REOMIG17H58~ THE NEWSLETTER ABOUT REFORMING ECONOMIES Voue, RANSITION Volume 9, Number 1 February 1998 China's Economy At a Crossroads In the following block of articles, we take a closer look at China's present economic situation, analyze some of the latest reform proposals, examine the role and history of local reform experiments, and report about impressions gained during a recent visit to Southem China. Will China Resist the Asian Flu?-An Economic Roundup According to the Chinese zodiac, we * By the end of 1997 China had amassed have entered the year of the Tiger. Cer- $140 billion in foreign exchange re- W hats Inside tainly this will not be the year of East serves, enough to finance more than a China Survey 1-11 Asia's wounded tigers. But what about full year of imports. -Calling for Reforms 4 China? Can it overcome the odds and *Releasing the Small 5 continue its high growth? The country Nonetheless, the Chinese leadership *Reporting from Reform-Heartland 8 has problems in common with its neigh- has to solve some major problems this Milestones of Transition 11 bors: some privileged insiders enjoy spe- year. To achieve the targeted 8 percent Lessons of the Asia Crisis 12 cial access to scarce resources, economic growth in 1998, fixed asset particularly bank loans; banks are investment must rise by at least 12 per- Warning to Russia's Tax Dodgers 14 loaded down with bad loans to overex- cent, according to Zhang Hanya, a mem- Russia's Mighty Seven 15 tended con-mpanies that are not competi- ber of a State Planning Commission think tive; signs of overinvestment and excess tank. The economy last year grew 8.8 Hungary's Opposition Program 18 capacity abound. percent, with a 10.1 percent expansion NGO Report on World Bank 20 But it is unliely that China will experience in fixed asset investment. (Between AIDS Epidemic-A Treat to Transi- a crisis similar to the one unfolding in 1992 and 1996 China achieved an aver- tion Economies? 22 Southeast Asia, for the following reasons: age annual growth rate of 11 percent.) Zhang said 20 million jobs would have Women in Transition Countries 25 *lncoming capital is predominantly long- to be created each year for the next sev- Hungarian Women's Partial Emanci- term foreign direct investment, and little eral years to meet the needs of the baby pation 26 of China's borrowing is short-term. boom of the 1980s. In addition, 10 mil- World Bank/lMF Agenda 30 lion surplus rural workers are expected The Chiriese currency is not convert- to head to cities each year to look for Conference Diary 33 ible for capital account transactions. jobs. (Zhang noted that more than 10 New Books and Working Papers 37 million people had so far been thrown * China in the mid-1990s experienced out of work as a result of China's cam- Bibliography of Selected Articles 39 record trade and current account sur- paign to turn around loss-making state Special Announcement 40 pluses (unlike Korea or Thailand). industry.) Macroeconomics and Growth Development Research Group The World Bank , $ t #,: 0;R i Deflatiot Ante lortas tax cuts and other incentives introduced ing system and avoid an Asia-style melt- to stimulate demand. down. He outlined reforms that would Economic growth has been dragged down revamp the central bank along lines simi- by falling domestic demand and is likely The plight of state-owned enterprises lar to the U.S. Federal Reserve, clamp- to be hit further this year by a slowdown (SOEs), many of which suffer from ing down on reckless lending by local in exports and foreign investment in- overstaffing, inefficiency, and heavy branches of state banks and introducing flows. Foreign direct investment in China indebtedness, will worsen in a sluggish Western-style accounting and credit-risk hit a record $45 billion in 1997, but, linked economy. In the past China has tried to procedures. Dai also pledged that Beijing to the Asian financial meltdown, it could spend its way out of downturns by open- would nearly double the funds used to well drop this year, China Daily has ing the credit tap to state enterprises. In write off bad debt this year to 50 billion quoted an unnamed senior trade official recent years SOEs have received 80 per- yuan ($6 billion) and further raise the pool as saying. Contract foreign investment, cent of the loans extended by state banks. to 60-70 billion yuan a year in 1999 and a reliable measure of future trends, But following the guidelines of the 15th 2000. plunged 33 percent in the first 11 months Communist Party Congress, held last Sep- of last year, according to government tember, China is trying to reduce a moun- The four main commercial banks-the statistics. Exports continued to boom in tain of nonperforming bank debt and has Bank of China, the Industrial and Com- 1997, with growth of around 18.5 per- ruled out a repetition of easy credit. Heavy mercial Bank, the Bank of Agriculture, and cent, generating a $40 billion trade sur- loss-making SOEs will be merged, sold the China Construction Bank-are tech- plus. However, in 1998 the impact of off, or forced into bankruptcy. nically insolvent. They had a total capital improved South-east Asian export com- base of 201 billion yuan ($24.2 billion) and petitiveness-resulting from regional Urgent Bank Cleaning Required total loans of 5,000 billion yuan at the end currency falls-could result in falling ex- of the first half of 