53875
Transition and Macro-AdJustment Division � Country Economics Department � The World Bank
.~------------------------~-------------------------------------
The case of national currencies in the former Soviet Union
Crov~lning the Estonian Kroon
n Jun{~ 199~! Estonia carried out and hyperinflationary conditions on liberalization at the startof1992. The
I a monetary reform to replace the
Soviet rublE with a new national
currency, the krl)on (I::TOwn). In doing
the black markets.
When Gosbank was disbanded at the
overall inflation rate, however, re
mained high as a result ofcontinuing
rapid increases in the total ruble
so, Estonia becEme the first country end of 1991 (together with the Soviet money supply throughout the former
of the former S(lviet Union (FSU) to Union), the number of ruble issuers Soviet Union.
achieve monet ary independence. fell to a "mere" fifteen, and the prob
Estonia's example is important not lem of uncoordinated inflationary fi Viewed from Estonia's perspective, the
only because se {era] other republics nance continued. The monetary over case for introducing a national cur
plan to imrodu~e their own curren hang was eliminated by the rise in rency seemed overwhelming. Thegen
cies, butaho because Estonia adopted prices thatfollowed the Russian price eral view was that an independent
a specific mondary mechanism-a
currency board� �-thElt is designed to
make the kroon a stable and convert What's inside ...
ible currency from the start.
China's Party Congress Endorses "So� the understaffed, underfunded judicial infra
Monetary Chs os cialist Market Economy" structure. (page 6)
Economic development should proceed with Varlet,. of Bunprian Taxes (page 8)
The background to Estonia's monetary out being bogged down in an abstract debate
reform is the monetary chaos that over what is socialist and what is capitalist, Reeearch UpdBte:ServicesB8B Growth�
emerged in the final years of the So announced the recent Party Congress in Promotina Sector in the FSU (page 9)
viet Union. Duri 19 1990and 1991 each Beijing, replicating Deng's cat and mice alle
of the republic~ of the Soviet Union gory: the color ofthe cat is not important as Quotation of the Month: "What Is The
established a SE parate central bank, long as it catches mice. (page 4) Market Value of Any1hinc in Russia
operating alonrside the Soviet-wide alter All?" Euromoney Interview with
Gosbank. By la:.e 1991 sixteen sepa Coastal Winds Blow Inward V":ae~rGeraah.enko.BeadoftheRussian
rate central ban ks were issuing ruble Central Bank (page 10)
credits with no overall coordination. In the next few years China's free trade
Gosbank has taKen care of the Soviet zones are expected to incorporate the entire Conference Diary (page 11)
Union's huge bldget deficit (exceed coastal area and even some selected inland
ing 20 perl~ent ofthe GNP), financing provinces. (page 5) Mneatones of Transition (page 12)
it through money creation. In addi
tion, central bf.nks of the republics Legal Reform in Hungary World BankIIMF Acenda (page 13)
were financing their enterprises and
governments. It all added up to hyper The streamlining ofHungary's legal system New Books and Working Paper8
inflation, s,ocialj st-style: the enormous to promote the private sector has made ma (page 14)
monetary overhang, combined with jor headway, despite difficulties such as
clarifying property rights and coping with Selected Articles (page 16)
price contJ:ols, produced severe short
ages in tr,e offidal supply networks
The Wor1d Bank/CECTM
nation required an independent cur duction o( new currencies in tl'te new reform-with its aim ofachieving the
rency; moreover, it was also thought states of the FSU. Cooperative ar immediate current account convert
that monetary independence was rangements, in which several central ibility of the kroon-seemed vital in
needed to escape from the continuing banks had the authority to issue view of the country's high trade de
inflationary pressures and monetary rubles, were bound to be inflationary, pendence, its urgent need to develop
instability in the rest ofthe FSU. The considering the strong political pres new exports in Western markets, and
Estonians recognized that even if suresfor monetary expansion and the its need to generate competition on
Russia were to try to stabilize the institutional weaknesses oftherepub the domestic market. The Central
ruble, other republics could under lican central banks. Russia 'mder~ Bank also aimed to insulate the mon
mine it by continuing an easy mon stood that the only effective means of etary policy from intense lobbying
etary policy of their own. In fact, do establishing currency stability was to pressures from industry and govern
mestic credit expansion in Russia make the Russian Central Bank the ment. To achieve these goals, the Es
remainedhigh,andpoliticalpressures sole entity authorized to extend ruble tonian government and Central Bank
for further credits to heavy industry credits. settled on the idea of a currency board
remained strong. (see box).
The International Monetary Fund
Inflation was not the only problem. (lMF) tried at first to delay the intro The kroon was to be introduced at a
Trade was becoming bogged down by ductionof Estonia's currency, argu fixed exchange rate vis-a-vis the
large delays in clearing payments ingthatthecountrywasnotyetready deutsche mark (DM), and with full
between Estonian and Russian enter and that the currency should be intro backing ofgold and foreign exchange
prises. Moreover, an excess of bank duced late in 1992, or in 1993. As it reserves. All future emissions ofhigh.
credits relative to currency notes in turned out Estonian authorities de powered money would have to be
the ruble area led to a severe shortage cided to proceed on their own, in view backed by foreign exchange receipts
ofcash in the first half of 1992. Even of the urgency of the situation and of the Central Bank. In essence, the
when enterprises had money in their with confidence that the monetary Central Bank would swear off domes
bank accounts, they could not draw reform could be carried out quickly tic credit expansion; the kroon's mon
on them to pay wages because of a and successfully. On the eve of the etary base would rise or fall only as
shortage ofcash. As Russia controlled monetary conversion, the IMI!' pro the Central Bank bought or sold for
the printing presses, and therefore vided them some last-minute techni eign exchange in return for kroons. To
the distribution ofnotes, many repub cal support, and followed up with ne avoid an unnecessary trade collapse
lics responded to the cash shortage by gotiations for a standby loan after the with the ruble zone, Estonia and Rus
issuing their own "coupon" moneys or monetary reform had taken place. sia agreed to maintain trade finane
other money substitutes, thus adding ingin rubles, with a floating exchange
to the chaotic monetary conditions. Smooth Conversion rate between the two currencies.
Russia also hoped for the rapid intro- The Estonian strategy of monetary The monetary conversion was under
taken during June 20-22, at a conver
sion rate of 10 rubles per kroon for
What is a currency board? bank balances, wages, prices, and
A currency board's only purpose is to its expenses and to maintain its reserues other contracts. Residents could con
issue notes (paper currency) and coins at the leuel set by law. vert up to 1,500 rubles into kroons at
convertible on demand into a foreign the 10:1 rate, and rubles in excess of
asset at a fixed rate of uchange. The In an economy where capital {lows can that sum at a 50:1 rate. About 2.2
foreign asset can be a foreign currency, occur (any economy with a conuertible billion rubles in cash were exchanged,
gold, or some other commodity, or a cur currency that has few barriers to for and these will be returned to Russia.
rency or commodity basket. A currency eign investments), the balance oftr(lde
board does not grant loans (except in does not impose any strict limits on a At the time of the conversion, the
serving as a clearinghouse for bank currency board system'IJ ability to ex market exchange rate was about 75
checks) or accept deposits. As reserves it pand the money supply. Instead, a more rubles per DM, or 7.5 kroon per DM.
holds high-quality, interest-bearing se complex but still market-based form of The new fixed rate was set at a slightly
curities, denominated in the foreign as limitation, based on people's estimates more depreciated rate, 8 kroon per
set. Its reserves must be at least lOOper ofprofitability, applies. Hong Kong and DM. At this rate, the initial holdings
cent ofits notes and coins in circulation. Singapore experienced trade deficits for of Central Bank reserves, made up
A currency board makes profits from the decades under their currency boCJtrd
mostly of monetary gold held in the
difference between the interest on the systems, yet their money supplies ex
securities that it holds and the expense panded all the while.
