Macroeconomics and Growth Division * Policy Research Department *The World Bank WVelfare or Economic Growth We are certain that the following articles will generate animated discussion about the costs and benefits offast growth. What is the role of traditional institutions in a radically changing society; that tries to overcome a historical lag to become a member of the European Union (EU) on an equalfooting with other members? Is there a real tradeoff between social expenditures and faster economic growth, or can the two be targeted at the same time? Jeffrey D. Sachs andAndrew M Warner from Harvard Universityargueforaccelerating growth in order to overcome the historical legacy in Cent ralandEastern Europe. Jose Tavares and R om ain Wa czia rg, aIs o fro m Harvard Un ive rsi ty, ana lyze th e posi ti ve effecet of de m ocra cy on gro wth b ut aIs o a rgu e tha t more equality, though important for holding the social fabric together, hinders growth. Michael Bruno andLyn Squire of the World Bank disagree, arguing that new World Bank research reveals that more equality in asset (land) dtstribution and equal opportunities in health care and education boost economtc growth. ________________ ____________________________:________________________ . -What's Inside... Banking Turbulence in the Czech How to Catch Up with the Industrial Republic (page 7) World-Achieving Rapid Growth in Quotation of the Month: "You want to make sure that people have health Europe's Transition Economies care and a full stomach and are not adversely affected byvthe transition." by Jeffrey D. Sachs and Andrew M. Warncr President Wolfensohn on strategic issues of the World Bank (page 9) The preerminenteconomic challenge be cut in half, totwventy-three years. The The World Bank Invests in Social for the Central European Econo- key issue for Poland and the other CEEs, Capital-An Interview (page II) T mies in transition (CEEs) is to therefore, is how to achieve high rates of Lsosfo odv rjc grow rapidly over a sustained period in economic growth in the next decades. (paessn 12) a odoaPrc order to narrow the economic gap with(pg12 Westemn Europe. If the CEEs grow only To do this, the CEEs will have to do The State in a Changing World- :: ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~h Nex 'D (pag 15) :: ' slightly faster than the EU, convergence better in th coming years than the recent will take several decades (see Transt- performance of the less advanced EU Euromoney's Country Ranking tion, vol.7, no. 1, January-February 1996, economies-Greece, Ireland, Portugal, (page 17) p. 6). Poland's income level today is 36 and Spain. Although Ireland, Portugal, Bank-Led Restructuring in Poland percent of average income in the EU. and Spain each grew rapidly in the last (page 19) Assuming that per capita income grows five years ofthe 1 980cs, that provedito be Letters to the Editor (page 22) an average of 1 percent a year in the EU ashortphased-only Irelandhas achieved Milestones of Transition (page 23) and 3 percent a year in Poland, it would rapid growth in the 1990s. Greece has d hetween agenditure 27d take forty-six years for Poland to reach never achieved sustained rapid growth in WolBnkMFAed(pg27 90 percent of the average per capita the past fifteen years, and Spain and Conference Diary (page 30) income ofthe EU. But ifPolandmanages Pornugal grew very slowly in the early New Books and Working Papers to boostgronWthto5 percent per capitaa 1980s and the early 1990s. For the fif- (page 32) year, the time it takes Poland to reach 90 teen-years during 1980-95, all fourcoun- Bibliography of Selected Articles percent of EU per capita income would tries fell short of 5 percent per capita (page 39) TheWorldBank/PRDMG Rates of Growth, Savings, and Investment (percent) haveestablished special economiczones Growth of Real GDP toencouragenewexport-orientedindus- Growth of real GDP per Savings Investment perperson real GDP economically as a share as a share (PPP adjusted tries and science parks for high-tech in- Type of Economy perperson activepop. of GDP of GDP 1994 dollars) dustries. These economic zones are Type of Economy ~~1985-94 1985-92 1995 1995 1994 Very fast growing economies often supported bytax holidays andgov- Chile 5.1 4.8 25.9 24.9 3,467 Hong Kong 6.4 6.4 n.a. 28.8 10,599 e9mentprovisionofinfrastructure(such South Korea 9.2 8.3 35.8 33.5 4,217 as land, energy, communications, ware- Malaysia 5.1 4.8 33.7 27.9 4,146 Mauritius 5.7 5.5 24.8 2798 4,226 housing, expedited customs processing, Singapore 5.7 5.7 42.3 33.1 8,616 and improved transport links to nearby Taiwan (China) 7.7 7.3 32.1 22.6 5,449. Thailand 7.4 5.9 28.8 33.8 2,463 airportsandseaports). Thegoveniment's Slow growing economies education policy also helped to achieve Argentina 2.1 2.3 19.1 16.6 5,324 Brazil -0.5 -1.1 24.0 21.0 4,017 high growth rates. Mexico 1.6 0.3 19.7 21.1 5,621 Turkey 3.1 2.4 21.5 23.2 3,077 Poor European Union economies 4. The VFGEs also have some natural Greece 1.4 1.0 15.2 19.2 6,224 advantages that have enabled them to Ireland 4.1 4.1 20.7 17.6 7,275 Portugal 8.1 8.6 20.4 28.5 5,070 pursue rapid export-led growth. They Spain 3.8 3.3 21.0 23.3 7,526 are all coastal economies with natural Central European economies Czech Republic (1994) 2.4 n.a. 21.1 20.0 5,880 seaports that could be equipped with Poland (1995) 5.0 5.0 18.0 19.0 3,826 modemrcontainerportfacilities. Onthe Hungary (1994) 2.5 2.1 11.6 21.0 4,645 n.a. Not applicable. whole, these are abundant labor econo- Source: Authors. mies and relatively scarce in natural re- Notes: See p. 15-16 of original manuscript. re l aly sources (Chile and Malaysia are the two exceptions in this regard). growth. Therefore, instead of being sat- high degree of market competition, open isfied with these growth rates, the CEEs trade, flexible labor markets, and low Theabundanceoflabormeantlowinitial should instead try to match the perfor- taxes, especially on labor income, wages andthe ability to compete intema- manceofthecountriesthathaveaproven tionally on the basis of labor-intensive record of sustained rapid growth. 2. Savingsandinvestmentrates arehigh, manufactures (footwear, apparel, tex- as a result of high government saving and tiles, and electronics assembly opera- Our list of very fast growing economies investment, high private saving, andhigh tions). Thesemanufacturesprovidedthe (VFGEs) includes Chile, Hong Kong, foreign direct investment. The VFGEs startingpointforexport-uedindustrializa- Republic of Korea, Malaysia, Mauritius, invest considerably in infrastructure tionginithesefeconomies, exceptiforsChile Singapore, Taiwan (China), and Thai- (energy, communications, andtransport), where the recent export-led growth has land. All are middle-income developing often in support of international trade come mainly t exrt-led growthha comemainy magriculture and resource- countries with populations (in 1989) of activities. In turn, high private saving based industries. A scarcity of natural morethan 1 million. They achieved aper seems to be related mainlyto acombina- resources has been an advantage to capita annual growth rate of at least 4 tionofdemographiccharacteristics,over- economies seeking to establish export- percent during 1985-94. all fiscal and regulatory policies, and led growth in manufactures-in the past national pension (retirement) policy, twenty-five years such economies have These countries all share important char- based on individual saving accounts run tended to grow more rapidly than re- acteristics of economic strategy. Their by private pension funds. source-rich economies. outstanding success is based on four clusters of factors: 3. The VFGEs have quickly absorbed If the CEEs adopt the policies of the newtechnologiesfromabroad(acquired VFGEs, the time needed to reach 90 I. Allocative efficiency (the efficiency throughpromotingforeign directinvest- percent of EU per capita income can be withwhichresourcesareallocatedamong ments and licensing) and have adapted cut from 120 to 23 years for Hungary, the various sectors of the economy at a them in domestic production (techno- and from 141 to 31 years for Poland. pointintime)isespeciallyhigh. Theyrely logical upgrading). None ofthe VFGEs is Similarly, the time needed to reach 70 mainly on market forces in the allocation a major innovator in technology, but all percent of the EU average can be cut of resources and have kept government have been effective in using world-class from 36 to 10 years forthe Czech Repub- interventiontorelativelylowlevels.These technologies to upgrade domestic pro- lic,from 4 to 13 years forHungary, and countries are further characterized by a duction and infrastructure. The VFGEs 2 September-October 1996 Transition Years Required to Close the Gap with the European Union higher than that in the 1993 GDP Years to raise GDP to Years to raise GDP to VFGEs, and even that in as percentage of Policy 70 percent of the 90 percent of the the less-advanced Euro- Country the EU Average action EU average EU average Czech Republic 53 Keep current policies 23 56 pean economies. Harmonize with EU 36 111 Harmonize with VFGEs 10 20 Whileoverallgovernment Hungary 48 Keep current policies n.o. n.o. spendingisveryhigh, bud- Harmonize with EU 45 120 getary investment spend- Harmonize with VFGEs 13 23 getary comen'son Poland Keep current policies 194 n.o.g iS lowby comparison Harmonize with EU 65 141 with that of the VFGEs. Harmonize with VFGEs 21 31 CEEs have squeezed in- n.o. Not obtainable with current policies. frastructure spending ex- Notes: see pp. 29-30, original manuscript. cessively to make room Source: Authors. csieyt aero for large current expendi- from 65 to 21 years for Poland. Harmo- is goingthrough deep soul-searching over tures, particularly transfer payments. nization withthe standards ofthe VFGEs the role of the state, as country after Extremely hegh public expenditure and will lead to large increases in expected country reaches a point of fiscal stress. taxatilon in the CEEnis likely to lend to growth rates: the Czech Republic can Perhaps the CEEs will be able to take a r isin enem lorate en- grow at 6.58 percent, Hungary at 4.61 larger step toward asmallerandgrowth- nsiglong-term unemploymentrate,en percent, and Poland at 6. 10 percent. promoting state. couragement ofblack-market activities, lower foreign direct investment, large The less-advanced EU economies failed There is no doubt that the CEEs have public deficits, and a reduction in na- to emulate the VFGEs in fiscal policy: achieved a stupendous breakthrough in tional saving rates. Many ofthese effects ofare already at play: public sector saving Greece, Portugal, and Spain (but not allocative efficiency since the start of is lower deficits are higher, and overall Ireland) saw steep increases in public market reforms. They became full- Isnl saving and ign ve rall spending and taxation as a percentage of fledged market economies underpinned far lower in the CEEs than in the VFGEs. GDP during the 1980s and first half of by administrative, political, and legal the 1990s, associated with a rising tax changes, in a relatively short period of The CEEs have several important wedge (the difference between the cost time-about half a decade. Within an- growth-promoting tasks in addition to of labor and the net wage), a high and otherfewyearstheCEEsshouldrivalthe the pletinofarket reforse rising unemployment rate, and a falling Western European economies in other the completlion of market reforms (es national saving rate. (Ireland bucked the areas oflegal and administrative reform, pecially privatization and financial trend after 1986, reducing total govern- such as banking reform, securities mar- (especially pension reform) to lower ment spending from 53 percent of GDP ket development, andcompetition policy. distorionsian re to say- in that year to about 43 percent of GDP in 1994.) But the size ofthe government spending ing rates: and taxation as a proportion of GDP has andtxatin a aprporton fGDPhas 1. A clear target date for membership For several reasons the CEEs are subject not declined since the onset ofreforms in in the EU is important in order to lock to the same fiscal pressures as the less- 1989; totalpublicspendingremainsabout in the economic reforms and boost advanced economies of the EU: a com- 50 percent ofGDP, among the highest in investor confidence. Most of the diffi- mon ideological commitmentto auniver- the world, and certainly the highest for culties ofaccession can be overcome if sal social welfare state; an effort to har- market economies at comparable levels c monize social, fiscal, and tax policies as of income. (A sharp cut in budget sub- a few basic priciples are recognzed: well as other areas of economic manage- sidies to enterprises and households has ment, including a large government role been offset by an equally steep increase * The CEEs need market access, not in the economy; and the political and in social spending as a share of GDP. financial aid from the EU (In return economic ratchet effects of entitlement The bulk of the increased spending unilaterally renounce their desire for a spending (when generous social insur- went to retirement pensions.) The over- significant share of EU structural ance systems are in place, they are ex- all high levels of tax collection are also s.) tremely difficult to unwind). This out- reflected in high marginal tax rates and funds.) come is not inevitable, however. The EU ataxwedge on labor incomethat is vastly Volume7, Number 9-10 3 The World Bank/PRDMG The CEEs should join the EU with a long transition period, presumably a How Democracy Fosters Growth: decade from the time of membership, in which to harmonize agricultural A New Empirical Approach policyandachieve free labormobility by Jose Tavares and Romain Wacziarg *The CEEs should opt out of the Social Charter (in return for agreeing /ost countries in Central and Butthese studies look atthe direct effect to a postponement of free mobility of ajgrEastern Europe andthe former of democracy on growth, an effect that labor), becausemthese economies should Soviet Union are recent de- is not well grounded in theory. If institu- not be further burdened with high so- mocracies. There are still public debates tions matterforgrowth, they mustmatter cial costs. on whether their political system is an indirectly through their effect on eco- assetorliabilityinthequestforeconomic nomic variables. Hence the mechanism 2. A coherent medium-term strategy is advancement. The different priorities through which democratic institutions required for expanded infrastructure given to economic and political liberal- affectgrowth deserves careful examina- investment spending (transport, corn- izationinRussiaandChina, forexample, tion. Ourworkhas attemptedto examine munications, and education) linked to also bring into question whether there is how democratic institutions affect cer- economic integration with Western an optimal sequence of liberalization. tain variables that are directly associated Europe. Science and technology poli- with growth in per capita GDP. We se- cies should spur productivity growth. Itis often arguedthat political rights and lected from the political science and the freedoms are in themselves a desirable economics literature seven variables that 3. A clearmedium-term strategy should feature of society andthatthey cannot be determine economic growth and are likely provide for the completion of privati- traded-off against potential economic to be affected by democracy. We then zation and deepening ofthe rule of law costs. Hence investigating the effects of used econometric methods to evaluate broad fiscal reform to reduce the share democracy on economic growth is some- the effect of democracy on each channel of government spending and taxation times deemed irrelevant at best, and variable and the effect of each channel in GDP, and setting appropriate (and dangerous at worst. But whether the variable on growth. Our sample con- ambitious) growth targets for the next development of political rights is the re- sistedofdata onfifty countries, thirty-six ten v'ears, with the aim of emulating the sult of material progress or is one of its ofwhichweredevelopingcountries, from growth performance ofthe VFGEs. determinantsisacrucialpolicyquestion. 1970 to 1989 (thus no transition econo- Is the cause of democracy better served mies could be included). This article is based on the authors' by allowing improvements in standards paper "Achieving Rapid Growth inthe of livingtotaketheireffectorbyactively The Seven Channels Transition Economies of Central Eu- promotingthepromptadoptionofpoliti- rope," Discussion Paper 544, July calrightsandfreedoms?Similarly,isthe * The qualtiy and stability of gover- 1996, Harvard Institute for Interna- cause of economic development better nance. By providing a clear system of tional Development, OneEliotStreet, served by prompt or delayed adoption of altemating between political forces and Cambridge, MA 02138. To orderfax: democracy? by encouraging open debate over policy (617) 495-0527. options, democracies allow peaceful and Formal economic research has failed to regular, rather than violent and unpre- Jeffrey D. Sachs is Professor oflnter- address these issues convincingly. Most dictable, transfers of power. Less uncer- national Trade at Harvard University statistical analyses pointto aweak effect tainty, resulting from less political insta- and advises governments in several ofdemocratic institutions on the speed of bility, is likely to foster investment and transition economies. material progress. Studies focusing ex- growth. plicitly on the role of democracy, such as Andrew M Warner is Research Asso- that ofRobert Barro (1995), have found Autocratic rulers have an incentive to set ciate at the Harvard Instituxte for In- that the effect of democracy on growth up highly distortionary policies that ben- ternational Development. is not statistically different from zero efit a small set of insiders at the expense when several growth-deternining vari- of the general population and to capture ables are held constant. the resulting rents. Democracies make it easier to keep these abuses in check, and they control the quality of policymaking 4 September-October 1996 Transition by guaranteeing freedom of the press tion and health spending is publicly fi- How Democracy Fosters Growth and of association and by promoting the nanced and contains a redistributive ele- independence of the judicial authority. ment. Thus if democracies are more Our empirical methodology has uncov- The results ofour study suggest a strong responsive than dictatorships to the basic ered several ways in which democracy and significant statistical relationship be- health and education needs of the popu- induces costs and benefits for growth. tween the efficiency of governnent ser- lation, they will choose policies that pro- Thefollowingtabledisplaysthepercent- vices and theextentofpolitical freedom. mote human capital accumulation. We age points of growth that result from a A lower level of distortions allows for find strongevidencethatdemocracy leads switch from dictatorship to full democ- higher growth in per capita GDP. to higher levels of human capital, which racy. in turn generates growth. The size and composition of public Growth Generated When Switching expenditures. Autocrats may face in- A move from dictatorship to democracy from Dictatorship to Democracy centives to increase the size of govern- can be expected to give greater weight to Channel Percentage ment to maximize their powers and le- the preferences of the poor in collective of growth points verage on the economy. Such abuses decisionmaking. Because many govern- Political stability 0.602 may be better kept in check in democra- ment decisions have an impact on in- Govemace 0.653 cies. lfdecisionmakers are also the own- come distribution, democratization-as Governance 0.65 3 ers of capital as in dictatorships, there is our data confirmed-leads to lower in- Govenment size 1.408 anincentivetoselectagrowth-maximiz- equality, which in turn could-slow eco- Trade policy penness 1.080 ingsize forgovemment. Ifthepoorhave nomic growth. Income inequality is a Humancapital 0.035 a larger say in public affairs, as they do channel through which democracy works Income inequality -0.78'6 in democracies,they maytendto votefor negatively for growth. Pubol nvestment -0.036 distorting redistributive measures that Total net effect 2.957 may hinder growth. These arguments *Trade openness. Democracies make Source: Authors. are not supported by our data, however. good neighbors. Democracies compete Going from autocracy to full democracy in the marketplace rather than on the Bypromotingasmallergovernment, better is associatedwith a 6.5 percent decrease battlefield. Moreover, protectionistpoli- governance, greater trade opeiness, in the ratio of government consumption cies tend to be imposed to benefit a few higher levels of human capital, and less spending to GDP. This decrease in the producers at the expense ofa great mass political instability, democracygenerates size of government fosters growth. of consumers; democracies and autocra- large gains in grovth. Because of these cies may weigh differently the prefer- positivefactors alone (that is, controlling Democracies may spend more on pro- ences of these two groups. In our data a for other determinants of growth), per ductive expenditures because voters can switch from total autocracy to complete capita GDP in a full democracy, such as voice preferences for types of spending democracy indeed spurs growth. those in Norway or New Zealand (the that lead to tangible improvements in their welfare. On the other hand, demo- The season of energy price increases cratic governments may face a shorter horizon because of the frequency of elections. This favors less-productive types of outlays, such as gifts to special interest groups or unproductive con- sumption spending. Democracies tendto ';' spend less than autocracies on produc- tive types ofgovernment spending, such JI as infrastructure andother public invest- ments. This is a pathway through which democracy can be detrimental to growth. ILT_____ * Societal choices and the electoral process (human capital and income "Darling, can you wait a little bit before calling the fire departmnent? At least now inequality). A substantial part ofeduca- the room will get a little warmer.P From the Hungarian magazine Hocipo. Volume7, Number 9-10 5 The WorldBank/PRDMG mostdemocratic countries inoursample), will tend to grow 4 percentage points The Less Equal the Asset Distribution, faster than that ina totalitarian country, the Slower the Growth such as Myanmar (the