53831
Socialist Economies Unit � Country Economics Department � The World Sank
Soviet Reform - a New Phase
by Abram Bergson. The autMr is Professor of their employers. For other consum and supplies of other products
Economics. Emeritu~. at Harvard University. ers, the ruble is aptly held to be not cigarettes are the latest example
real money, but a kind oflottery ticket taper off sporadically . But overall per
- redeemable for goods only with capita consumption is probably little
t is no s,ecret that in its sixth year luck and perseverance.
I
below pre-Gorbachev levels, if at all.
under peresi~roika the Soviet
economy is hardly prospering. The The breakdown of the Soviet con Inflationary finance
appropriate antidote for its ineffectu sumer goods market has become a
ality, Mikhail Gorbachev has deter familiar theme in the Western media. Nevertheless, ifsupplies are markedly
mined, is still more restructuring, and However, what is rarely understood short of demand, it is due chiefly to
the Supreme Soviet has approved, at is that there has been no sharp fall the government's budget deficit, which
his urging, a new program for economic off in supplies of consumer goods. is widely reported having mush
reform that might have seemed Provision of some food stuffs is down, roomed in 1989 to 92 billion rubles, or
unimaginably bold just a few years
ago. The difficulties in the way of the
economic invigoration thatGorbachev What's inside...
Quotation olthe month
has been seeking. however, are now From Manto Market-Interviews
formidable. Alec Nove, author of The Economics of
At the annual meetings ofthe IMF and Feasible Socialism, is drawn into p0
According to the U.S. Centrallntelli the World Bank we asked some of the lemics with Professor Janos Komai on
gence Agency's e$timates. the Soviet guests - Finance Ministers from theroleofthe state in a post-communist
GNP was still growing as of 1989, but Eastern Europe and a senior bank of society. Nove notes that publicly-owned
the tempo was on1:" 1.4 percent, or less ficial from the USSR - about the in companies can improve their perfor
than the average rate of 1.9 percent tended steps toward a market economy mance in a competitive environment.
achieved during Ul81-85, a period now and the assistance they are expecting (page 9)
referred to in the USSR as one of from the Bretton Woods institutions.
(page 3) Milestones of Transition (page 10)
stagnation (zastoO. A good harvest
has been reported!ror 1990, but indus Policy, efforts, dollars_. Overcoming the Howring Crisis
trial output is falling absolutely and
perhaps markedly. The World Bank Director of the Euro The World Bank recently initiated a
pean Country Department IV outlines conference to review a wide range of
Unsatisfactoryas this record hasbeen, a strategy of support, from economic housing reform actions.We asked the
for the Soviet leadership a related and sector analysis to specific lending author of the draft summation about
kind of economic deficiency must be activity. (page 5) the specific proposals. (page 11)
even more troubling. Never known to
function well, the Soviet consumer Nicaragua: New Economic Book and Working Paper Briefs
Strategy (page 13)
goods market has ilately ceased func
tioning almost entirely. Queues and In Nicaragua the recent political Conference Diary (page 14)
empty shelves are as pervasive as changes laid the groundwork for a fun
ever, and some particularly scarce damental transformation toward a World Bank\IMF Agenda (page 15)
products are rationed locally or dis market economy, driven mainly by ag
tributed preferentially to workers by ricultural exports. (page 6) Bibliography (page 16)
Volume 1. Number7 Octoberl990
Transition The Wor1d Bank/CECSE
struction materials factories, etc. -
are to be auctioned off to the people. Marx to Market
Gorbachev's new program has been
criticized as being vague. In response,
Interviews with Eastern European
he has affirmed that his concern was
only to provide guidelines. Such a
Finance Ministers
procedure must have seemed indi-
he 1990 Annual Meeting of the currently used. A new property law
cated by the extraordinary circum-
stances now prevailing, particularly
the as yet legitimated transfer of
power that is occurring from the cen-
T IMF and the World Bank was
unique in one way: the first
time the Bretton Woods institutions
will facilitate privatization, the bank-
ing law will create a two-tier banking
system, and tax reform will guaran-
tral government to the republics. With hosted all the countries ofthe Eastern tee equal treatment for every form of
one republic after another asserting European region (except Albania.) ownership. Along with free wage bar-
sovereignty, the very existence of the gaining, social benefits should help
USSR as a viable political entity can TRANSITION seized the opportunity the most disadvantaged citizens ad-
no longer be taken for granted. and asked the various finance minis- just to the market economy.
ters, as well as the Deputy Chairman
Survival strategy? ofthe Soviet Foreign Economic Bank, "We expect standby credit from the
what their respective country's IMF, structural adjustment loans
It surely was audacious then for road maps are for traveling through from the World Bank, and technical
Gorbachev to frame any reform pro- the historically unknown territory assistance from both. To reschedule
gram at all, nevI::r mind a detailed "from Marx to market"? Also, what debt, Bulgaria needs further loans
blueprint. In formulating guidelines, kind of help do they expect from the from Western commercial banks."
Gorbachev no doubt has wisely del- multilateral financial institutions?
egated consi,derable authority to the Czechoslo-
republics and local governments (for Bulgaria: vakia:
example, with respect to prices and Belcho Vaclav
denationalization}. A new inter-re- Belchev Klaus
public economic committee is to par-
ticipate in execution of the reform "The coun- "On the
program at the highest level. The try has to macroeco-
program itself, while taking account undertake nomic level
ofrecommendations from Gorbachev's immediate we must
own prime minister, Nikolai Ryzhkov, steps to control in-
makes substantial concessions to an contain the flation,
alternative program vigorously ad- effects ofthe maintain-
vocated by Gorbacbev's chief political crisis and ing a delicate balance between ::he
rival, the president of the Russian start the transition process: budget requirements of stabilization and
Republic, Bods Yelltsin expenditures will be trimmed by 20 economic growth, without falling into
percent, by canceling planned invest- the trap of overreaction - we do not
Whether Gol'bache:v W111 be able to ments and slashing outlays for the need a shock treatment, a Polish-
enlist the cooperation of the republics state apparatus. Prices will be liber- style "big bang. n There is no need to
will soon become apparent. The Rus- alized by the end of the year, with the set up any specific time schedule for
sian Republic in particular has yet to exception of basic goods and services. this stabilization policy [but} on the
retract its commitment to initiate its Under the forthcoming 'little other hand, radical changes are nec-
own reform program. Gorbachev's privatization' scheme, small- and essary on the microeconomic level,
program is sometimes consistent with medium-size businesses, restaurants, namely large-scale, rapid transfor-
that but not always. hotels will be sold to cooperatives, or mation of property rights. Laws to
to domestic or foreign individuals. enable state companies to becomejoint
In principle, conflicts that emerge Phased-in privatization ofmajor state stock companies should be completed
could be resolved by Gorbachev's use companies will start in early 1991. before Christmas.
of his newly-enlarg'ed presidential
powers, but his presidential decrees "A new foreign investment code will "After more than 40 years of absence
have not always been effectual lately. permit unlimited foreign share hold- we have returned to the Bretton
Gorbachev's reform program could ing. The commodity exchange should Woods Institutions. We are negotiat-
easily become a test of whether the be operative by the end of the year, ing with the IMF on an extended
central government, he in particular, the Sofia Stock Exchange by mid- standby facility and with the World
are able any longer to shape Soviet 1991. In January a single market Bank on structural adjustment loans."
economic policy in any d�~cislve way. rate for the leva will replace the three
Volume 1. Number 7 3 October 1990
"~ .. ---.-------------......-----
Transition The World Bank/CECSE
Hungary: stantially improving our balance of "Price and wage liberalization is also
Ferenc payments. However, recent external on the agenda. We are phasing out
Rabar blows, the Gulf crisis, the collapse of price control of goods and services in
CMEA trade, and trade loss due to sectors where at least three competi-
"Currently, German reunification endanger the tors are present and getting rid of
78 percent of results achieved so far. most subsidies. Convertibility of the
imports are lei will depend on international sup-
liberalized "The program of systemic changes is port, at a level equal to the $1 billion
and 80 per- also surging ahead. Next year, from stabilization fund granted to Poland.
centofprices 100 to 200 large-scale, and about 350
are deter- medium- and small-scale enterprises, ~e need technical assistance from
mined by '-=c=.c:::==-='----'=-c-_-' will be privatized. The remaining state theIMF and the World Bank. Consid-
market forces. To further reduce the enterprises will be transformed into ering the multiple effect of the Iraq
role of the state as final redistributor, joint stock companies and will be crisis, the restructured CMEA rela-
subsidies built into the prices of con- privatized in later years. Anew, more tionship, and the pains of the transi-
sumer goods, rents and other social liberal foreign investment law pro- tion process, we expect a serious dete-
services will be eliminated. In paral- vides full transfer of profits, acceler- rioration of our balance of payments.