West since 1939, more than equalled
of maintaining its notes and coins in the total stock of the broadly under
circulation. It remits to the gouernment From related studies by Steve H. Hanke stood kroon supply (M2). Thus, at the
all profits beyond what it needs to pay and Kurt Schuler start, the entire money supply, not
just the high-powered money (as in
October 1992
--"--r'-~'II"-I ____- - - - - - - - - - - - - - - - - -
Transition
some other currency board arrange property. There is a new attention to institutional bulwark (such as a cur
ments), was backed by more than 100 financial reform, because banks and rency board arrangement) and by
percent currency and gold reserves. other intermediaries must now sur sound fiscal policy.
vive by their profitability rather than
The post-conversion monetary policy through cheap credits from the Cen It is time to move rapidly to create
guarantees the convertibility ofkroon tral Bank. M~or policy initiatives in national currencies in the FSU, linked
into DM at the fixed 8;1 rate for all several of these areas will be backed by floatingexch ange rates, andbacked
current account transactions. Profits by an IMF standby loan concluded in by ample and timely international fi
and capital arising from foreign in September. Estonia is also seeking nancial assistance.
vestment can be freely repatriated. other balance ofpayments support to
Estonian residents are not, however, help cushion the move to energy prices boo Hansson and Jeffrey Sachs
allowed to open f)reign currency bank at world levels and the restructuring The authors adv ised the government
accounts abroad. except with special of the industrial sector. of Estonia and the Central Bank of
permission, nor can they establish new Estonia on the monetary conversion.
foreign currency accounts in domes The Estonian monetary reform clearly Ardo Hansson is Research Fellow,
tic banks. Domestic credit expansion points the way for the new states of Stockholm Institute ofEast European
by the Central E ank is generally pro the FSU. Most, or all, will have their Economics. and Economic Advisor to
hibited, and th~l Central Bank's op own national currencies. Estonia's the Prime Minister ofEstonia. Jeffrey
erations are larl~ly restricted to for experience demonstrates that it is Sachs is Galen L. Stone Professor of
eign exchange operations at the possible to move to a stable and con International Trade at Harvard Uni
official exc:hange rat.e. In particular, vertible currency right from the start, versity.
the currency board precludes central ifthe policies are supported by a sound
bank credits to finance the budget.
Therefore, the g,wernment ofEstonia
undertook several strong fiscal ac
tions, including tax increases, to
Ut, lat. manat. manatl, rubel...
undergird the llew monetary policy. Among the Baltic states Lithuania re and Ukraine where non-ruble curren
New bank supervision procedures are placed the ruble on October 1 with tem cies have been introduced.)
also being putinto place to strengthen porary coupons that will be used until
the banking sy!,tem. the new Lithuanian currency, the lit, is Other ex-Soviet states also announced
introduced. Latvia issued the Latvian intentions to replace the ruble with
Good Results ruble in July and postponed introduc theirowncurrencies: forexample Geor
tion of the lat. gia ("maneti"), Azerbaijan ("manat,,),
The results of tile first three months Uzbekistan, Armenia, Kazakhstan,
are extremely iJ,ositive. The currency Ukraine has put off the debut of its and Kyrghyzstan. Moldovan Econom
has been stable ,md convertible, while grivna; the government will instead in ics MinisterSergiu Certan said in early
troduce the c8rbovanets by the end of October that "i t would be a mistake to
the ruble has continued to depreciate
the year for accounting purposes and introduce a national currency now
sharply. Indeed, monetary policy in linkit to the ruble, said the deputy head when Moldovaisin an economic crisis."
the ruble area turned out to be much of the country's central bank. In the
worse than eXlJected, with the ruble meantime coupons--mone'tary surro Those states thatrename their curren
money supply nearly doubling over gates since 1991-should take on all cies would not necessarily leave the
the summer months. After an initial aspectsofa currency (for example, since ruble zone. At the CIS summit in
exchange rate of 10 rubles per kroon January salaries have been paid only in Bishkek in late September, Armenia,
in late June, the Estonian currency coupons). Belarus, Kazakhstan, Kyrghyzstan,
appreciated to around 20 rubles per Russia, and Uzbekistan signed an
kroon by late Beptember. The main Belarus has withdrawn the ruble from agreement to maintain the ruble zone.
shortcoming of'~he new system to date circulation in areas bordering
is that ruble-ba sed trade with Russia Lithuania and Ukraine. The
has yet to develop effectively; there is rubel ("bel" stands for Belarus),
as yet no well-fllnctloning foreign ex introduced last June to circu
change market in Tallinn for convert late alongside old Soviet
ing ruble:; and kroon. banknotes, would now be the
only legal tender for all types of
The mODE!tary "eform has given fresh transactions in those border
impetus t() othc~r areas ofreform. Fis areas. (ANational Bank official
cal policy has been subjected to re explained that the Bank wants
to prevent an influx of rubles
newed discipline. Privatization is
moving fhrward more rapidly, with a into Belarus from Lithuania OM Bel4rus ruble.
sounder base for auctioning state
Volume 3, Number)l 3
The World Bank/CECTM
No October Surprise in Beijing
The buzzword: Socialist market economy
The recent Congress of the Chinese often repeated, and more colorful China-and by implication criticizes
Communist Party (Beijing, October aphorism "it doesn't matter ifa cat is planning. The Report notes that prac
12-18) has been hailed as a major vic black or white, as long as it catches tice in China has proved that where
tory for the reform forces in China mice." market forces are given full play, the
and a major personal victory for se economy exhibits vigorous and sound
nior leader Deng Xiaoping who has The emphasis on economic develop development.
seen his reform proposals adopted as ment also signals an abandonment of
the guiding principles for the coming the very cautious targets of the 8th The Congress reaffirmed that the
period and reform-minded candidates Five-Year Plan. Instead of the 6 per household responsibility system (in
appointed to the leading positions in cent per year growth target ofthe Plan, other words private farming) will be
the Party. The Congress saw the el the work report calls for 8-9 percent retained as the basic rural policy and
evation of what is called "Deng economic growth. (In the Bank's re that the Special Economic Zones policy
XiaopingThought"to the same stand cent economic report on China, it was will be extended to many parts of
ing as Marxism-Leninism and Mao also estimated that with faster reform, China, including border areas and the
Zedong Thought. growth could rise to an average of8.5 Yangtze valley (see box, page 5). The
percent.) The report placed particu Congress reaffirmed multiple forms
Deng's Thinking Prevails lar emphasis on the growth of the ser of ownership, "so long as the public
vice sector and explicitly called ~Dr an sector remains dominant." However,
Deng's approach to policymaking, early startto the famous Three Gorges public sector is defined as embracing
which is essentially the art of prag project. not only collective enterprises, but also
matism, has now been enshrined in locally owned Township and Village
the "theory of building socialism with Ownership Targets Enterprises (TVE) and the Chinese
Chinese characteristics." The Consti share in joint ventures. This broad
tution of the Party was amended at The Congress has made it clear that definition gives great scope for the
the Congress to include this theory. reform policies are to remain at the continued decline in the share ofstate
The Work Report (the basic document heart of policy making and that the owned enterprises in total output.
presented to the Congress for ap reform era is regarded as China's sec
proval) emphasizes economics devel ond revolution. The Chinese economy The Party now seems poised for a
opment as a central task. The report is now a socialist market economy, major rationalization of the state
also asserts: "We must not get bogged and where previous reports all used owned enterprises. The Work Report
down in an abstract debate over what the word "planning," the current'Work underlines the need for price reforms
is socialist and whatis capitalist."This Report gives the strongest endorse and new incentives so that "efficient
is a more explicit version of Deng's ment to the role of the market in enterprises will prosper and the inef
ficient ones will disappear."
The changing property mix in China
Shares of industrial output (percent) Industrial output growth by sector (percent)
One of the main initiatives launched
70 � State
by the Congres~ is a program of gov
100
o Collective ernment reform, to be completed over
60 I] Private, joint a three-year period. A major rational
80 venture, and ization of the central government and
50 others the abolition ofseveral ministries and
60 40
agencies are expected, with the goal
of creating a government organiza
30 tion that is mOre in line with the re
40
form objectives and that exercises only
20 indirect control of the economy.
20
10
The One�Party System Remains
o ~.u~~UL.u"U.UL~'~
o
1980 82 84 86 88 90 2000 1986 87 88 89 90 91 The Congress reaffirmed Deng
Note: 1991 and 2000 data are preliminary.