most autocratic country in our sample). by Michael Bruno and Lyn Squire Democracy also has costs in terms of growth, having to do with income in- In 1955 economist Simon Kuznets ar- One likely explanation involves credit. equality and public investment, which gued that as a country industrializes, Investment is crucial for economic ex- jointly account for a 1 percentage point the gap between the rich and poor first pansion. Land is a prime form of col- difference in growth rate weren poll idens and then gradually narrows. lateral. In countries with a very un- democracies and complete dictatorships. But Kuznets's original work used his- equal distribution of assets, many Some of these costs may well be worth torical data from the first half of the people find it difficult, or impossible, paying, however; for instance, less in- nineteenth century forjust three coun- to invest even in their own health or come inequality may be considered a tries, Great Britain, Germany, and the education. The new research findings desirable feature of society in its awn United States. Usingagreatly improved and the different experiences of coun- right, even if it comes at some cost to information base, World Bank research tries suggest three lessons: growth. showed that growth does not consis- tently affect equality either way. -Countries that wish to reduce poverty We started out by asking whether the should aggressively pursue sustained cause ofdemocracywas better served by Of the eighty-eight countries in which economic growth. allowing the improvement in standards there was economic growth for a de- of living to take its effect, or by actively cade, equality improved slightly in *Countries with very unequal asset dis- promotingthe prompt adoption ofpoliti- about half the cases and worsened tribution should try to improve the cal rights and freedoms. By explicitly slightly in the other half. The changes access of the poor to productive as- investigating the channels of influence over time were much smaller than the sets. Land redistribution is often po- from democracy to growth, ourapproach differences in equality across coun- litically difficult and may hurt the poor has revealed the economic costs and tries. While growth did not affect equal- if it reduces investment, which is cru- benefits ofdemocracy. The benefits were ity, it was strongly associated with re- cial to growth. Other potential rem- larger thanthe costs. Democracy fosters duced poverty. Incomes of the poorest edies include improving access to edu- growthI development and political free- fifth of the population improved in 85 cation, health care, and credit. dom are mutually reinforcing. percent ofthe cases in which there was economic growth for a decade. In *Our research does not support the The authors are Ph.D. candidates at general, the higher is the rate of growth, widely held view that governments Harvard University. This article is the larger is the improvement in the must choose between equality and based on theirpaper "How Democracy poor's incomes. growth. The most effective policies Fosters Growth " (1996). The papercan will be those that simultaneously pro- be obtainedby contacting the authors at World Bank research shows that the mote both. tavares@fas. harvard.eduorwacziargg less equal a country's distribution of fas. harvard.edu. assets, the slower its economic growth. Excerpted from the authors' recently What is the impact of equality on published article in the International References growth? Using new data, the Bank Herald Tribune. study found that developing nations with a more equal distribution of as- Michael Bruno is Chief Economist Garro,hRobert ER94. kiDemPocracpyand sets, particularly land, grew more rap- and Senior Vice President for Devel- Huntington Samuel P 1991. The Third idly than countries with a less equal oprmentEconomics at the WorldBank. Hav.Untint,sam P. 1991.ahe Thrdss distribution. The Bank study did not Lyn Squire is Director of the Policy Wave. University of Oklahoma Press; find a similarly strong association be- Research Department at the World Tav9r6s, JHose anDeRomrai Wacsiars. tween income equality and growth. Bank. 1996. "How Democracy Fosters Growth." Harvard University, Ph.D. Why is a more equal distribution of candidates, August. land and other assets good for growth? 6 September-October 1996 Transition Banking Turbulence in the Czech Republic and the "Bad Boys" from Motoinvest A grobanka, the largest private rectly controlled bythe bank. Sharehold- should sell their investment fund shares bank of the Czech Republic and ers allied to Motoinvest also gained a to the group, the campaign argues. But the fifth largestbank inthe coun- 30-40 percent stake-practically corpo- a recent Business Central Europe por- try, was placed under forcedcentral bank rate control-of Agrobanka. Motoinvest trait argues that Motoinvest's empire has administration in mid-September. The itself hada l4percentstakeinAgrobanka. become increasingly like those of the intervention followed the collapse of the large institutions it claims to be battling. medium-size Plzen-based Kreditni Banka But who is behind the Prague investment in August. The bank has run up losses of group Motoinvest? The group has ac- About three months ago, several state some 12 billion koruny ($450 million). quired a reputation of one of the Czech financial institutions, including the Na- The main reason for Kreditni's failure is financial system's leading "bad boys." tional Property Fund and the country's widelyconsideredtobeincompetentman- Nearly everyone in the group is under largest health insurance company, agement, although allegations of fraud thirty. Jan Slosiarik, one of the "boys," VseobecnaZdravotni Pojistovna, began against several top bank officials are also explainedthe group's credo: 'You are on withdrawing their deposits from under investigation. Ceska Pojistovna, a field with given boundaries, but every- Agrobanka. Agrobanka was also forced Kreditni Banka's majority shareholder thing else is changing every day. Find to pay off its obligations to other state- and the Czech Republic's largest insur- your position, find your chance, and go affiliated depositors. Its liquidity assets ance company, was also hit by these for it." Motoinvest's chosen method of worsened, but other banks refused to events. The core of Kreditni's problems pursuithasbeentogoaftertheunderval- lend to it, presumably because of its was non-payment by a large number of ued stock of Czech companies as the connections to Motoinvest. The four the bank's debtors, most of them local government pushed through its mass largest (state-controlled) banks-Ceska entrepreneurs with little creditworthiness privatization plan. Motoinvest has also Sporitelna (the largest savings bank), by Western standards. Because of inex- attemptedto gain significantinfluence in Komercni Banka, Ceskoslovenska periencedmanagement,Kreditnilentbil- the banking sector through hostile take- Obchodni Banka, and Investicni a lions of koruny to high-risk borrowers overs of some banks' investment funds. Postovni Banka-refused to trade with who have been unable to repay their Agrobanka on the interbank market in an obligations. A special investigating com- Since late last year, Agrobanka and the apparentjoint effortto force Motoinvest mittee, set up by the Czech parliament on small Plzenska Banka, controlled by the out of the banking sector. (Motoinvest October 1, will investigate the affair and Motoinvest group, have spent more than also owns a significant minority stake in present its findings by the end of Febru- I billion koruny ($38.4 million) to con- Ceska Sporitelna, the country's ary. vince investors that the group is their second-largestbank.) Motoinvestfmally crusading The upheaval in the Czech banking sec- friend, ready ~ ~ 's tor raises questions about bank supervi- to do battle ', sion. In total, twelve banks have been with the large strippedoftheirlicenses, putinto liquida- banks and in- tionorplacedundertheadministrationof v e s t m e n t the Czech National Bank (CNB) in the funds that past two years. In a recent analysis, the d o m i n a t e Prague newspaper Dnes said that Czech finance Agrobanka's difficulties are rooted in the and are re- government's attempt to force sponsible for Motoinvest, a private investment group the financial - specializing in financial ventures, out of s y s t e m s the banking sector. Motoinvest has been opaqueness .. $ / involved in the Plzen Kreditni Banka as and ineffi- a major shareholder in the insurance ciency. Small giant, Ceska Pojistovna, which is indi- i n v e s t o r s Volume7, Number9-10 7 The World Bank/PRDMG expressed a willingness to leave Nobodyknows whatthe futureholds for beendelayedalreadythisyear,butitwas Agrobanka (and the entire banking sec- Motoinvest. Director Jan Dienstl was expected to move ahead after June's tor) but is asking fora large premium for arrested in mid-September, though he parliamentary elections. Now Prime its stake-around 130 percent of was later released. General directorPavel Minister Vaclav Klaus wants to postpone Agrobanka's share price before forced Tykac leftthecountrysayingthathislife privatizationtomaintainthesector's sta- administration. was in danger. He was followed into a bility. Jan Kalvoda, leader of the Civic self-imposed exile by Kreditni Banka Democratic Alliance, a coalition partner Since itcame under CNB administration, board member Libor Sadilek. They and inthegovernment, arguesthatprivatiza- Agrobanka's situation has stabilized other high ranking officials from tion is needed to create real market con- somewhat. The four state banks quickly Motoinvest and Kreditni Banka are still ditions in the sector. But experts doubt agreed to put together a rescue loan of 6 under investigation, accused of misuse that privatization alone will reduce the billion koruny ($231 million) for of funds and harming the bank's credi- marketpowerofthe"bigfour,"particu- Agrobanka. The CNB has announced tors. For example, the Kreditni Banka's larly the power ofCeska Sporitelna, the that it will honor Agrobanka's financial economics director allegedly received a major provider of funds to the interbank obligations; all deposits, including inter- 3 million koruny golden handshake upon market. est, registered at Agrobanka as of Sep- leavinghis postin August, afterthe bank's tember 17 are guaranteed. Agrobanka license had already been revoked by This article is basedon recent reports of currently has deposits of up to 40 billion Czech authorities. news agencies, the Open Media Re- koruny ($1.53 billion). The European searchlnstitute, andOxfordAnalytica, Bank for Reconstruction and Develop- The banking sector shakeup has dimmed an Oxford, UK-basedinternationalre- ment (EBRD) has expressed an interest privatization prospects for the four larg- search group. in buying up to 20 percent of the bank's eststate-ownedbanks. Privatizationhad equity, provided that Motoinvest sell its shareholdings andthata strong strategic investor(eithera foreignbuyeroracred- l. 3Q: 3 t- itable domestic buyer, such as Komercni Banka) buy a significant stake. Given the importance of banks and ,i /.- /i bank-controlled investment funds in the ' governance of industry, the questions of bank governance and of the tangled and nontransparent webs ofcross-ownership among banks, insurance companies, and investment funds revealed by the Kreditni and Agrobanka affairs take on wider significance. A new banking law that is being prepared proposes a further tight- ening of liberal conditions for investors. Important changes are likely to be made I in the law (whichwill probablybepassed | next year), such as requiring CNB 's per- mission for purchasing a 10 percent or greater stake inacompany (thethreshold - is now 15 percent) The apparent ability of Motoinvest to gain effective control of Agrobanka without this pennission 1 has been one of the most troubling as- pects ofthe latest developments for CNB officials and sector observers. "I was more involved in the policy side-they ran the day-to-day operations." From the World Press Review. 8 September-October 1996 Transition Quotation of the Month: "You want to make sure that people have health care and a full stomach and that they are not adversely affected by the transition." President James D. Wolfensohn on Strategic Issues of the World Bank Group The Cancer of Corruption corruption measures, through technical Joint Initiative with Nongovern- and monetary assistance. mental Organizations We need to address transparency, ac- countability, and institutional capacity. Social Underpinnings From the moment I came to the World And we need to deal with the cancer of Bank, and even before I cane here, I was corruption. In country after country, Social, cultural, and institutional factors being hit over the head with the words people are demanding action on this is- are key to success and to sustainability. "structural adjustment," as though this sue. They know that corruption diverts Without these social underpinnings, it is evil were the principal cause of all evil in resources from the poor to the rich, difficult for economic development to theworld. AndIdidnotbelievethat. So increases the cost of running businesses, succeed and virtually impossible for itto I got Doug Hellinger (from the Develop- distorts public expenditures, and deters be sustained. For economic advance- ment GAP) and a few others from the foreign investors. They also know that ment, you need social advancement- NGO community, who I do not think corruption erodes the constituency for and without social development, eco- could be characterized as intimate friends aid programs and humanitarian relief. nomic development cannot take root. of the institution, to join with the Bank And we all know that corruption is a For the World Bank this means that we pick-ten countries to look at the effects major barrier to sound and equitable need to make sure that the programs and ofstructural adjustment. That process is development. Solutions can only be projects we support have adequate social nowongoing.NGOs selectedtheirgroup. home-grown. National leaders need to foundations: It is a very broad-based group. Many takeastand. Civilsocietyplaysakeyrole *By designing more participatory coun- NGOs have records of being highly as well. try strategies and programs, reflecting critical of the Bank. I am interested in discussions not only with governments, hearing from NGOs and from countries Working with our partners, the World butalso with community groups, NGOs, that have been affected by structural Bank Group will help any ofourmember and private businesses. adjustment on whether what the Bank countries to implement programs to dis- -By putting more emphasis in ourproject has been doing is good or bad. If they say courage corrupt practices. And we will and analytical work on social, cultural, that we should improve what we're do- supportintemationaleffortstofightcor- andinstitutionalissuesandtheirinterplay ing in certain areas, as far as I'm con- ruption and to establish voluntary stan- with economic issues. cernedthatwill be agoodfinding because dards of behavior for corporations and *By learning more abouthowthedynam- then we can do things better. If they investors in the industrial world. The ics among public institutions, markets, comeback and confirmthatwe are doing Bank Group cannot intervene in the and civil society affect social and eco- things pretty well, then more people will political affairs ofourmember countries. nomic development. know that there are some myths associ- But we can give advice, encouragement, ated with some ofthe critism ofthe Bank. and support to governments that wish to In virtually all transition economies, mov- The Bank is out from behind the barriers. fight corruption-and it is these govern- ing from a socialist to a private enterprise We are anxious to find out what we can ments that, over time, will attract the system requires strong social underpin- do better. larger volume of investment. The Bank nings. You wantto make sure that people Group will not tolerate corruption in pro- have health care and a full stomach and Private Sector Partnership grams that we support; and we are taking that they are not adversely affected by steps to ensure that our own activities the transition. If you have political and We have strengthened our outreach to continue to meetthehighest standards of economic advancement, you must have corporations, helping them to assess and probity. Ifwe find evidence ofcorruption socialadvancementcomingalongwithit. to implement projects in our client coun- in projects in which we are involved, we This is why we are discussing the possi- tries. One message is coming through will cancel the projects. But we can bilities of financing social programs in loud and clear at these Annual Meetings: encourageandworkwiththe manycoun- transition economies. we should strengthen our guarantee pro- tries that are interested in taking anti- gram. There are forty-three confirmed Volume 7, Number9-10 9 The WorldBank/PRDMG and probable projects in our Interna-. countriesthatgetthefundamentalsright. realize the potential ofinformation.tech- tional Bank for Reconstruction and De- We are working with our clients on those nology. velopment(IBRD)guaranteepipeline- fundamentals. Strong financial systems most awaiting government action or are key. But there are pervasive prob- Toward a Results Culture investor decisions for the next step. We lems withprudential regulations andtheir I pledged last year to build a "results" are actively lookingathowto expandthis enforcement. Aboutone in five develop- culture at the World Bank-and this program even further. Under our charter ing countries face a banking crisis. Un- effort is showing tangible progress. We the Bank may lend only to governments productive public expenditures and un- have stressed that we will measure our and may guarantee loans to the private collected taxes are a further enormous performancenotbydollarslentorprojects sector only when there is a counter- drag on these economies. That is why approved but by development impact: guarantee by the government. There is the Bank Group, working with the Inter- results on the ground. By putting quality tremendous pressure to allow some parts national Monetary Fund (IMF), is help- ahead of quantity, we have fundamen- of the Bank Group to provide nongov- ing our clients strengthen their financial tally changed the incentives that guide enment guarantees. sectors andreformtheirexpenditurepro- our staff. Backed by tougher quality grams. Ifthe new compact is to succeed, assurance for our work, we are: The International Finance Corporation we must tackle the issues of economic *Increasing our country focus and client (IFC) has had a record year, leveraging and financial efficiency. involvement in our assistance strategies more than $19 billion in support of bylocatingsomeofourcountrydirectors projects worldwide. In the next year, the Sharing Development Experience in our borrowing countries. IFC will extend its reach to sixteen na- * Paying greater attention to our clients tions in which it has never worked be- We have been in the business of re- needs, with customized advisory ser- fore, where the investment climate is searching and disseminating the lessons vices and important new products such tougher.The Multilateral Investment of development for a long time. But the asthesingle-currency loan, which allows Guarantee Agency (MIGA) also contin- revolution in infonnation technology in- our clients to borrow at an effective 50 ues to exceed original expectations. Its creases the potential value of these ef- basis points above theAAA rate. We are guarantees have catalyzed foreign direct forts by vastly extending their reach. To also speeding up our procedures. investments, now totaling an estimated capture this potential, we need to invest * Improving our professional expertise $15 billion, and its on-line marketing and in the necessary systems, in Washington through the creation of sectoral "net- information service-theIPAnet-offers and worldwide, that will enhance our works" among our staff, with the first of data and analysis on thebusiness climate ability to gather development informa- these established in the human develop- in more than ninety countries. Given the tion and experience and to share it with ment area. rapid growth in demand for its services, our clients. In effect, we need to become * Strengthening our management capac- our Board will soon be discussing my the Knowledge Bank: ity, with a substantial executive educa- recommendation for a capital increase * By networking, pooling our wealth of tion program and an exchange program for MIGA. cross-country experience, capturing the with a broad range of private and public best global thinking and expertise on a institutions. We have established a Private Sector given issue, and making it easily acces- * Investing more in our staff, including a DevelopmentGrouptopoolthestrengths sible to our clients and partners. doubling of skills-training this year. of these three institutions and to make * By expandingthe role of our Economic * Looking atstrengtheningthe fieldunits. them more easily accessible to our pri- Development Institute, which already There is an image of "World Bank bu- vate sector partners. We need to attract reaches thousands through its learning reaucrats." I have no doubt that we have more private flows to poor countries. In programs, and is well on its wayto reach- anumberofther,maybetoomany. But 1995, 75 percentofprivate flows, which ing millions by hamessing teleconferenc- whatyou cannot ignore is thatthere is an totaled $170 billion, went to just twelve ing, television, and the Internet. v enormous body of people inthe Bank, an countries. Aboutfiftycountries, mostof * By pioneering new partnerships that extraordhnarilydedicatedgroupofpeople' them very poor, received virtually no connectourclientswithglobalcentersof who have committed their lives to devel- private inflows. Investmnent is linked to knowledge and investment. Our World opment. good policies and good governance, lib- Wide Web site is accessed 1.5 million eral trade regimes, and high savings rates, times a month. Through the Information This compilation is based on President combined with sound legal and judicial and Development Fund, the Bank and its Wolfensohn s speeches and press con- systems. Simply put, capital goes to the partners help the poorest countries to ferences held during the Annual Meet- ings. 10 Septemnber-October 1996 Transition The World Bank Invests in Social Capital: Interview with Head of the Social Task Group ncourage