lel, wages have to be increased to ated depreciation, and loss carry-for- We need $300-500 million standby
compensate for those subsidies. We ward measures to more than compen- from the IMF, compensatory finance
are drafting a broad wage reform pro- sate for phasing out the present three- for partial reimbursement of the
gram and will support new entrepre- year tax holiday. In mid-1991 a value- higher oil costs, and project financing
neurs and set up funds to assist small- added tax will replace the present from the World Bank and the IFC."
and medium-size ventures. turnover tax. In early 1992 a stan-
dard personal income tax will be in- Soviet
"A stringent anti-inflation program troduced. Local governments will be Union:
with monetary and fiscal restrictions able to levy property and other taxes Thomas
will be pursued unabated. The par- to exercise genuine authority. Alibegov
tial convertibility ofthe forint will be
introduced: Hungarian enterprises "Further assistance from the IMF and "The prob-
will be free to buy foreign currency the World Bank is essential, to reduce lem is pace
with forints. We have put convertibil- ... our inherited $40 billion of exter- and se-
ity in the forefront for several rea- nal debt." quencing.
sons. Hungary has an open economy, Churchill
so it is of utmost importance to boost Romania: once said:
foreign trade. Besides, currency con- Theodor 'you cannot
vertibili ty would attract more foreign Stolojan leap over a precipice in two steps.' But
investment as entrepreneurs appre- after 70 years of totalitarian rule and
ciate it more than tax privileges. "Initially central planning we cannot reach our
we had goal of a market economy in one step.
"Hungary has approached the IMF planned to What we can do is build a solid bridge
for a three-year standby, and also for implement and walk over it.
a loan from the special compensation a market
and contingency fund to offset losses system over "First we have to create full-fledged
from the oil price explosion, a severe two years. money. Enterprises should produce
drought, and the elimination ofCMEA Recently goods for sale instead of to meet sta-
trade." we realized that the transition has to tistical demands. The huge monetary
be accelerated: the old system of cen- overhang has to be eliminated. Freely-
Poland: tral planning has been destroyed and set prices and internal convertibility
Leszek the new structures are still missing. of the ruble are essential. Macroeco-
Balcero- First we will transform statH enter- nomic principles must take their
vicz prises into joint stock companies, proper place and subsidies must be
while still keeping them under state eliminated. Wages should be in-
"Two pro- control. In the second stage, starting creased to the real value of labor;
grams are in March 1991, stock companies will prices can then indicate real market
running be privatized, with 30 percent of the values. Unavoidable sacrifices by so-
side by side. shares going to the general public and ciety have to be regarded as an invest-
The stabili- the rest being sold to Romanian and ment for the future. I disagree with
zation pro- foreign investors. Inauguration of the any limitation of production due to
gram suc- Romanian Stock Exchange in late changes in property ownership.
ceeded in cutting the inflation rate, 1991, with the help of the IFC, will Therefore, I am against freehold or
stabilizing the zloty, balancing the bring share trading into full swing. lease-hold arrangements, which re-
budget, boosting exports, and sub- move factors of production from the
october 1990 4 Volume 1. Number 7
Transition The World Bonk/CECSE
normal cycle. Land-lease in agricul- foreign exchange markets should be the two institutions what should be
ture is advisable as long as utilization set up. The Soviet Union should be- preserved in our special environment,
of the land is guaranteed. come a common market of sovereign what new structures should be cre-
republics. Seventy years of economic ated in the areas of banking, audit-
"We need to privatize small-scale in- cooperation has developed, although ing, fiscal and monetary policy, for-
dustries withoqt delay, but for the in a distorted way, strong cohesion eign exchange, and foreign trade. But
time being the ~oviet Union lacks the among the regions of the Union. A membership is two-sided. I do not
appropriate means or experience to drastic change of economic and trade think it will be difficult [to be ac-
privatize large organizations. I would relations would disrupt the member cepted) after working out a broad eco-
prefer to see the state as majority republics' economies. Changes must nomic reform program, opening up
share owner of sovereign business be carried out, but the merits of this our economy, creating internation-
organizations, operating under the integration should be preserved. ally acceptable statistical services,
same principles as do such French and abiding in other respects by the
public sector compan ies as Renault or "We expect technical assistance from rules of the Bretton Woods organiza-
Societe ~nerale. For the optimum
allocation of resources, capital- and
the IMF and World Bank. We have to
decide together with the specialists of
tions."
p_ _ _ _
~. _
c-..... ....
iWJIoGI. u.. ....
-twn.tr(-- M_
_
I~~-------�-�
I Policy, Efforts, Dollars
gana and Czechoslovakia}, commi tments a structural adjustment loan and a
, Remarks of Mr Eu,genio Lari, a director of in FY91 are projected at 15 loans for about transport sector loan. We expect to
the World Bank'~ European Department, $2.5 billion. continue lending to Yugoslavia at the
delivered at a recent conference in Washing- rate of $600-700 million annually.
ton on theE'astem Ruropeanfinancialscene, "There is also a substantial expansion in
organized by Priel!' Waterhouse.
economic and sector analysis, with a Hungary:
number of studies focusing on overall
economic management, trade liberaliza- ... we are making use of relatively new
"The World Bank has developed a tion and promotion, enterprise and instruments, i.e., "hybrid loans," which
strategy of assistance {toward Central banking refonn, energy and transport, combine quick-disbursing funds to
and Eastern Europe] with the basic human resources, environment �.. The support institutional and policy re-
goal of providing strong support to the World Bank is also deeply involved in the fonns, and investment funds to support
ongoi ngrefonns. Whil e differen tiating fonnulation oflegislation and regulations restructuring at the enterprise and
by country, the World Bank's strategy affecting the financial sector and has subsector level. FY90 lending reached
is to address simultaneously a core of undertaken studies to determine the im- $366 million, under a structural ad-
interrelated issues, giving special em- pact on CEE of the changes in the CMEA justment loan and two loans for the
phasis to stabilizj ng each economy and and to suggest ways to mitigate their modernization of the financial sector
restoring the basic internal and ex- initial negative effects. and integrated agricultural export
ternal equilibria. In this stabilization promotion. In July, the World Bank
phase the IlMF takes the lead, and the "This economic and sector analysis is approved the first Eurodollar transac-
World "Bank supports the Fund's data complemented by a special program for tion under its Expanded Cofinancing
gathering, analysj.s, policy dialogue and Central and Eastern Europe which was Operations (ECO) program - a par-
recommendatiom, often participating started last year and is intended to tially guaranteed $200 million fixed-
in Fund mission~. But analysis and stimulate analytical work on socialist rate Eurobond issue for Hungary's
experience show that, m parallel, it is economies in transition and coordinate State Development Institute.
necessary to . . , initiate structural [Bank] research in this field. A Socialist
changes and systemic transfonnation, Economies Refonn Unit has been estab- Poland:
and moderate the social costs of stabi- lished to focus on operationally-{)riented
1ization' lestanex~essivefall in output, analytical tasks in priority areas. ... In FY90 Poland received five World
employment, and standards of living Bank loans for $781 million, support-
sets in, callsing social and political "Looking at individual countries, in brief, ing programs for industrial export de-
upheavalsand ultimateiyundermining the picture is as follows: velopment, agro-industries, environ-
the refonn itself... mental management, railways and
Yugoslavia: energy resources. A $300 million
"Lending activities of the World Bank structural adjustment loan was ap-
in Central and Eastern Europe (CEE) ... through policy dialogue and lending proved at the end of July ... A field
have increased dramatically in both operations, the Bank supports the intro- office has opened in Warsaw. We ex-
quantitatiVE' and qualitative tenns. duction of a new framework ofincentives, pect to continue lending to Poland at a
Against five operat onsfor $543 million the restructuring of enterprises and rate of about $800-1000 million annu-
(or 3 percent of total World Bank lend- banking systems, promotion of small and ally.
ing) in FY8H, total World Bank com- medium enterprises, rehabilitation,
mitments in FY90 were $1,839 million modernization, and expansion of basic "As far as Romania, Czechoslova-
(or 12 percent of total World Bank infrastructure (energy, transport, water kia, and Bulgaria are concerned .�.
lending) in ten ope'rations. With the supply), and remedial action and im- we expect that substantial programs of
expected ret.urn to actlVe status of provement in the environment. Lending technical and financial assistance will
Romania and the new members (Bul- in FY90 amounted to $692 million under be in place shortly ...."