Source: Official Chinese statistics, Xiaoping's long-held view on political
4 October 1992
Transition
reform. Despite the debate about re
forming the system of People's Con Coastal winds blow Inward
gresses, a very clear statement em
phasized: "the [political] goal of the China's rapid growth is expected to � Inland regions are relatively concen,
reform is to build a socialist democ continue over the next decade or more, trated in the energy and raw materials
racy suited to Chinese conditions and based on two fundamental conditions: sectors, which are the least reformed
absolutely not a western, multiparty high savings and investment rates and part of the state economy. State price
parliamentary system." a work force that is relatively skilled controls on these items act like an addi
and healthy for a low-income country. tional tax on inland regions.
The new Centra I Committee has ap
During the 1980s, economic liberaliza � Foreign investors have been unwin
pointed a Political Bureau expanded ing to invest in the interior's abundant
tion proceeded at similar rates in the
to twenty persons, with much stron country. As a result, growth was fairly natural resources because ofdepressed
ger represE!ntati,)n of reform-minded evenly spread nationwide. However, in global commodity markets. With
leaders from such citil~s and provinces the late 1980s coastal regions began to China's stilI underdeveloped capital
as Shanghai,Tiwljin, and Guangdong. develop much faster than inland re markets, it falls to the central govern
The Standing Ccmmittee ofthe Polit gions. Following 1989 the "coastal de ment to mobilize the large sums ofcapi
buro-the most powerful group in velopment strategy" was criticized and tal necessary for resource development,
China-now has seven members, and an "industrial policy" that would apply leaving the interior highly dependent
two ofits older members have retired. impartially to the whole nation was ad on the state economy.
Among thE! three new members are vocated. During the bitter ideological
Vice-Premier Zhu Rongji, the former battle, however, foreign trade reforms Coastal regions, by contrast, are poised
mayor ofShangt,ai, and an economist were moving ahead, facilitated by the to grow rapi dly as they are furtheri nte�
who has contributed to several World fact that elements of decentralization grated into the East Asian and world
Bank studies on China. were already built into the system and economies. Thus far, only the provinces
driven by the need to export and the ofGuangdong and Fujian have experi
The strong offici 11 backing for contin fact that local leaders could reap ben enced integration into the global mar
ued refonns in China is not an unex efits from attracting foreign trade and kets. Successful reform policies have
pected developm ent; nonetheless it is investment. been a precondition for this develop
of major importance. There is wide ment. However, transfer oflow technol
spread expectation that the rest of The economies of the coastal provinces, ogy, labor-intensive manufacturing
this decadf~ will witness an economic which were better placed to take ad from adjacent Hong Kong (China) and
vantage of trading opportunities, grew Taiwan (China) played a crucial part.
performance eVEiry bit as spectacular
more rapidly. In late 1991, and particu
and enviable as was observed during This integration process has not ex
larly with Deng Xiaoping's southern
the first dncade of reform. tour in early 1992, the emphasis was hausted its potential. Transnational
again on opening the economy to for manufacturing is spreading rapidly
Peter Harrold, EA2CO, eign participation-a far easier task throughou t Southeast Asia, and south
The World Bank than framing coherent reform policies ern China is becoming increasingly in
for the domestic economy. As a result, tegrated into these networks. Although
,r
there has been increasing differentia the region as a whole remains depen
tion between coastal and inland China. dent on the U.S. market, demand for
This is likely to continue to shape de final goods within the region is also
velopment in the 1990s for the follow growing-slightly faster than U.S. de
ing reasons: mand.
~1
� Becauseofpoorcommunicationsand The economic regions of northern and
less skilled work forces, inland facto southern coastal China are expected to
ries are not as efficient as coastal facto expand and meet in the Lower Yangtze
ries--producing between 15 percent and region around Shanghai and then ex
40 percent less per unit of input. tend up the Yangtze vaney. By 2000, the
entire coastal area will be integrated
� Transport costs for inland producers into international tradingrelationships,
Nt!
to access world markets are signifi with the "accelerated growth area" also
cantly higher than costs for coastal pro incorporating selected inland provinces,
ducers. And information about world such as Hubei and Hunan.
market opportunities is less available.
(Based on Oxford Analytica)
From thil Polish weeUy NlF.
Volume 3, Numter9
The Wond Bank/CECTM
The Challenge of Legal.Reform in Hungary
An assessment and some proposals
Property Rights is attempting to transfer the bulk of reforming the regulation and financ
state assets into private hands. ing of property development and use.
In Hungary-as in other CEE coun In the regulatory area, reforms are
tries-clarifying property rights is For real estate, Act I of 1987 on Land needed in rent control, zoning, and
perhaps the most difficult and slow has been instrumental in freeing up construction standards. With regard
moving area oflegal reform. Not only . the private market. A private dtizen to financing, reforms are needed in
does it require confronting the vested (either natural or legal) may now ac collateral and foreclosure laws and
interests of former owners, existing quire real estate in Hungary without institutions. Mortgages on real estate
users, and newly emerging business any legal limitation. However, other have long been legally possible but
interests, but it must be Carried out in practical impediments, such as ambi rare. Interest and availability of fi
a setting plagued by poor records, guity in title to property and difficult nancing is now growing in the case of
struggling institutions, and a legacy access to credit, continue to retard commercial property. although direct
of distorted public policies. the development of a real estate mar foreign financing of commercial prop
ket. Foreigners are prohibited from erty development is prohibited by the
In late 1989 and 1990 Hungarypassed owning agricultural land (unlel;s spe inability offoreigners to register mort
extensive amendments to the social cifically permitted by another' law), gage liens on Hungarian real estate.
ist constitution, which now asserts a but may own non-agricultural land In the case of housing, lenders have
commitment to a market economy and and immovable real property after been discouraged from making sub
encourages entrepreneurship and receiving permission from the Minis stantial mortgages because ofthe lack
competition. It establishes protection try of Finance. In contrast, Hungar of effective legal mechanisms to re
of private property, including compen ian corporate entities that are partly possess the collateral in case of de
sation in the event of expropriation, or wholly foreign-owned are entitled fault. Tenant protection laws,
and assures the right to freedom of to own real property related to the grounded in the still-applicable 1971
association. The most important pro company's objectives. Housing Act, make foreclosure and
visions on property in the Civil Code eviction a cumbersome and futile en
have also been amended. Private own Title to both publicly and privately deavor. Collateral other than real es
ership is now fully accepted in Hun held real estate is not likely to be tate is not used at all because oflegal
gary, and the privatization program complicated by restitution (or and institutional shortcomings that
"reprivatization") in Hungary as it is need to be resolved.
Markets and law in Poland, Romania, East Germany,
Czechoslovakia, or Slovenia. For intellectual property rights, pro
The legal framework in a market Hungary's solution to the perceived tection has generally been considered
economy serves at least four purposes injustices caused by socialist expro better in Hungary than in other CEE
(loosely related to specific and well� priations is the Compensation Act of countries. However, inadequate
recognized areas oflaw): 1991. This law partially compensates means for investigation and enforce
� 7b define property rights, whether both Hungarians and foreigners ment remain a problem, resulting in
for real, tangible, or intellectual prop whose property was expropI'iated widespread piracy, mainly ofsoftware,
erty (through the constitution and through regulations enacted after music, and pharmaceuticals. As Hun
more specific laws). 1939. Compensation coupons (em gary begins to recognize and protect
� To establish a framework of rules bodying lump-sum settlement.s but private property rights generally, in
for exchanging those rights (generally not exceeding 5 million forints) may tellectual property may also begin to
through contract law). be used as full or partial payment for be better protected. This will, how
� 7b set ground rules for entry into property sold by the state, including ever, require stronger investigative
and exit out ofthe productive process
apartments, shares in privatized and enforcement policies, without
(entry is governed by company and
state-owned industries, and farm which infringements will be difficult
foreign investment law, while bank
ruptcy and liquidation laws govern
land. Only former land ownere~ may to curb.