public involvement in project for Baku, the capital of these changes for World Bank strategies. World Bank projects, set up a Azerbaijan, includingpricingpolicy, has * The social impact of Bank-supported E lhigh-profile social learning group, been modified as a result ofconsultations interventions. and channel additional resources into a with nongovernmental organizations * New measures of progress, such as wide-ranging social development pro- (NGOs), the academic community, and social indicators relating to the distribu- gram-these are some of the major pro- consumers. tion of wealth or to levels of violence, posals of a World Bank task group that * Small, experimental social projects (pi- crime, personal security, trust, and social has just completed its report at the re- lots) should be kept alive indefinitely, if capital. quest of President Wolfensohn. The necessary, with modest means. In Rus- head ofthe task group on social develop- sia, for example, the Bank's pilotprojects A multidisciplinary social learninggroup ment, Vice President Shahid Javed Burki help municipal governments take over should continue the task group's work, (Latin America and the Caribbean Re- certain social facilities and services from overseeing the integration of social fac- gional Office), explained major compo- enterprises. tors in the Bank's activity, monitoring nentsoftheprogramto Transition editor * The Bank's social investments should implementation, and collecting and dis- Richard Hirschler. seminating infonnation about successful projects. Q. What will the Bank do differently as a result of the task group's recomi - - - Q. How will this new emphasis on men dations? social issues affect the financial stabil- ity of the Bank? Investment in health, A. The study is not yet completed though education, and poverty reduction, it will be shortly submitted to the Board while strengthening the social fabric of Directors for further discussions. But . of society, will not necessarily be prof- the major directions are already set: the itable ventures. Maybe it is not even bottom line is thatthe World Bank has to possible to talk about return rates. go beyond economic development, in- Can the Bank financially endure this corporating social concerns into its ac- activity in the long run? tivities. Somemajor initiatives ofthetask group are the following: A. I do not see any problem with that. We * During the current and the next (1 998) be small, simpleto implement, and quick will continue to require the return rates financial year all regional departments to bring results. Bank grants to NGOs- that are considered necessary. To put it should present two or three country as- perhaps from the proposed Civil Society into a historical perspective, consider sistance strategies (CAS) to the manage- Fund-could be an efficientway to build thatin 1973 PresidentRobertMcNamara ment and the Board that cover social capacity, try out new incentives, and announced for the first time that the development. These social assessments reduce poverty among the poor who are Bank's projects wouldtargetrurai devel- should incorporate results of dialogue not reached by government programs. opment. However, the retained empha- conducted with representatives of busi- sis is on increasingproduction. As a next ness, labor, womens organizations, and The research program should be ex- step, World Development Report 1980 voluntary and other nongovernment pandedbyfully integrating social dimen- on human resources development em- groups. These groups should increas- sions of development. Topics should phasized that human capital isas impor- ingly participate in programs that target include: tantas physical infrastructureand inputs. the elimination ofpoverty, improvement * The social,institutional, cultural factors World Development Report 1990 on of living standards, and expansion of thatgo into policy formulation and imple- poverty recommended thatgovernments spending on health andeducation. Public mentation and the impact ofthese factors target the poor in their development pro- involvement in projects directly affect- on development outcomes. grams. Now we have gone one step ing their lives should be intensified. For * The changing role of the state market further: supporting the social empower- example, the water supply rehabilitation and civil society and the implication of ment of the people-in other words, Volume 7, Number 9-10 1 1 The WorldBank/PRDMG formation of social capital. A new part- countries, and other lending organiza- specific problems and to increasingly nership is taking shape that will qualita- tions. Transition economies, forced to involveNGOs in its effortstomitigatethe tively change the relationship between downsize their social welfare systems, anguish of those losing out in the transi- the Bank and NGOs, foundations, client can expect the Bank to focus on their tion process. How to Jump-Start Enterprise Adjustment: Lessons from a Moldova Project by Vladimir Goran Kreacic Enterprise restructuring is one of the have easier access to start-up capital, Initially, manyenterprisesjoinedthepro- most difficult areas for countries of the know-how, and equipment suppliers- gram, mistakenly expecting some form former Soviet Union. Our World Bank at small and medium-size enterprise lev- oftraditional subsidy from the state. By team had an interesting experience in els it makes a difference. October 1995 almost fifty enterprises Moldova in preparing and implementing, had signed a memorandum entitlingthem jointly with the govermnent, a private * Long exposure to the Soviet system. to atemporary freeze ofpastdebts, while sector development project. Thecountryinheritedanirrationalindus- requiring them to meet their current ob- trial structurewithoversizedenterprises. ligations. In agreement with the credi- A stabilization program and mass priva- * Limited decisionmaking powers and tors, the enterprises had to draft and start tization in Moldova was not followed by absence of market-oriented manage- toiimplementarestructuringplan. Atthe enterprise restructuring. By 1995 output rial skills in enterprise directors who time of the first review, in December dropped to 40 percent of its 1989 level. had been participants in a wider, highly 1995, sixofthe firms had metonly about Moldovan enterprises tried to avoid the centralized system. 80 percent of their current obligations. hardening budget constraints through The creditors eliminated all six firms passive strategies: accumulating tax, The Groundwork fromtheprogram. The remaining firms- wage, and interest arrears; delaying pay- ten of which also received technical as- ment of electricity bills; and turning to The World Bank-supported private sec- sistance-became even more active in barter. The population invested its priva- tordevelopmentprojectintendedtojump- reducing costs, collecting receivables, tization vouchers in Moldovan enter- startenterpriseadjustmentbyencourag- selling unused assets and inventories, prises, only to become the legal owners ingthe indebted firms and their creditors and searching for new markets. of firms that were effectively owned by to agree on out-of-court, informal debt the creditors, which in the majority of settlement (debt moratorium), and a re- Early results showuimproved production cases was the state. structuring program. Together with the efficiency, significant cost reductions government, the Bank has offered both (through major downsizing of excess Why did the adjustment enterprises in creditandtechnical (advisory) assistance labor, energy conservation, and improved Moldovafallsofarbehindthatin Central for the restructuring, in order to: material management), creation of a European transition economies? While number of smaller spin-off firms, and the budgetconstraints were equallyhard, * Give enterprises some breathing room sustained ability to meet their current some basic differences played an impor- by restructuring current debt service obligations (see box). In September tant role: payments. 1995-March 1996 state and local au- thorities, the Social Fund, andothercredi- * Considerable geographic distance to * Give creditors hope offuture payment, tors received $103 million (equivalent), competitive markets. Moldova a land- because downsizing the enterprises and as enterprises started making their cur- locked country between Romania and sale of assets are designed to create li- rent payments. Many ofthe seventy-five Ukraine, could not reap the full benefits quidity to settle unpaid arrears. local consultants, trained during project oftrade liberalization. In Central Europe preparation, are providingbasic restruc- import liberalization forced local produc- * Give shareholders hope that through turing services to enterprises. The de- ers to respond in order to compete and restructuring, aviable core businesscould mand for restructuring services contin- survive. Central European managers are be developed that will ensure profit and uestogrow. Already sixty-twoenterprises close to their Western counterparts and further expansion. 12 September-October 1996 Transition signed memoranda with their creditors, Partnership with locals. From the be- was considered a priority; therefore the seventeen ofwhich are receiving restruc- ginning, the World Bank team was eager team focused on the dissemination of turingassistance. to share ideas, concepts, and implemen- infonnation, using local sources andmedia tation strategies, including project de- outlets, and initiated press briefings and In large part this success was due to the sign, with local partners to ensure a close training seminars (on entrepreneurship, managers recognitionthattheyhave only relationship (theownership ofthe project, for example) for local officials, enter- two alternatives: create a positive cash inthe Bank'sjargon). Together, the Bank prise managers, and students. flow from operations and asset sales or team and local partners analyzed alterna- accept legal bankruptcy and liquidation. tives and subsequent project costs and Messages for Future Projects This recognitionpulledtheprocessoutof benefits. Officials likely to be directly itsearlierparalysis. involved with the project attended study For future World Bank projects in the tours to the Czech Republic, Poland, former Soviet Union, the Moldovan ex- Initially, managers and government offi- Romania, and Slovenia. Local inputs perience yields several clear messages: cialsinsistedthatenterprisesneededonly were encouraged at every level. An investment funds to buy advanced tech- enterprise assistance agency, ARIA, was During project preparation: nology andmake the enterprise competi- designed to evolve as demand requires. tiveagain. Oppositiontoanyhardbudget Rather than staffing with foreign and *Groundwork for the project should be measures was enormous. local consultants, ARIA-with its skel- devised early on (microactions should be eton staff-contracts out all restructur- based on macroeconomic conditions Methods for Promoting Change ing work to emerging local private con- presentedintheCountryAssistanceStrat- sultants, who in tum are trained by foreign egy). Motivation. To counter such strong re- experts. sistance, the World Bank team empha- * Teams working on overlapping issues sized that further idleness could resultin Reaching critical mass and self- should coordinate activity to prevent the loss of all jobs, whereas prompt sustainability. Duringprojectprepara- misunderstandings and to maintain the action would result in the loss of only tion local partners were trained through project cycle timetable; innovative fea- somejobs. To persuade enterprise man- theWorldBankEconomicDevelopment tures should be discussed early on with agers and political and business leaders Institute (EDI), the World Bank-IMF those who have clearance authority in that business as usual was simply not Joint Vienna Institute, the Central and the respective regional department. possible, seven nonviable enterprises Eastern EuropeanPrivatizationNetwork were closed and their assets sold at auc- (CEEPN), the UN Industrial Develop- * Lawyers at the Bank should contribute tions. These pilot bankruptcies had a ment Organization (UNIDO), and other to design in the early stages; departmen- number of positive visible effects: they programs fundedunderbilateral arrange- tal management should be promptly in- opened a channel for the sale of unused ments. Gainingpublic supportforreform formed about any processing problems. assets, generated cash for the fiscal bud- get and for the contracting enterprises, Career adjusment andfacilitatedtheestablishmentofsmall and middle-size enterprises. The project team members also orga- nized seminars for top officials and par- liamentarians, which focused on enter- prise restructuring and liquidation, financial sector reform, andthe effects of macroeconomic policy measures. Set- ting up meetings with officials from other European transition economies and initi- ating study tours to Central Europeproved instrumental in communicating the need for, and the inevitability of, change. "Very precise and fast, just as an ex-math professor should be." From the Hungarian daily Nepszabadsag. Volume7, Number 9-10 13 The WorldBank/PRDMG For efficient preparation in the field: than postponing the necessary prepara- * If possible, components should hot be tion for the implementation phases. delivered before there is a demand for * Local partners with motivation, skill, them: components should be sequenced and power should be identified and *Project preparation should be designed in such a way that the first action creates brought into develop andprepare project so that the newly trained local consult- local demand for the next action. Thus components jointly. antsareofferedaroleinimplementation. in Moldova the hard budget constraint In Moldova, rather than creating a cen- increased demand for restructuring as- * Nonfinancing aspects of the project tralized institution and loading it with sistance, andmanagementcontracts were should be deliveredas early aspossible- foreignandlocal consultants, trained local introduced as an incentive to restructure well before projectapproval bythe Board consultants are left in the private sector and to enable managers to betterevaluate of Directors, if grant financing is in- and subcontractedbyforeigners orARIA. the restructuring results, which in turn volved; early demonstration effects are ARIA and local enterprises have already affectmanagers' rewards. Managers are extremely important. proven that they can successfully diag- now pushing for accounting reform. nose andpreparebasic restructuring pro- * Pilot projects can improve partnership grams for medium-size enterprises. and extend local support. (In Moldova pilot liquidations demonstrated that as- sets released into the marketfacilitatethe Three Success Stories creation of new business.) Spin-offs to employees. By 1995 out- age for increasing productivity. The * Financingwithin theprojects is second- put of Mashfrigcomplex (MFG), an companytodayhas a streamlinedmanu- ary, and the government should not nur- industrial refrigerator producer had facturing process that occupies only a tureunjustifiedexpectations. WorldBank dropped to 4 percent of its 1989 level, quarter ofthe spaceoftheformer plant. teams should let the government know with monthly sales of $50,000, pro- Therestofthepremises has been leased this early on, through clear and continu- duced by 1,100 employees. The or sold to four newly established cmall ous communication with local officials. breakup of the former Soviet Union and medium-size enterprises, owned had completely eliminated its former mainly by former Stejaur employees. * Brief, focused, and relevant technical markets. The government abandoned Overall production costs have been cut notes amplify the teams' credibility and earlier efforts to privatize the company by 30 percent, and the company has boost local interest, stimulate demand, as a single unit. Instead, with foreign introduced new modem-designed fur- and minimize misunderstandings. technical assistance, the government niture. Stejaur is now a profitable and liquidated the company and helped to expanding company. * Local counterparts recognize hardwork establish small enterprises by spinning in the field and they are likely to recipro- off the remaining productive assets to Backfrom the brink. Avisitto parts of cate. former employees. Less than twelve the Farmaco pharmaceutical company months later, twenty-five registered that have not yet been restructured is a *Wheneverpossible, projects should use private companies were operating on joumey back to the nineteenth century. consultants who are familiar with the the former MFG premises, employing After signing its debt moratorium and local decisionmaking culture andbureau- 213 workers-mostly former MFG restructuring memorandum with its cracy. employees-with an aggregate monthly creditors, Farmaco removed 150 truck- sales volumeofabout$190,000 (equiva- loads of trash from the premises; To secure sustainability: lent). cleaned, painted, and repaired the fa- cilities; and rearranged the equipment. * Ensure that local partners understand Modern manufacturing design. The Farmaco has received offers from five that complicated components or condi- Stejaur furniture factory was one ofthe foreign strategic investors to purchase tionalities in the technical assistance firstmanagement-employee buyouts in shares in the company. The govern- projects serve their effective implemen- Moldova. In mid- 1994, with technical ment is accelerating the privatization tation of those projects. assistance provided under the private process to make the firm eligible for sector development project, the com- financing under the private sector de- * If sufficientresources are notavailable, pany began to implement a Japanese- velopment project's credit line. the project should be scaled down, rather financial enterprise restructuringpack- 14 September-October 1996 Transition The State in a Changing World: Ideas from the forthcoming World Development Report World Development Report 1997 will are efforts to retract and refocus an over- ments that challenge financial markets look at how an effective, capable state stretched and ineffective state (as in the do so attremendous cost to their credibil- affects the provision of the goods and former Soviet Union). In other cases, ity. Rapid communication technologies services, rules, and institutionsthatallow changes involve removing a maze of have altered people's access to knowl- markets to flourish and people to lead checks and balances that has paralyzed edge and are changing their expectations healthier, happier lives. Keeping cross- the levers and agencies of the state. The of government. This Report will ask country differences in mind, it asks why changes can involve broad political re- whether global integration is leading to and how some states are more capable forms, as in Eastem Europe and Russia, more disciplined government and to than others at playing a catalytic and where more democratic forms of gov- greater convergence in tax regimes, regu- facilitating role in sustainable develop- ernment have emerged over the past lations, investment codes, and account- ment and poverty eradication, and how decade. Or changes can result from ing and environmental standards. changes the world over-rapid global- political upheaval or ethnic and other ization and technological change, the social tensions that break down the basic Part Three collapse ofsocialism, the reawakening of functions of the state to law, order, and citizen action-are reshaping our think- stability. In such dysfunctional states as The third part will investigate how the ing about the state. Bosnia, building state authority will be a state can become more efficient as an vital first step. economic manager, rulemaker, protec- The state is fundamentally a mechanism tor, and service provider. How and why to facilitate the provision of public and Part Two some countries appear to be more suc- collective actions, ranging from breath- cessful than others in setting good poli- able air, safe water, sound currency, law The second part will analyze primary cies is still not fully understood. Why do and order, defense, and (in an increas- sources of pressure on states to change: countries continue to resort to short-term ingly information-based world) public markets, citizens, global forces. The Re- populist measures when their long-run information. port will show how the balance between costs arewell-known? Greater efficiency state and market has changed over time, and equity in tax policy and the allocation Capable state institutions are also needed from a relationship of control and an- of public expenditures are essential ele- to provide a system of checks and bal- tagonism to one of partnerships and ments of state reform. But many coun- ances that present the arbitrary and ca- complementarity. In solving the prob- tries still spend too much on inequitable pricious use of sovereign state power. lems of market failure and helping mar- programs and on defense. Excessive checks and balances can lead kets to grow, some analysts argue that toparalysisorgridlock; insufficientchecks government intervention (ifdonethe right All too often, regulatory initiatives have and balances can lead to abuse of state way) can be market-enhancing. The been undermined by powerful vested power for personal or misguided objec- Report will also examine concems about interests and self-interested officials. tives. The challenge is to create a bal- theabilityofmarketstotakeappropriate Regulation sometimes raisestransactions anced state structure that mediates inter- consideration of inequality and of the costs, undermines property rights, and ests, protects the underprivileged and welfare of future generations. thereby inhibits private sector develop- weak, delivers services, and focuses ment. The challenge is to identify a menu collective action onsustainable economic Citizens around the globe are becoming of regulatory tools from which countries and social development and the eradica- more active and vocal about state failures can select those most likely to yield ben- tion of poverty. The Report consists of and inefficiencies. The Report will ex- efits in their specific country settings. five parts. amine ways of checking potential abuses and violations of state power and sub- Designing effective programs to meet Part One jecting state officials to public scrutiny. this end without falling into the trap ofan expensive and ineffective welfare state The first partwill focus on how states are Large global flows ofprivate