1997. Official estimates port growth. China's financial system has been weak, show 20 percent of their loans-equal to characterized by a rapid buildup of 1,000 billion yuan-are nonperforming. If The evidence of emerging deflationary nonperforming loans to SOEs financed half that amount could be recovered, it tendencies in the Chinese economy is largely by household deposits. Central would still leave bad debt of 500 billion clear. Between January and November bank governor Dai Xianglong has called yuan, more than double the bank's capi- the retail price index rose by just 0.9 per- 1998 a "crucial year" to carry out dra- tal base. Loan loss reserves were well cent year-on-year. The retail price index matic reform of the nation's shaky bank- under 1 percent of loans. (A recent World fell by 0.4 percent and 0.8 percent in October and November, respectively. In Privatization recent months food prices have fallen, while manufactured goods prices have re- mained stable and those of service-re- lated items have experienced sharp rises. A variety of factors, including high inven- tory levels amounting to an estimated r.,.i $70 billion, or 8 percent of GDP, are likely to sustain this deflationary trend in 1998. fF In recent years the supply of consumer durables, such as cars and electrical appliances, has significantly outstripped growth in domestic demand. Large stock --________ piles of unwanted goods and excess in- dustrial capacity are a legacy of the boom begun in 1992, when growth in fixed-as- set investment hit a peak of 50 percent year-on-year. Consumer products manu- "Boss, Mr. Jones says that if we throw in the revolving chair, he can facturing wdil probably once again outpace shrinking demand in 1998. Meanwhile, the double the price for the factory..." property glut is likely to persist, despite From the Budapest-based magazine Hungarian Economy. * TRANSITION, February 1998 © 1998 The World Bank Bank report on bank restructuring pointed tax revenue increases sufficient to fi- does not require high interest rates to out that financial distress is likely to be- nance the recapitalization program-is protect it.) This move would reduce the come systemic when nonperforming carried out, China can emerge with a debt burdens of loss-making SOEs. loans, net of provisions, reach 15 per- more efficient financial system and will Officials claim the interest rate reduc- cent of total loans.) Just before going to be more likely to maintain high rates of tion would help promote the develop- press China. announced that it will float a domestic savings. Related financial re- ment of a securities market and thereby $32.5 billion domestic bond issue to re- form measures include: create an environment in which SOEs capitalize the four giant state-owned com- can be transformed into joint stock com- mercial banks. * Some economists call for the creation panies. Given high inventory levels, it of a "bad debt bank" that would buy up all is not clear that reductions in interest A large part of the accumulated bad (un- bad debts at a discount and try to make rates would have an immediate stimu- paid) loanswere originally "policy loans," them worth something, much as the lative effect on industrial investment. initiated by the gcvernment to enable Resolution Trust Corp. did in rescuing the state companies to provide housing, U.S. savings and loan industry. Others Vice Premier Li Lanqing, speaking at the schools, and hospitals. The annual 21 say the government should write off the World Economic Forum in Davos, percent increase of bank credit in China bad debt and recapitalize the banks, bor- pledged to protect the value of the yuan. is similar to that experienced in other rowing money from the private sector or He explained that a devaluation would countries prior to the emergence of ma- selling equity to outside investors. lead to devaluations of other currencies jor banking crises. This excessive reli- in the region, and this would have a ance on expanding bank credit is * In early February China lifted lending snowballing effect, disastrous for stabil- reflected in China's unprecedented high credit quotas for state-run commercial ity and growth in Asia and growth of the ratio of incremental bank credit to an- banks (this is likely to result in decreased world economy. (Asia is the source of nual goverrnment fiscal revenues. As fis- lending to SOEs). more than half of China's investment and cal revenues dramatically declined the destination of about 30 percent of relative to output, an ever-increasing * Banks will be authorized to adjust in- its exports. A devaluation of the yuan share of the government's expenditure terest rates, now fixed, within a certain would make imported goods-machin- program was financed through the quasi- band depending on the bank's risk analy- ery, petroleum, and wheat-more expen- fiscal operations of banks. (By 1995 the sis of the borrower. sive and possibly reignite inflation. About annual increase in credit extended half of China's exports rely on imported through the state-owned banking system * There are plans to reduce the number raw materials.) was half again as large as the combined of trust and investment companies to annual bucdgetary expenditures of cen- only one to two per province or munici- Vice Premier Li also confirmed that tral, provincial, and local governments- pality and to close badly