exit). use their coupons to purchase farm
� To oversee market structure and be land. Company Law
havior to promote competition
(through antimonopoly and unfair Although rules on real property own In the late 1980s Hungary imple
competition laws). ership are now firmly market-ori mented a series of reforms designed
ented, much more work is needled in to further its transformation to a
6 October 1992
Transition
market economy. Unlike Poland, it did investments made pfi.er 1993 (see box 528 in 1991 to 3,403 (786 as reorgani
not revive its prewar company law. on page 8). zations and 2,617 as liquidations) in
Rather, Hungary used the opportu the first quarter of 1992 alone. Be
nity to draft an entirely new code, the Contracts cause the law came into effect Janu
Act on Economic Associations, based ary 1, 1992 and requires reporting
on German andAustrian models. The In Hungary two distinct spheres of after ninety days in default, there was
law recognizes various forms of busi contractual relations existed during an even greater surge of3,540 filings
ness organization, inc1udingthejoint the socialist period: private transac in April-including 2,259 reorganiza
stock company, r,he limited liability tions among individuals, usually for tion filings and l,2811iquidation fil
company, and general and limited sman monetary amounts or equiva ings. This surge in cases demonstrates
partnerships. lents, for which the Civil Code was the difficulty of applying the tradi
(and still is) adequate to set a frame tional solution-judicial bankruptcy
Since Hungary ,)pened its doors to work for bargaining and to resolve proceedings-to the systemic prob
foreign investment in 1988, the coun any qisputes that may arise; and com lems of enterprise insolvency in CEE
try has enjoyed a level of foreign in mercial contracts between state en countries. Itis highly improbable that
vestment lmma':;ched by any other terprises, which were instruments of any judicial system-much less one
CEE country. This was initially be the state economic plan. Butnowcom with relatively little exposure to eco
cause Hungary's ori8:inal foreign in mercial transactions in the economy nomic matters-could handle such a
vestment law, Act XXN of 1988, was are increasingly being conducted ac surge in caseload efficiently and ef
the most liberal investment law in cording to the Civil Code (originally fectively.
the region. The l~,w has been modified designed for the small, noncommer
periodically sincl~ then, but it still re cial private transactions). The appli Competition Law
tains the basic features that are at cable sections of the Code embody
tractive to foreign investors. The law standard western contract concepts. Competition law can be an important
allows foreign individuals and enti Because courts have little experience tool to prevent abusive monopolistic
ties to own up to 100 percent of a with commercial contract cases, court behavior. In Hungary a new competi
Hungarian investment, includingthe interpretations and decisions over the tion law. Act LXXXVI of 1990 on the
real property associ~tted with it. No coming years will determine justhow Prohibition of Unfair Market Prac
special permission is needed. In the far "freedom of contract'" extends, tices, took effect on January 1, 1991.
event of exproprlation, the law guar particularly when it collides with The law deals with the traditional
antees foreign ir.vestors full compen other social concerns. areas of antimonopoly enforcement,
sation in the currency of the original including horizontal and vertical
investment. Bankruptcy Law agreements among firms, abuse by a
single firm of a dominant position,
Although the HtJlgarian forint is not Hungary's Law on Bankruptcy Proce and merger control, and it sets up a
yet formany convertible, the foreign dures, Liquidation Procedures, and specialized antimonopoly office, the
investment law does allow foreign Final Settlement was passed by par Office of Economic Competition, to
investors to repatriate their forint liament in September 1991. The law enforce these provisions (subject to
profits in the currency of the original differs from the previous one in sev review upon appeal by the Budapest
investment (at the official exchange eral important respects. Itencourages district court).
rate), "provided the company has the reorganization in lieu of liquidation
equivalent amoilnt in forint on re when feasible, and it tries to encour The law also covers unfair competi
serve.'" Foreign individuals and com age real as well as financial restruc tion and prohibits such activities as
panies with foreign participation are turing to make surviving firms more misleading advertising or "unfair"
permitted to maintain hard currency competitive in the longer run. It tries acquisition and use of business se
accounts in any Hungarian commer to balance the distribution of control crets. One important element miss
cial bank. '1:he foreign investment law over assets and bargaining power ing from the law is authority of the
also offers generous industry-specific between debtor and creditors. And it antimonopolyoffice to order the break
tax incentives to foreign investors. establishes time limits on the differ up oflarge ttlonopolisticfirms prior to
However, these have been widelycriti ent stages of the bankruptcy and liq privatization. Such a link between
cized by economists and tax policy uidation procedure in order to speed antimonopoly policy and privatization
experts, both because they discrimi up the process. exists in Poland and Czechoslovakia
nate against domestic investmentand and is a useful tool to prevent the
because they caLIse tremendous rev The number ofbankruptcyfilings has privatization ofpublic monopolies into
enue loss and c(lmplicate tax admin skyrocketed in the first few months private ones (which are certainly
istration. Recogrdzingthese problems, under the new law. Although data is much harder to control or break up
Hungary h as m(J ved recently to elimi somewhat sketchy, the number offil once in private hands). The Office of
nate special tax incentives on foreign ings appears to have increased from Economic Competition, in addition to
VohlmA ~ \lllmh,::,( 0
The World Bank/CECTM
handling individual complaints, Capitalism already? A variety of Hungarian taxes
should educate the public about the
Corporate 7hx. The general rate for the and outside Hungary. Nonresidents are
distortions caused by monopoly be
entrepreneurial profit tax (corporate taxed on their in-country income. (Aper
havior and lobby the government and tax) is 40 percent. The following tax
parliament to minimize barriers to son is a Hungarian resident ifhe or she
incentives will apply to foreign invest has a permanent home there or is
international trade-the most pow ments made before the end of 1993: present for 183 days in a calendar year.)
erful antimonopoly force of all.
For tax rates, no distinction is drawn
� Joint ventures with founding assets between foreign source and local source
Judicial Institutions worth more than 50 million forints and income. The personal income tax rate
a foreign stake ofat least 30 percent are has ranged between 0 and 40 percent in
Over the pastfew years the judiciary's eligible for a 60 percent profit tax: con 1992 (compared with 0-60 percent in
workload in Hungary has more than cession in the first five years of opera 1989 and 0-50 percent in 1990-91):
doubled because ofthe registration of tion and for a 40 percent concession in
new private companies, the rapid rise the next five years-as long as at least Income brackets
in the number ofcommercial disputes, 50 percent of their activity can be de forints tax rate (percent)
the rash ofnew compensation claims, fined as material production.
Up In 100,000 0
and growing criminal activity. In or � If a joint venture satisfies the above 100,000-200,000 25
der to accommodate private sector requirements and its activity is classi 200,000-500,000 25,000 forints +
activities, the judicial infrastructure fied as being of special interest t,o the 35 percent on income
will need to be upgraded through country (such as electronics; the manu exceeding 200,000
training, staffing, and equipment. An facture ofvehicle parts and components, more than 500,000 130,000 forints +
area needing particular attention is machine tools, and agricultural, food 40 percent on income
processing, and forestry machinery; excaeding 500,000
debt collection. Of 700,000 lawsuits
medicine; the production of vegetable
filed nationwide last year (a 60 per The budget draft for 1993 (still await
protein; packaging technology; and tour
cent increase from the previous year), ing parliamentary approval) stipulates
ism-related operations), a full tax holi
two-thirds involved uncollectible day is granted for the first five years, that the tax rate for the top income
debts. Streamlining debt collection, followed by a 60 percent reduction for bracket increases to 50 percent.Accord
perhaps by allowing private debt col the subsequent five years. ingly, an income of 1,000,000 forints
lection in uncontested cases or reduc � Ifajoint venture ploughs in its prof would be taxed at a rate of 330,000
ing procedural requirements in judi its or reinvests them elsewhere in Hun forints + 50 percentofincome exceeding
cial cases, could relieve much of the gary, a tax reduction-identical to the 1,000,000 forints.
current strain on the courts. Also, amountofreinvested profits in the same
arbitration could be a useful alterna year-applies. Social Insurance. Based on employees'
tive to court procedures as a means to gross wages, employers pay 44 percent
resolve commercial disputes among After December 31, 1993, the above in and employees 10 percent in contribu
private parties. centives will be eliminated, but a "grand tions to social insurance. Additionaliy
father law" will remain in effect for joint an unemployment contribution was in
In sum, Hungary has been at the fore ventures set up before that date. troduced last year to hel p fund retrain
front of CEE countries in reforming ing programs and unemployment ben
its legal framework to promote pri Value Added 7hx. The value added tax efits. Employers' contributions to this
vate sector development. Yet in the (VAT) system copies a common Euro fund are 5 percent and employees' 1
face of numerous legal and institu pean type. It must be fully borne by the percent-again, based on employees'
tional difficulties, the challenge of end-user or final consumer, unless the gross wages.