capital and remains a nettlesome challenge. What changing and how successful they have lowertransport andcommunication costs structural changes are needed in tradi- been achieving sustainable economic and have made it tougher for individual states tional transfer mechanisms, including social development. In some cases, there to act alone and independently. Govem- pensions, unemploymentcompensation, Volume 7, Number 9-10 15 The World Bank/PRDMG severancepay, family benefits, and child chotomy between state and market is that matters-the capability matters benefits? How are compensatory giving way to an understanding of their more. schemes designed that cushion vulner- complementarity. Citizen action is in- * The great (and false) debate between able groups from short-term adverse ef- creasing. Yet most states remain resis- state and market seems to be over for fects? This is particularly important for tantto change. Beneficiaries ofthe status now. There is growing realization that a many countries of the former Soviet quo-includingpoliticians, bureaucrats, more credible-not larger-state is Union and Eastern Europe, where pov- andcorporate orfarminginterests-will needed to create the institutional infra- erty doubled between 1987 and 1993. tryto sloworderail changes thatthreaten structure necessary for markets to flour- Changes in technology and better appre- their position, regardless of the broader ish. ciation of the capacity of markets and social benefits. * All over the globe, citizens are demand- nongovernmental organizations have cre- Richer countries tend to rely more on ing greater transparency and openness in ated new opportunities for more com- democratic institutions. Therefore, it the conduct of government; not only a petitive and efficient provision ofpublic be expected that economic progress will cleaner government that delivers ser- services and a new scope for competition lead toward more democratic forms of vices but also one that effectively medi- and pnrvate financing (for example, tele- g B ates competing interests. I I in Mxico, pwer gen government. Broad political con-test- l communications inability bowever appears to be neither Globalization Is making governments eration in China, and road maintenance necessary nor sufficient for sound eco- generallymoreresponsive andless capri- through contracting). nomic and social policies,andanycoun- cious in their economic actions. Handling nomlcandsoclal~weny-frs centurys problemswcoun-e tries-the Republic of Korea (in the 'Wnt'-first century problems will re- Part Four 1970s)Chile(ihe l9805) and Cha quire a more agile, information-intensive *0have recorded remarkable economic and state, working in concert with the inter- The fourth part will show that introduc- social progress within what appear to national community, rather than a weak ing greater contestability (through de- hav beogretobnon hoteapea po state subordinatedto international inter- centaliatin, dlegtio, an paticpa- have been or to be noncontestable politi- es. centralzation delegation andpacal systems. In several East Asian coun- tion) improves the operation of state . m b - * Reforms are underway, beginning with institutions. To restrain arbitrary action, cipline and state institutions to help reducing the size ofthe state and moving countries have at their disposal a wide information and coordination problems toward strengthening vital state func- variety of checks and balances (for ex- . the market have been identified as tions, in some cases requiring recon- ample, a strong, independent judiciary) factorsskilJillyappliedtoensuregrowth struction ofthe state. Introducing greater whilemaintainingtheflexibilitytopursue . . . . economic contestability is akey to mak- desirabl publi initia. Gand improve public services, even with- desnrable pubiic dtiatives. Greater de- out overall political contestability. ing state institutions work better. centralization of decisionmakingto lower * Changes intechnology, better apprecia- levels of government can make the state The Report will try to show that cross- tion of the capacity of markets and non- more responsive and accountable in ser- border problems need cross-border solu- governmental organizations, greater de- vice provision. The Report will examine tions and so will require more interna- centralization to local government and country experiences in assigning expen- tional cooperation. To the extent that communities, reforms in public sector ditures and revenues to different levels of foreign aid has helped preserve large management-all of these have created govermnent and designing intergovern- government, its decline can accelerate new opportunities for more competitive mental transfers and revenue-sharing ar- reforms. The necessary institutional and efficientprovision ofpublic services. rangements. Reforms in core public sec- strengthening of the state will require * More effective international coopera- tor institutions can improve performnance new forms of institutional and technical tion will be needed to help nations man- along two interrelated dimensions: better assistance. age global challenges and take advantage decisionmaking and improved strategic of the emerging opportunities in the priorities, as well as efficient and effec- Conclusion twenty-first century, as the demand for tive implementation of policies and pro- international collective action grows. grams.O h bsso findings to date, the grams. On the basis of findings to date, the. The World Development Report 1997 Report reaches the following conclu- will be published next June. The Staff Part Five sions: DirectorisAjayChhibber WorldBank, The fifth part will examine how reforms . The state and its policies explain many Room N7-063, tel. (202) 4 73-4869, fax ofthe state can be sustained. Borders are ,. n . (202) 522-0056, e-mail: achhibber becomng mre prous.The alsedi- ifferences in people's lives around te iwrdbn.og becoming more porous. The false di- globe. It is not the size ofthe state alone (@worldbank.org. 16 September-October 1996 Transition Euromoney's Country Ranking: The Winner Is...East and Central Europe! In Euromoney's semiannual ranking of Methodology do not report under the debtor reporting country creditworthiness, the winners system. are the emerging economies of East and The Euromoney country risk assessment Central Europe. SoutheastAsian econo- uses analytical indicators, credit indica- * Credit ratings (10 percent). The aver- mies are looking riskier, however, as debt tors and market indicators, in nine cat- age of sovereign ratings from Moody's, ratios worsen and monetary instability egories. The weighted scores are cal- Standard & Poor's, and IBCA. spreads. The only rising economies in culated as follows: the highest score in Asia are in Indochina. Vietnam rises each category receives the full mark for * Access to bank finance (5 percent). three places to 63, partly as a result ofits the weighting; the lowest receives zero. Calculated from disbursements of pri- membership in theAssociation ofSouth- In between, figures are calculated ac- vate, long-term, unguaranteed loans as a east Asian Nations (ASEAN); it is also cording to the formula: final score = percentage of GNP. OECD countries expected to debut in the international weighting/(maximum score-minimum that do not report under the debtor re- bond market next year. Even Cambodia score) x (score-minimum score). The porting system receive a score of 5. rises two places, although its ranking countryriskranking showsthefinal scores Scores are based on the World Debt remains lowly at 109. afterweighting. Tables 1995-96. The place gainers are mostly in Eastern * Economic data (25 percent weight- * Access to short-term finance (5 per- and Central Europe, as the reform pro- ing). TakenfromtheEuromoney 1996- cent). Scores are calculated taking into grams put in place since the fall of com- 97 global economic projections. Each accountcoverage available fromthe U.S. munism begin to bear fruit. The biggest country scores the average ofthe evalu- Exim Bank, the U.K. NCM and Export riser in the region is Slovenia, which is ations for 1996 and 1997. Credits Guarantee Department (ECGD), now rated as fractionally more credit- and membership in OECD consensus worthy than the Czech Republic. *Politicalrisk(25percent). Euromoney groups. Slovenia's economy is expectedtogrow polled risk analysts, risk insurance bro- more than 4 percent a year, both this year kers, and bank credit officers. They were * Access to international bondandsyn- and next. Poland, however, is forecastto asked to give each country a score be- dicated loan markets (5 percent). Re- produce the fastest growth in Central tween zero and 10 (10 indicates no risk flects Euromoney's analysis ofhow eas- Europe this year and next, at more than of nonpayment; zero indicates that there ily the country might tap the markets 5 percent a year. As a result, Poland is no chance of payments being made). now, based largely on issues since Janu- moves up three places. Russia, despite its ary 1995. A score of 5 means no problem continuing economic problems, is also * Debt indicators (10 percent). Scores whatsoever; 4, no problem on 95 percent rapidly improving its credit rating. As are calculated usingthe following ratios of occasions; 3, usually no problem; 2, recently as last September, it ranked at fromtheWorldBank's WorldDebt Tables possible problem (depending on condi- 142. By March it had risen to 100; now 1995-96: (a) debt service to exports (b) tions); 1, possible in somecircumstances; it is 86. Boris Yeltsin's reelection re- current account balance to GNP and (c) zero, impossible. moved some ofthe political uncertainty, external debt to GNP. Figures are the although his impending heart surgery- latest available, mostly for 1993. * Access to and discount onforfaiting (5 announced after our poll was con- percent). Reflectstheaveragemaximum ducted-will inevitably increase it again. * Debt in default or rescheduled debt (10 tenor available and the forfaiting spread percent). A score between zero and 10, over riskless countries, such as the United The Baltic States have also improved based on the amount ofdebt in default or States, based on the average maximum their rankings, particularlyLithuania, the debt that has been rescheduled over the tenor minus the spread. Countries for highest ranked of the three, which rises past three years. Ten indicates no which forfaiting is not available score 26 places to 59. All three countries are nonpayments; zero indicates all in de- zero. Data were supplied by Morgan now in the international bond market. faultorrescheduled. Scoresarebasedon Grenfell Trade Finance, West Merchant Their economies are looking healthy, the World Debt Tables 1995-96 and Bank, the London Forfaiting Company, and all are expected to show solid growth Euromoney estimates for countries that Standard Bank, and ING Capital. next year. Volume7, Number9-10 17 The World Banc/PRDMG Transition Countries' Risk Rating: A Euromoney Ranking Rank Debt in Aa:ess to Aaoes to ACcess Dcwount St. I*rd7 Ebonoric dfitica Dbt default or Credt bak shat-term to catat on 1996 1996 Courity Tcta'ff , nuc ris h7dcJatos resdeued rangs finance finance marts forfafing 1 1 LuDrebourg 99.51 25.00 24.51 10.00 10.00 10.00 5.00 5.00 5.00 5.00 2 2 SAtzerland 98.84 23.84 25.00 10.00 10.00 10.00 5.00 5.00 5.00 5.00 3 5 LUifted States 98.37 23.96 24.41 10.00 10.00 10.00 5.00 5.00 5.00 5.00 34 46 Slovenia 73.80 18.48 15.46 9.83 10.00 6.46 2.68 3.24 4.00 3.66 35 36 Czech Republic 73.65 19.81 17.27 9.57 10.00 6.25 0.46 2.35 4.00 3.93 40 40 China 71.27 18.93 16.87 9.73 10.00 5.63 0.00 2.35 4.00 3.76 44 44 Hungary 67.18 17.45 14.71 8.50 10.00 3.96 3.13 2.35 3.50 3.59 49 48 SlovakRepublic 62.23 16.47 13.66 9.61 10.00 4.38 0.09 1.47 3.00 3.55 55 58 Poland 57.12 18.56 13.97 9.36 0.00 4.58 0.49 2.94 3.50 3.71 59 85 Lithuania 55.18 12.75 11.01 9.94 10.00 3.13 0.00 5.00 2.00 1.36 61 67 Romania 53.11 12.57 11.15 9.76 10.00 2.50 0.10 1.47 2.50 3.05 63 66 Vietnam 52.04 14.80 11.91 8.51 10.00 0.00 0.00 0.88 2.50 3.44 71 73 Estonia 48.04 13.94 10.90 10.00 10.00 0.00 .0.00 0.00 1.50 1.70 74 78 Croatia 47.23 12.64 7.67 9.84 10.00 0.00 1.12 0.00 3.00 2.97 75 89 Latvia 47.12 12.64 9.99 9.97 10.00 0.00 0.00 2.00 1.50 1.02 86 100 Russia 42.62 11.47 8.33 9.73 8.26 0.00 0.00 0.88 2.00 1.95 92 99 Bulgania 40.42 10.89 8.32 8.87 9.40 0.00 0.00 0.59 1.00 1.36 103 110 FYRIMacedonia 36.27 9.16 5.21 9.31 10.00 0.00 0.00 0.00 0.50 2.08 109 119 Carnbodia 35.29 6.21 7.38 9.31 1000 0.00 0.00 0.88 1.50 0.00 114 102 Albania 34.23 8.48 5.04 9.62 10.00 0.00 0.00 0.59 0.50 0.00 125 134 Moldova 31.54 8.94 4.78 9.90 6.92 0.00 0.00 0.00 1.00 0.00 129 111 Kazakstan 30.58 7.19 8.25 9.89 2.38 0.00 0.00 0.00 200 0.86 130 137 Lao PDR 30.45 6.21 8.53 8.71 3.65 0.00 0.00 2-35 1.00 0.00 135 136 lUkraine 29.54 7.41 5.56 9.96 295 0.00 0Q11 1.47 1.00 1.09 137 150 Amrienia 28.52 7.72 3.04 9.96 7.80 0.00 0.00 0.00 0.00 0.00 142 128 Belarus 27.69 6.47 4.31 9.93 5.99 0.00 0.00 0.00 1.00 0.00 147 114 LUbekistan 25.42 1.36 7.36 9.96 5.65 0.00 0.00 0.00 1.00 1.09 148 152 iNbngolia 26.41 0.00 7.06 9.35 10.00 0.00 0.00 0.00 0.00 0.00 153 153 Georgia 24.14 7.40 3.70 9.49 3.55 0.00 0.00 0.00 000 000 156 121 Kyrgyzstan 23.61 0.00 5.15 9.83 4.88 0.00 0.00 3.25 0.50 0.00 157 154 Turkrnenistan 22.91 6.51 5.90 0.00 10.00 0.00 0.00 0.00 0.50 0.00 161 156 Mozambique 21.71 3.28 2.75 5.61 8.24 0.00 0.00 0.59 1.00 0.00 168 171 Azerbaijan 16.86 7.95 3.91 0.00 0.00 0.00 0.00 0.00 5.00 0.00 173 173 Tajikistan 14.45 0.00 5.21 0.00 5.73 0.00 0.00 0.00 3.50 0.00 174 174 Cuba 11.50 3.71 3.03 0.00 0.00 0.00 0.00 1.76 300 0.00 176 175 North Korea 5.39 1.87 2.64 0.00 0.00 0.00 0.00 0.88 0.00 0.00 178 178 Mghanistan 3.92 0.00 3.04 0.00 0.00 0.00 0.00 0.88 0.00 0.00 So:irce.B axwey 1996. 18 September-October 1996 Transition Bank-Led Restructuring in Poland: Its Impact on Enterprises by Cheryl W. Gray and Arnold Holle S ince 1993 Poland has been con- enterprisestookthe program seriously, dation. Profitability was not all that sidered a model of commercial and it appears to have been free of mattered, however. Size also appears banking reform among transi- fraudorcorruption. Compliancewith to have been important, with larger tion economies. Poland's Enterprise its prescriptions was high but not per- firns tending to enter conciliation re- and Bank Restructuring Program fect. For example, boththe 1992 gov- gardless of profitability. This is not (EBRP), adoptedbyparliamentinearly ernment stance and the 1993 law re- surprising; politically, these firms are 1993,aimedto rehabilitate and laythe quired that banks stop new lending more difficult to close. groundwork for privatizing seven of (including rollovers of previous loans) the nine commercial banks that had to firms with debts already classified Despite these strengths, the survey been created in 1989 out of the Na- international accounting firms as losses results suggest that the EBRP may tionalBankofPoland.Underthebanks' or indoubt of being repaid. Yet, con- have had limited power to promote command, the EBRP planned to re- trary to these directives, about one- necessary restructuring in firms. Fur- structure and privatize a group of fi- eighth of the firms in the sample re- thermore, the program focus on the nancially troubled state enterprises. ceived new loans or rollovers. The new and temporary bank conciliation The program required the banks to EBRP also envisioned that enterprises process resulted in neglect of other establish workout units and to take entering bank conciliation would be more fundamental and longer-term action by March 1994 to recover loans commercialized (that is, transformed workout and exit processes. The exit that had been classified as losses (or into joint stock companies). Seventy- processes continue to be poorly de- those in doubt of being repaid) as of five percent of firms were com- signed for the needs of a market end- 1991 (the "base portfolio") mercilized, but the rest were not. economy. through one of several resolution paths stipulated in the law-repayment, bank Furthermore, the EBRP was very use- Bank Conciliation conciliation, court conciliation, bank- ful as a catalyst in forcing otherwise ruptcy, state enterprise liquidation, or passive creditors totake actionagainst Bank conciliation agreements appear sale of debt. bad debtors. Although the debts in to have been unsophisticated. They question turned bad in 1991, creditors dealt primarily with financial condi- How effective has the EBRP been in took no action at all in more than 80 tions-mostly large debtwrite-offs and fostering the restructuring or closure percent of the survey's sixty-two con- renegotiation of payment dates-and of problem firms? To answer that ciliationcasesuntilthelawwaspassed included very few tangible require- question, the World Bank surveyed in early 1993. Even after the law was ments for operational or management 139 of the 787 firms that had been adopted, nothing happened in more change. Weaker banks (that is, those through the program. Sixty-two ofthe than 60 percent of cases until bank with lower capital and higher bad debt firms had signed a bank conciliation conciliation was initiated, on average ratios) were willing to undertake sig- agreement: 45 had gone into court con- ten months later. By then, the debt had nificant debt-equity swaps, but stron- ciliation, bankruptcy, or state enter- been in arrears more than two years. ger banks undertook very few. Re- prise liquidation, 22 had repaid or be- The signing dates of most agreements structuring plans that were actually come current on their loans, and the cluster closely around March 1994, prepared for firms, appear to have debt of 10 had been sold. the original EBRP's deadline, greatly overestimated futureprofitabil- ity, particularly when weaker banks The survey confirmed that the EBRP Finally, the division of firms among (the three banks to be consolidated had a positive impact on balance, but resolution paths appears to have fol- with Pekao S.A.) were in the lead. that its benefits fell far behind the high lowed economic logic (see figure). expectations set for it. The reform Better-off firms tended to enter con- Given these features, it is not surpris- program was clearly innovative and ciliation, while weaker performers ing that the agreements have resulted well designed. In general, banks and tended to go into bankruptcy or liqui- in iittle restructuring to date. The first Volume 7, Number 9-10 19 The WorldBank/PRDMG two years of the agreements' imple- areprivatized. Thefactthatmostdebt- performance of firms in court concili- mentation saw a slowdown in the rate equity swaps were concluded by the ation did not improve, and in eight of of layoffs from previous years, an in- weaker banks (those last to be priva- ten cases, firms in our survey continue crease in the average wage rate (after tized)-and that the equity went pro- to have problems servicing their debt. adjusting for inflation), and a decline in portionately to other, often passive, average operating profitability and cash creditors (including the government)- Poland's bankruptcy and the related flow. (Reported netprofits soared, but heightens the concern that it may be a legislation have major weaknesses in this was because loan write-offs were long time before these swaps translate design and implementation, most no- booked as income.) The main effect of into effective private ownership and tably the low priority given to secured the conciliation process was to provide governance. creditors, the institutional weakness of firms with breathing room. Weak op- bankruptcy courts and related profes- erating performance in 1994 and 1995 Court Conciliation and Bankruptcy sions, and the difficulty that judges suggests that many firms continued to and trustees have in identifying and have problems and that financial disci- Court conciliation cases in the survey curbing fraudulent behavior. Bank- pline was perhaps still somewhat soft. were concluded on average in about six ruptcy is inevitably a slow process, and Indeed, booking write-offs as profit months-aboutthe same time required in the twenty-three survey cases the may have given a misleading impres- for bank conciliation cases. Firms in process was expected to take on aver- sion of higher post-conciliation profit- court conciliation received smaller debt age about three years. Creditors have ability, may leadto further pressure for write-offs butgreater extensions in debt little involvement in the bankruptcy wage increases or more debt forgive- maturity than firms in bank concilia- process and in the sample, creditors ness in the future. tion. On a net present value basis, the were expected to recover little of their extent of debt relief under the two original claims (on average 17 percent Debt-equity swaps were not used as processes appears to have been simi- of claims for banks and 7 percent for widely as originally hoped, and the lar. In contrast to bank conciliation, suppliers). conciliation process did not lead to the extent ofdebt write-off in the court extensive ownership change. Of the conciliation cases was positively cor- As currently designed, neither bank- sixty-two state-owned enterprises in related with two other economic vari- ruptcy nor court conciliation gives the sample, majority stakes in no more ables: the firm's operatingprofitability creditors sufficient control over firms than one-fifth will eventually be in and its level of indebtedness. With in financial distress. Both could work private hands if the banks themselves regard to outcomes, the subsequent much better if redesigned, if supported Average number of employees 1991 / 1992 A v e r a g e O p e r a tin g P r o fita b ility a n d N u m b e r o f E m p loy ees 1,400- ~ 1 2178 1~ ~~ .o- 1047 X91 1,000 --91 600I o Z D O X t t t ~~~~~ ~~ ~ ~~~2 7 2 8.5 % ~~~~~~~~~~~-20% - 17.6 % - 111 10|| - 20 % - 30% - 40% -4 7 % -45 % - 50 % Repayment/ Bank Court Sale of Liquidation Bankruptcy "good clients' conciliation conciliation debt Average operating profita bility 9 9/ 1992 20 Septemnber-October 1996 Transition by institutional development in the surveyed creditors were expected to helped them build institutional capac- courts and related professions, and if recover almost nothing (6 percent of ity in their workout units (though not better systems of collateral and debt claims for banks and 3 percent for necessarily in their credit units), and collection were developed. Court con- suppliers). The loophole of state enter- furthered the difficult task of weeding ciliation could be redesigned in several prise liquidation needs to be plugged if out and closing clearly unviable firms . ways