managed and China would invest $750 billion in infra- a ratio of 1.5:1. In the mid-1980s this thinly capitalized financial institutions. structure and environmental projects ratio in industrial countries ranged from over the next three years to stimulate about 0.15:1 in the United States to as * The central bank plans to consolidate economic growth. Building more roads, high as 0.81:1 in Japan.) its own local branch network into 12 or subways, and extensions of the railway 13 new regional offices, and to reform network, economists have pointed out, Chinese banks and other financial institu- the numerous rural credit cooperatives, will more effectively promote growth than tions are heavily exposed to real estate which have proliferated in recent years. allowing state-owned enterprises to pur- lending, although market values has de- sue more irrational expansion. In mid- clined sharply by the second half of 1995. How to Save Growth? February Premier-designate Zhu Rongji In Beijing, Shanghai, and Shenzhen mil- confirmed that China is working on a New lions of square feet of luxury villas and The central bank cut interest rates Deal-like program to stimulate the townhouses are unoccupied and even three times between May 1996 and economy and relieve increasingly high more first-class office space is vacant. October 1997 in an attempt to stimu- unemployment. late growth. As actual interest rates If a program of financial reform-includ- remain at around 6 percent, experts Based on reports of Oxford Analytica, ing recapitalization and commercialization believe there may be room for rates to the intemational research group based of the banking system, adherence by en- be lowered by a further 1 or 2 percent. in the U.K., as well as on news agency terprises to hard budget constraints, and (The yuan is not freely convertible and reports. (O 1998 The World Bank TRANSITION, February 1998 China's State-Owned Companies Need Urgent Reform by Chi Fulin Economic reform in key public projects, and improve overall enterprises issued only 4 billion yuan worth China has entered a competitiveness. (Some authorities of transferable corporate bonds. critical stage. How to force the mergers administratively from * Investment funds, particularly restruc- solve problems and dif- above. Playing matchmaker, govern- turing funds of SOEs, should be ficulties confronting the mental departments are forcing well-per- strengthened in order to pool dispersed state-owned economy is forming enterprises to take over poorly individual savings and channel them into in the forefront of reformers' agenda. The performing ones.) investment. Part of the state-owned 15th National Congress of the Chinese * Separating successful enterprise shares of listed companies should be Communist Party has decided to accel- groups from indebted underperformers, trusted to investment funds. These com- erate the reform of state-owned enter- and encouraging their listing on the stock bined resources can facilitate strategic prises (SOEs) and consolidate the exchange. restructuring of SOEs. Further experi- situation in three years. The transforma- * Attracting foreign and domestic inves- ments with these funds should be con- tion of large and medium-size SOEs into tors to buy into large and medium-size ducted in selected regions before shareholding companies (corporatization) SOEs. This would improve their ownership instituting them across the country. seems an effective way to achieve this structure and management efficiency, * Performance of listed companies goal. Since the mid-1980s both private accelerate adaptation of advanced tech- should be improved and poorly perform- companies and selected SOEs have nologies, and increase their intemational ing companies should be restructured chosen to issue shares in order to raise competitiveness. without delay. The overall quality of the capital. Corporatization has also helped * Consolidating banks that are burdened listed companies is good. Over the past to find motivated owners for SOEs and with the accumulated bad (unpaid) debts seven years their average return on net establish the structure of modern corpo- of borrowing enterprises (these liabili- assets has been 13.9 percent. This rate, rations. But many questions have been ties can be transferred to separate debt however, has deteriorated in recent raised: trusteeships). years. The 1995 corresponding figure - Coping with the social consequences dropped to 10 percent and 16 listed com- 1. How can the conversion of SOEs be of the necessary mass redundancies panies made losses. integrated into the strategic restructuring and relieving-at least partially-SOEs of the larger national economy and how of their obligation to provide social ser- 3. How can state-owned assets be can the process be accelerated? Cer- vices to their employees, without endan- managed effectively to promote tainly, SOEs in competitive industries gering the social security of the people. corporatization-the transformation of should go ahead with corporatization and SOEs into joint stock companies? complete it within three to five years; in 2. How can the capitalization of the Should central and local government particular, the state-owned public utilities economy be accelerated? In other agencies be the direct owners (owner sector (including telecommunications, words, what should be done to develop