implementing all of this new legisla product or service in question is des
tined for export, in which case u full TDC. A technical development contri
tion is truly daunting. bution (TDC) of 4.5 percent is paid from
refund of the VAT can be claimed. Until
the endof1992 most basic products and companies' profits. TDC payments are
Cheryl W. Gray services are tax-exempt or carry an "0" put in a special state-handled fund for
CECTM, the World Bank VAT rate. Other services are subject to technical development, which is allo
a 15 percen t rate, and for some products cated by tendering or by individual ap
The article is based on "Legal Reform a 25 percent rate applies. The rates are plication. Joint ventures can apply.
for Hungary's Private Sector," by the same for imported goods. ('Ib in
Cheryl W. Gray, Rebecca Hanson, and crease tax revenues, the 1993 budget Local Taxes. Building, real estate, busi
Michael Heller, World Bank PR Work draft proposes a two-tier 25 percentand ness, communal, and tourist taxes can
ing Papers, WPS 983,1992. 7border: 8 percent rate and the elimination of be levied. The basis and level of taxa
Maxine Berg, the World Bank, Rm. N the 0 rate and exemptions.) tion depend on the needs of the commu
11�021, tel: (202) 473-6969. nities in question, within limits deter
Personal Income Tax. Residents are mined by the law.
taxed on their totalincome-both within
October 1992
Transition
Research Update: Services as Growth Sector in the FSU
A new World B~nk research project, On the eve ofGorbachev's perestroika, vices). Particular emphasis will be
"Services as a Growth-Promoting Sec in 1985, only 39 percent ofthe Soviet given to the last category.
tor in the Fonner Soviet States," will labor force was employed in services,
analyze services in the new states of and a mere 40 percent of gross na Historical data on services in the
the FSU, study the gap between an tional product came from the service fonner Soviet Union will then be used
ticipated and actual services, and industries. The Soviet Union trailed to explore differences in the level of
chart the experience with growth in far behind the middle- and upper-in services among the former Soviet
services of other (post)socialist coun come countries, where 53 percent of states in recent years. This quantita
tries in transitic,n. the labor force was employed in ser tive analysis will be complemented
vices, accounting for 50 percent of by a qualitative analysis of the evolu
Neglected Sector gross national product. In five less tion of services, especially business
developed industrial countries and consumer services, since 1985 in
For a combination of reasons-the (Greece, Ireland, Portugal, Spain, and the former Soviet states and in other
system of central planning, a bias Turkey), the respective figures were economies in transition such as China,
against consumption, Marxism's doc 43.1 and 55 percent. In the industri Czechoslovakia, eastern Germany,
trinal bias aga;nst "nonproductive" alized countries as a whole, the per Hungary, and Poland.
services,the monopoly position ofpro centages of labor force in and gross
viders, and the abolition of private national product from services were With a look toward the future, the
production-the service sector as each 61 percent. The United States' study will simulate the potential con
sumed over the years a rather limited service sector led the statistics with tribution of services to future value
role in the Soviet economy (and So 69 percent and 67percentrespectively. added, employment, and household
viet-type Elconomies). The Soviet eco consumption and identify a policy
nomic structure, compared with simi New states of the FSU can benefit agenda to facilitate the rapid expan
larly developed countries, was from the dynamism of the service sec sion of services.
uniquely lopsidBd, with a large indus tor, especially of business and con
trial base and 11. small service sector. sumer services. The latter is a major Data Sources
Besides bt~ing small, the service sec factor in increasing static and dynamic
tor was inefficient and client-"un efficiency, improving quality of life, Information on the characteristics of
friendly." TheJ.igh cost of transac generatingjobs, and providing ample the service sectors in Western coun
tions and. lack of services were opportunities for the expansion of the tries and in some Central and East
partially offset over the years by the private sector-through joint ven ern European countries are available
second ecCtnom}" which toward the end tures and locally owned companies. from various data bases, including
ofthe old regime might have accounted those of the World Bank and OECD.
for up to 20 per( ent of all transactions Comparative Analysis Certain data on the Soviet Union and
in the househdd sector-and prob partial information for some of the
ably an ,wen higher proportion of Drawingon international, cross-coun fonner republics for previous years
many individual services. try time series data sets, the research are available in official statistical re
will first undertake a comparative ports of Goskomstat. Data also are
The lack of pnvately owned, small analysis of the importance of services being provided by the Center for Tech
scale services and the almost total at different levels of development. nology of Social Policy in Moscow, and
absence of small-scale production in Services will be measured by value by Genadii Zoteev. Other data sources
the "official economy" had dire conse added, employment, compensation of include the IMF, the CIA, and the U.S.
quences for both quality of life and employees, investment, and house Census Bureau.
economic efficiency. Inadequate con hold consumption; various proxy in
sumer services imposed a heavy bur dicators, as well as per capita gross The project was begun in April 1992
den on the time management ofhouse national product, will be used for the and will be completed in April 1993. It
hold members especially in view of level of development. Services will be is managed by Martha de Melo, Wil
the almost full participation of work broken down into three subsectors: liam Easterly, and Gur Ofer, CECTM,
ing age womer, in the labor force. (It infrastructure services (housing, the World Bank. (For additional in
has been estimated that the time transportation, and communication), formation contact Martha de Melo, tel:
people spent standing in line equaled public services (health, education, and (202) 473-9073, or William Easterly,
full-time employment for 11 million public administration), and business tel: (202) 473-8965, or Gur Ofer, tel:
people.) and consumer services (all other ser (202) 473-8970.)
Volume 3. Nurr ber () 9
The World Bank/CECTM
Quotation�of the Month: "What Is the Market Value of
Anything in Russia after All?"
Skeptical views of the chairman of the Russian Central Bank
. Victor Gerashenko, chairman of the Q. You are saying that privatizcltion uidation by his committee. In the past
Russian Central Bank, believes that should come before price reform? six months interenterprise debts-39
the state needs to interfere more in billion rubles at the beginning of the
the running of the economy until A. It's a chicken-and-egg question year-have begun to snowball and
market reforms take root. He ex what comes first? [But] how can we go have now reached 3.2 trillion rubles.
plained his views in an interview pub through privatization now when we We were headed for a liquidity and
lished in the September issue of the [still] have distorted prices and val bankruptcy crisis for a simple and
London-based Euromoney. Excerpts ues? Should we sell shares in state obvious reason: the wholesale price
from the interview follow: enterprises or should we distribute index increased sixteenfold in the first
them? I think distributioI\ is wrong six months ofthe year and firms sim
Q. How bad is the economic situation ? because people will take less care of ply couldn't afford to buy anything. It
what's been given to them than they isjust like whathappened to ordinary
A. The situation is quite serious. The will of what they have earned. Prop Russians when retail prices were lib
main task is to create conditions that erty should be earned. eralized. The state gave them a help
will enable us to produce more and to ing hand by raising wages and pen
do so at reasonable prices and that Q. But is there any other alternative to sions. The same approach is valid in
will create competition between dif thegovemment's share give-awaypro boosting the working capital of enter
ferent sorts of enterprises. It will be gram? prises. Commercial banks will evalu
two years before real progress toward ate enterprises' requests for loans and
a market economy can be made. Un A. No population, whether here ()r in their ability to repay. But with such
der these conditions [we must] main Britain or in the United States, is the high interest rates as we have now,
tain production of necessary items- prime mover of its economy acting enterprises can't afford the interest
using profitable or even unprofitable solely through ownership of busi [payments] and they have no possi
methods, because the state is the main nesses and factories. It's difficult to bility of raising money in the stock
owner of production capacity and we guess how successful the government's market because we haven't got one. I
have made little progress in privatization plans will be. Even dis admit that some managers were rais
privatization. For the time being it is cussion of the value of the vouchers is ing prices in an abuse of their mo
the responsibility of the government becoming more and more acute. The nopoly position but anyone would
to manage state firms to ensure maxi bulk of the people will not turn their behave like this under our conditions.