to increase flexibility. Govern- the other formal processes are to work Loans could be written down without ment claims should be included in the as intended. It should be strictly lim- creating an environment of general debt process. Asmallermajorityshouldbe ited to solvent firms. If this is not forgiveness. These are important required for approval of a workout feasible, the process should be elimi- achievements in transition, and the in agreement-not varying with the ex- nated altogether because of the abuse many ways approach in Poland serves tent of debt write-offs proposed. All it invites. as a model for other transition econo- creditors should be allowed to vote mies. (whether present or not). And more Sale of Debt and Repayment financial and operational restructuring The process, however, does not ap- options couldbe availableforinclusion The EBRP includedanonbureaucratic pear to have rapidly imposed strong in restructuring agreements. Creditors' market-based alternative to these for- restructuring mandates on problem rights under bankruptcy should be mal processes-sale of debt. This debtors, and its success in privatizing strengthened by rearranging priorities alternative appears to have played a them has been limited. The EBRP was to put secured creditors first, by reduc- very limited role, however. Few sales a good start, but continued work is ing up-front fees, and by giving courts were attempted and even fewer con- needed to build strong banks that can and trustees greater powers and re- cluded. Tax disadvantages and debtor impose effective corporate governance sources to uncover and to punish antipathy appear to have undercut on enterprises in times of financial fraudulent transactions. Any design banks' incentives to sell, and the diffi- distress. Now that bank conciliation improvements need to be comple- culty of using debt to "pay" for pur- has expired as an option, the Polish mented by strong economic policies chases or swapping debt into equity government should shift its energies to that give banks and other creditors appears to have undercut potential improving the traditional exit pro- powerful incentives to use these debt- purchasers' incentives to buy. A sec- cesses-formal and informal workouts collection mechanisms. ondary market for debt can be an ef- and bankruptcy-fundamental to any fective and nonbureaucratic means to well-functioning market economy. State Enterprise Liquidation increase financial discipline in problem firms, but it will take some time-and Detailed results of the surveyare avail- State enterprise liquidation is the most probably a change in tax and other able in two World Bank Policy Re- problematic of the three formal pro- rules-to build such a market in Po- search Working Papers by Cheryl W cesses. It is almost entirely controlled land. Gray and Arnold Holle: "Bank-Led by debtors. In most cases debtor man- Restructuring in Poland: An Empirical agement chooses the trustee-and in The EBRP also allowed firms to repay Look at the Bank Conciliation Pro- some cases even serves as trustee! In or become current on debt andthereby cess" (1650) and"Bank-Led Restruc- the cases surveyed, state enterprise avoid other resolution paths. A large turing in Poland: Bankruptcy and Its liquidationisprovingtobe significantly number of firms (about 40 percent) did Alternatives" (f1651), September 1996. slower than bankruptcy. Firms con- repay. Almost 40 percent of the cases (See page 33 for ordering informa- tinue to operate far longer than in the surveyed used retained earnings to tion). Shorter versions are forthcom- bankruptcy process, and more assets repay, while 28 percent have bor- ing in Economies of Transition. eventually end up under the control of rowed new money to pay back old managers and employees of the origi- debt-a result not necessarily in ac- Cheryl W Gray, Principal Economist, nal firm. The process, though on pa- cord with the goals of the EBRP. Finance and Private Sector Develop- per designed for solvent firms, is often ment Division, Policy Research De- used as a way to get around bank- Therefore initial evidence suggests that partment. ruptcyandkeepdebtormanagementin the outcome of Poland's first experi- control of assets for as long as pos- ment with bank-led restructuring is ArnoldHolle,former consultant to the sible. Creditors are the big losers. decidedly mixed. The EBRP forced WorldBankcurrentlywith Boston Con- They have no power. In the cases banks to confront their problems, sulting Group, London, U.K. Volume7, Number9-10 21 The World Bank/PRDMG Letters to the Editor With reference to the article "Quotation on reform than have Armenia or Land Registration System Is a Must ofthe Month. ... Surprising Findings ofthe Kazakstan, Belarus has a higher score Economist Intelligence Unit's Senior than Georgia, and Hungary is ahead of Encouraged by your editorial in the Economist" [See Transition, July-August Poland and Slovenia. Certainly, many July-August issue of Transition (See 1996, page 9], may I express my skep- aspects ofanalysis-such as progress in "World Bank Group Coordinates Pri- ticism concerning quantitativecriteriaof market institution-building-are highly vate Sector Activities," page 1), I would transition, such as the European Bank subjective and therefore vulnerable to like to share with your readers a few for Reconstruction and Development's questions ofvalidity. However, we might thoughts based on my experience as a (EBRD) "index of reform progress" or rely on the Fund's and the Bank's collec- consultant with Unido in Uzbekistanand the Economist Intelligence Unit's (EIU) tive knowledge about the given coun- as a World Bank project adviser in Po- indexes. Iwellunderstandaresearcher's tries, based on regular reviews of their land. overwhelming desire to quantify every- economic and structural policies. I must thing. But in the case of the economic say that my personal (and unofficial) In many transition economies privatiza- transition from a centrally planned to a impressions from the Fund's Board dis- tion of housing is progressing slowly. market economy, the process is of a cussions of the economic policies of the Governments still own and manage a nature that resists quantification, at least aforementioned countries have often been major part ofthe housing stock, and that the kind based on proxies so far identi- contrary to the "measurements" you stock deteriorates because of overall fied. published. If strong empirical evidence neglect and lack offunds for renovation. contradicts a theoretical construction, Also, foreign investors are unsure about In brief, the conclusions emerging from somethingmustbewrongwiththetheory, their legal property rights when they in- the use of "reformprogress indexes" are not the empirical evidence. vest in real estate and in some instances either self-evident or incorrect. For ex- are exposed to deliberate harrassment by ample, among the factors presumably In sum, I believe that the use of the administrationofficials. Inseveralcoun- crucial for reform, the article mentions indexes, at least in their present form, triestherearereportsoffraudulentdouble "proximity to Western Europe," "size of contributes nothing to the analysis of sales of already privatized real estate countries," "wealth in minerals," and economies in transition. The results are (because of lack of an adequate land "external environment." What a great unreliableandmisleading. Isuggestthat registration system). Mortgage fmanc- discovery! Much of this is what was weavoidtheirusealtogether,atleastuntil ingcouldprovideanimportantsourceof called"geographicaldeterminism,"inthe the EBRD or any other organization fundsforthedomesticallyfundedexpan- years ofmy youth. Ifproximity to West- comes up with a more credible method- sion of these economies, using the pri- em Europe were so essential, a glimpse ology. vate real estate stock as the basis for ofthemapcouldreplacethewage-inten- loans. But in many countries the land sive exercise with indexes. This ap- Andrei Vernikov registration system does not provide for proach with indexes, however, leaves Adviser to the Executive Director of adequate security for lending on such a little room for the design and implemen- the IMiFfor the Russian Federation basis. tation of macroeconomic and structural measures, which I believe are the ulti- (Editor s note: We fully agree with Mr. A few years ago, the UN Economic matefactorsdeterminingreformprogress. Vernikovthatcountrycomparisons,lists, Committee of Europe began to work on and rankings-no matter how sophisti- ha.-monizingprincipals fora modern land The methodology underlying the indexes cated the methodology used-are al- registration system, giving special atten- is unclear. For example, it is hard to ways subjectto charges ofarbitrariness. tiontothesituationinthetransitionecono- imagine what could be the basis, other However, our purpose is to inform the mies. The World Bank is financing a thananarbitrarydecision,forattributing readers, and these lists are partly the multitudeofprojectsintransitionecono- a weight to each of the heterogeneous outcome of and in part an influence on mies, many relatingto privatization, pri- factors (in fact, we are comparing apples currentthinkingontransitionissues. And vate (foreign) investment, expansion of to oranges). What is worse, the calcula- that is why, undeterred by prospective national economies, land use, and land tions produce misleading results. Ac- (probablyjustified) criticism, we publish reform. It is a prerequisite for any of cording to the index rating, Uzbekistan in this issue the latest Euromoney coun- those programs to have a modern land has achieved more substantial progress try rankings.) administration system in place that can 22 September-October 1996 Transition adequately protect property rights. To followed by the drafting of policies and andoverall project'implementationinthe establish some generally accepted prin- guidelines for land registration systems transition economies. ciples, it would be desirable to conduct a and by country feasibility studies (ac- multicountry study on the status of land cording to priorities) to document cur- Reinhold Wessely registration systems-addressing legal, rent status and to present proposals for President and CEO of Prime Consult administrative, technical, and human implementing such systems. These steps GmbH resources issues. That study could be could then be followed by pilot projects Vienna, Austria Milestones of Transition Bulgaria linked to external funding. Bulgaria is- at the end of July. Dai predicted that sued some $5 billion of Brady bonds in inflation could be held to between 7-8 Long-delayed mass privatization began 1994 as part of a $8.16 billion foreign percent this year, against the official 10 on October 7. Some 3 million Bulgarians commercial debt restructuring deal, but percent target. He also said that GDP are expected to bid for shares in 968 its economy failed to meet projections growth could exceed 9 percent, against companies out of a total of 1,063 state mapped out by the London Club. the original target of 10 percent. The companies up for sale. Under the mass central bank, however, will keep a firmn privatization scheme, the state will con- CEFTA grip on monetary policy. tinueto exert control over "strategic com- panies," such as oil refineries andtourist Another relaxation of mutual trade re- Czech Republic offices; only 25 percent of their shares strictions was decided during the mid- will be offeredto investors. Banks, arms September summit meeting of the five TheJanuary-Augustforeigntradedeficit factories, railroads, power plants, and Central European Free Trade Associa- reached 100 billion koruny ($3.7 billion) service companies will not be privatized. tion (CEFTA) countries (the Czech Re- at the end of August, equal to the trade About 65 percent of shares in medium- public, Hungary, Poland, the Slovak deficit for the full year in 1995. The size companies and 90 percent in small Republic and Slovenia) in Jasna, Slovak deficitis beingfueledby risingwages and companies will be privatized. Results of Republic. Govermnent heads agreed on a slowdown in the growth of domestic the bids will be announced by the end of furtherliberalizationoftradein industrial production. Experts estimate that the November. products, standards for rules of origin of annual trade deficit for 1996 may reach goods, and a step-by-step reduction in as much as 140 billion koruny. Prime The Bulgarian government is seeking Slovenian tariffs on agricultural goods. Minister Vaclav Klaus has asked five of help from the European Union (EU) on The five countries also agreed to admit his ministers to prepare analyses of the the ongoing grain crisis, asking for grain Romanianextyear andsaidthatBulgaria situjation and suggest solutions. Some shipments and commodity credits under was near to fulfilling membership crite- economists andexporters have urged the preferential terms to be repaid in three ria. Lithuania and Ukraine have also govermment to devalue the koruna. years. Bulgaria is also negotiating with indicated their desire to join CEFTA, Ukraine and Kazakstan. This year's which would make the association a In mid-September the Czech govern- harvest-about 1.9 million tons-is the market with 150 million consumers. ment approved a balanced state budget lowest in ten years. Since the beginning for 1997, estimating revenues and ex- of 1996, bread prices have increased China penditures at549. 1 billionkoruny($20.3 fivefold . billion). Expenditures to promote exports China expects its foreign exchange re- are expectedto increase 60 percent, while Bulgariawill barelybeableto servicehalf serves to swell to $ 100 billion by year's those for transportation will rise 57 per- its foreign and domestic debt in 1997, end, ranking it second behind Japan and cent and those for housing, 42 percen. said Deputy Prime Minister and Eco- ahead of Germany and Taiwan (China) nomic Development Minister Rumen among countries with healthy foreign At. their September 16 meeting Czech Gechev. According to Reuters, the risk exchange balances. Dai Xianglong, the economic ministers recommended that has increasedthatBulgariawillbecome governor of China's central bank, energypricesbegraduallyfreedoverthe the first country to default on a Brady People's Bank, made the forecast while next two years. They offered lower- debt restructuring deal, as economic re- announcing that the country's foreign incomefamiliescompensationforhigher covery remains remote and is strongly exchange reserves reached $90.8 billion energy prices. Czech Labor Minister Volume 7, Number 9-10 23 The WorldBank/PRDMG Jindrich Vodicka said that higher energy wage was 28,200 Hungarian forints in with municipalities onbehalfofthe state prices will also be reflected in pension companies and state institutions with privatization agency. The supervisory increases. Energy prices have been sub- more than ten employees, a year-on- board of the state privatization agency sidized by the state, and the cost of year increase of 16.8 percent. The low- questioned whether Tocsik did any sub- producing energy is currentlyhigherthan est wage, 21,000 forints, was registered stantial work and charged a number of its sale price. in the textile industry, while the 49,000 top privatizationofficials with irregulari- forint average in the banking sector was ties (for example, forcing local govern- European Union the highest. The average monthly gross mentstorenegotiate compensationdeals, wage was 42,950 forints, with white- that had already been settled by the law. The EU's European Investment Bank collar workers receiving on average As a consequence, Minister for Trade plans to increase by 50 percentnextyear 56,690forintsandmanuallaborers 32,650 and Industry, Tamas Suchman, who is its lending in Eastern Europe, which now forints. Employees in public education responsible for privatization, resigned totals almost 2 billion deutsche mark got only 9 percent more than a year and almost all top officials of the state ($1.3 billion) annually. To date, the Bank earlier and employees in state medical privatization agency, including General has made loans worth 1.6 billion deutsche services only 11 percent. Wages in gov- Manager Imre Szokai, were fired. Sev- marks in Hungary. Wolfgang Roth, vice ermnent offices grew 13 percent on av- eral criminal and administrative investi- president of the European Investment erage to 38,810 forint gross. gations are under way. Bank, said the bank believes that the development of the railway network Budapest is still among the twenty-five Hungary's new pension system is sched- should be among the top priorities for mostexpensive cities intheworld, butan uled to be introduced in early 1998. Hungarian infrastructure projects. Other abundantsupplyoffirst-class office space Csaba Laszlo, deputy state secretary at areas in which the bank stands ready to keeps rents from rising quickly. Accord- the Ministry of Finance said that the lend to Hungary include environmental ing to a recent list in The Economist, currentplanenvisagesthattwo-thirdsof protection, water management, energy office rents are higher in Moscow and a young employee's pension contribu- projects, and extension of the Budapest PraguethaninBudapest. Thepeak prices, tion goes into the state pension system metro system. deutsche mark (about $36) per square and the other third into an individual meter per month, were paid in 1991-92. savings account, managed by private As a necessary prelude to admitting new Increased supply has lowered the figure pension funds. Other active wage-earn- members from Central and Eastern Eu- to about 40 deutsche mark ($26). Cur- ers would have the option to join the rope, the EU's fifteen heads of state, rently, 80-85 percent of first-class of- private pension fund scheme. The plan pledged inaDublinsummitto rewritethe fices are rented by foreign firms. also involves a continued rapid expan- EU's founding treaties. They promised sion of voluntary private pension to finish on schedule in June 1997. Talks The privatization process maintained its schemes. Personal savings totaled 2,400 with aspiring member states-from Es- momentum in the first six months of billion forints atthe end ofJuly, while the toniato Maltato Poland-are setto begin 1996, followed by atemporary intermis- assets of investment funds totaled only six months after the close of the consti- sion. According to a Finance Ministry 90 billion forints. tutional conference, andmost ofEurope's report on the economy, the power plant leaders hope the first new members will Tiszai Eromu has been sold, andtenders Hungary's trade deficit totaled $1.7 bil- join around 2000. The goal of the con- for the Bakonyi and Vertesi plants have lion inthe first seven months ofthis year. stitutional review is to streamline the been invited. Preparations to privatize The seven-month trade deficit in 1995 EU's bureaucracies, strengthen its for- large state-owned companies, such as was $2.1 billion. Exports were up 5.2 eign policy machinery, and beef up its the bus manufacturer Ikarus, the rubber percent from the same 1995 period at crime-fightingabilities. companyTaurus, andthetransportcom- $7.3 billion, while imports practically pany Volan, have begun. In October the stagnated at $9.0 billion. Hungary process was temporarily suspended, fol- lowing an unprecedented scandal known Poland According to a Central Statistics Office as the "Tocsik case." report, real wages were down 7.2 per- Poland's new privatization plan envis- cent in the first half of 1996, unable to Lawyer Maria Tocsik, received a con- ages the selling of about 120 large and keep pace with average annual inflation sulting fee of 804 million forints ($5.1 medium-sizecompanies in 1997, together of`25.8 percent. Theaveragenetmonthly million) (a "success fee") fornegotiating with about 300 smaller firns, with most 24 September-October 1996 Transition state-owned assets being privatized by tion ofgas and some foodstuffs increased According to the State Statistical Com- 2000. The plan was approved by the (sugar, 65 percent, vegetable oil, 46 per- mittee, Russia's federal budget deficit cabinet on September 30. Prime Minis- cent). The number of unemployed was reached5 1.3 trillion rubles ($9.5 billion), ter Wlodzimierz Cimos-zewicz stressed up 20,000 at the end of September from or 4.3 percent of GDP, this year's first that the appointment of Miroslaw the previous month at 6.7 million and seven months. This is more than the PietrewiczofthePeasants'Party-which 425,000 higher than a year earlier, al- 3.85 percentlimitinitiallyagreedtowith has been less enthusiastic about privati- though the unemployment rate remained the IMF (both figures use Russian meth- zation-to head the new Treasury Min- steady at 9.2 percent. Consumer prices odology). Some 55 percent ofthe deficit istry (to oversee privatization) does not were up 31.7 percent in September, was covered by the issuance of state mean any slowdown in the process. compared to the same period in 1995. securities and 45 percent by external financing. Tax arrears totaled 48.1 tril- As a result ofthe recent restructuring of According to Economics Minister lion rubles. Poland's public administration, the Trea- Yevgeny Yasin, Russia is preparing radi- sury Ministry began to take control of cal reform measures that are aimed at Ministers are split into two camps and 204 of the largest strategic state enter- jump-starting struggling companies to Russia is on the brink of a fierce bureau- prises (power plants, coal mines, and return the country to economic growth. cratic battle, followingafairly long politi- vodka distilleries), while ownership of The first steps are expected to be ap- cal breathing space, the Nezavisimaya 1,168 firms is being transferred to local proved in the next few weeks, but the Gazeta argued on October 1. The fi- governments. The privatization ministry reforms will take 2-3 years to implement. nance group, led by First Deputy Prime has been abolished. The Treasury Min- These measures include: Minister VladimirPotanin and including istry will own all state equity still held in Finance Minister Aleksandr Livshits and partlyprivatized firms, including banks, *Tax reform. Lightening the tax burden, Economics Minister Yevgennii Yasin, insurance companies, and Lot Polish simplifyingthe tax code, and broadening wants to concentrate on reducing the Airways. The Committee on European deductions for legitimate business ex- interest rate (in partto allow more foreign Integration will replace the Ministry of penses. The government also will begin borrowing), fighting tax arrears, and Foreign Economic Affairs, which, along