representatives) of state companies, the power industry, civil aviation, and rail- a securities market that could meet the whether listed or not? way and highway systems) should be re- SOEs' needs forcapital increase through formed, as should the financial sector, stock offerings. (At present, capitaliza- With the exception of vital sectors or stra- with special attention paid to reforming tion of the economy-financial assets tegic industries, the state should entrust the state-owned commercial banks. on the capital market as a share of total state-owned assets and state-owned stock financial assets-amounts to only 10.06 rights to relevant institutions such as com- Unresolved issues include: percent.) Some suggestions: mercial banks and investment banks. Joint * Establishing sound enterprise groups * A larger volume of transferable corpo- stock (shareholding) companies cannot per- through merger and acquisition of profit- rate bonds should be made available on form optimally if govemment administra- making joint stock companies. Through the capital market. Right now, this bond tion is not separated from enterprise the formation of transregional, transin- market is hardly developed. At the end of management. Fully state-owned enter- dustrial, and transnational enterprise 1995 the total value of corporate securi- prises should develop a diversified owner- groups, the public sector could concen- ties on the capital market reached 178.8 ship structure. State-owned holding trate resources, finance the envisaged billion yuan, while as recently as 1997 companies should be entrusted with asset * TRANSITION, February 1998 ( 1998 The World Bank management of state-owned stocks, main- tween the enterprises and their employ- and their employees will be an impor- taining and increasing their value. ees would become closer. Some experts tant factor in improving enterprise per- suggest, though, that employee owner- formance, itself crucial to the successful 4. How can an effective corporate gov- ship could lead to a "free ride," unjusti- corporatization of SOEs and prolifera- ernance structure for the shareholding fied wage increases, and distribution of tion of shareholding cooperatives-both companies be built? Performance of bonuses. They question whether enter- key goals of the economic reform. stock companies ultimately depends on prises that are partly or fully owned by effective operation that is compatible employees can be managed and oper- Chi Fulin is Executive Deputy Director, with market conditions. Creating an ef- ated efficiently. Still, establishing a ra- China Institute for Reform and Develop- fective corporate governance structure tional relationship between enterprises ment (CIRD), Haikou, Hainan, China. and rational operating mechanism is thus of utmost importance. The follow- ing issues need special attention: CTe Sale Goes On-Transformig * The proportion of state-controlled stock companies is too high. Out of the Small Enterprises in China 530 listed companies 373 are controlled by the state, accounting for 53 percent by Yuanzheng Cao, Yingyi Qian, and Barry R. Weingast of the total capital stock. The second- largest stockholders own no more than China's small and medium-size enter- dustries such as airlines, banks, elec- 5 percent of the shares on average. The prises number roughly 285,000, out of a tricity, oils, and petrochemicals. state's dorninant ownership of shares total 300,000 state-owned enterprises can distort enterprise behavior. More di- (SOEs), accounting in 1993 for 57 per- "Release the Small" versified ownership would promote more cent of employment and 43 percent of efficient operations. state industrial output (see table). By the early 1990s it had become evi- - The complex relationship between dent that the unreformed state enterprise shareholders, the board of directors, State-owned Industrial Enterprises, sector was an obstacle to China's de- and management needs to be defined Characteristics and Performance, by velopment. SOEs continued to consume and standardized. In Shaanxi Province, Size, 1993 a great portion of bank credit and other out of 62 stock companies only 16 are (as percentage of total SOEs) resources; most had excess employ- listed on the stock exchange. Most of Net ment, and close to half were loss-mak- the unlisted but corporatized firms Size Share value ers. In terms of capital structure, small haven't introduced regular meetings for of of of Profits SOEs generally carry more debt than shareholders, and even if they did, the enter- enter- Out-Employ- fixed and large and medium-size SOEs, them- meetings have seldom served a practi- prises prises put ment assets taxes selves highly leveraged by international cal function. In many companies the Large 5.0 57.0 43.0 62.0 66.7 standards. In 1995, in the industrial sec- chairman of the board of directors is Medium 13.0 23.0 26.0 19,0 194 torthedebt-assetratiowas71.5 percent also the general manager. It is urgent Small 82.0 20.0 31.0 19.0 13.9 for small SOEs, compared with an av- to establish effective corporate gover- Total 100 100 100 100 100 erage 65.6 percent for all SOEs; and the nance structures, with due consider- debt-equity ratio was 2.49, compared ation to a sharing of responsibilities, in Small and medium-size SOEs fall with the SOE average of 1.92 and the accordance with the Corporate Law. mainly under the supervision of