mum use of productive assets as long vouchers into shares but will instead In such cases the state should again
as firms are producing goods in de try to convert them into cash. We will regulate prices.
mand in the market. end up with only a certain number of
proprietors ready to take risks Q. Some people think your credit deci
Q. What should be the priorities for through the vouchers program l!Ild sion was highly inflationary. Isn tin
reform? with their own capital. We will need flation a major problem?
to create investment funds similar to
A. Under the Soviet system the cost of those in Czechoslovakia to help them A. Inflation is a problem, I agree. We
labor was low and basic goods and to become share-owners. discussed the debt problem with
services were either free or cheap. [prime minister] Gaidar and with
With salaries low, the tax system had Q. The central bank has decided to Chubais. The credits from the central
to depend on the pricing ofretail goods. guarantee debts between state enter bank will be used to repay
We had massive distortion and the prises. Won't this send a signal elwt interenterprise debts at levels as of
value ofmoney was artificial. It wasn't the state will bail out firms that refuse the middle ofSeptember and to supple
a unit of value but simply a unit of to respond to market signals? ment the finance ministry's credits,
accounting. So we must first of all which were insufficient and inad
find a proper price structure to move A. I disagree with the assessment. equate. Any money left. over will be
to a market economy. The older gen When the decision was published, the used to increase the working capital
eration, which grew up under the privatization Chief,Anatoly Chubais, of enterprises.
state-administered economy, prefers felt that the central bank was inter
an evolutionary approach to price re fering with his responsibility to com Q. But won't that boost the money sup
form using administered price rises. pel firms to pay their debts or face liq ply?
,,, Odoher 1992
~�---���--'�--r'-<Ir-l _ _ _ _ _- - - - - - - - - - - - - - - - - -
Transition
A Wholesale prices have increased A I was not criticizing the IMF, I was method and speed ofreform. Decisions
sixteenfold while money supply has . just being skeptical about our ability cannot be made if the population is
only a factor of 2.2-<10 you reany to negotiate with the Fund and ex not ready for them.
think that the money supply is big plain [to them] what's going on. The
enough? I don't think so. Yes, credits credit ceiling of 700 billion rubles is Q. How long will it take before reform
between enterprises are quasi-money partly economic, but mostly it is a goals are reached?
and are a component of the money political requirement. [Achieving]
supply. But whEm the state commer single-digit inflation in December is A To create competition we need in
cial banks pass on the credits of the the same. The essential economic aims vestment, whether local or foreign.
central bank to enterprises, bank and should be amended to [take into ac We need to improve tax legislation.
enterprise relations will become more count] realities in Russia. Ifwe liber It's too rigid. We need a land law, a
businesslike. alize energy prices, we will go full circle mortgage law. But the foreign inves
and have high inflation as a result. tor will move rapidly only when our
Q. If the budgE,t defICit is the main We are not in the position of western own investment reaches a certain
cause of inflation, can't the central economies ofbeingableto apply proper level. He won't climb into the cage
bank refuse to fi'lance the budget in its monetary policies. until there's already a similar sort of
fight against inflation? animal there. For this we need
Q. How troublesome are the differences privatization. This will give everyone
A. We have no laws like this.... Be ofviews on policy between the govern a chance. The main aim of
cause the govEimment has low tax ment, the central bank, and the par privatization should be the creation
revenues as a result of declining pro liament? of a private housing sector.... Then
duction, we would lose social support we1l have labor mobility. We asked
for reform ifthe central bank refused Parliament chairman Ruslan the IMF how we could assess the val
to provide credits because ofsome anti Khasbulatov was right when he said ues of enterprises when our pricing
inflation principles. that we all want to reform the system is in such disarray. They said
economy. Either the government is it would be very difficult. We1l prob
Q. You have saii the value ofthe ruble always right as was the reality in the ably end up basing evaluations on re
on the currency exchange is far too past, or we, the public and the mass placement value. What is the market
low. Why is it ~o low? media, should have the right to ana value of anything in Russia after all?
lyze and give our own opinion. The The government's present reform ef
A. The vc,lume of transactions on the press tends to ignore this and support forts are not correctingthe price struc
currency exchB,nge is not representa only one view - the government's. ture.... I'm always afraid when people
tive. In t.he Pflst eight months only There are real differences about start trying to find the final solution.
$1.3 billion wai; sold. Buthalfofit was
central bank :,ntervention. The for
eign trade mirlistry says that export
Conference diary
receipts should be $2 billion to $2.5 Market Economy and Business ested in cooperation with foreign firms
billion per m :>nth. So where's the Belarus '93 and experts. Theoonference will include
money? The turnover is much too January 18�24, 1993, Minsk, Belarus plenary sessions and presentations, as
small. The rEtention allowance is well as individual meetings with po
wrong. Our balance of payments dif Brown University's Center for Foreign tential partners. Factory tours can be
ficulties don't give us the ability to Policy Development (CFPD) is co-spon organized upon request of Western
maintain the carrentsystem whereby soring its third conference in Minsk, participants.
exporters can retain 30 or 40 percent Belarus together with BelASBI, the
Belarussian Computer-Aided Business CFPDis organizing similar conferences
oftheir export receipts. One hundred
Information system. The conference in Ukraine (March 22-29) and tenta
percent I)f eXIJ,ort receipts should be
aims to develop business between West tively in Uzbekistan Oate spring).
sold to the central bank and then any More information: Tania Lozansky,
ern and Belarussian participants and
body who wants to import can come to make recommendations on improving Centerfor Foreign Policy Development,
the bank for h2rrd currency-probably the legal, financial, and business infra Brown University, Box 1948, Provi
with some restrictions on luxury goods structures in Belarus. dence, RI 02912, tel: (401) 863�3465,
and so on. We need a foreign law com fax: (401) 274-8440.
pelling enterprises to bring their for Western participants are expected to be
eign exchangl~ into Russia from for practitioners and experts of relevant Editor's note: 7b enable us to inform
eign banks. business, financial and legal issues. our readers onforthooming conferences,
Belarussian participants represent a please send us tM necessary details at
Q. How are the IMF talks going? You wide cross-section of government insti least three months ahead oftM scMd�
previously criticized the conditions the tutions and private enterprises inter- uled date.
IMF hat: set for providing credits.
Volume 3, Nur:1ber 9 11
The World Bank/CECTM
Milestones of Transi'tion
In late October Czech and Slovak lead 1993. The Agency on Privatization, four-point plan as the basis for set
ers agreed on a customs union be which prepared the plan, was to deal tling their dispute over the Gabcikovo
tween the two republics after Czecho with eleven companies worth more hydroelectric dam project on the
slovakia splits on January 1, 1993 than 10 million leva. Dan ube.According to Hungarian Sec
(duty-free exchange of goods and ser retary of State Janos Martonyi the
vices, common trade and customs poli Russian First Deputy Premier four points include an immediate halt
cies toward third countries). A joint Vladimir Shumeiko has said that en to work on the dam by Czechoslova
council and a permanent secretariat ergy supplies to other members of the kia; the acceptance of binding inter
will coordinate these policies. Slovak CIS might be reduced by 60 to 63 per national arbitration; a commitment
Premier Vladimir Medar said that cent in 1993. He justified this on the to maintain the normal volume of
the Czechoslovak koruna will remain grounds that the former Soviet re water in the original riverbed; and
the common currency indefinitely, but publics and East European countries the creation of a small group to exam
that either side could pull out of the were re-exporting Russian fuel and ine the immediate consequences ofthe
arrangement at any time. The next raw materials. As an example, he Danube damming.