a long-promised shift from levies on breaking up monopolies like Gazprom. with the Ministry of Industry and Trade corporate profits to consumption and The sectoral group, led by First Deputy and the Antimonopoly Office, was abol- personal income taxes. (The new tax Prime Minister AlekseiBolshakov, wants ished. The Economics Ministry and the code is not expected to be ready for to halt the slide in industrial production. Office of Competition and Consumer presentation to parliament before the Protection are assuming the functions of spring, says an October 23 article in the Lukoil signed a $5 billion, eighteen-year the abolished offices. Nezavisimaya Gazeta.) joint venture agreement with Atlantic Richfield CO (Arco) ofthe United States First-half GDP grewjust over 4 percent *Incentives to improve accounting and for project development in the former year-on-year. Although growth is not as management. Giving companies tax in- Soviet Union. This is the first such vigorous as in 1995, it remains strong. As centives to adopt Western accounting venture between a Western and a Rus- nominal earnings growth gathers mo- standards, implementing clear protec- sian oil company. Arco is expected to menturn, itmay provedifficultto achieve tions for shareholders' rights, and pro- provide nearly 100 percent of financing dramatic success in bringing inflation viding realistic assessments ofthe value in return for a 46 percent ownership down further in the 1997 election year. of assets. interest in whatever projects the joint Russia *Shiftng socialprograms from compa- venture builds nies tolocal governments. Turnthebur- Russia's GDP fellpercet tinthis year' den of social sector subsidies still borne The project closest to fruition is a pro- Rusia' GD ffl pecen ith1995r by companies-a holdover from the So- posed $1.5 billion, 900-miile pipeline that first nvne months from the swme 1995 whencompaniesprovidedhous would connect the Tenghiz oil field in period. Industrial production fell 5 per- ing heath care andeducation forwork- Kazakstan to a port on the Black Sea. cent in the nine months, and was down ers-to local governments. Remaining Arco already holds an 8 percent stake in 6.8 percent in September from a year subsidies for utility rates also will be Lukoil, which controls about one-fourth earlier. Output steeply declined in met- removed with elfareandpensionben ofthe conservatively estimated 50 billion als, consumer goods, including cars, efits shifted from the current broad eligi- barrels ofSiberian reserves. Lukoil needs vodka, meat, fuel, and energy. Produc- bility to a need-based system. capital to pursue new projects. Siberia Volume7, Number 9-10 25 The WorldBank/PRDMG could someday supply Arco's West state-owned stakes in top companies as September introduction. (The new cur- Coast-based refining and marketing net- collateral for loans to the budget. rency is being issued in banknotes with a work now fed mainly by North Slope oil facevalueof 1,2, 5, 10,20, 50, and 100. fields in Alaska, which are declining at Critics attacked the deals as rigged, giv- Citizens could exchange unlimited sums the rate of 6 percent a year. Alaska ing well-connectedbanks access to blue- oftheirkarbovantsyatarateof 100,000 accounts for 63 percent ofArco's world- chip companies at below-market prices. for 1 hrivnya. Hrivnya equivalents of up wide production this year. Under the terms of the deals, the banks to 100,000,000 karbovantsy are being have the right to sell the shares after paid in cashto citizens, while sums above An October 9 article inPravda noted that September 1, using the proceeds to pay that are being credited to citizens' bank average life expectancy in Russia had the loans and keeping 30 percent of any accounts. fallen to 64 years by the end of 1995, 58 additional profits. But with the stock years for men and 70 years for women. market in the doldrums, lenders have The Wall Street Journal reported from Mortality rates for men age 40 to 44 shown no desire to sell the shares. Kiev that Ukraine's murky tax laws are climbed from 7.6 per 1,000 in 1990 to driving many potential investors away. 15.2 in 1995. For men age 55 to 59, Slovak Republic Profits ongovernmentsecurities aretax mortality rates climed from 23.4 and exempt ifthe securities are held to matu- 36.2. Environmental pollution, and the The seven-month trade deficit reached rity, but profits could be subject to a 30 increase in unemployment, poverty, 31.9 billion koruny ($1 billion), up from percent capital gains levy if sold in the crime, and drug addiction contributed to 26.97 billion koruny in January-June. secondary market before redemption. It the deteriorating indicators. January-July imports grew 26.2 percent is unclear whetherthis tax appliesto state year-on-year, compared to only 4 per- debt. A 15 percent withholding tax and Russia's health care sector received only cent growth for exports. The trade bal- the lack of double-tax treaties may sur- 38 percent of the funds earmarked in the ance further deteriorated in the first ten prise some investors when they repatri- 1996 budget inthe firstten months ofthe months. According to experts, devalua- ate profits. A central bank official said year, revealed Health Minister Tatyana tion remains a possibility in the medium that tax policy needs to be codified and Dmitrieva. Hospitals and research labo- term. made uniform. ratories received only 52 percent of ex- pected funds, and medical educational Ukraine Declining life expectancy, growing infant institutions, 71 percent. This money is mortality,andahighnumberofabortions barely enough to pay salaries, which are Ukraine's 1997 budget forecasts the first all contributed to a negative population often delayed, and only covers some 30 post-Soviet growth in the economy and growth in Ukraine of -5.8 percent in percentofnecessary medicines orequip- ahalvingofinflation. DeputyPrimeMin- 1995, down from -4.7 percent in 1994, ment. ister Viktor Pynzenyk told reporters that Ukrainska Hazeta reported on Septem- the budget foresees a 1.7 percent rise in ber 26. The average life expectancy Russiaisplanningseveralmajorprivati- GDP from the projected 1996 figure, dropped from 69.4 years in 1992 to 68 zation projects for the next few months, andafallininflationto 24.9 percentfrom (among men, to 62.8 years) in 1994. Of announced Alfred Kokh, the new head 48 percent expected this year. The bud- every 1,000 infants born, 14.5 diedwithin of Russia's State Property Committee, getdeficit is expectedto fall to 4 percent their first year. The number of abortions which oversees privatization. The sales of GDP, or 2.4 percent by western cal- declined slightly, from 154.3 for every oflarge stakes inthetelecommunications culations, from 6.2 percent this year. 100 deliveries in 1994, to 153.1 in 1995. concern AO Svyazinvest and the elec- Pynszenyk said the government will not tricity utility RAO Unified Energy Sys- revive the inflationary printing ofmoney Vietnam tem are aimed primarily at foreign inves- to meet targets. tors. Government officials from the The Vietnamese dong will be allowed to Russian parliament and leading banks Ukraine's central bank stopped defend- depreciate gradually. The head of have reached broad agreement not to ing a rate of 1.76 hrivnya to the dollar, Vietnam's central bank announced that challenge last year's controversial announced Viktor Yushchenko. The interest rates in the coming months will loans-for-shares privatizations. They authorities will letthehrivnyafloatfreely be cut to bolster economic growth and agreed to make the mechanism more on local foreign exchange markets, after reduce a growing trade deficit. Nguyen transparent in the future. At last year's spending $200 million on boosting con- Van Tru, head ofthe Ho Chi Minh branch auctions, leading banks won control over fidence in the new currency since its ofthe state bank, said in an earlier article 26 September-October 1996 Transition thatthepolicyofkeepingthedong stable rice exports has effectively been shrink- We appreciate the contributions from against the dollar at around 11,000 over ing because of inflation. Import quotas the Open Media Research Institute s the last two years-while inflation rose should be lifted on many items, while Daily Digest. more than 25 percent-has encouraged import taxes raised. imports. The profit from dollar-priced World Bank/IMF Agenda Annual Meetings: Hong Kong in 1997 companies. (The closures could lead to * Donors need to coordinate programs and Prague in 2000 the loss of an estimated 30,000 jobs.) more actively with each other and to The fate of nine banks put under super- ensure a major role for the government The World Bank and Intemational Mon- vision since September 23 has to be through sectoral task forces. etary Fund (IMF) will hold their annual resolved as well. On September 3, the * Investments should be made sustain- meetings in Hong Kong in September World Bank approved a $24.3 million able over the medium term by establish- 1997, some three months after the former loan fora social insurance administration ing viable budgets at all levels ofgovem- British colony rejoins China. The IMF project to provide financing for expert ment, ensuring that recurrent costs are and the World Bank have accepted the advisory services, foreign and localtrain- funded, and establishing appropriate Czech Republic's invitation to hold the ing, computer hardware and software, sectoral policies for cost recovery and annual meetings in Prague in 2000. fellowships, study tours, public educa- resource mobilization. tion materials, minor office upgrading, World Bank Urges Reforms and incremental operating costs. World Bank Sponsors "High Tech" in Bulgaria Animals in Bosnia ... Reconstruction in Bosnia Bulgaria's Deputy Prime Minister Ru- The World Bank is making available men Gechev noted on October 7 that the According to a recent report from the 3,500 cows and 2,600 goats to Bosnian IMF Executive Board would consider World Bank and the European Commis- farmers, as part ofa$50.4million emer- releasing a second $116 million install- sion, some $880 million of the $1.89 gency aid project designed to kick start ment on a $582 million, twenty-month billion pledged to the reconstruction of Bosnia's war-torn agriculture sector. agreement in November. The first $116 Bosnia at donor conferences in Decem- "Thesehigh-tech German animals," said million installment was made in July and ber 1995 and April 1996 is under imple- Michael Koch of the Bank's Sarajevo helped Bulgaria make debt payments mentation (that is, contracts have been office, "are intended to replace some of that were due that month. Disbursement tendered, signed and are are under way). the estimated 600,000 cows lost during of the new installment is particularly An estimated $558 million of the $880 Bosnia's conflict." The project, a col- important because it is linked to $200 million was disbursed for critical recon- laboration between the UN's Intema- million in other loans pending from mul- struction between January and August tional Fund for Agricultural Develop- tilateral agencies and up to ECU 60 mil- 1996. Another $500 million or so could ment and the World Bank, is providing lion ($76.4 million) from the European be tendered or contracted by year end, farmers with livestock, machines, and Union. Bulgaria has sufficient reserves bringing the total under implementation veterinary support helpingto reestablish to repay $230 million in debt due through tonearly$ 1.4 billion, orabout75 percent a structure for loans and repayments that the end of the year, but it faces a $1.4 of 1996 pledges. The report lists four could serve as a model for the shattered billion debt bill in 1997. Inflation is ex- actions required from donors to maintain banking system. In late September the pected to climb to more than 100 per- the accelerated pace: World Bank approved a $90 million In- cent, up from 32 percent in 1995. Re- * The $647 million in firm commitments temational Development Association lease of the money had been delayed still awaitingtendering should be pushed (IDA) credit for Bosniato help the coun- from September because the IMF was forward. try rebuild govenmment institutions and waiting for completion of Bulgaria's first * With three-fourths of 1996 pledges relaunch banking and other reformns. large cash privatization deal, the first expected to be under implementation or ThirteenWorld Bankprojects areopera- voucher auction under mass privatiza- disbursed by year end, new pledges will ticnal in Bosnia, and 629 contracts, with tion, and court proceedings on sixty-four be needed in early 1997 to prevent imple- a value of$ 140 million, have been signed pending bankruptcies of state-owned mentation delays. with the Bank's financing. Volume7, Number 9-10 27 TheWorldBank/PRDMG ... and an Electricity Loan to Ukraine ...and Hopes for a New Facility from in the management of semiautonomous the IMF councils that have oversight of interme- On October 10 theWorldBank approved diary education system councils, support a $317 million loan to Ukraine to help The IMF should decide by December for new program development for un- finance an electricity market develop- whether to grant Ukraine a $2.5-$3 bil- dergraduate and continuing education, ment project. The project will provide lion, three-year extended finance facility and support for the development of in- working capital forthe country's thermal to succeed an $867 million stand-by run- struction and research of advanced power plants. The project includes com- ning into early 1997, said Ukraine's cen- courses and researchgrants atthe master's ponents for: increasing fuel stocks and tral bank Governor Viktor Yushchenko. and doctoral levels. spare parts stocks at fourteen thermal Ukraine will then negotiate with the IMF power plants to sufficient levels, carrying on a stabilization loan, to a maximum $200 Million Credit for the Kyrgyz out deferred maintenance at fourteen $1.45 billion, to stabilize the hrivnya. Republic? thermalpowerplants, installingmetering and communications equipment to im- Russia Seeks Bank Restructuring The World Bank was ready to provide a prove recording and billing of electricity Loan $200 million credit for the development flows at key wholesale market delivery Russia's financial authorities seek a $1 of the Kyrgyz Republic's agriculture, points, and introducing technical ser- billion World Bank loan to help restruc- energy, and social security sectors, said vices and training for project implemen- . . World Bank Vice President Johannes tation, financial management, and devel- tem hard hituby'a rapiddecl bankinfla- Linn (Europe and Central Asia Regional opment of a pftvatization program. The ionthathasexposedRussianbanks bad Office) during a recent visit to the project will be implemented over three lontfolioseRussianbankslbad country's capital, Bishkek. Kyrgyz was loan portfolios. Russia's central bank nt'scpalBike.ygyws years, and completion is expected by .dfinance I one of the first transition economies to June 30, 1999. Total cost of the project and fianc mini king one .s- achieve real growth. So far this year, '~~~~~~~~~~n mthe loan. "Bankin system restructur- is $377.6 million. ing," said First Deputy Chairman GDP has grown 3 percent, and the Bank Alewxander Khandruyev, "is the central expects 7-8 percent GDP growth in Ukraine Expects $900 Million bank's and the goverment's priority." 1997. in 1997... The IFC Outreach Initiative http:lHwww.imf.org Ulkraine expects to receive $900 muillion in World Bank loans nextyear for energy The International Finance Corporation The IMF now has a Web site on the and agriculture development projects, (IFC) will help to attract private invest Internet. The public has access to on-line said Deputy Prime Minister Viktor ment to countries that Westem busi- IMF press releases, information on IMF Pynzenyk. "The possible fuinding from nesses have largely shunned. The IFC lending, the IMF's 1996AnnualReport, the World Bank would be greater than has selected sixteen countries and re- and a variety of other material. The ever before," Pynzenyk said after talks IMF 's Dissemination Standards Bulletin at the Bank and the IMF. The World i ( and Boardforglobaleconomictransparency Bank would like to approve up to $1.5 mies) and will send m investment officers Bankwoldliktoappoveupo$1.5 to generate business opportunities for standards may also be accessed through billion in loans to Ukraine in fiscal year loc andreign etporeners. The the IMF's home page. The site also con- 1997, and hopes to be able to disburse countries include Albania Azerbaij an tains a directory ofIMF publications that between $600-$650 million in calendar counies e Mania FYR' allowsuserstosearchforpublicationsby year 1996. In 1994-95, the Bank pro- Bosnia-Herzegovina, Macedonia u author, title, or subject. An e-mail ad- vided $527 million. A $300million loan n dress is providedforrequestingfreepub- for enterprise development and a $300 . . . lications, and an order form may be millionloanforagricultural reformhave downloaded for priced publications. recently been approved. A $300 million recenfotlyheenoappctroved.oAt300rillonet In mid-September the World Bank ap- Record Lending Strains IMF loan for the Coal Sector and other projects proved a $P50 million loan to help reforPm Rcr edn tanM are currently in the pipeline. A recent hed hihe edcaion systoe n Rorm Liquidity Bankreprt aystha abut 00,00-the higher education system in Romama Bank report says that about 300,000- and to train academic staff and profes- 400,000 miners inthe Donbass coalba- sionals in the new fields required in a Accordingto the Financial Times, record sin may leave the industry. The Goven- market economy The project has three lendingto Mexico andRussia has pushed mentisputtinginplaceasocial mitigation cmpone orf improvemen the IMF's liquidity to its weakestpoint in and employment creation program. r r 28 September-October 1996 Transition five years. The IMF's 1996 Annual Re- the next three fiscal years, said Javad reforms and the government's efforts to port noted commitments of about $26 Khalilzadeh-Shirazi, World Bank Direc- design and implement agricultural and billion through stand-by and extended toratthe East Asia andPacific Regional farm reforms by providing noninflation- arrangements in the latest financial year, Office (Country Department 1). ary budget resources to ease liquidity compared with $22 billion the year be- Khalilzadeh-Shirazi discussed plans for constraints. The creditwill focus on ben- fore and $20 billion at the height of the the forthcoming international donor con- efits for children and low-income and debt crisis in 1982-83. This level ofcom- ferenceonVietnamduringhis recentvisit nonworking pensioners and will allow mitments cuts the liquidity ratio of un- to Hanoi. The conference, the fourth of regular payments of wages and salaries. committed usable resources to liquid li- its kind, will take place in Hanoi this year abilities to less than 90 percent in April rather than in Paris so Vietnam can ex- In One Sentence 1996, from 126.1 percent in 1995. IMF plain a new five-year economic plan. liquid resources andthe liquidity ratio are * On September 12 a $5 million World expected to continue falling to about 70 IDA Rehabilitates Gas Delivery Bank loan was approved for Uzbekistan percent (the "red line") next year, said in Azerbaijan. . . for a pilot water supply engineering IMF Managing Director Michel projectthatwill eventuallysupply25,000 Camdessus in a recent news conference In mid-September the World Bank ap- people. in connection with the annual IMF/World proved a $20 million IDA credit to reha- Bankmeetings. Camdessus urgedadou- bilitate and improve Azerbaijan's gas * A $45 million World Bank structural bling ofquotas, while noting that a mini- delivery system. The credit will be given adjustment loan to Macedonia FYR will mum increase oftwo-thirds is necessary to the Azerbaijan government, which provide balance-of-payments support to to preserve the IMF's size relative to the will lend it to the national gas company further liberalize its foreign trade regime world economy. Azerigas to install or upgrade gas meters and privatize agricultural estates. at industrial and commercial enterprises, Road Development in China upgradethegas system's equipment, and * An $80 million structural adjustment streamline the company's management. loan to Lithuania, approved in early On October 10 the World Bank ap- The Bank identified Azerbaijan as the October, will help to restructure the proved a $300 million loan to China for country most dependent on natural gas. country's troubled banking, energy, ag- the second Xinjiang highway project, The current distribution system loses or ricultural, and social protection sectors, supporting growth and modernization of is unable to account for an estimated 20 including anew regulatory framework in the transport system and alleviating in- percent of its inputs. the banking sector; introduce commer- frastructure bottlenecks in Xinjiang, the cialization, institutional reforn, andpriva- largest ofChina's provinces and autono- ... .and Supports Tajik Reforms tization in the energy sector; open the mous regions. The project is the latest in agricultural sector to private sector op- a series of Bank loans totaling $2.6 On September12 IDA providedacredit portunities and international trade; and billionthatareaimedatimprovingChina's of SDR 34.8 million for an agricultural improvethe legal frameworkandadmin- highway system. From 1980 to 1994 recovery and social protection program. istration of social insurance while in- gross output of agriculture and industry The credit will support macroeconomic creasing private sector involvement. grew at an annual rate of 19.7 percent in Xinjiang,increasingtradeandtrafficvol- Bank consolidation in Russia umes on its roads. Isolated from China's economic and political centers, Xinjiang is serviced by only one main railroad and two highways; future economic growth is impeded by this sparse transport net- work. $1.5 Billion IDA Credits for Vietnam? The World Bank will press on with $1.5 billion in IDA credits to Vietnam dunng From the Wall Street Journal Europe ' "Central European Economic Review." Volume 7, Number 9-10 29 The WorldBank/PRDMG Conference Diary Die weitere Entwicklung der EU und lin GmbH. Topics include: the impact of Organized by Evangelische Akademie die Wirtschafts und Warungsunion transeuropean networks on economic Muelheim and Wissenschaftliches (Future Development of the EU and growth, and international competitive- Schlesisches Institut in Opole. the Economic and Monetary Union) ness and the labor market, with special Information: Evangelische Akademie November 4-5, 1996, Bad Saarow, regard to the strengthening of the com- Muelheim, Uhlenhorstweg 29, 45479 Germany petitive position ofsmall-medium enter- Muelheim an der Ruhr, Germany, tel. prises and of the East-West integration. 