county international average of around 1. In * Within the conditions of a socialist mar- and city governments (some are super- 1994, 90 percent of loss-making SOEs ket economy, improved employee per- vised by provincial governments) and are were small. About 60 percent of small formance needs to be encouraged. The often engaged in competitive industries SOEs are making losses. interests of employees and employing such as machinery, electronics, textiles, enterprises should be coordinated. Em- and food processing. The central gov- In 1994 China quietly began privatizing ployee ownership could be one solution. ernment supervises most very large and restructuring its SOEs under a re- It pools workers' savings and channels enterprises, some of which are in natu- form program intended to "grasp the them into investment. If employees were ral monopoly industries such as telecom- large and release the small." By the end able to buy enterprise assets (and re- munications and railroad transportation, of 1996 pioneering provinces had priva- ceive some free), the relationship be- and some in government monopoly in- tized up to 70 percent of their small © 1998 The World Bank TRANSITION, February 1998 SOEs and in many other provinces net worth of. firms is small relative to joint stock company. A survey of sev- about half were privatized. Local govern- total assets-sometimes even close to eral provinces showed these reform ments have been the,driving force be- zero. When such a firm is sold to em- models accounted for more than half hind the reforms, which have proceeded ployees or outside investors, the trans- of all conversions. The rest included relatively smoothly and with fewer so- fer price of equity is very low. In many bankruptcies and takeovers by other cial problems than expected. The cases the employees can afford to pur- enterprises. privatization programs in Eastern Europe chase the enterprise with their own sav- and Russia were linked somewhat to the ings. In some cases "zero price transfer" Incentives to Privatize liquidity and wealth constraints of poten- is used, with buyers assuming control tial buyers of firms and was thus one of a firm and its debt for nothing. This is What incentives do local governments reason forthe free distribution of shares. the equivalent of buying firms with bor- have to privatize and restructure the Such constraints are less of a problem rowed capital. firms under their supervision? China's in China. market-preserving federalism requires The major forms of ownership reform that local governments: After more than 15 years of reform, are stock cooperatives, in which enter- * Assume primary authority and respon- households have accumulated huge pri- prises shares are sold mostly to em- sibmt friter alteonomies. vate savings in the form of bank depos- ployees, followed by sales to a private ibility for their local economies. its. But, as noted earlier, most SOEs' domestic or foreign investor or firm; and * Impose hard budget constraints. debt-asset ratios are very high, particu- corporatization, in which the enterprise * Open their economies to outside com- larly those of small SOEs, and thus the is transformed into a limited liability or petition. Local Governments-Testing Grounds for Reform, Chinese Style Economic reform, Chinese style, relies on local govern- tance and support for what has been going on in some local ments, as a kind of "laboratory." Many major reform efforts areas for several years. have been tried first on an experimental basis in a few local areas. Successes were learned from and imitated on Until 1978 the central government forced all regional and lo- a moderate scale by a few provinces. And if these experi- cal governments to adhere to the same centrally dictated ments succeeded, the reforms were recommended and reform models. This "one size fits all" approach left no room promoted by the central government as national policy. The for independent experimentation, adaptation, or local govern- introduction in the late 1970s of the agricultural household ment autonomy of decisionmaking. This approach to institu- responsibility system started with experiments in Anhui tional change failed miserably. Since 1978 reform has taken and Sichuan provinces and was later promoted by the cen- place within the framework of federalism, Chinese style. Cen- tral government. The rapid development of township-vil- tral and local govemment roles were altered in fundamental lage enterprises in the early and mid-1980s grew out of ways: the central government no longer attempted to estab- successful initiatives in a few coastal areas (such as lish the model of reform. Local governments have had the Jiangsu province), undertaken without the central authority to decide on the nature and speed of reform and to government's planning. While the central government at adapt reform measures to local needs. Given hard budget first only tolerated such enterprises, it later came to sup- constraints and an open economy, local governments cannot port them, and many inland provinces later followed suit. afford to make big mistakes for an extended period. In the development of markets in the late 1980s some ar- Economic reform, Chinese style, differs considerably from eas (such as Guangdong province) liberalized prices and economic reform in Eastern Europe and the former Soviet opened their markets