L -_ _ _ _ _ _ _ _ _ _ . _ _ _ _ __
Volume 1. Number 7 5 October 1990
Transition The Wond Bonk/CECSE
Nicaragua: Challenges of the
New Strategy
. n January 25, 1990 a fourteen- volume of exports has been falling the economy as envisioned by the
O , party coalition led by Violetta
. Chamorro recorded a stunning
electoral triumph in Nicaragua, cap-
since 1983 and now is about half the
level of 1980. By mid-1990 the
country's total external debt had
Sandinistas. The Constitution of1987
reserves to the state both domestic
and foreign trade activi ty. As a result,
turing 55 percent of the popular vote. reached $10 billion, almost nine times the state became the primary com-
Mrs. Chamorro's victory laid the as much as the present GDP; of this mercial agent, the sole marketer of
groundwork for fundamental trans- amount $3.5 bil1ion was in arrears, 44 agricultural export crops, the importer
formation of the Nicaraguan economy, percent ofit unpaid interest. By mid- and distributor of agricultural inputs,
away from the statist approach of her 1990, the per capita burden of the and the owner of major retail outlets.
Sandinista predecessors and the oli- arrears alone was almost four times It also fixed domestic prices, includ-
gopoly of the earlier Somoza regime, larger than GDP per capita. ing wages, as well as the exchange
toward a market economy driven rate, where it instituted a system of
main ly by exports of agricultural At the sectoral level the picture is multiple exchange rates that penal-
products such as cotton and coffee. equally bleak. In agriculture, for ex- ized exporters.
ample, the area planted to cotton in
For this transformation to happen, 1989 was about half what it had been The state also owned a large share of
the formidable legacy of the previous at the start of the decade. The num- the country's capital stock, acquiring
government must be overcome, ber of cattle in the country was esti- it by the expropriation of the proper-
stripping away structural rigidities mated to have fallen from 3 million ties owned by General Somoza (his
introduced over the past ten years head to 1 million during the same agricultural holdings left the
and recreating competition as the period. Concerning education, Sandinistas with over half the
basis for supply of goods and services. whereas significant gains in enroll- country's cultivated area) and his
ment were recorded in the first part of cronies, and later - through decree
Sandinistan heritage the decade, these flattened out in re- - the property of other private own-
cent years. Both pre-school and pri- ers as well. By the end of 1989 the
The Sandanistas came to power in mary school attendance was low, and market share of about 300 state-
1979 with an agenda for the complete the illiteracy rate was on the rise by owned enterprises and Frente-asso-
political and economic transformation the end of the decade. ciated cooperatives had� increased to
of Nicaragua. This was achieved in about 40 percent in the manufactur-
their eleven years of power. The state's How the economy came to deteriorate ing sector and above 50 percent in
role in production, finance, and com- so completely and rapidly is a complex agriculture. The combination of wage
merce expanded dramatically. The issue. Certainly, the Sandinistas in- and price (including exchange rates)
Sandinista Front (Frente Sandinista herited a strife-tom economy and a fixing and lack of control over fiscal
de Liberaci6n NacionaD became an highly skewed distribution of re- accounts eroded production incen-
important social agent. However, as a sources. Over time, the continuing tives. This led to the downward spiral
result of various internal and exter- civil strife required significant. mili- of output, decline of capital invest-
nal factors, such as the continuing tary expenditures, and the U.S. eco- ments, and deteriorating financial
civil strife with the Contras, the U.S.- nomic sanctions led the government conditions for individual firms.
imposed economic sanctions, the sheer to rely on a highly inefficient system
mismanagement of the economy, and of bilateral economic assistance. But The financial sector was also reserved
a miscalculation of public sentiment, these factors - not denying their to the state by provisions in the
the Sandinistas were forced to give up importance - were an overlay to the Constitution. Inevitably, standard
power after being defeated in free centrally managed economy, estab- credit norms were disregarded and
elections. They left behind an economy lished by the Sandinistas, where it loan losses mounted. Negative real
in total disarray and a country deeply was difficult to enforce fiscal or interest rates encouraged producers
divided along ideological lines. monetary discipline, provide incen- to act as financial intermediaries. As
tives, or set relative prices. The result a consequence, the sum total of do-
Total output has fallen each year since was macroeconomic disequilibria: mestic credits increased and the
1984, and by the end of 1989 was 10 highly negative real interest rates, quality of the loan portfolio deterio-
percent lower than at the beginning hyper-inflation, price distortions, rated. By 1990 all four commercial
of the decade. Inflation in mid.June multiple exchange rates, and a banks in the country were insolvent,
1990 stood at 880 percent on an annual thriving black market. and the Central Bank, being respon-
basis, after having reached 1,690 sible for back-stopping the banks,
percent in 1989, and over 33,000 The critical element in this develop- recorded large losses as a result.
percent in 1988. Additionally, the ment proved to be the state's role in
october 1990 6 Volume 1, Number 7
Transition The World Bank/CECSE
When the Chamorro government took more specific about the required re- tion, the appropriate mechanism for
office in April, 1990, it faced a grossly fonns. bringing it about is not clear.
overvalued exchange rate, depleted
international reserves, a large swell The government has outlined five ba- The recently announced reform
in domestic credit, and a swollen fis- sic objectives for the next three years: measures, as outlined above, go a
cal account that was largely absorbed � eliminating the underlying long way toward correcting the cur-
by public sector wages. Its first 150 causes of inflation by reducing the rent situation and achieving a true
days were further marked by con- fiscal deficit to a level that can be transformation of the economy. Ad-
frontations with the opposition, which financed without monetary creation, ditionally the government is working
drew on its network of labor unions linking the growth of bank credit to closely with the international com-
and public sector employees to dispute the ability of the financial sector to munity through a broadly constituted
and disrupt the government's eco- attract new resources, and exercising consultative group to address the is-
nomic plans. In the period between greater control over state-owned en- sues of debt overhang, technical as-
the election and Chamorro's as- terprises. sistance, and new financing. Funda-
sumption of power, the Sandinistas � full introduction of the new cur- mentally they seek to harness the
raised wages, increased spending and rency (and anchoring it to the dollar), fiscal and monetary forces generating
increased credit to thwart the new thus addressing the decline in de- hyperinflation and instability. This
government's announced intention of mand for the old hyper-inflated cur- implies not only tighter control on the
reducing inflation to zero in three rency and completing the process be- central government but also - in an
months. gun several months earlier. initial stage - the imposition of strict
� improving efficiency and com- supervision of state-owned enter-
Basic objectives petitiveness through deregulation, prises, including the banks, and later
liberalization of the financial sector a large-scale privatization effort.
The government itself was ill-pre- and foreign trade, tax reductions, for-
pared to mount a stabilization and eign investment, and privatization. To do this, however, the government
reform program. Largely because no � alleviating the social costs of must tackle the ideological issue in
one expected them to win, the adjustment and eradicating extreme three ways. First, it needs to take
Chamorro government came to power poverty through the social emergency charge of the state machinery where
with only broad objectives and few and social investment funds. it has not yet done so, to be able to
specific measures to achieve them. � creating a climate of confidence implement its announced goals and
The paradox that emerged in the to permit a speedy reactivation of objectives. Second, given Nicaragua's
initial days of the Chamorro govern- production, investment, and employ- adverse social indicators compared to
ment has characterized the stabili- ment through the return of expropri- its neighbors, the government must
zation and reform process ever since. ated assets where justified, a clear pay careful attention to the social
On the one hand is a deep and bitter definition of property rights, and a costs of adjustment and design well
ideological division in the country, process of national consultation. targeted programs of assistance And
with neither side having a dominant third, it must continue to work at
position but each well organized to Barriers of ideology maintaining a national consensus on
rally around their respective cause. the need for reform. As the new gov-
On the other halld is the realization Three factors make the Nicaraguan ernment has said on several occa-
that attacking the fundamental eco- transformation distinctive: sions: the costs of doing nothing are
nomic disequilibria in the economy � It is being done in the context of far greater, and the benefits of idle-
will require consensus building, public an external debt overhang that poses ness much smaller, than the cost of
awareness, and compromise. an insurmountable financing gap and undertaking these far-reaching re-
puts in doubt the sustainability ofthe fonns.
Nonetheless, the government intro- reforms. Without considerable debt Richard Clifford
duced some corrective measures, and forgiveness on current debt and LA2CO
there are some irdtial signs that the concessiona} tenns on new monies to
transformation is taking hold. A new finance the government's stabiliza-
currency, the cordobas oro, linked to tion program, refonn will not be pos-
the dollar, is being phased in slowly; sible.
multiple exchan~ie rates were dis- � Large-scale demobilization ofthe
continued, public ublity rates in- Nicaraguan army and the Contra .- .-.-
creased, aEd some state-owned en-
terprises privatized. The government
forces is necessary to provide relief to
the budget and free resources for the ,
has been able to eliminate the ex- proposed social emergency programs. I' I .........