round ofpre-breakup talks is expected named Hungary, which, he claimed,
to cover financial issues, including had earned $1 billion this year by re The Polish cabinet approved in late
taxation and protection ofinvestments exporting Russian oil, fertilizers, and October a deficit of 85 trillion zlotys,
and the division offederal property. metals. It is thought that Russia has or 5.3 to 5.5 percent of GNP, in a draft
recently cut back on oil supplies to budget that projects 2 percent GNP
Bulgaria's Prime Minister Filip CIS members who were in arrears. growth and a fall in inflation to 38
Dimitrov resigned on October 28 af percent for 1993 from a current rate
ter losing a parliamentary vote of con Industrial production in Russia fell of more than 40 percent. The budget,
fidence called over the economy and by 18 percent in the first nine months which is to go to parliament for ap
alleged arms sales to former Yugosla of 1992 compared with the same pe proval before mid-November, forsees
via. Earlier, the government approved riod last year, the government re a 2 percent drop in real wages next
a 30 percent price increase for elec ported. The production slump inten year, after a fall of up to 7 percent in
tricity starting in November. It has sified in August, reaching a low of 27 the first half of 1992. Taxes would
also announced plans to use 5 billion percent as compared with August account for almost 80 percent of rev
leva ($215 million) of state funds in a 1991. The October rate of inflation enue, while social outlays and debt
one-off action to assume responsibil (CPl) is expected to increase to 25 servicing would be the biggest items
ity for nearly all investment credits percent, the highest since the price on the spending side.
granted before 1991 and to help re liberalization in January. The ruble
solve the problem of overdue debts fell to 398 per dollar on October 29 in Mongolia's government has warned
between state firms and banks. Total trading on the Moscow Interbank that living standards will collapse this
inter-enterprise debt in Bulgaria is Currency Exchange (from 393 on Oc winter ifforeign donors do not step up
estimated at more than 60 billion leva tober 27). aid. Chultemiin Ulaan, chairman of
($2.55 billion). The government also Mongolia's National Development
wanted to begin privatization of at Hungarian and Czechoslovak offi Board, told delegates at an interna
least ninety-two companies before cials had agreed in principle em a tional aid conference in Ulan Bator
that economic output was plunging at
"Buy now, while you still belong to the middle class." a rate of almost 20 percent per year.
The conference, organized by the
United Nations Development Pro
gram, was primarily focused on
Mongolia's long-term needs.
Tanzania's President Ali Hassan
Mwinyi says that privatization is the
only way to revive state-run corpora
tions whose debt is estimated at $3.1
billion, AFP reports. International
donors try to persuade the country to
dismantle or sell 400 unprofitable
From the Hungarilln daily Magyar Hirlap. state-run firms to private investors.
12 October 1992
'~---'-i'-'I--+---------------------------
I
Transition
World Bank/IMF Agenda
World Bank and IMF Support to pharmaceuticals. (All three Baltic Institute, which offers courses in eco
Lithuania states joined the Bank this year; Es nomic and financial management and
tonia on June 23, Lithuania on July 6, public administration for officials and
A $60 million World Bank loan to and Latvia on August 11.) private sector executives of Central
Lithuania (approved on October 22) and Eastern Europe and the former
will help the COWltry to maintain es IDA Brings Good Things to Soviet Union. The Institute is spon
sential services in energy and health Laos��� sored by the World Bank, the IMF, the
care and help sustain adequate agri EBRD, the BIS, the OECD, and the
cultural production. (Badly needed With the support of a new $36 million European Commission.
imports include vaccines, drugs, and International Development Associa
blood-control SUpp1iE~S; feed grain, tion (IDA) creditto Laos,14,500 house Hungary to Chair 1993Annual
protein meal, an d veterinary medi holds in the southern and central parts Meetings
cines; lubricants; and fire-resistant ofthe country will be able to switch on
cable.) Of the $60 million, $45 million the lights-300villages will be linked Hungary's Finance Minister Mihaly
will finance imports directly, and $15 to the national power grids. (IDA is Kupa has been named Chairman of
million will be made available for the World Bank's affiliate for theAnn ual Meetings for 1993. Mexico
purchase with lo,~al currency in com concessionallending.)At present only and Zimbabwe will name Vice-Chair
mercial banks to m'Olet the import a sixth of the 4.1 million population men.
needs of local en !;erprises. The Fund has access to electricity. The funds
has approvl~d an ;~82 million stand-by will also finance training for staff of World Bank Opens Hungarian
credit for LithuEmia, to support the the country's power utility and steps Office
country's economic reform program. to improve network efficiency by re
The credit (thefiri5t one since the Baltic ducing losses and improving billing The World Bank opened its Budapest
state joined the j:'und in April 1992), methods. Part of the money will pay office on October 26 with Andrew P.
can be drawn o'{er the next eleven for a study on expandingthe country's Rogerson as Resident Representative.
months. The economic program is first and largest dam, the NamNgum, Address: World Bank Field Office,
designed to brinl~ down inflation to a where electricity is produced for do Suba Trade Center, 4th Floor,
monthly rate of2 perc.mt by next sum mestic use and for export to neighbor Nagymezo utca 44, Budapest 1065,
mer, and to limit the fall in real GDP ing Thailand. (The World Bank has Hungary. Tel: (361) 269-0389 or 269
to about 2~! percent for the program approved lending totaling $227 mil 0393.
year. (Consumer prices increased by lion to Laos since its government
about 2,200 percent from January launched economic reforms in 1985.) Consultative Groups to
1991 to July 199:~, and GDPfell more Coordinate FSU Aid?
then 30 percen!:. since early 1990.) ��� and Helps China's Financial
Envisaged structural reforms include Reforms Japanese Prime Minister Kiichi
furtherpriee liberalization, privatiza Miyazawa, hosting the end-October
tion, creating a government securi A $60 million IDA credit will contrib Conference on Assistance to States of
ties market, finllncia.l sector reform, ute to a more efficient mobilization of the Former Soviet Union, called for
and designing ~md implementing a savings and their allocation to high the World Bank to be put in charge of
social safety net. priority productive investments in overseeing long-term assistance to
China. Projects include establishing those countries. Russian Deputy Pre
World Bank Helps Latvia Keep a sound payments and clearing sys mier Aleksander Shokhin said that
Warm tem in the central bank for settlement while Russia welcomed the idea of
ofmonetary transactions, bringingthe consultative groups, it wanted au
A $45 million World Bank loan to country's accounting standards in line thority shared between the World
Latvia win pro'Vide foreign currency with international standards, and Bank and Russia's Agency for Inter
to buy critical imports in the energy, strengthening the role of the Finance national Cooperation and Develop
agriculture, and health sectors. Im Ministry in debt management. ment. British Overseas Development
ports include heavy fuel oil (to assure Minister Linda Chalker, speaking on
adequate heat :md electrical power Vienna Institute for Human behalf of the European Community,
this winter); a~:rochemicals, veteri Investment told the conference it would be help
nary medicines, and machinery for ful if all countries were to call upon
food production; and drugs, vaccines, In Vienna six international institu the World Bank to convene consulta
and supplies for local production of tions inaugurated the Joint Vienna tive groups.
Volume 3, Numter 9 13
The Wood Bank/CECTM
New Books and Working Papers *
.. The CECTM unit of the World Bank regrets that it is unable to supply the publications ,risted.
World Bank publications: The Livestock Sector in Eastern
[Theoretical explanation of macroe co
Europe-Constraints and Oppor
nomic instability during transition.]
Poland-Health System Reform tunities
WP No. 69, Washington, D.C., 1992,
A Country Study, Washington, D.C., Discussion Paper No. 174, Washing
23p.
1992,104 p. ton, D.C., 1992, 51 p.
7b order: IMF Publication Services,
Since the 1970s, health indicators in Ramgopal Agarwala
700 - 19th Street, NW, Washington,
Poland have plummeted. Life expect- . China: Reforming Inter D.C. 20431, tel: (202) 623-7430, fax:
ancy is down and postneonatal mor governmental Fiscal Relations
(202) 623-7201.
tality is worse than in other Euro Discussion Paper No. 178, Washing
pean countries. Polish men die ton, D.C., 1992, 76 p.