while others (Hunan and Heilongjiang Union. Reform in those economies is far more centrally provinces) chose to regulate prices and stay closed. Over driven. The more diffused, federal perspective on reform in time other provinces began to liberalize their markets. The China-where large numbers of local governments are seek- same pattern is emerging for SOE reform in the 1990s. In ing ways to promote economic gain and remove sources of September 1997 the central government announced a na- economic inefficiency-provides important insights to the tional policy in favor of privatization, but as with previous economic and political dynamics underlying privatization, reform issues the announcement is a formal sign of accep- as well as other reforms in China. TRANSITION, February 1998 (C 1998 The World Bank Hard Budclet Constraints. Both fiscal Maintaining inefficient enterprises is in- is thus a pressing issue: harder budget and financial reforms between 1994 and creasingly costly for local govern- constraints combined with increased 1996 have played important roles in ments, some of which have been competition from the nonstate sector hardening the budget constraints of lo- unable to pay schoolteachers for sev- have translated into strong financial pres- cal governments. The 1994 tax reform eral months. Propping up inefficient sures on many local governments to ad- introduced a clear distinction between SOEs deters employment creation and dress the SOE problem. national and local taxes and determined diverts local governments' attention that the value added tax, as a major in- from their mandate to be good regula- Excerpted from the authors' recent work- direct tax, would be shared by the na- tors of local economies that are increas- ing paper From Federalism, Chinese tional and local governments at a fixed ingly populated by nonstate firms. Style, To Privatization, Chinese Style, rate of 60:40. The 1995 Budget Law re- which can be dovvnloaded from the Web quired that local governments balance The small SOEs cannot compete with site: http://wvww-econ.stanford.edu/econ/ their budgiets, introduce strict control ruralenterprisesorforeignfirms, because workp/swp97049.html. over their bond issuance, and limit their of a lack of incentives. Nor can they com- borrowing in the financial market. In 1994 pete with the large SOEs, since they lack Yuanzheng Cao is Senior Research Fee- the central bank instructed its local technology and human capital and can- low and Deputy Director at the Institute branches to report exclusively to its not profit from economies of scale or mo- of Economic System Reform, Beijing, central headquarters, which sets na- nopoly power. Small SOEs are thus China; Yingyi Qian is Assistant Profes- tional monetary policy. (Before, these squeezed between nonstate firms and sor at the Department of Economics, branches were under dual supervision, large SOEs. As a result loss-making Stanford University, Email: yqian@ reporting both to the bank's central head- SOEs are concentrated in small SOEs, leland.stanford.edu; Barry R. Weingastis quarters and to the local government in which are mostly supervised by county Senior Fellow, Hoover Institution, and their region.) Yet local governments have governments: 90 percent of loss-making Ward C. Krebs Family Professor of Po- continued to assume primary responsi- SOEs are small SOEs, and 60 percent litical Science, Department of Political bility for managing local economies and of all small SOEs are unprofitable. Science, Stanford University, Email: maintaininc their own revenue sources. Privatization of these loss-making SOEs weingast@leland.stanford.edu. Market Competition. Both foreign firms and domestic nonstate firms- including township-village enterprises and private enterprises-have become major sources of competition for the SOEs. Since 1993 China has been the second most attractive destination for foreign direct investment (FDI), after the United States, and by mid-1997 it had accurnulated a total of $200 bil- lion in FDI. Rural enterprises have ex- panded in the 1990s, becoming a major domestic competitive force. In 1993 I rural enterprises accounted for 70 per- cent of canned food production, 61 ^D _ percent of electric fans, 59 percent of paper, 45 percent of coal, 42 percent of silk products, and 37 percent of ce- ment. By the mid-1990s foreign firms . .- ., nn together with rural enterprises ac- counted for more than half of China's "We're a forward-looking company, Smyth, and I can see you're being industrial output. Competition pressure sacked next week." on SOEs 1rom nonstate firms reached I a new levial. From the World Press Review. (C 1998 The World Bank TRANSITIN, February 1998 Where Reformers Shape the Future-A Visit to Southern China by Richard Hirschler Late last year, I participated in an economic conference on the exotic island of Hainan and visited the explosively developing city of Shenzhen, showcase of Guangdong province in southem China, which itself-together with Hong Kong and Taiwan-is the world's economically most dynamic region. In the following 'traveler's tale," I hope to illustrate, through personal impressions and conversations with economic researchers and corporate executives, that China's long reform march is continuing. F rom the distant sandy beach, new special zones were created, and form and Development (CIRD), which across