.j -,----rr'!"
change losses of the Central Bank.
Broader fistal and m1metary disci-
� Above all, a significant segment
of the population, although a minor-
:,
i
i
�
� ' ..
~" ... - -
pline, however, has proved elusive ity, has not rejected the ideology and I
and has prompted the government to political impetus of the former statist I '........ _-
I - ..
examine more closely the causes of approach. Thus, while the govern- I
the current economic chaos and be ment has a mandate for transfonna- I from the Yugoslav magazine Jezs
Volume 1. Number 7 7 October 1:f90
Transition The Wortd Bank/CECSE
Quotation of the Month: \\The Task of
the State is to Clean up the Mess"
, , A�� n attack on 'market so- "He is so concerned with providing agement but by a break-up and sell-
cialism' is now coming incentives for private enterprise that off. The many American company
from a number of East he even opposes progressive taxation. executives who award themselves
European economists, converts to free- annual incomes of$1 million and more
market ideology, who usually express "Here our paths do diverge. But I can surely do so because oftheir position
regret at their own 'naive' illusions of see why. He is understandably con- at the top of the company's
earlier times about the 'reformability' cerned with legitimizing privat.e ac- nomenklatura rather than through
of Soviet-type 'socialism.' A leading quisitiveness in a social setting in successful entrepreneurship or ex-
exponent of these ideas is Janos which it was denigrated when it was ceptional marginal productivity!
Kornai. He expresses his views sys- not actively repressed. To take a
tematically and cogently in The Road Soviet example, suppose there were "Kornai rightly states that 'the criti-
to a Free Economy [1990). Its basic apples in Krasnodar and no apples in cal deficiency of socialist state prop-
argument is that there is no 'third Kharkov. An enterprising would-be erty consists in the impersonalization
way,' no viable alternative to West- trader could make a lot of money by of ownership.' Therefore I, too, would
ern capitalism in one of its several buying them cheap in Krasnodar and welcome the emergence of real own-
forms, once one rejects Soviet-type selling them at a much higher price in ers who take personal care of their
'socialism.' The experience of Hun- Kharkov. Most of his fellow citizens, business. But does he not know that
gary shows particularly clearly the as well as the law enforcement agen- in France a company or corporation is
failure of attempts to combine public cies, would regard such activities as known as a Societe anonyme? We now
ownership and marketization. So illegitimate speculation, the apple have institutional investors who ac-
anything like 'market socialism' is, in merchant as 'greedy' and a scoundrel. quire large packages of shares with
his view, a chimera. Clearly, all this must change. The other people's money and sell them
way to prevent fortunes from being again, maybe a few weeks later .... I
" .. .1 agree at once that the Hungarian made in such ways is by encouraging connect my vision of a flourishing
halfway house - with state enter- free entry into the apple merchandis- private sector with the concept that
prises still subject to various instruc- ing business; competition should 'small is beautiful,' with owners who
tions, benefiting from subsidies, soft quickly eliminate the excess profit. do relate directly with what they own.
budget constraints, and lack of effec- This is indeed much, much better I do not conclude from this that (the
tive competition - was very unsatis- than to send the successful merchant firms of] absentee owners should be
factory. Also that what he calls to jail or to subject him to a 90 percent expropriated, or limited liability
'freedom requirements' for private tax rate. On this I agree entirely with companies abolished in the real
enterprise should certainly exist: Kornai. Western world in which we live. But
there should be no discrimination in in envisaging a transition from Soviet-
respect to supplies, taxes, access to "But an inhabitant of Thatcherite type socialism to something more
foreign markets and foreign exchange, Britain could be excused for wishing acceptable, we should not consciously
no need to apply for permits and li- to stress the undesirability of ex- aim to reproduce some of the less
censes. tremes of inequality , much orit based desirable features of Western society,
on inheritance, or on what have to be and by 'less desirable' I mean also
"I raised earlier the question whether characterized as unproductive ac- those that contribute negatively to
to qualify as socialist, a society needs tivities. To me an en trepreneur is one economic efficiency and welfare. True,
to impose some upper limit on the size who devises some new product or Kornai shows himself well aware of
of private activities. This is not a method, produces goods and services, the fact that private-sector operators
question that concerns Kornai, and thereby enriching not only himself can 'greedily want to make money ...
this is, of course, an important dif- but society. He (or she) works, indeed cheat customers ... defraud the state
ference. More important still is works very hard and responsibly. This ... forgo productive investment: and
Kornai's emphasis on overcorrecting is not quite the same as pocketing an so on. Customer choice, 'the dissolu-
for the Communist regime's ideology enormous commission for placing tion ofthe shortage economy,' compe-
of egalitarianism and its negative privatization issues on the stock tition, should act as a cure.
attitudes toward 'unearned' income, market, or buying land neE~ded for
that is, income from property owner- housing in order to resell it at a large "Yes, it should. But should it not also
ship, stock exchange or commodity profit, or the 'work' of corporate raid- act as a cure to the inefficiency of
deals, and the like, as well as income ers, whose take-over is followed not publicly-owned or cooperative enter-
from other kinds ofen trepreneurship. by installing a more efficient man- prises? Of course a nationalized mo-
october 1990 8 Volume 1. Number 7
Transition The World Bank/CECSE
I
no poly facing a ~ueue of customers in just one example: housing. He is all reply: the state also neglected the
a sellers' mari\;et will often fail to for decontrol, for market forces to environment and achieved record
perform adequately. But must pub- operate. But he must know that in levels of pollution, but it still remains
lic-sector enteti>rises necessarily op- Budapest, as in London, New York, the task of the state to clean up the
erate amid sh9rtage? Yes, Kornai Paris, and so on, the market rent mess. To clean it up in association
himself wrote in his Economics of exceeds the total earnings of a high 'Nith private business, private capi-
Shortage, in W~'Ch he demonstrated proportion of teachers, postal workers, tal, including foreign capital, is most
that the genera ion of shortage was, cleaners, hospital staff members. As certainly needed to finance necessary
so to speak, sys matico Let us accept for infrastructure, even in affluent investments.
that it is indeedl a built-in character- ,'-\.merica the individualist tax-cutting
istic of Soviet-t?jPe planning. But we ideology has led to a dangerous "... Komai is, after all, not Hayek or
are not speaking of a Soviet-type backlogofrepairs to roads and bridges. Friedman. He does recognize a role
economy. I The USSR, Poland, and Hungary need for the state beyond that of a 'night
large-scale infra structural invest- watchman.' Of course his ideas are
"Kornai himself~ould no doubt agree ment of a kind typically financed by deeply influenced both by East Eu-
that competition - customer choice the state in all countries. ropean experience and by the ur-
- makes a vi~l difference to pro- gent need to compensate (even over-
ductive efficien~, to producer moti- " 'Inflation', says Kornai, 'is not a compensate) for the distortions im-
vation to satisfy Uemand .... Is it not natural disaster, it is created by gov- posed by the state and party under
the fact of compefition, the absence of ernments or the political powers be- communist rule.
queues, of chron,c shortage, that re- hind them.' An oddly Friedmanite
ally matters? An~ in some areas of life formulation. In Britain, despite the "... Which leaves us far from social-
the sense of p~lic service matters, government's commitment to com- ism in any variant of that ill-defined
too. One thinks o(the quality contrast bating inflation and [despite] a bud- word. Perhaps we would both settle
between ArnericM commercial tele- get surplus, inflation has been fueled for a kind of welfare-capitalism-with-
vision channels land the BBC, the by unrestrained credits and loans a-human-face, not easy to distinguish
tradition (whet it has survived granted by deregulated private fi- from a socialism with a big role for
commercial pressures) of punctual nancial institutions. private capital and individual entre-
postal deliveries,1 and the like. preneurs? Much may depend in the
I
"Last, a word on structurally signifi- end on the stability of the interna-
"Is there not a c~se for much more cant investment and the related tional system that the East Europe-
research into whlich publicly-owned question of the functioning of a capi- ansarenowsokeentojoin. Whatifit
enterprises perform well and which ta) market.... In Britain, at least, the founders under a mountain of debt
badly - and where and why? stock exchange is not a significant and cumulative trade-and-payments
I source of venture capital or of re- disequilibria? As far as I am con-
"Electricite de ~rance, the Dutch sources forrealinvestment .... Hun- cerned, not devoutly to be wished. But
railways, Norwegian coastal shipping, gary, too, has inherited a number of who can say that it is impossible?"