� � �
prematurely from cardiovascular dis
ease, cancer, and accidents and inju Available from the World Bank book� Henry Y. Wan, Jr.
ries. The health system suffers from store or to order: World Bank Publica� The Market Transition in Taiwan
ineffective service delivery and a tions, tel: (908) 225�2165 or P.O. Box [China]: Any Relevance for PRe?
heavy reliance on public funds. Basic 7247�8619, Philadelphia, PA 19170� WPS Transitions from State Social
medical supplies are scarce, facilities 8619. ism, No.5, 1992,57 p.
are inadequate, and health workers To order: Cornell University, M.
are demoralized by hard work and � � � Einaudi Center, Ithaca, NY.
low pay. As a result, health care is
poor in quality and hard to obtain. IMF publications: Chinese entrepreneurs still make
The government pays most costs and decisions in an environment different
confines private services to diagnos M.I. Blejer, M. Mecagni, R. Sabay, R.
from their counterparts elsewhere.
tic tests and ambulatory care for acute Hides, B. Johnston, P. Nagy, R. Peper
The wage contract still borders on ex
illnesses. Albania: From Isolation 'lbward
ploitation. The criterion for success is
Reform
the ability to navigate the socio
A government health care task force Occasional Paper No. 98, Washington
political milieu and not the ability to
worked with the Bank in June 1990 to D.C., 1992, 84 p.
solve technological and marketing
draft reforms. In the short term, re problems. The latter function is exer
forms aim to protect past achieve E.R. Borensztein, D.G. Demekas, and
cised by foreign partners, either in a
ments, prevent a worsening of health J.D.Ostry
joint venture, or in a trading relation
status in vulnerable groups, and bal The Output Decline in the After
ship like international subcontract
ance care between public and market math ofReform: The Cases ofBul
ing. And it is the foreign partners who
control. In the medium term, the sys garia,Czechoslovakia,andRoma
retain the initiative in business deal
tem must cope with the rising burden nia ings and earn the lion's share of prof
of chronic, noncommunicable dis WP No. 59, Washington, D.C., 1992,
its, according to this paper.
eases; upgrade technology; and ad 41 p.
just the mix ofchronic and acute care. The Chinese economy has every op
The drastic changes ahead will not be Guillermo A. Calvo and Fabrizio
portunity to perform at least as well
easy, the study says. "Even with the Coricelli
as the Taiwanese economy. The ob
most favorable possible increase in Output Collapse in Eastern. Eu
stacle is not the socialist bias against
spending on health-which would rope: The Role of Credit
monopolistic capitalism but bureau
come at the cost of much-needed in WP No. 64, Washington, D.C., 1992,
cratic institutions that prevent com
vestment in other sectors-Poland 22p.
petition, claims the author. Instead of
would have to face the trade-off be keeping inefficient firms alive, prior
tween equity and efficient delivery of Adam Benett and Susan Schadler
ity should be given to management
health services. InterestRate Policies in CEE:The
reform and inefficient businesses
Influence of Monetary Overbang
should be exposed to competitive
China-Long-Term Issues and Op and Weak Enterprise Discipline
forces.
tions in the Health Transition WP No. 68, Washington, D.C., 1992,
Country Study, Washington, D.C., 21 p.
Other papers in this series:
1992,133 p.
Shoukang Lin
� VictorNee.SleepingwiththeEn.
Cornelis de Haan, Tjaart Schi11horn A Simple Monetary Model of a
einy: Why Communists Love the
van Veen, and Karen Brooks Shortage Economy
Market. No. 92.1,36 p.
14 October 1992
I
Transition
� Janet Mitchell. Creditor Passiv highest incomes, the mos~ favorable � Izabela Bolkowiak and Andrzej
ity and Bankruptcy: Implications location, the fewest agricultural prob Wernik. Problems of Fiscal Policy
for Economic Reform. No. 92.2, lems, booming trade with the EC, the in Poland. WP No. 28.
25p. bestrecord oftransition, and the least � Grzegorz W. Kolodko. Stabiliza�
� Sijin Suo Motivations of Profit threatening migratory pressures. tion, Recession and Growth in
Seeking Behavior and Market [Editor's note: The newly independent Postsocialist Economies. WP No.
Oriented Growth of Chinese Slovenia is not included in the au 29, 1992, 60 p.
Firms. No. 92.3, 35 p. thors' assessment.] Poland comes
� Yusheng Pengo Wage Determina next, and the Baltic states might be Information: IF, Information and
tion in Rural and Urban China. ready as soon as Poland. Bulgaria and Publication Section, Warsaw,
No. 92.4,42 p. Romania are further behind economi. Swietokrzyska 12.
� Valerie Bunce and Maria Csanadi. cally and politically and are more
A Systematic Analysis of a Non likely to generate major migration � � �
System: Post CommunisminEast flows, contends the CEPR report.
ern Europe. No. 92.6,26 p. Recent publications in the Hungar
Thorder:CEPR,25-280ldBurlington ian Ministry of Finance series, "Pub
Th order: Soviet and East European St., London WIXlLB. TeI:(4471) 734 lic Finance in Hungary";
Studies Program ,Rakey Cole, 164 Uris 9110, fax:(4471) 734-8760.
Hall, Ithcu:a, N'114853�7601. Infor Used in Pub� � 'lechnica1 'lerms
mation: Ms. J oA 'ln DiPerna, tel:(607) � � � lic Finance in Hungary. No. 100,
255-1004. 1992,170 p.
CERGE, Charles University, Prague, � TheBudapest Stock Exchange,
� � � Faculty of Social Sciences 2 Years Old. No. 10 1.
� New Labor Code in Hungary.
Is Bigger Betf;t~r? The Economics
Working papers: No. 102.
of EC Enlargement
� NewActonPublicFinances.No.
Centre for Economic Policy Research,
� Karel Dyba and Jan Svejnar. Sta 103.
London, Monit��ring European Inte
bility and 'li"ansition in Czecho � Act on Employees' Stock Own
gration NC). 3, 1992, 115 p.
slovakia [in early 1992]. WPS 7, 30 ership Program.. No. 104, 21 p.
p.
Key observ'atiolls of the 1992 Annual � KatherineTerell.Productivityof Th order: Perfect Publisher, 1075
Report on furth3r enlargement of the Western and Domestic Capital in Budapest. Rumbach S.u.15/a.
Community: Polish Industry. WPS B.
� Zdenek Drabek. Convertibilityor � � �
� The Ce,ntral and East European Payment Union? Convertibility!
Countries (CEI;Cs) would be expen WPS 12. New books:
sive entrants, "ith current EC "cohe
sion" policies entailing annual trans Lecture transcripts: Robert W. Cambell
fers from curretlt members ofB billion The Failure of Soviet Economic
ecu to Czechoslovakia, Hungary, and � Mart Bakal. Foreign Investment Planning
Poland and 5 billion to Bulgaria and and Privatization Projects. April Indiana University Press,
Romania. 2, 1992, 20 p. Bloomington, 1992.
� Immediate free trade should be � Miles Valta. The Establishment
introduced bet',veen the CEECs and of Stock Exchanges and Privat V. Samonis and C. Hunyadi
the EC for all goods and services, in ization in the CSFR. May 13, 1992, Big Bang and Acceleration: Mod
cluding agriculture and other sensi 13p. els for the Postcommunist Eco
tive sectors; high capital mobility nomic 'li"ansformation
should be formalized in a new Euro 7b order:CERGE. Thboritska23. es Nova Science Publishers, Commack,
pean Economic Space (EES). 130 87 Prague, Czechoslovakia. Tel: NY, 1992, 65 p.
� Although current income dispari� (422) 277-251, fax: (422) 277-249. Information:NSP,tel:(516)499-3103.
ties probably will not generate migra fax: (516) 499-3146.
tion in excess Df 5 percent of CEEC � � �
population OVI~r twenty years, free
labor mobility should not be intro� Recent working papers ofthe Warsaw
duced now. Institute of Finance, Poland:
At present thl~ Czech republic and � Grzegorz W. Kolodko. Structural
Hungary appear the most plausible Adjustment Policy in Poland. WP
candidates fol' admission with the No. 26.
Volume 3. Number 9 15
The Wand Bank/CECTM
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Staff may contact the Joint Bank�Fund Library, (202) 623- 7054.
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TRANSITION is a regular publication of the World Bank's Transition and Macro-Acljustment Division, Country Economics Department. The
findings, views, and interpretations published in the articles are those ofthe authors and should not be attributedto the World Bank or its affiliated
organizations. Nor do any ofthe interpretations or conclusions necessarily represent official polley ofthe World Bank orofits Executive Directors
or the countries they represent. Richard Hirschler is the editor and production manager. Desktopping is by Mary Mahy for the Policy Research
Dissemination Center. To be on the distribution list, send name and address to Richard Hirschler, Room N-6027, The World Bank, 1818 H Street
NW. Washington, D.C. 20433 or call (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.
16 October 1992