the bay, the Haikou sky- the far-away island lost its uniqueness. has been recognized for its painstak- line of looks almost like Hong Real estate prices nose-dived, and to- ingly precise economic evaluations and Kong: huge office buildings, impressive day, few believe that the new city will reliable forecasts. The institute was es- residential developments, postmodern ever be built. tablished in 1991 under the leadership hotels surrounded by palm trees. Haikou of Director Gao Shangkuan and Deputy is the capital of Hainan, a tropical island Coming closer to Haikou, the visitor dis- Director Chi Fulin. The small but enthu- at the southernmost tip of China. Until covers that the impressive skyline was siastic team of researchers and edu- 15 years ago it was considered one of deceptive: the facades hide half-finished cators are constantly working on new themostdestitute,impoverished'regions structures and abandoned building reform proposals to address such di- of the country-emperors once found sites-sad reminders of the burst real verse issues as separating ownership this a reassuringly distant place to send estate bubble. Expectations of a tourist and management, restructuring enter- their political opponents. boom have not materialized either: the prise debt, developing capital markets, seashore, with its copies of Greco-Ro- dealing with the mass dismissals of Dreams and Reality man statuary, is deserted; the five-star workers arising from state enterprise hotels have to content themselves pri- transformation, and protecting the in- In the early 1980s things changed for manily with domestic tourist groups. terests of minority shareholders. The in- the better when the island was declared stitute organizes international a special economic zone (SEZ). An un- Haikou Beach symposiums to exchange ideas with precedented construction boom began, foreign experts and runs training and-real estate prices went sky-high. A !:Mpi courses for enterprise and bank man- Japanese conglomerate began building Oa11 agers. Last November CIRD organized at Yangpu, on the barren western coast h a symposium that focused on convert- of the island, an SEZ within the SEZ- ing China's state-owned enterprises into a "turnkey" offshore city for half a mil- joint stock companies (see Chi Fulin's lion people. Some officials envisioned article on page 4). in Hainan an island paradise that would 3 . i combine the best features of H Ong The timing of the symposium could not Kong, Taiwan, and Hawaii, becoming , have been more opportune. The Chinese both a flourishing financial-economic economy has started to show signs of center and a major tourist attraction. For , losing steam. The huge accumulation of a while things looked rosy. No fewer bad debt in state-owned banks and its than 1,200 real estate companies mirror image, the massive indebtedness signed leases at Yangpu to sublet prop- of SOEs, have become a huge problem erty in the area and, they hoped, reap It seems ironic that while the island is requiring urgent attention. Transformation great profits. Others bought land around suffering the consequences of serious of SOEs was the major t0pic at the an- Haikou. Nobody wanted to be left out economic misjudgments, Haikou is nual meeting of bankers and economists of the coming boom. But it'never mate- home to one of China's leading reform in Beijing, under the chairmanship of rialized. In 1992 ;and 1993 hundreds of think tanks, the China Institute for Re- Premier-designate Zhu Rongji. * TRANSITION, February 1998 C) 1998 The World Bank Private conversations increasingly participated in the debate. Questions and primarily Hong Kong companies settled, turned toward the possible effects and opinions flew: How to counter political in- taking advantage of the relatively cheap lessons of the East Asian economic cri- terference in the appointment of company labor and churning out toys, textiles, managers when the board of directors is leather goods, and other consumer prod- Haikou--Old Town forced to rubberstamp selections? How ucts for export. The Hong Kong dollar cir- to make corporate governance effective? culates freely in this city, and speculation What should be the role of the Party sec- on the stock exchange is part of life. retaries in the shareholding companies? Every fourth person has a telephone, A Hong Kong scholar warned participants making Shenzhen the most "telephonic" of the risks of listing companies on the city in China. stock exchange-described as a casino for speculators-and also talked at length While the original expectations of trans- about the hazards of market failure. But forming Shenzhen into a science-based the majority of those present could not hi-tech center haven't been realized yet, be scared away. They supported the con- a dazzling 45 percent annual growth rate version of SOEs into listed joint stock has catapulted it into a unique metropo- corporations and specified the advan- lis of 4.5 million people. The visitor be- tages: market-oriented behavior; and a comes disoriented and confused in this well-defined principal-agent relationship huge, turbulent, bustling "frontier" city that sis. Some argued that the faltering of among shareholder owners, their repre- defies all urban planning. But the hype the East Asian miracle should be seen sentatives on the board of directors, and may slow down: according to the latest