American airportS! Swiss postal buses, structural distortions. I imagine
Swedish telephonfs, even Budapest's Kornai's reply: yes, and these distor-
own municipal \ransport system, tions were due to state control, state FromAiec Nove's recent article "Market Social.-
could be contrasteid with examples of intervention, state investments, so ism' and"Free Economy' published in Dissent,
wasteful or unsu9cessful 'public' ac- why should the remedy involve more aNew York Quaterly. Theautlwr is Professor of
tivities, which ex~st also. Must not of the same? To which one can only Economics at the University of Glasgow.
Kornai also study the many cases
where the state-lor municipally-
owned enterprise' is subjected to a
hard budget consttaint? The world is
full of complaints Ithat public-sector
expenditures of al'll kinds have been
repeatedly cut, so, it seems obvious
that governme.nt~can resist pressures
and can close do the unsuccessful,
if determined to d so.
"And what of the r Ie of the state as
provider or !inanc. r of health, edu-
cation, public parkt;, roads and other
infrastructure, Ol~-age pensions, a
better environmen � low-rent hous-
ing? Do such things lead us along 'the
road to serfdom'? rnai ... may rely i
on private-sector pr10vision. But take ! From the Czechoslovak magazine Ro"ac
Volume 1. Number 71 9 October 1990
I
I
I
Transition The World Bank/CECSE
Milestones of Transition
Algeria has abolished state trad- in October, retail prices in Yugoslavia owned assets or to bid for one ofthe
ingmonopoiies and is allowing for- almost doubled in the first nine 10,000 smaller retail shops, gas
eign firms, through local agents, to months of 1990, industrial produc- stations, restaurants, etc. that the
sell scarce goods in the country for tion fell by 10.4 percent compared to State Property Agencyplansto sell.
the first time since the 1970s. An the same period in 1989, the trade The second state-initiated
embryonic stock exchange will op- deficit reached $2.2 billion, and bank- privatization round is scheduled in
erate soon, and Prime Minister ruptcy procedures began against 771 December, state holding compa-
Mouloud Hamrouche has pledged companies employing more than nies are for sale. The first round in
to shift the country to a market 450,000 people. September opened with a tender to
economy by 1991. He also an- handle the privatization of20 prof-
nounced the decision to convert *** itable companies slated for sale
state enterprises into autonomous The European Bank for Recon- and attracted an average of 10 bids
profit centers, setting their own struction and Development for each enterprise. State-initiated
budgets, prices, and production (EBRD) anticipates starting opera- privatization will take place three
targets. State-owned companies tions by April 1991. Two-thirds of its or four times a year, each round
with heavy losses will be closed 42 member nations from East and offering 40-50 companies for sale.
down by ye~r-end. The government West, the European Community, and According to the government plan,
is considering elimination of price the European Investment Bank, have by the end of three years the size of
subsidies on basic goods in favor of ratified the articles of agreement. the state-owned sector will have
targeted assistance to the needy. Besides lending to both public- (40 shrunk from 90 percent to under
percent) and private-sector (60 per- 50 percent.
*** cent) projects, the London-based
China's Prime Minister Li Peng EBRD will hold equity in companies, ***
confirmed in a recent speech that advise on privatization, and train Romania has devalued the lei by
the country would continue its cau- specialists in banking and account- nearly 50 percent. Subsidies on
tious slow-growth policy for the ing. The EBRD proposes to take the most consumer goods have been
foreseeable future, slightly in- lead in Poland in financing transfor- removed although prices for bread,
creasing investment targets, mation of the telecommunications meat and electricity will remain
gradually boosting imports, and network and will help organize the fixed to protect low-income work-
accumulating foreign exchange re- privatization ofcompanies and banks ers. The country faces inflation,
serves to meet debt repayment ob- and the reform of the social security food and energy shortages, high
! ligations. Beijing's annual growth system. unemployment, industrial stagna-
target for 1991-95 had been 5.5- tion, and a deteriorating trade bal-
6%. Although the tight credit re- *** ance. The trade deficit for the last
strictions were loosened in the A complete overhaul of the Council quarter of the year might amount
spring, aggregate demand re- for Mutual Economic Assistance to $1.2 -$1.5 billion.
mained weak and output stagnated (CMEA), the economic and trade or-
through mid-year. According to ganization of the former communist ***
economic forecasts, real invest- countries, is underway. The council's Czechoslovakia has devalued the
ments will surge during the last Reform Commission submitted rec- commercial rate of the crown by
quarter and industrial growth ommendations for radical changes in 35-38 percent against leading cur-
could reach 5-6% for the second the trading and payment system, re- rencies. The new rate to the dollar
half of 1990. moving all vestiges of multilateral is 24 crowns. Tourist rates were
economic cooperation. The successor devalued also, but by a smaller
*** organization, under a new name, will amount.
The Serbian Republic, abolish- serve as a regional economic secre-
ing de facto Yugoslavia's internal tariat, preparing briefs, disseminat- ***
common market, is imposing du- ing statistical information, and car- The new Soviet banking law
ties on goods from Slovenia and rying out technical and macroeco- transfers full authority to the
Croatia - Slovenia is retaliating nomic research. Trade and payment Central Bank for controling mon-
with corresponding meaures. Offi- matters will be negotiated bilater- etary and credit policies. The cen-
cials have said that Yugoslav re- ally. tral banks of the Soviet republics
publics seeking to secede would be are no longer subsidiaries and have
liable for their share ofthe national *** become legally independent. The
debt of$16.5 billion and would face The Hungarian government has set law also creates a commercial
problems getting new loans. Ac- up a $64.5 million Livelihood Fund to banking sector.
cording to official figures released allow Hungarians to purchase state-
october 1990 10 Volume 1. Number 7
TranSition The Wond Bank/GEGSE
Overcoming the Housing Crisis:
Propcbsals for Action
I
' I
ousing re~orm is becoming a control ofthe population. In most cases about one-third of the maintenance
H
; high priofity issue in most
state-con rolled economies.
With the failure . f earlier low wage-
citizens were unable to decide on the
size, comfort and location of their
housing. Private housing was at best
costs, the housing stock is in poor
condition and new housing construc-
tion has to be subsidized.
low rent policies, t~e problems include tolerated and usually confined to the � The system creates large price
huge housingsub~idies, overburdened social and geographical fringes ofthe distortions. The ratio of the market
budgets, chronic rousing shortages, society (at least in the early stages of price of average housing units to me-
aging and worn ~ut housing stocks, central planning). On the other hand, dian annual family income is between
frozen household, savings, and con- the state guaranteed subsidized low 10 and 12 in these countries- and 22
strained labor mbbility. Social ten- rents and utilities and took responsi- in the case of Poland - in contrast to
sions have been ~ggravated by the bility for the development and main- a ratio of 3 in countries with healthy
housing assignment system and by tenance of existing housing stock. housing situations.
regressive subsid~es. � After decades of bureaucratic
I This situation has meant that: management, housing has become an
The Infrastructur! and Urban Devel- extremely complex financial and fis-
opment Department (INU) of the � Property rights for tenants in cal chain of distortions, large trans-
a
World Bank held seminar in Wash- public housing are often stronger and fers, and inefficiencies. The grey
ington (June 12-114) on housing re- more valuable than ownership be- economy covers a growing proportion
forms in sociali~t countries. The cause the occupancy rights to heavily of extra-legal housing transactions.
meeting was atte*-ded by delegates subsidized units are permanent and
from China, CzeToslovakia, Hun- can be transferred to relatives. Q. Has any consensus emerged from
gary, Poland, Ron:enia and Yugosla- � Access to heavily subsidized the conference on rehabilitating
via, by international experts and se- rental housing in most cases does not housing in these former socialist
nior World Bank staff. Attendees re- depend on household income. countries?
viewed a wide raftge of actions to � Rents are uniformly fixed at the
reform the manag~ment of existing national level. The most extreme ex- A. The participants agreed to work
housing stock and Idiversify the pro- ample is in the Soviet Union where on market-oriented reforms of the
duction of new hou~ing. As a result, a regulations on prevailing rent were housing system, removing ideological,
draft conclusion WB.S worked out and passed in 1928. political, and market monopolies. This
discussed with the ill tensted parties. � There are serious impediments means implementing market wages
to subletting, transferring, or ex- and letting the majority of the popu-
We asked the aJlthor, Bertrand changing property. Private rental lation choose freely between renting
Renaud, Housing iiFinance Adviser housing is forbidden, in principle. and ownership, and pay in full for the
(lNU) , to explain Ihe substance of housingofits choice. Public resources
this document. i The undesirable results of such a should be concentrated on the socially
housing system are that: disadvantaged groups who need direct
Q. What was the piarticipants' gen- support. Experts have begun work-
eral diagnosis of thie ailing housing � The housing stock is poorly uti- ing out detailed reform programs.
