To order Mrs Ewa Krzyztoik Polish Policy Research Group Dept of Economics Warsaw University ul Dluga 44iO PLmiddotOO241 Warmiddot saw Fax (4822) 31middot28middot46]

Tomasz Zilicz Environmental Polic) in Poland No 12 1991 19 p

Volume 3 Numb43r 3

Andrzej Lubbe Transfonning Polish Industry No 13 1991 40 p

Katarzyna Tymowska and Marian Wisniewski Social Security and Health Care in Poland No 16 1991 34 p

Kathryn Wittneben Competing for Soviet Business ReshyshapingUS ForeignEconomic Policy and American Business Attitudes Geonomics Institute and the American Committee on US-Soviet Relations Deshycember 1991 95 p

Recent Occasional Papers ofthe Geonomics Institute (To order George Bellerose Editor Geonomics Institute 14HillcrestAvenue Middlebury VT 05753 Tel (802) 388middot9619 fax (802) 388middot 9627)

Stanley J Kabala EnvironmentandDevelopmentin the NewEasternEurope-Addressingthe Environmental Legacy of Central Planning No3 1992 28 p

Istvan Dobozi Soviet Energy Policy and Consumpshytion in the 1990s The Need for New Thinking and Price Reform No4 1992 37 p

Vladimir Popov et aL (Moscow Graduate amphool of International Business Acadshyemy of National Economy) The Russian Economy in 1992 Foreshycasts and Annual Survey of 1991 No5 199246 p

Christopher Calgue and Gordon C Rausser editors TheEmergenceofMarket Economies in Eastern Europe Blackwell Publishers Cambridge Mass and Oxford UK 1992 352 p

15

Girma Kebbede The State and Development in Ethioshypia Humanity Press Highlands NJ 1992 177 p

Yue-man Yeung and Xu-wei Hu editors Chinas Coastal Cities Catalysts for Modernization University ofHawaii Press Honolulu 1992

WR Smyser Economy ofUnited Germany-Colosshysus at the Cross-Road St Martins Press New York NY 1992 273p

Janine Wedel editor TheUnplanned Society-PolandDurshying and After Communism 1992 Columbia University Press New York NY 1992271 p

Willy Kraus Private Business in China-Revival between Ideology and Pragmatism Hurst Publishers London 1991 246 p

iFamily Enterprise I I

I I I

I ~Outof ( work

From the Hungarian weekly Uj

March 1992

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3

Transition lhe World BankCECSE

Staff may contact the Joint Bank-Fund Library (202) 623middot7054 BIBLIOGRAPHY OF SELECTED ARTICLES

Postsocialist Economies

Commander Simon Innationandthe Transition to a Market Economy An Overview World Bank Economic Review (US) 6 13-12 January 1992

Sundararajan V Central Banking Reforms in Formerly Planned EconomiesFinanceandDevelopment (US) 29110-13 March 1992

CIS and the Baltic States

Batyuk Oleg Ukraine Tax Reform World Tax Report (UK) 27 February 1992

Ozhegov A E Rogovskii and I Iaremenko Conversion of the Demiddot fense Industry andTransformation of the Economy of the USSR Probshylems ofEconomics A Journal ofTransshylations (US) 3479-94 October 1991

Shaposhnikov A What are Coopera tivesandHowShouldTheyBeDealt With Problems ofEconomics A JourshynalofTranslations (U S) 3464middot 78 Sepshytember 1991

Stokes Bruce Wild CapitalismNashytionaIJournal(US) 2476-81January 111992

Studemann Frederick Baltic Renaismiddot sance International Management (UK) 4742-43 February 1992

Treisman DanieL Regulations Set Stage for Russia Privatization Intershynational (UK) N 0426-7 March 1992

Vale Michel Economic Reform in the Eyes of Public Opinion Soviet ReviewAJournal ofTranslations (US) 3224-43 November-December 1991

Gorst Isabel Backto Baku Develop ment Petroleum Economist (UK) 5814-16 December 1991