49-208-599060,fax49-208-599-6600. Organized by Konrad-Adenauer-Stif- Information: H. J: Knaupe, Bildungs- tung, Bildungswerk Berlin. Topics in- zentrumamMuggelsee, Furstenwalder The Further Development ofCEFTA: clude: development of the EU after Damm 880, 12589 Berlin, Germany, Institutionalization, Deepening, Maastricht; chances and problems ofthe tel. 49-30-648-4201, 648-9010,fax 49- Widening? monetary union; political union and the 30-645-5244. November 28-30, 1996, Warsaw, common foreign and security policy; and Poland the eastern enlargement of the EU. Twenty-Eighth National Convention Information: Konrad Adenauer Stif- of AAASS Organized by Friedrich-Ebert Founda- tung, Bildungswerk Berlin, Molken- November 14-17, 1996, Boston, United tion and the Cooperation Bureau for markt 1-3,10174Berlin, Germany, States Economic Research on Eastern Europe. tel. 49-30-238-5546, fax 49-30-238- Topics include: CEFTA integration and 4494, Internet. http:1//www. kas. del Organized by the American Association the role of common institutions; CEFTA for the Advancement of Slavic Studies. on the road toacommon market; CEFTANs Forging Alliances in Global Markets Information: Wendy Walker, American enlargement; the role of CEFTA in the November 6-8, 1996, New Orleans, Association for the Advancement of Balkans,Lithuania,andUkraine;CEFTA United States Slavic Studies, 8 Story Street, Cam- asthecatalystforEasternenlargementof bridge, M4 02138, United States. tel. the EU. Organized by the International Manage- 617-495-0677, fax 617-495-0680, information:HeinrichMachowski, Co- mentDevelopmentAssociation(IMDA). e-mail: aaass(hcs. harvard. edu. operation Bureau for Economic Re- Topics include: managing change in glo- search on Eastern Europe, German In- bal markets from the perspective of re- Von Albanien bis Aserbaidshan- stitute for Economic Research, gional development. Wirtschaftskooperation im Suedoest- Koenigin-Luise-Str 5,,D-14195Berlin, Information: Zafar U. Ahmed, Institute lischen Europa Germany. tel. 49-30-897-7836,fax 49- for International Business, College of (From Albania to Azerbaijan: Eco- 30-897-7899, e-mail: 0308977080- Business, Minot State University, Minot, nomic Cooperation in South East 000O@,t-online.detribakova @diw- NorthDakota58707, UnitedStates, tel. Europe) berlin.de. 800-777-0750 ext. 3826, fax 701-858- November 18-20, 1996, Tutzing, 3127, e-mail: ahmed@warp6cs.misu. Germany The Post-Soviet World: nodak. edu. A Period of Transition Organized by Evangelische Akademie November 29, 1996, Reading, United Transnationale Vernetzung der Infra- Tutzing. Kingdom strukturen-Katalysator fur die Ein- Information: Evangelische Akademie heit Europas Tutzing, Schloss Strasse 2+4, 82327 Organized by the Centrefor Post-Soviet (Transnational Networking of Infra- Tutzing, Germany, tel 49-8158-2510, Studies, University of Reading. structure-Catalyst for the Unity of fax 49-8158-251133. Information: Joan Batchelor, The Cen- Europe) tre for Post-Soviet Studies, GSEIS, November 6-7, 1996, Berlin, Germany Arbeitslosigkeit in Polen and Arbeitslo- University of Reading, Whiteknights, sigkeitinDeutschland-Ein Vergleich PO. Box218, ReadingRG6 6AA, United Organized by Bildungszentrum am (Unemployment in Poland and Un- Kingdom. tel. 44-0118-9318378,fax44- Muggelsee/Bundeverband mittelstan- employment in Germany-A Com- 0118-9755442, e-mail: J.M.Batch discheWirtschaftiUnternehmerverband parison) elor@reading. ac.uk. Deutschlands/WirtschalisforderungBer- November 26-3 0, 1996, Opole, Poland 30 Septemnber-October 1996 Transition Twenty-Third International Confer- 7AN, UnitedKingdom, tel.44-171-505- Organized by the University of Split, ence: "Macromodels '96n 6043, fax 44-171-251-6909, e-mail: Faculty of Economics. December 4-6, 1996, Lodz, Poland 101574. 674compuserve@com. Information:Secondlnternational Con- ference on Enterprises in Transition Organized by the Institute of Economet- Albanian Economy Toward Free Organizing Committee, University of rics and Statistics, University of Lodz. Market Split, FacultyofEconomics, Radovanova Topics include: national economy mod- December 14-16, 1996, Tirana, 13, HR-21000 Split, Croatia, tel. 385- els; evaluation of forecasts and analysis Albania 21-341866, 385-21-362465, fax 385- of uncertainty in modeling; andmodeling 21-366026, e-mail: eitconf)oliver efst. economies in transition. Organized by PHARE-ACE 1995 and hr. Information: Piotr Wdowinski, Scien- the University ofAthens. Topics include: tificSecretary, Macromodels '96, Insti- public sector; foreign trade; exchange First Exhibition and Conference for tute ofEconometrics and Statistics, ul. rate and monetary policy; small-medium the Russian Security Industry Rewolucji 1905 r 41, 90-214 Lodz, enterprises; foreign investment; sectoral June 16-20, 1997, Moscow, Russia Poland, teL/fax 48-42-32300 7, e-mail: issues; agricultural policy; banking; re- intek@krysia. uni. lodz.pl. gional development; and privatization. Organized by E. J. Krause & Associates. Information: A. Panethimitakis, Uni- Information: E. J. Krause & Associ- Significance of Politics and Institu- versityofAthens, 1, SofokleusStr, 10559 ates, Boeklinstr 12, 40235 Dusseldorf tions for the Design and Formation of Athens, Greece, teL 30-1-321-1454,fax Germany, teL 49-211-685434, fax 49- Agricultural Policy 30-1-322-1965, e-mail: alexpan@ath. 211-6912268. December 9-11, 1996, Halle/Saale, forthnet.gr Germany Globalization, Technological Change, Ninth Annual Bank Conference on and the Welfare State Organized by the Institute for Agricul- Development Economics (ABCDE), June 1997, Washington, D.C., United tural Development in Central and East- 1997, Washington, D.C., United States States em Europe (IAMO). Information: Peter Weingarten, Insti- Inaugurated by James D. Wolfensohn, Organized bytheJohns Hopkins Univer- tute for Agricultural Development in President of the World Bank, and spon- sity, American Institute for Contempo- Central and Eastern Europe (IAMO), sored by Michael Bruno, Chief Econo- rary German Studies. Topics include: Magdeburgerstr 1, 06112Halle/Saale, mistandSeniorVicePresidentDevelop- the impact of global competition and Germany, tel. 49-345-5008129,49-345- ment Economics. Conference has technological change on the demand for -5008110;fax49-345-5126599, e-mail: sessions on Corruption: Catalysts and skilledand unskilled labor; the flexibility weingarten(iamo. uni- halle.de. Constraints (Michael Johnston and Su- ofthe labormarket in adaptingto changes san Rose-Ackerman), Incentives and in the demand and supply for labor; the Satellite Business Forum for Russia Performance in Public Organizations impact ofregulation in the labor market, and the CIS (Sherwin Rosen and Dilip Mookherjee); the service sector, and the environment December 10-11, 1996, Hotel Radisson Poverty and Environment (Karl Goran- on changes in the demand for labor; the Slavyanskaya, Moscow, Russia Maler and Ramon Lopez); and Leaders impact of social costs on the demand for in Growth: Can Others Follow? (Alberto labor and real wages; andthe role oftrade Organized by the Adam Smith Institute. Alesina, Takatoshi Ito). Participation by policy in relation to labor and environ- Topics include: international coopera- non-Bank and non-IMF staff by invita- mental standards. tion and strategicpartnerships;the shape tion only. Information: Mathias Moersch, Eco- of the Russian federal space program; Information: Boris Pleskovic or Gre- nomic Studies Program, American in- the impact of international agreements gory Ingram, Research Advisory Staff, stituteforContemporary GermanStud- and regulations; the commercialization World Bank, 1818 H Street, NW, Room ies, 1400 16th Street NW Suite 420, ofRussia's satellite and launch industry; N7-031, Washington, DC 20433, tel. Washington, D.C. 20036-2217, UJnited and financial considerations and busi- 202-473-1062,fax 202-522-0304. States, fax 202-265-9531, e-mail: ness applications of satellites. mmoersch(&jhunix.hcfjhu. edu. Information:DorotheaJilli, Adam Smith Second International Conference on Institute, Conference Division, 11-13 Enterprises in Transition Charterhouse Buildings, London ECIM May 22-24, 1997, Split, Croatia Volume7, Number 9-10 31 The World Bank/PRDMG Essex Conference on Russian Social New Books and Working Papers Science Data The Macroeconomics and Growth Division regrets that it is August 1997, Essex, United Kingdom unable to provide the publications listed. Organized by the Centre for Russian World Bank Publications profiles summarize national develop- Studies, University of Essex. ment strategies and describe each Information: Rachel Walker, Centre To receive ordering and price infor- country's economic features, current for Russian Studies, University of mationfor WorldBank publications, socioeconomic issues, recent political Essex, Wivenhoe Park, Cochester, write: World Bank, P.O. Box 7247- developments, andmedium-termpros- Essex C04 3SQ, United Kingdom, tel. 8619, Philadelphia, PA 19170, United pects. 44-1206-872743, e-mail: walkr@ States, tel. 202-473-1155, fax 202- essex. ac. uk. 676-0581; or visit the World Bank Policy Research Working Papers bookstores, in the United States, 701 Tenth Polish Sociological Congress 18th Street, N.VW, Washington, D.C., Lev M. Freinkman and Irina September 22-25, 1997, Katowice, orinFrance, 66avenued'Iena, 75116 Starodubrovskaya, Restructuring of Poland Paris, e-mail: books@worldbank.org, Enterprise Social Assets in Russia: Internet: http://www.worldbank.org. Trends, Problems, Possible Solu- Organized by the Polish Sociological tions, Policy Research Working Paper Association. TechnicalPapers 1635, August 1996, 38 p. Information: Polish Sociological As- sociation, Nowy Swiat 72, 00330 Gerhard Pohl, Simeon Djankov, and SocialspendingbyRussianenterprises Warsaw, Poland, fax 48-22-26773 7. Robert E. Anderson, Restructuring represents as much as 20 percent of Large Industrial Firms in Central gross wage costs. What to do about Russia in the Asia-Pacific Region and Eastern Europe: An Empirical social services that Russia's state en- June or July 1998, Melbourne, Analysis, World Bank Technical Pa- terprises have traditionally provided is Australia per 332, 1996, 48 p. a major issue in enterprise restructur- ing and public policy reform. If taxes Organized by ICCEES. Discussion Papers andthe provision ofsocial services are Information: Further details will be rationalized at the time those social forthcoming. See also ICCEESNews- Philip Musgrove, Public and Private assets are divested, pioneering steps letter, 1996, No. 36-37. Roles in Health: Theory and Fi- couldbetaken in restructuringthe social nancing Patterns, World Bank Dis- sector. As enterprises are restructured, Sixth World ICCEES Congress cussion Paper 339, 1996, 94 p. the public sector must become involved July 29-August 3, 2000, Tampere, in: Finland Michael S. Borish, Wei Ding, and *Protecting critical services, such as Michel Noel, On the Road to EU kindergarten, that might otherwise dis- Organized by ICCEES and the Finnish Accession: Financial Sector Devel- appearas enterprise funding is reduced. Association for Russian and East Eu- opment in Central Europe, World *Facilitating housing and health ser- ropean Studies (FREES). Bank Discussion Paper 345, 1996, vices reform. Information: Anneli Virtanen, Pertti 176 p. *Guaranteeing citizens' access to pub- Piispanen, or ValdemarMelanko, In- lic services. stituteforRussian and East European Other World Bank Publications *Reducing costs by rationalizing the Studies, Annankatu 44, Fin-O0100 management and provision of services. Helsinki, Finland, tel. 3580-228- Trends in Developing Economies Municipal governments are divesting 54434, fax 3580-228-54431. 1996, 590 p. enterprises of housing in a nontran- sparent way. Vested interests have We appreciate the contributions ofthe This seventh annual collection of pro- many ways to postpone or block dives- Cooperation Bureaufor Economic Re- files, text, and summary statistical tables titure-even though most enterprise search on Eastern Europe (email: describes the recent economic perfor- managers welcome it because it will diw334trgdbOdiwll.diw-berlin.de). mance of 117 developing economies reduce their costs and administrative through December 1995. The country burden. To order: Larisa Markes, 32 September-October 1996 Transition RoomH2-021, tel. 202-473-6578,fax Bernard Hoekman and Someon of the Kunda Cement Factory, IFC 202-477-3288,e-mail:lmarkes@world Djankov, Intra-Industry Trade, For- Discussion Paper 30, 1994, 42 p. bank. org. eign Direct Investment, and the Re- orientation of Eastern European Air pollution has earned Kunda the Hua Wang and David Wheeler, Pric- Exports, Policy Research Working dubious distinction ofthe "Gray Town ing Industrial Pollution in China: Paper 1652, September 1996, 29 p. of Estonia." Social benefits exceed An Econometric Analysis of the Levy private costs by a margin wide enough System, Policy Research Working Pa- The authors find a strong relationship to justify the environmental invest- per 1644, September 1996, 30 p. To between export performance and ment in terms of increased social wel- order: Hua Wang, Room Ni 0-039, tel. growth in vertical intraindustry trade fare; beneficiaries range from the com- 202-473-3255,fax 202-522-3230, with the EU. The Czech and Slovak pany and nearby residents and e-mail: hwangl@,worldbank.org. Republics, Hungary, Poland, and entrepreneurs to residents of neigh- Slovenia all rely heavily on the EU for boring countries. The findings can have Alex Fleming, Lily Chu, and Marie- inputs-more so than Austria, Portu- a significant bearing on investment Renee Bakker, The Baltics-Bank- gal, and Spain, for example. As their decisions, management operations, and ing Crises Observed, Policy Research per capita exports to the EU have also government policy. Working Paper 1647, September 1996, grown the fastest, this appears to be a 35 p. To order: Suzanne Coffey, Room characteristic of successful transition. H6-305. tel. 202-473-2635, fax 202- Simple redirection of traditional ex- 522-0005, e-mail: scoffey@world ports from markets in the Council for IMF Publications bank. org. Mutual Economic Assistance (CMEA) did not play an important role in the To order: IMFPublication Services, Cheryl W. Gray and Arnold Holle, growth of exports to Western Europe. 700 19th Street, N. W, Washington, Bank-Led Restructuring in Poland: Instead, sale increase to EU countries D.C. 20431, United States, tel. 202- An Empirical LookattheBank Con- consists of products not previously 623-7430, fax 202-623-7201. ciliation Process, Policy Research exported to the CMEA, or of tradi- Working Paper 1650, September 1996, tional export items that have been sub- IMF Working Papers 39 p. stantially upgraded or differentiated. Anthony J. Richards, Volatility and Poland's enterprise and bank restruc- Inflows of foreign direct investment Predictability in National Stock turingprogram,adoptedin 1993,halted correlate highly with levels of Markets: How Do Emerging and the deterioration ofthe country's com- intraindustry trade. But if large invest- Mature Markets Differ? Working mercial banks, but its bank-led work- ments in the automobile sector are Paper 96/29. out process has done little to further excluded, these investments seem un- the operational restructuring or priva- likely to have been a major force driv- Brian Aitken, Have Institutional In- tization of enterprises. Strong banks ing the growth of intraindustry trade. vestors Destabilized Emerging Mar- are needed to impose effective corpo- To order: Faten Mabab, Room H8- kets? Working Paper 96/34. rate governance. 087, tel. 202-973-5853,fax202-477- To order: BillMoore, RoomN9-038, 8772, e-mail:Jhatab@worldbank.org. Joseph E. Gagnon, Paul R. Masson, tel. 202-473-8526,fax202-522-1155, and Warwick J. McKibbin, German e-mail: gmoorel@,worldbank. org. IFCPublications Unification: What Have We Learned from Multi-Country Models? Work- Cheryl W. Gray and Arnold Holle, Laurence Carter, IFC's Experiencein ing Paper 96/43, May 1996, 27 p. Bank-Led Restructuring in Poland: Promoting Emerging Market Invest- Bankruptcy and Its Alternatives, ment Funds 1977-1995, IFC Lessons Atis R. Gosh, The Output-Inflation Policy Research Working Paper 1651, of Experience Paper no. 2, 1996. Nexus in Ukraine: Is There a Trade- September 1996,3 8 p. To order: Bill Off? Working Paper 96/46, May 1996, Moore, Room N9-038, tel. 202-473- Yannis Karmokolias, Cost-Benefit 31 p. 8526, fax 202-522-1155, e-mail: Analysis of Private Sector Environ- gmoorel@,worldbank.org. mental Investments: A Case Study Volume 7, Number 9-10 33 The World Bank/PRDMG Ke-young Chu and Sanjeev Gupta, and Key Policy Issues, September External Debt Statistics: Resource Social Protection in Transition 1996, 158 p. Flows, Debt Stock, andDebtService Countries: Emerging Issues, Work- Statistics 1984-1995, no. 43-96-09- ing Paper 96/50, May 1996, 27 p. World Economic Outlook (Parts I 3, August 1996, 215 p. and II), October, 1996, 193 p. and The weakening financial and adminis- 103 p. Time series (going back to the mid- trative capacity of transition econo- 1980s) detail debt service and debt mies affects the government's social The world economy's growth rate will stock data for both major country protection programs. The formal sec- accelerate gradually throughthe rest of groups and 135 individual countries tor is shrinking, and unemployment the 1990s, reflecting a sharp rebound and territories. Data on net resource and underemployment are rising rap- in activity in the transition economies flows to major country groups and idly. The revenue base of social pro- of Eastern Europe and the former separate debt tables for the successor tection programs is shrinking, together Soviet Union. But this upturn is vul- states of the former Soviet Union, with the ability of these countries to nerable to setbacks in the reform pro- former Czechoslovakia, and the pre- target social benefits. Therefore, so- cess. The world economy is expected 1991 Yugoslavia are also included. cial benefits have to be restructured, to grow 4.1 percent next year, with relying more on self-targeting mecha- growth in the developing world falling Slovak Republic, 1995-1996, no. 10- nismstodeliverbenefits, and immedi- slightly to 6.2 percent. Transition 96-33-1, September 1996, 164 p. ate steps have to be taken to improve economies should be able to sustain payroll tax compliance. growth rates of 4 to 5 percent a year in OECD's periodic review ofthe Slovak the long term, but major efforts are economy. Quick economic growth of Peter J. Quirk, Macroeconomic Im- also needed to put their banking sys- the Slovak Republic has astonished plications of Money Laundering, tem onasoundfooting; this is essential many analysts. It recorded one of the Working Paper 96/66, June 1996, for the mobilization and effective allo- best macroeconomic performances 33 p. cation of domestic saving. among Central and East European countries. The country's gross do- Zuliu Hu and Mohsin S. Khan, Why Is OECD Publications mestic product grew 7.4 percent in China Growing So Fast? Working 1995. The inflation rate, which stood Paper 96/75, July 1996, 27 p. To order: OECD Washington Center, at25.1 percentattheendof 1993,was 20011 LStreet, N. W, Suite 650, Wash- reduced to 6.1 percent by May 1996. Thierry Pujol, The Role of Labor ington, D.C. 20036-4922, United State budget and current account bal- Market Rigidities during the Tran- States, tel. 800-456-6323, fax 202- ances recorded surpluses in 1995. The sition: Lessons from Poland, Work- 785-0350, or in France, 2 rue Andre- unemployment rate peaked at the be- ing Paper 96/77, June 1996,26 p. Pascal, 75775 Paris Cedex 16, tel. ginningofl995,at l5percent,butfell 33-1-4910-4211,fax33-1-4910-4276. to 11.9 percent by May 1996. The William Jack, The Efficiency of VAT report focuses on the need to restruc- Implementation: A Comparative Jean-Claude Berthelemy and Aris- ture the banking sector and privatized Study of Central and Eastern Euro- tomene Varoudakis, Financial Devel- companies. It also deals extensively pean Countries in Transition, Work- opment Policy and Growth, no. 41- with the Slovak Republic's potential ing Paper 96/79, July 1996, 14 p. 96-09-1, October 1996, 130 p. for expanding its tourist industry. Natasha Koliadina, The Social Safety The relationship between financial de- The Changing Social Benefits in Rus- Net in Albania, Working Paper 96/ velopment and overall economic sianEnterprises, no. 14-96-15-1,Sep- 96, August 1996, 55 p. growth is reciprocal. By aligningthese tember 1996, 150 p. two factors, the authors identify four Other IMFPublications "convergence clubs,"groups ofecono- Centre for the Study of Public Policy mies that are heading for different Takatoshi Ito, David Folkerts-Landau, growth regimes. Identifying into which To order: CSPP Publications, Uni- and others, International Capital category a country falls can help versity of Strathclyde, Livingstone Markets: Developments, Prospects, policymakers to devise the most ben- Tower, 26 Richmond Street, Glasgow eficial policies. 