sectors in the socialj st coun tries? lized; many people are inadequately
housed, and still some residents live The draft framework incorporating
I
A. Severe shortag~;s and ever-ex- in luxury. the outcome ofthe seminar and views
panding public sectlr subsidies are � Subsidies are highly regressive; of the participants is analytical in
today's most visible! problems. The the bigger the unit, the more the nature. The individual countries
full legacy of centrall planning, when tenant benefits. must, of course, con sider th eir specific
it comes to resource ~nobilization and � Housing mobility rates are ex- sectoral and ~acroeconomic condi-
decision making, will not disappear tremely low, thus impeding labor tions,
overnight. In an effo~t to control sav- mobility.
ings, the authoritie!; provided uni- � Subsidization, with chronic ex- Q. What is the right sequence ofhous-
form low wages to c~'ver eurrent ex- cess demand, has created permanent ing reform?
penses while health,leducation, and housing shortages. (In Poland 80 per-
housing expenditurel;. were expected cent of married couples live with their A. The best route is to reform the
to be covered throug~ the redlstribu- in-laws for an average of ten years management of existing housing
bon system. As .a resuiit, cr'.lcial hous- before finding an apartment.) stock, starting with the ownership
ing decisions were reYlOved from the � Since rents in most cases cover and rent regulations. Housing stocks
I
Volume 1, Numt,er 7 I 11 October 1990
I
Transition The World Bank/CECSE
make up about 25-35 percent oftotal Strategic Actions for Better Management of
tangible wealth (including industrial
facilities, non-residential real estate, Existing Housing Stock
etc.) in most of these countries.
Reform of the financial mechanism is Strategic Areas Proposed Actions
extremely important as well. Housing
subsidies should be placed under the
direct control of the household; rent Reform of property rights � Convert permanent and guaranteed
reforms, the mobilization of savings tenancy rights to fixed-term renew-
for housing, and the introduction of able contracts
long-term loans have to be consid- � Develop commercial contracts bal-
ancing the interests of owners and
ered. At the same time, changes renters
should be initiated in the construction � Lift restrictions on private property
of new housing.
Q. What specific steps do you have in Rent reform � Charge full rent to cover long-term
mind? replacement cost
� Shift utility charges to full-cost
A. In their fiscal policy these countries pricing, peak-load pricing and uni-
should phase out both budget and off- versal individual metering
budget subsidies, whether in the form � Combine rent increases with im-
provement of maintained units
ofloan subsidies granted to builders,
underpriced subsidies on construction
materials, or free real estate. Tem- Subsidy targeting � Use housing allowances as a transi-
porary subsidies should be up-front, tion subsidy
transparent, and integrated into the � Provide the new social subsidy di-
budget. In their financial policy they rectly to the family and detach it from
should eliminate subsidies on the the use of a specific housing unit
supply side also. � Target subsidies based on a mixof
socioeconomic characteristics and the
Mortgage loans must be adjustable to choice of unit
inflation rate and financially sound.
Credits are to be separated from Exchange of units � Develop listing and information
subsidies, and the latter must be systems
minimized over the life of the loans. � Write laws for efficient brokerage
The privileges of large construction services
firms in terms of their access to land,
materials, and financing must end.
Some other advice: encourage com- Privatization � Base the valuation of unit and se-
petition among builders, support lection of sale price on the macroeco-
newly-established private developers nomic situation and local market
and construction companies, shift conditions
� Give priority to present tenants but
land-use controls to local govern- allow sales to any interested buyer
ments, and upgrade land-use regula-
tions.
New owners of rental property � Develop new decentralized non-
Q. How could the World Bank facili- profit local institutions to manage
tate these efforts? housing stock with financial au-
tonomy (compare various European
A. The World Bank provides member models)
countries with technical assistance to � Deregulate and convert state coop-
eratives into private cooperatives
formulate an appropriate housing
policy, and organizes and coordinates Financing � To overcome the high price/income
access to international practice. The ratio, work out some combination of
Bank also offers financial support, seller financing and mortgage loans
disburses loans to pilot operations. � Consider shared appreciation
and provides seed capital to acceler- mechanisms to avoid large windfalls
ate reforms in the sector.
october 1990 J2 Volume 1, Number 7
Transition The World Bank/CECSE
Book and Working Paper Briefs Financial policyin Hungary is becoming a
crucial indirect lever for managing ma-
croeconomic policies as well as ach:ieving
Arye L.Hillman and Adi Schnytzer The authors analyze nine case studies of a better and more efficient allocation of
CREATING THE REFORM-RESIS- manufacturing firms in a wide range of resources. The authors indicate that the
TANT DEPENDENT ECONOMY: industrial sectors. Many of the firms are first steps of the economic reform are
THE CMEA INTERNATIONAL searching out new export markets in re- clearly in the right direction, but changes
TRADING RELATIONSHIP World sponse to falling domestic demand and in macro-financial indicators are still of
Bank, PRE WP Series, No. 505, Washing- uncertain CMEA trade. little significance, indicating the presence
ton, 1990, 28 p. still of administrative and technical ob-
*** stacles. The paper underscores four
The authors focus on each CMEA KangChen supporting measures: (i) monetary au-
participant's comparative advantage and The Failure of Recentralization in thorities' ability to conduct monetary
on the incentives to resist trade liberal- China: InterplaYB among EnterpriBeB, policy must be enhanced. This requires
ization and market-oriented reform be- Local GovernmentB, and the Center upgrading their monitoring and forecast-
cause of rents accruing to industry.spe- (from the forthcoming MARKETS AND ing capabilities and development of an
cific factors of prodllctioil. POLITICIANS, Kluwer Academic Pub- interbank money market; (ii) improving
lishers, Boston) the operations and the financial condi-
Eastern European economies benefited tions of the intermediaries: commercial
in the 1980s from Dreferential terms of The paper shows the intricate interplay banks, specialized financial institutions,
trade that provided an ~mpiicit subsidy between China's government hierarchy insurance companies, etc.; (iii) encourag-
from the SOVlet Union. The Soviet Union and enterprises, addressing three impor- ing healthy competition among financial
provided the hard goods: oil, natural gas, tant issues: (i) How much power did local intermediaries; (Iv) establishing a satis-
and raw materials (potentially for sale for officials actually gain in the decentrali- factory regulatory framework that does
hard currency) and took soft goods in zation process in the 1980s? (iil Why have not discriminate against development of
exchange: machinery, equipment, etc. that local governments come to be regarded as the securities markets.
were of poor quali ty and not marketable both anti-reform and pro-reform? (iii) Are
in the West at prices that would recover the central officials capable of enforcing
costs. This trading pattern meant that their demands and taking power away
enterprises could produce goods acceptable from the local governments and what are New Books and
only for CMEA transactions (.i.e., capital the constraints on recentralization? Working Papers
was transaction-specific). The abolition of
the CMEA trading system and the tran- In the process of economic change, local
sition to world market prices will impose officials captured decisionmaking power Branco Milanovic
substantial t,~rms of trade loss on the that was intended to establish enterprise POVERTY IN POLAND. HUNGARY, AND
economies of the member states. Conse- autonomy. The outcome has been an YUGOSLAVIA IN THE YEARS OF CRISIS.
1978-87 World Bank, PRE WPS No. 507,
quently, the integration of the CMEA "aristocratic economy~ ruled by "dukes"
Washington, September 1990, 30 p.
with Western mark~!ts w.ll decrease the and "princes' who exercise local protec-
value of the capitailltock of Eastern Eu- tionism, pursue regional expansion, and Michael C. Burda
ropean enterprises. take no responsibility for macroeconomic THE CONSEQUENCES OF GERMAN
instability. China's reforms in the 1980s ECONOMIC AND MONETARY UNION
*** were characterized by both rural CEPR Discussion Paper No. 449, London, Au-
Erika Jorgenslm, Alan Gelb, and Inderjit decollectivization and administrative de- gust 1990, 34 p.
Singh centralization. These two changes rein-
LIFE FOR POLISH FIRMS Ul''DER forced one anotherin a way that inhibited Gregorcz W. Kolodko
THE BIG BANG: PRELIMINARY both subsequent recentralization and CRISIS, ADJUSTMENT AND GROWm
IN SOCIALIST ECONOMY - POUTICAL
FINDINGS IcROM A FIELD TRIP further reform. Local governments were CHALLENGES AND THE DILEMMAS OF
Paper presented at ~he I.::onference on a liberalizing influence in sustaining past ECONOMIC SCIENCES Institute of Fi-
AdjustmentandGrowth, Pol tusk, Poland, policies and resisting recentralization, but nance Working Papers No.7, Warsaw, 1990.