CEE

CSFR Telecom Update Eastern Eushyropean andSoviet TelecomReport(U S)

Vol 3 No 310-11 March 1 1992 To orckr ITC Publications 2940 28th St NW Washington DC 20008 kl (202) 234middot 2138J

Denton Nicholas SPA [ofHungary gets Cabinet HeavymiddotHitter Privatization International (UK) No 419 February 1992

Eder Stephan Moving to a Market Economy [New Commercial Code in Czechoslovakia Central European (UK) 940middot43 February 1992

Evans Garry Breaking Up is Hard to Do Euromoney (UK) p 22-27 January 1992

Hotopf Max East Hungers for Megamiddot bytesInternational Management (UK) 4748-49 February 1992

Kouba Karel Systemic Changes in the Czechoslovak Economy and Its Openmiddot ing to World Markets Soviet and Eastshyern European Foreign Trade (Us) 273shy16 Summer 1991

Land Thomas Nuclear Power East Europes Reactors in Trouble Nature (UK) 355 p 98 January 9 1992

Lynn Matthew Free at Last InternashytionalManagement (UK) 4729-31Janushyary 1992

Moore Phllip NewRisks for [FastmiddotWest) Trade Financiers Central European (UK) 935-39 February 1992

Slay Ben Roundtable Prospects for Reform [in Czechoslovakia FRE RL ResearchReport (USGermany) Vol 112 23-29 March 20 1992

Slovenia Financial Times Survey ImiddotVI (UK) March 301992

Smorsarski Grog Polands Banking Boom Central European (UK) 918middot25 February 1992

Tupin Ryszard Polish Banking Ready for Reform Central European Finance and Business in Central and Eastern Eushy

rope (UK)No 926middot29 February 1992

Valencia Matthew The race to fund the future [Fund Management in the CEE Central European (UK) No 821middot26 December 1991

Asia

Bohnet Armin and Zhong Hong Conmiddot tradictionsin ChinasEconomicRemiddot form Swiss Review of World Affairs (Switzerland) 4112middot14 March 1992

Chen Chien-hsun Modernization in China Selfmiddotreliance and Depenmiddot dence American Journal ofEconomshyicsandSocioltyeny(US)51[57]-70Janushyary 1992

Han Zhlguo and Jipeng Liu Emermiddot gence and Development ofa Share System An Investigation Report on Chinas Share Economy Social Sciences in China (China) 1210-31 November 1991

Kaye Lincoln Hinterland of Hope [The Turnen River Area Develop ment Program Far Eastern Ecomiddot nomic Review (Hong Kong) 16-20Janushyary 16 1992

Barry Naughton Implicationsofthe State Monopoly Over Industryand Its Relaxation Modern China (US) Vol 18 13-13 January 1992

Putterman Louis Institutional Boundaries Structural Change and Economic Reform in China Modern China (US) Vol 18 13-13 January 1992

Wong Kar-yiu Intlation Corrupmiddot tion and Income Distribution The Recent Price Reform inChinaJourshynal of Macroeconomics (US) 14105shy23 Winter 1992

Africa

Mozambique The Quest for Primiddot vate Health Services Southern Afrishycan Economist (Zimbabwe) 427-29 December 19911January 1992

RANSITON is a regular publication of the World Banks Socialist Economies Reform Unit The findings views and interpretations pu bUshed n the artl~les are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the lI~terpreta~IOns or~ndusi~ns necessarilyr~presentofikial policy of the World Bank orofits Executive Directors or the countries they represent Rlch~rd ~Ir~chle~ IS the editor and productIOn manager Desktopping is by Mary Mahy for the Policy Research Dissemination Center To be on the distnbutIOn hst send name and address to Richard Hirschler Room Nmiddot6027 The World Bank l8l8H Street NW Washington DC 20433 oreal (202)473-6982 or fax (202) 676-0439 Information on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

March1992 16 Volume 3 Number 3