34 September-October 1996 Transition GI IXH, Scotland, tel. 44-141-552- Helsinki, Finland, tel. 35-89-183- Janos Kornai, Adjustment without 4400,.fax44-141-552-4711, Internet: 2268, fax 35-89-183-2294, e-mail: Recession: A Case Study of the http://www. strath. ac. uk:80/Depart- pave.palace@ bonnet.f Internet: http:/ Hungarian Stabilization, Discussion ments/CSPP /www.boff/env/eng/it/iten.stm. Paper 33, August 1996, 48 p. John S. Earle and Richard Rose, Own- Iikka Korhonen, Dollarization in University of Leicester Publications ership Transformation, Economic Lithuania, September 1996, 7 p. Behavior, and Political Attitudes in To order: Faculty of Social Sciences, Russia, Studies in Public Policy 269, Juhani Laurila and Inkeri Hirvensalo, Centrefor European Economic Stud- 1996. Direct Investment from Finland to ies (CEES), Department of Econom- Eastern Europe: Results of the 1995 ics, University ofLeicester, LE] 7RH, James L. Gibson, Putting Up with Bank of Finland Survey, September UnitedKingdom, tel.0533-522-892, Fellow Russians: Political Toler- 1996, 40 p. fax 0533- 522-908. ance in the Fledgling Russian De- mocracy, Studies in Public Policy 275, Tatiana Popova and Merja Tekoniemi, Barbara M. Roberts, Transition in 1996. Social Consequences of Economic Poland and Shifts in Sectoral Com- Reform in Russia, September 1996, position of Demand, Discussion Pa- Mary McIntosh and Dan Abele, Toler- 26 p. pers in European Economic Studies ance for a Multiethnic Bosnia- 96/2, June 1996, 25 p. Herzegovina: Testing Alternative Interstate Statistical Committee of Theories, Studies inPublicPolicy267, the CIS Publications Joshy Easaw and Dean Garratt, Politi- 1996. cal Business Cycles within Integrated To order: Interstate Statistical Com- Economies: Possible Considerations RichardRoseandWilliamMishler,Po- mittee of the CIS, 39, Myasnitskaya for the EU, Discussion Paper 96/3, litical Patience in Regime Transfor- Str., 103450Moscow, Russia, tel. June 1996, 23 p. mation: A Comparative Analysis Of 7-095-207-46-51; 7-095-207-42-37, Post-Communist Citizens, Studies fax 7-095-207-45-92, e-mail: statpro Rumen Dobrinsky, Mikolay Markov, in Public Policy 274, 1996. gsovam.com. and Stephen Pudney, Poverty and Social Security in Bulgaria during Tacis Publications Commonwealth of Independent Transition, Discussion Paper 96/4, States, 1996: Statistical Portrait, August 1996, 33 p. Belarus Economic Trends: Quarterly 1996, 51 p. Update, June 1996, 49 p. To order: Frankfurt Institute for Transforma- RupinderSingh, tel. 375-172-208442, The CIS Countries in Figures, 1996, tion Studies Publications fax 3 75-1 72-208657, e-mail: bulletin 275 p. @bettacis.minsk.by. To order: FIT, Europa-Universitat Collegium Budapest Institute for Viadrina, Postfach 776, D-15207 Georgian Economic Trends: Advanced Studies Publications Frankfurt, Germany. Monthly Statistical Updates and Quarterly Reviews. To order: Oliver To order: Collegium Budapest Insti- Erik Dietzenbacher and Hans-Jurgen Weeks or Simon Stone, 16 Zandukeli tute for Advanced Study, H-1014 Wagener, Prices in the Two Str., Tbilisi, Georgia, tel. 995-3293- Budapest Szentharomsag utca 2, Germanies, Discussion Paper 4/96, 9161, fax 995-3293-9160, e-mail: Budapest, Hungary, tel. 361-156- 1996, 23 p. oliverfgyet.kheta.ge. 1244, fax 361-1 75-9539, e-mail: collegium. budapest@ colbud. hu. Gunter Krause, Revisionism Debate Review of Economies in Transition in the GDR's Economic Science [in Publications Janos Kornai, The Citizen and the German], Discussion Paper 2/96, State: Reform of the Welfare Sys- 1996, 35 p. To order: Pave Palace, Bank of Fin- tem, Discussion Paper 32, August land Unit for Eastern European 1996. 22 p. Jan Winiecki, Foreign Investment in Economies, P.O. Box 160, FIN-00101 Eastern Europe: Expectations, Volume 7, Number 9-10 35 TheWorldBank/PRDMG Trends, Policies, Discussion Paper3/ tel. 201-487-9655,/ax201-487-9656, mentary Responsibility for Eco- 96, 1996, 14 p. e-mail: wspcgwspc. com). nomic Transition in Central and Eastern Europe, CSCE, Congres- Other Publications Martin Grundmann, ed., Transforma- sional Research Service, U.S. Library tion and Arms Conversion in the of Congress, Washington D.C., July Valentijn Bilsen and Jozef Konings, Baltic Sea Region and in Russia, 1996, 234 p. Job Creation, Job Destruction, and Kieler Schriften zur Frieden- Growth of Newly Established Pri- swissenschaft,Germany, 1996,230p. Popularly elected legislatures of the vate Firms in Transition Economies: region provide a crucial link between Survey Evidence from Bulgaria, Asignificantpart ofthe transformation the administrative organs of the state Hungary, and Romania, Discussion process, arms conversion is amultidi- andthepopulation.Theirrole-estab- Papers on Economic Transformation: mensional problem. It includes all as- lishing the legal and regulatory frame- Policy, Institutions, and Structure 59, pects of the military industrial com- works for economic activity, deciding Leuven Institute for Central and East plex-range, quality and cost of budget allocations, and providing ef- European Studies, 1996, 36 p. To or- production, organizational structure, fective mechanisms foradministrative der: Katholieke Universiteit Leuven, finance, personnel policy, and sectoral oversight-is therefore critical. Ch. Deberiotstraat 34, 3000 Leuven, and intersectoral relationships. The Through legislation andoversight, par- Belgium, tel. 32-16-326-598,fax 32- book discusses macrostructures and liaments influence andeven determine 16-326-599. microconditions of arms conversion the conditions for economic develop- and presents research results from ment. Their actions also have a critical Anthony T. H. Chin and Ng Hock Central and Eastern European coun- impact on the investment environ- Guan, Economic Management and tries and various industrial branches. ment-promoting legal standards, Transition Towards A Market To order: LIT Verlag, Dieckstr. 73, sound budgets, tax codes, and privati- Economy: An Asian Perspective, 48145Munster, Germany, tel. 49-251- zation programs. More broadly, the World Scientific Publishing Co., 1996, 235-091, fax 49-251-231-972. parliament serves as a representative 500 p. To order: World Scientific institution. Publishing Co., Inc., 106OMain Street, John P. Hardt, Jean F. Boone, Stephen River Edge, NJ 07661, United States, B. Heintz, and Aaron Presnall, Parlia- - S 4~~ ~ ~ .. J From the World Press Review. 36 September-October 1q96 Transition The support for parliaments in transi- Publications Unit, International Kurt Schuler, Should Developing tion provided by U.S. Congress and Training Centre of the ILO, Corso Countries Have Central Banks? In- implemented by the Congressional Unita d'Italia 125, 1-10127 Turin, stitute of Economic Affairs, 1996, Research Service included: Italy, fax 39-11-663-4266. 126 p. - Establishing a modem technical in- formation system, also making avail- M. Holt Ruffin, Joan McCarter, and Central banking, though now wide- able and effectively using the global Richard Upjohn, The Post-Soviet sp.read, is a relatively recent phenom- Internet system. Handbook: A Guide to Grassroots enon, especially in developing coun- * Developing a parliamentary library to Organizations and Internet Re- tries. Rivals to central banking include strengthen the information and research sources in the Newly Independent currency boards, monetary institutes, capabilities of a modern parliament. States, Center for Civil Society Inter- free banking, and "dollarization. " Most * Generating independent, objective national, United States, 1996, 393 p. economists and policymakers believe research capabilities to inform the that every independent country should parliament's deliberations and legisla- Since 1991 dynamic new organiza- have its own central bank, so it can tion. tionswerecreatedintheformerSoviet conduct an independent monetary * Providing adequate training for mem- Union by public-spirited citizens ready policy. Currency quality (such as in- bers, staff, and interns in the use of a to make their institutions more hu- flation rates and periods of high infla- modern parliamentary support system. mane, their economies more produc- tion and exchange rates) for 155 coun- To order: CSCE (Commission on Se- tive, their environments cleaner, and tries are analyzed to provide curity and Cooperation in Europe), theirlegal systems morejust. The enor- performance indicators. 234 Ford House Office Building, mous variety ofthese grassroots initia- Washington, D.C., 20515-6460, tivesspreadfromthe Research Center The results show that central banking United States, tel. 202-225-1901,fax for Human Rights in Moscow to the in developing countries has performed 202-226-4199, e-mail: csceghr. Red Crescent Society in Azerbaijan worse than other monetary systems house.gov. and the Wildlife Foundation in and worse than central banking in in- Khabarovsk. dustrial countries. Some developing Dennis Rondinelli and Max Iacono, countries have recently established cur- Policies and Institutions for Man- TheHandbook provides contactinfor- rencyboards; others shouldfollowtheir aging Privatization: International mation for hundreds of independent example. To order: Institute of Eco- Experience, International Labor Of- associations and describes theirprinci- nomic Affairs, 2 Lord North Street, fice, Geneva, 1996, 184 p. pal programs and activities. A special Westminster, London SWiP 3LB, section introduces Internet resources United Kingdom, tel. 44-171-799- Experience suggeststhatprivatization relatedtothe newly independent states, 3745, fax 44-171-799-2137. isneitherapanaceaforallgovernment's from electronic mailing lists to World ills nor sufficient to ensure economic Wide Web and Gopher sites, as well as Privatization in the Economies in progress. The advantages of privati- utilities for moving from Latin charac- Transition, European Center for Peace zation can be maximized when govern- ters to Cyrillic and vice versa. Contact and Development, May 1996. To or- ment ensures a competitive environ- information formore than twenty clear- der: European Centerfor Peace and ment, has adequate procedures for inghouse organizations, as well as Development of the UN, University promoting cost reduction and service descriptions ofmore than 150 projects for Peace, 11000 Belgrade, Kneza quality, strongly supports small and in the newly independent states, cre- Mihaila 7/lI, Yugoslavia, tel. 38-111- medium-scale enterprise development ated by U.S.-based entities, ranging 633-551, fax 38-111-623-169. and state enterprise restructuring, and from cultural exchanges to financial performs an effective regulatory role sector reforms and housing develop- George Soros, "Can Europe Work? to minimize corruption and inequity. ment, are also part of the volume. To A Plan to Rescue the Union," For- Ultimately, privatizationismostlikely order: Centerfor Civil Society Inter- eign Affairs, vol. 75. no. 5, to succeed in a vibrant and vigorous national, 2929 NE. Blakeley Street, September-October 1996, 7 p. market economy, which governments Seattle, WA 98105-3120, UnitedStates, have an important role in creating, tel. 206-523-4755, fax 206-523- The economy is too importantto leave supporting, and sustaining. To order: 1974, e-mail:ccsi@u.wash ington.edu. to central bankers. With exchange Volume7, Number 9-10 37 The World Bank/PRDMG rates permanently fixed and monetary Arieh A. Ullmann and Alfred Lewis, Three countries (the Czech Republic, policy under the European central eds., Privatization and Entrepre- the Slovak Republic, and Poland) have bank's control, national governments neurship: The Managerial Challenge obtained investment grade marks from will have few policy instruments at in Central and Eastern Europe, In- the major international rating agen- their disposal. Ifthey follow diverging ternational Business Press, Fall 1996, cies. The region's foreign debt-GDP fiscal policies, the monetary union 400 p. ratio has fallen by one-third between could be endangered by individual To order: InternationalBusiness Press, end-1990 and mid-1995, but the ratio governments' pursuit of irresponsible l OAlice Street, Binghamton, New York remains relatively high for the region courses. That is why Maastricht set 13904-1580, United States, tel. 800- as a whole. To order: European Com- limits on government debt. But if 342-9678,fax800-895-0582, e-mail: mission, rue de la Loi, Wetstraat 200, those limits are fixed in advance and getinfoghaworth.com. B-1049 Brussels, Belgium, tel. 322- forever, governments have no room 296-1858, fax 322-295-7619, 322- for maneuvering. Economies need to Eira Varis, The Restructuring of Pe- 299-3302. be managed, and economies tied to- ripheral Villages in Northwestern gether by a common currency also Russia, UNU World Institute for De- Useful Web Sites need a common fiscal policy. The velopment Economics Research Maastricht Treaty sidesteppedthatis- (UNU/WIDER), 1996, 37 p. To order: Collection of Hungarian Economic sue by fixing only the entry require- UNU/WIDER, Katajano-kanlaituri 6 Laws (in English) ments. If the governments involved B, 00160 Helsinki, Finland. http:J/www.iqsoft.hu/pages/h_hmj. cannot take concerted steps now to html. combat unemployment, however, it is Financing Your Business in Eastern doubtfultheywillbeabletodosolater. Europe, no. FN-ll, 1996. Meta database, derived from sev- In that case, it may be better not to eral Hungarian data bases have a common currency at all. Sourcing Manufactured Products in http://www. iqsoft. hu'-mnolnark/meta/ China: The Who's Who of China's meta_e.html The countries of Central and Eastern Best Export Manufacturers,CS-1 1, Europe desperately need to get closer 1996. To order: World Trade Execu- Public Management Newsletter, to the European Union. Although com- tive, Inc., P 0. Box 76], Concord, MA from SIGMA/OECD (Support for munism is dead, the institutions and 01742, United States, tel. 508-287- Improvement in Government and attitudes of an open society are not yet 0301, fax 508-287-0302. Management in Central and East- firmly established. Negotiations on the ern European Countries), ajoint ini- admission of new members will prob- Heloidoro Temprano, The Improve- tiative of the OECD/CCET and the ably start in earnest in 1999. Further ment in the External Position of European Union PHARE Program. enlargement will render the intergov- Central and Eastern European Current issue (vol. 2, no. 1, 1996) ernmental process completely unwork- Countries, European Economy, includes: "Czech Republic Tackles able. The bureaucraticmethodofbuild- Supplement A, no. 2, 1996, European Local Budget Reform;" "Controlling ing an integrated Europe has exhausted Commission. Personnel Costs;" "Bureaucratic Bur- its potential. dens on Private Enterprise in a Tran- The balance of payments of most Cen- sitional Economy." The Intergovernmental Conference tral and Eastern European countries http://www.oecd.org/puma/sigmawebl should convene a Constitutional As- experienced a notable improvement in 2pmf2/22pmfioc.htm sembly, but it would not be empow- 1994; exports grew strongly and cur- ered to appropriate further slices of rentaccountdeficits shrankinamajor- Newsin Brieffromthe International national sovereignty without first ob- ity of countries. In 1995 the deficit Research andExchanges Board,vol. taining the approval of each of the increased again, although the aggre- 7, no. 4, July-August 1996 issue, fea- member countries. Only a bold mea- gate current account deficit of the re- turing "Albanian Law in the Making: sure, clarifying the nature and identity gion remains, in terms ofGDP, signifi- An Interview with Ilir Zherka," p. 3. of the European Union can stop the cantly below its 1993 peak. Projections http://www. irex. org gradual disintegration of Europe and for 1996-97 point toward a renewed prevent a return to the conditions pre- decline in the deficit to about its 1994 vailing between the world wars. level. 38 September-October 1996 Transition Bibliography of Selected Articles Postsocialist Economies Business Locations in Europe. Finan- Lcdz Revitalizes Polish Municipal cial Times Survey (United Kingdom), Bond Sector. Euro Week (United King- Benhabib, J., and A. Rustichini. Social October 8, 1996. dom) 471:7, September 20, 1996. Conflict and Growth. Journal of Eco- nomic Growth (United States) De Lion, C. Holding Their Own [in Nell, J. Stabilizing the Kuna. Central 1(1): 125-42, March 1996. Slovenia]. Central European (United Banking (United Kingdom) 6(3):46-53, Kingdom/United States) 6(8):24-25, 1995-96. Dewatripont, M., and G. Roland. Tran- September 1996. sition as a Process of Large-Scale In- Pivovarov, A. Ukraine Launches Am- stitutional Change. Economics of Tran- Eastern Europe/Russia: Equities Back bitious Oil Transportation Plan. Eastl sition (UnitedKingdom) 4(1): 1-30,1996. in Vogue. lMF/World Bank Develop- West Commersant (United States) ment Bank Report (United States) Sep- 4(16):4-5, September 15, 1996. Johnson, S., D. Kotchen, and G. W. tember 1996, p. 54. Loveman. Complementarities and the Rutkowski, J. High Skills Pay Off: The Managerial Challenges of State En- Enhanced Reform Can Give Momen- Changing Wage Structure during Eco- terprise Restructuring: Evidence from tum to Ukrainian Economy. LFSir- nomic Transition in Poland. Econom- Two Shipyards. Economics of Transi- vey/lnternational Monetary Fund (In- ics of Transition (United Kingdom) tion (UnitedKingdom)4(1):3142,1996. temational) 25:267-68, August12,1996. 4(1):89-112,1996. Liesman, S., J. Dorsey, and B. Bahree. Ennew, C. T, J. Kirnag, and M. Wright. Timwell, S. Tirana Tastes the Market The Great Oil Game. Central Euro- The Development of Bank Marketing [Albania]. The Banker (United King- pean Economic Review (Belgium) in Eastern Europe: The Case of dom) 146(848):60-63, October 1996. 4(8):14-16, October 1996. Slovakia. The Service Industries Jour- nal 16(4):443, 1996. Ware, C. International Aid for Infor- Wang, Z. K. Integrating Transition mation Development: International Economies into the Global Economy. Filatotchev, I., 1. Grosfeld, J. Karsai, M. Aid in Emerging Markets Such as Finance andDevelopment: A Quarterly Wright, and T. Buck. Buy-Outs in Hun- Asia, Central and Eastern Europe or Publication of the International Mon- gary, Poland, and Russia: Governance Latin America Creates A Multitude etary Fund and the World Bank (Inter- and Finance Issues. Economics of Tran- of Opportunities for the Information national) 33:21-23, September 1996 sition (United Kingdom) 4(1):67-88, Sector.Managinglnformation(United 1996. Kingdom) 3(10): 24,1996. Central and Eastern Europe Herer, W., and W. Sadowski. Informal Woodley, Z. The EBRD Directory of Beck, E. Romanian Roulette. Central Sector and Unemployment Issues in Business Information Sources on Cen- European Economic Review (Belgium) Poland.ResearchBulletin(Poland) 5(2): tral and Eastern Europe and the CIS. 4(8):32-33, October 1996. 9-18, 1996. Managing Information (United King- dom) 3(10): 47, 1996. Blishen, C. Only the Best Need Apply International Telecommunications. [in Poland]. Central European (United Financial Times Survey (United King- Zotkiewski, Z. Do Market Imperfec- Kingdom/United States) 6(8):10-14, dom), September 19, 1996. tions in Economies in TransitionMat- September 1996. ter? A CGE Analysis for Poland. Jones, C. Showdown in Sofia. The Research Bulletin 5(2): 9-18, 1996. Bonin, J. P., and B. Leven. Polish Bank Banker (United Kingdom) 146(848): Consolidation and Foreign Competi- 57-59, October 1996. CIS and the Baltics tion: Creating a Market-Oriented Banking Sector. Journal of Compara- Kamenickova, V. Czech Republic Barberis, N., M. Boycko, A. Shleifer, tive Economics (United States) 23(1): Implements Local Government Bud- and N. Tsukanova. How Does Privati- 52-72, August 1996. get Reform. SIGMA Public Manage- zation Work? Evidence from the ment Forum (France) 2(2): 3, 1996. Russian Shops. Journal of Political Volume7. Number 9-10 39 The World Bank/PRDMG Bibliography of Selected Articles continued Economy(Unmted States) 104(4):764-90, A Journal of Translations 37(5): 3, Kennedy, P. The Myth of a Rising August1996. September 1, 1996. Asia. New Perspectives Quarterly (United States) 13(3): 46, 1996. Brzezinski, Z. If Russia Joins the G-7, Mafia Groups, Officialdom, and Gov- Why Not China? New Perspectives ernment in the Russian Far East. Rus- Kamow, S. Vietnam: It Can Succeed, Quarterly (United States) 13(1): 39, sian Far East Update (United States) ButWillIt?Smithsonian(UnitedStates) 1996. 6(8), August 1996. 26(10): 32, January 1, 1996. Complete List of Laws and Regula- New Crackdownin Russia? US. News Li, D. D. A Theory of Ambiguous tions on Privatization. The Russian and WorldReport (United States) 121(6): Property Rights in Transition Econo- Economic Barometer (Russia) 5(2): 38, August 12, 1996. mies: The Case of the Chinese Non- 34-50, 1996. State Sector. Journal of Comparative Russia Floats on a Sea of Debt. IMF/ Economics (United States) 23(1): 1-19, D. Chemichovsky, H. Barnum, and E. World BankDevelopment BankReport August 1996. Potapchik. Health System Reform in (United States) September 1996, p. 61. Russia: The Finance and Organiza- Malpass, D. The China Mistake. The tion Perspectives. Economics of Tran- Asia International Economy 10(2): 32, March sition (United Kingdom) 4(1):113-294, 1, 1996. 1996. Amsden, A. H., D. Liu, and X. Zhang. China's Macroeconomy, Environ- Pei, X. Township-Village Enterprises, Gaidar, Y Yeltsin: Property Rights in ment, and Alternative Transition Local Governments, and Rural Com- Russia. New Perspectives Quarterly Model. World Development (United munities: The Chinese Village as a (United States) 13(3): 37, 1996. Kingdom) 24(2):273-86. Firm during Economic Transition. Economics of Transition (United King- EnterpriseManagement: RussiaCould Chacko, J. M., and P. Chelminski. An dom) 4(1):43-66, 1996. Do Its Own Housecleaning...with the Investigation of the Business Envi- Help of Russia's Commercial Bank- ronment in China: Recommendations Rohwer, J. Forecasting Asia and Re- ing Sector. Russian Far East Update for Foreign Investors.American Busi- flecting on Vietnam. Vietnam Business (United States) 6(9):8-9, September ness Review (United States) 14(2): 32, Journal (United States) 4(5):44-45, 1996. June 1, 1996. October 1996. FnithPowell,H.BankingonBigBrother China Equities: Shenzhen Fights Samo, G. M. Vietnam or Bust: Why [in Russia]. Central European (United Back. Emerging Markets Investor TrademarkPiratesAreLeavingChina Kingdom/United States) 6(8):30-32, (United Kingdom) 3(8): 13, September for Better Opportunities in Vietnam. September 1996. 1996. DickinsonJournalofInternationaiLaw 14(2):291, 1996. Ianovskiu, R. G. , . A. Perminova, and T. China Takes a Deep Breath. US. News A. Mel Nilova. Women and Society in and World Report (United States) Vietnam: WaitingforaRating. Emerg- Russia. Russian Social Science Review: 121(10): 36, September 9, 1996. ingMarkets Investor (United Kingdom) 3(8):13, September 1996. TRANSITION is a regular publication of the World Bank's Macroeconomics and Growth and Division, Policy 1 Research Department. The findings, views, and interpretations published in the articles are those of the authors and l 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, its Executive Directors, or the countries they represent. Richard Hirschler is the editor and production manager, Room N11-025, tel. (202) 473-6982, e-mail: Rlirschler*worldbank.org. Jennifer Prochnow is the research assistant, desktop publisher, and producer of graphs and figures. If you wish to receive Transition, send your name and address to Jennifer Prochnow, Room Nll- 039x, World Bank, 1818 H Street, NW, Washington, D.C. 20433, or call (202) 473-7466, fax (202) 522-1152, or e-mail Jprochnowwalker*worldbank.org. Internet: http://www.worldbank.org/html/prddr/trans/trans.htm. Information on upcoming conferences on transforming economies, indication of subjects of special interest to our readers, letters to the editor, and any other reader contributions are appreciated. 40 September-October 1996