October 1990, 17 p. the very authority and means that per- 31 p.
mitted this also gave rise to local protec-
The paper explores firms' r(sponsf's to the tionism, contrary to domestic rational- Zdenek Drabek
Polish stabilization, ~ade reform, and i zation of resources and commodi ty flows. A CASE STUDY OF A GRADUAL AP-
market liberalization r:ackage. The PROACH TO ECONOMIC REFORM: THE
microeconomic perspeetive gained by the *** VIET NAM EXPERIENCE OF 1985-88
examination can provide iMportant com- Mario I. Blejer and Silvia B. Sagari World Bank, Discussion Paper, Asia Regional
Series, Washington, September 1990, 38 p.
mentary on the macrooconomic questions: HUNGARY: FINANCIAL SECTOR
when will a positive supply response from REFORM IN A SOCIALIST Peter Bolinger
producers kick ::n and when will the eco- ECONOMY World Bank, PRE WP Se- A MULTILATERAL PAYMENT UNION
nomic revival gather steam'! ries, No.543 (forthcoming), Washington FOR EASTERN EUROPE? CEPR Discus-
D.C., 1990, 26 p. sion Paper No. 458. London, August 1990, 24 p.
Volume 1. Number 7 13 October 1990
Transition The Wond Bank/CECSE
On the World 8ank\IMF Agenda
Aid to Eastern Europe less than half the previous year's to- phone capacity 50 percent over three
tal of$L35 billion). years and by the end of the decade
Willi Wapenhans, vice president of will reduce the current 12-year wait
the World Bank (EMN) recently said Tour de l'Europe de rEst for a telephone to one year.
in Prague that the Bank and the IMF
will not let Eastern Europe's refonn To decide whether Romania is eli- IDA Credit to Ghana
process be derailed by the economic gible for IMF credits could take some
effects of higher oil prices and the time, said the Fund's managing di- With a credit of SDR 12.5 million
disintegration of the Comecon. He rector Michel Camdessus. He was ($16.5 million), the International
estimated that Eastern Europe will speaking in Bucharest during his first Development Association (IDA) is
suffer $7-8 billion a year in trade visit to the country in October. Ear- supporting Ghana's project to diver-
losses from Comecon, and the same lier, the IMF and the Romanian gov- sify agricultural exports. The world's
amount if the oil price averages $25 a ernment worked out a technical as- third largest producer of cocoa will
barrel annually. Earlier, U.S. Presi- sistance program to bring an IMF expand production of coffee, oil palm,
dent Bush pledged help for Eastern team to Romania to help the country rubber, and pineapple by encourag-
Europe in the face of rising energy establish new monetary and budget ingprivate sector investments in small
costs and urged the IMF to provide an policies. In Bulgaria Camdessus fo- farms and low-cost processingplants.
additional $5 billion. According to U.S. cused on the government's decision to The project will also improve small
officials, the IMF could raise its lend- suspend servicing its $10 billion for- farmers' access to bank credit and
ing limits to permit additional loans eign debt, noting that "international fertilizers and will upgrade rural roads
to Hungary, Poland, Yugoslavia, economic help is offered only if the and develop crop markets.
Czechoslovakia, Bulgaria, and Ro- IMF can convince the world that
mania. The EC Commission also is Bulgaria's program to change into a Poland Initiative
stepping up pressure to create a spe- market economy is feasible."
cial rescue fund to support balance of Camdessus also met representatives The World Bank will help Poland
payments adjustments and currency ofthe Czechoslovak government and speed up direct private investment
convertibility. In a memorandum to agreed to send an IMF team to study and has proposed setting up an in-
the Group of 24 industrial nations, the economy, in light of the current ternational fund with the European
the commission estimated that East- negotiations for a standby facility. Investment Bank, the EBRD, and the
ern Europe would need about $10 European Community, revealed
billion in 1991 to cope with the Gulf The IFC in Czechoslovakia Moeen Qureshi, senior vice president
oil crisis and keep economic reform on of the Bank. He declined to mention a
track. The G-24 pledged $15 billion to Czechoslovakia, havingjoined the In- target amount for the fund but said
Hungary and Poland and a further ternational Finance Corporation, the that seed capital to restructure the
$3.5 billion to Bulgaria, Yugoslavia, private sector development ann of energy sector alone would require
and Czechoslovakia. In addition, the World Bank, is negotiating terms about $500 million to $1 billion. The
Bettino Craxi, special representative for establishing a mutual fund to in- Bank could also underwrite arrange-
of the UN on debt issues, has recom- vestin privatized companies. Finance ments to protect the rights of foreign
mended a debt moratorium for coun- Minister Vaclav Klaus said the fund investors, to transfer profit, or buy
tries most affected by the Gulf crisis. would help with the mechanics of and sell assets in Poland, he said.
privatization and would encourage
Humanitarian Loan to China the development of an institutional Albania Ante Portas?
investor base.
The World Bank and its affiliate the The Albanian government is cur-
IDA cleared loans and credits totalin g World Bank to Help Telephone rently negotiating conditions for
$275 million to China on October 30. Program in Hungary membership in the World Bank and
The $75 million World Bank loan and the IMF, according to Dhimiter
a $200 million IDA credit are to be Hungary will modernize and expand Gazgha. an official of the Albanian
used to reduce poverty, create jobs, telecommunications, especially for State Bank. Albania has short-tenn
finance agriculture and rural enter- businesses and other high-volume debt of $30 million and long-tenn
prises, develop local banking and subscribers, by connecting about debt of $52 million. Gazgha added
improve education, health, and hous- 300,000 additional customers to a new that the Albanian economy could
ing. However, $750 million of previ- digital network. The project, which likely support $2-4 billion of debt. The
ously approved World Bank loans will cost$L35 billion, is supported by governmen t is moving toward partial
have been on hold since the June a $150 million World Bank loan. In convertibility of the lek as soon as
1989 events in Beijing. (During the addition, the European Investment January 1991.
FY90, the World Bank approved five Bank win lend $100 million. Officials
loans to China totaling $590 million, said the new network will boost tele-
October 1990 14 Volume 1. Number 7
Transition The Wor1d Bank/CECSE
--~-~----T------------- ~----~--~~-~--"
Conferertce Diary
,
TechnoioJ and Environment best suited for new subregional interac- ment for Eastern Europe: Results so
sePtember~ Leningrad
227, tion: transportation, communication, en- Far; Financing for Eastern Europe -
vironmental protection, tourism, and en- How MuchisNeededand Where; Asia's
International Pugwash Conference ergy. Planned Economies; Reform and Re-
on "Technolo and Environment" dis� construction in the Soviet Union and
cussed the So, .et and Eastern Euro- Nuts and Bolts Eastern Europe; and the Soviet Union:
pean environnJlental problems. Lack of October 18, New York City Chaos followed by Chaos, or Stability?
information on each other's activities
severely restricts their respective en- One-day seminar organized by the Na-
vironmental iresearch and policy tional Foreign Trade Council of New York, Forthcoming
analyses. Paflticipants will publish on the human aspects of setting up a
studies on th~ reglOn's comparative business in Eastern Europe: obtaining Conferences
envi.ronment~~ pOlicies. Interested advice and assistance, finding employees
partIes WIll meetm Prague, Czechoslo- and motivating them, and calculating sal�
vakia, in Marcr 1991. (For further in� ary scales. Implementing Privatization
formation, con~act; Jorge Wong. Valle, November 7�8, Ljubjana, Yugoslavia
(202) 47;1�7592,'. Technology, Culture and
Development "Latest Implementation Problems of
Adjustment Lending October 26-27, Columbus, Ohio Privatization in Eastern Europe," a
October 4�5, P ltusk. Poland conference organized by the Interna-
\ International conference on "Technology, tional Center for Public Enterprises in
Conference on iThe World Bank's Ex- Culture and Development: The Experi- Ljubjana, the Economic Development
perience with~ Adjustment Lending: ence of the Soviet Model," organized by Institute of the World Bank, and the
Lessonsf,)r Eastern Europe," organized theOhloState University Center for Slavic UN Development Programme. The
by the World Bjmk (CECMG) and the and East European Studies and the Uni� conference will incl ude presentations
World Econom);~ Research Institute of versi ty Learning Guild, Office ofContinu- on selected country experiences from
the Warsaw Sc1\1001 of Economics. ing Education. The conference explored Poland, Czechoslovakia, Hungary,and
the present condition and future pros� Yugoslavia, followed by analyses of
Reform-orientbd governments in pects of technological development in the advisory, training, and technical assis�
Eastern Europe\should be prepared to Soviet Union and Eastern Europe and the tance. Participants will include heads
sustain restrucfuring programs that impact ofsocial andcultural influences on of national privatization agencies,
will require two ~ three years toachleve technology. (Information: James P. policymaking advisers from the above
their goals. The ~lternative is perpetual Scanlan, Director, Center for Slavic and four countries as well as from Bul-
stagnation and l<yng.term deterioration East European Studies, 344 Dulles Hall, garia, Romania, and the Soviet Union,
ofli ving standarns. The conference also 230 W. 17th Ave., Ohio State U., Colum. and observers from consulting firms,
dealt with the c~mparative evaluation bus, OH 43210.1311;Tel:(614)292.8770.) brokerage firms, merchant banks, and
of stabilizatior.' programs, the se- other international organizations.
quencing of polih changes, the adap- Economic Revolutions
tation to the n~w economic environ- October 29-31, at Baylor University,
ments and iconstraints, and Transition to a Market
Waco, Texas Economy
privatization strl:!tegies. (A brief sum�
mary of the lectu~'e "Life Under the Big November 28-30, Paris, France
International business confp-rence on
Bang" appears oJ" page 13.) "Economic Revolutions in the Soviet Union "The Transition to a Market Economy
\ and East Central Europe," focused on the in Central and Eastern Europe," an
Adriatic.Dan~be Cooperation expected pace and sequence of institu-
October 14�16, Vienna. Austria OECD-World Bank�sponsored confer-
tional changes from the Eastern Euro- ence. Plenary sessions will cover de-
\ pean perspective (the intended role of sign and implementation of a strategy
Conferencl~ on "Cooperation in the Western trade, aid and investments) and
Adriatic-Danube Regi.}n." Sponsored for economic transformation; lessons
from the American perspective (how from the West's experience developing
by the Aspen In ,titute and the gov- Eastern Europe fits into U.S. corporate
ernmentofltaly, t'lecoderencefocused a market strategy; and sequencing
and governmental strategies). Partici- reforms and policy measures in the
on possibiliti.es fo regional cooperation pants included Soviet, Eastern European,
within the new ::urope (such as the transition to a market system to
and U.S. experts. maintain durable economic growth.
Pentagonal, a 100: group of five Cen-
tral European na ,:ions: Austria, Italy, Workshops will cover tax reform, labor
Global Outlook markets, social policy, balance of pay-
Hungary, Yugosl~,via, and Czechoslo- Octpber 29�NolJember 1, Philadelphia, Pa.
vakia). Ses:;ions ~'overed problems of ment constraints and convertibility,
modernizat:ion, in1:erna':ional competi- and restructuring the~enterprise sector.
Organized by the economic consulting Participants will include senior officials
tiveness, and the\role of the West in group WEFA. This year's International
promoting ehang�;. Participants also and experts from the participating in�
Economic Outlook Conference dealt with ternational institutions and countries
reviewed possible 1:argets of future for- the "Shocks to a Vulnerable Global
eign investments t,hat are considered involved in the reform process.
Economy". Topics included: Shock Treat.
Volume 1, Number 15 Ort,-.,hor 1 (')/V!
Transition The World Bank/CECSE
~------~.--- ~-------- ��---~--~----1
I
BIBLIOGRAPHY OF SELECTED ARTICLES� I
Sociaiist Economies "virage". Le Courrier des Pays de L'est Smith, Sheila and Sender, J.B. Pov-
(France) No. 351:70� 75, July-August1990 erty, gender and wage labour in
Fairlamb, David. So far so good. In- (English summary, p. 2). rural Tanzania. Economic and Po-
stitutional Investor (U.S.) 24:72-76, litical Weekly (India) 35: 1334-42,June
September 1990. Tardos. Marton. Property ownership. 16-23, 1990.
Eastern European Economics (U .S.) 28:4-
Fine, Ben. Scalingthecommanding 29, Spring 1990. Asia
heights of public enterprise eco-
nomics. Cambridge Journal of Eco- Uzan, Marc and Mokam, Bernard. La Awanohora, Susumu. Playing for
nomics (U.K.) 14:127-42, June 1990. reponse americaine aux delis time: IMF delays Vietnam's eco�
economiques de l'Europe de PEst. nomic review. Far Eastern Eco-
Grinberg, R. Inflation in socialist Eurepargne (France) No. 46:22-24, Sep- nomic Review (Hongkong) 149:94-96,
countries: regularities and pecu- tember 1990. September 20, 1990.
liarities.ProblemsofEconomics(U.S.)
33:42-58, May 1990. USSR Cheng, Elizabeth. Barriers to rela-
tions. China Trade Report (Hongkong)
Ickes, Barry W. Do socialist coun� Bond, Andrew R. and Sagers, Matthew J. 28:1, June 1990.
tries suffer a common business Adoption of law on economic au-
cycle? Review of Economics and Sta- tonomy for the Baltic republics and Koo, Anthony Y.C. The contract re-
tistics (U.S.) 72:397�405, August 1990. the example of Estonia: a comment. sponsibility system: transition
Soviet Geography (U.S.) 31:1-10, Janu- from a planned to a market
Moroney, John R. Energy consump- ary 1990. economy. Economic Development and
tion, capital and real output: a Cultural Change (U.S.), VoL38, No.4,
comparison of market and planned De Bardeleben, Joan. Economic reform July 1990.
economics. Journal of Comparative and environmental protection in the
Economics (U.S.), Vol. 14, No.2, June USSR. Soviet Geography (U.S.) 31:237- Orr, Ann. Evolution of external
1990. 56, April 1990. trade and payments of China,
Mongolia and Vietnam. Journal of
Eastern Europe Gel'vanovskii, M. Reform of price for- Development Planning, United Na-
mation in the USSR: Problems and tions, No. 20:81-105,1990.
Economic trends 1990191: East and contradictions. Problems of Economics
West Germany following mono (U.S.) 32:70-87, April 1990. Sattaur, Omar. Thoroughly modern
etary. economic and social union. Mongolia. New Scientist (U.K.)
Economic Bulletin. Deutsches Kir'yanchuk, V.Y. and Podkolzin, V.V. 127:45-50, September 1, 1990.
Institut ftir Wirtschaftsforschung Perestroyka and the economic region
(Germany) 27:1-16, September 1990. in state management and planning. Wu,Jiahuang andSu,Ziqing. China's
Soviet Geography (U.S.) 31:366-74, May economic reform and its implica-
Hegedus, Jozef and Tosics, Ivan. 1990. tions for the international trading
Hungarian housing finance, 1983� system. Journal of Development
1990: a failure of housing reform. Rakovetskaya, L.r. Spatial aspects of Planning, Uni ted N ations. No. 20:201-
Housing Finance International (U.K.) grain production in the USSR. Soviet 16,1990.
5:34-41, August 1990. Geography (U.S.) 31:108-15, February
1990. Latin America
Herbst, Irena. Financing the build�
ing industry in Poland. Housing Volkonskii, V. "Cultured huckster" Guy, James J. Cuba: a regional
Finance International (U.K.) 5:42-45, among us: on the restructuring of power without a region? World
August 1990. economic priorities. Problems of Eco- Today (UK) 46:165-69.
nomics (U.S.) 33:42-53, August 1990.
Kristan, Ivan. Federalism and Herrera Campins, Luis. Latin
democratic centralism. Review of Africa American vision of perestroika.
International Affairs (Yugoslavia) Review of International Affairs (Yu.
41:4-8, July 5-20, 1990. Frommlet, Wolfram. We cannot wait for goslavia) 41:10�13, June 20, 1990.
presents: how health care in Ghana
Lhomel. Edith. L'economie is being improved. Development and � More information from the Joint Bank�
Albanafse en 1989-1990: Ie grand Cooperation (Germany) No.4:12.14,1990. Fund Library, Tel:623-7054
TRANSITION (formerly Socialist Economies in Transition) is a regular publication for internal use of the World Bank's Socialist Economies
Unit (CECSE) in the Bank's Policy. Reseal'Ch and External Relations complex_ The findings, views and interpretations published in the articles
are those of the authors and should not be attributed to the World Bank or its affiliated organizations. Nor do any of the interpretations or
conclusions necessarily represent official policy of the World Bank or of its Execut.ive Directors or the countries they represent. Richard
Hirschler is the editor and production manager. Design and desktopping are by S. Gerard in the PRE Dissemination Unit. To ~t on the
distribution list, send your name and address to Richard Hirschler, Room N-6027 ,The World Bank, 1818 H StreetNW. Washington, D.C .20433
or call (202) 47:1-6982. Information on upcoming conferences on socialist economies, indication of subjects of special interest to our readers.
letters to the editor. and other reader contributions are Anl,rec~iAI:"d.
October 1990 16 Volume 1, Number 7