as a warning: China should delay new managers. It was clear that the promise surveys, vacant office space in late 1997 reform measures, especially the of increased profits and the opportunity was the equivalent of three years of take- planned liberalization of the financial to raise capital on the stock market are a up. An additional 22.6 million square feet sector. Others took just the opposite powerful motivation. The two-day confer- was under construction and scheduled to view, maintaining that ownership diver- ence seemed a ringing endorsement of be completed in 1998-2000. Oversupply sification was urgent, together with bet- the views of those who want to go is expected to last for 10 years. ter bank regulation, greater ahead-Chinese style-with ownership transparency, and meticulous monitor- reform. Like Hainan, Shenzhen seemed to lose ing of banks and enterprises. East its uniqueness when SEZs began spring- Asia's economic miracle, they pointed Just a one-hour flight from Hainan and ing up like mushrooms, numbering 1,700 out, was based in large part on the cozy, we are in Shenzhen, Hong Kong's "ex- secretive relationship between govern- tension" in Guangdong province. (Exten- Shenzhen ment officials, bankers, and entrepre- sion not only in a geographic but also a neurs. When some big companies and social and cultural sense: Hong Kong TV banks got into trouble, the government was on wherever we went, and people was a partner to the failure and cov- regularly visit Hong Kong, though both cit- ered it up. Structural realignment was ies are fenced off from the rest of China.) . < E thus delayed too long and now requires too much sacrifice. China, it was argued, In 1980 Shenzhen, a small fishing vil- should heed this lesson and eliminate lage, was selected to become one of the special protection for whole industries, first four special economic zones- s . and instead use scarce resources to al- China's "windows to the world," after its leviate the unavoidable social distress long isolation. More than just a customs- that accompanies transformation of free industrial area, the zone has served state-owned enterprises. as a testing ground for new reform ideas. by 1992. But in 1992 it managed to be- The atmosphere was heated during the The Frontier City come the first Chinese city to be given CIRD conference. Foreign experts, Chi- legislative authority (Municipal People's nese managers, local party leaders, gov- Shenzhen became a free-enterprise en- Congress). And in 1994 Shenzhen was ernment officials, and scholars clave, where a huge number of foreign, the first to make an all-out effort to © 1998 The World Bank TRANSITION, February 1998 U separate the management of converted pany. He supervises an empire of enter- profitmaking is his job but also his hobby. state enterprises from the administra- prises involved in everything from pro- He is also a driving force in Shenzhen's tive authority of the oWner-government. ducing electronics, to supplying energy, entrepreneurial lobby. In 1984 he invented, Three levels of management were in- to running Shenzhen's airport. SIHC organized,andlatermanagedVanke'spre- troduced: the State Asset Management holds shares in 36 enterprise groups- decessor company, the state-owned sci- Office, which supervises the investment of which 16 are fully, and 20 partly entific and educational exhibition center holdings, which in turn supervise the owned-and has total assets valuing 84 in Shenzhen. It developed quickly and in enterprise groups. Members of the State billion yuan (about US$10 billion). The 1988 changed profile, becoming a listed, Asset Management Office are Party president proudly notes that since invest- joint stock company. Seventy-six percent and government officials, including the ment holding companies took over the of Vanke's shares are circulated on the Party secretary and the vice mayor of supervisory job, administrative interfer- stock exchange. As a result of a series Shenzhen. The office, which took over ence in enterprise affairs has been of publicofferings,theproportionofstate- the administrative role of the ministries, muted, the enterprise groups have be- owned shares has been reduced to 10 supervises the investment holdings, come more efficient, and their products percent. Last year it posted a 17.5 per- sets their performance targets (mainly have become more competitive. Less cent profit rate, with almost 3 billion yuan measuredbygrowthinassetvalue),and conclusive is the holdings' behavior in total assets. (Investment business recommends individuals to sit on the when it comes to loss-making enter- proved the most profitable, generating holdings' boards of directors. Interviews prises. A jewelry company belonging to more than a third of the profits, though with senior officials of holdings and en- a member enterprise group went bank- this activity represented a mere 0.35 per- terprise groups revealed details that rupt, but a pharmaceutical firm bought it cent of turnover.) Wang Shi received the were not obvious from the literature. up and assumed all liabilities. The lender city's "best entrepreneur" award. banks hastened to waive interest on their The Management Pyramid earlier loans over five years. In another The company's major activity (85 per- case, a finance and trading company cent) is real estate development in 12 Shenzhen Investment Holding Co. went bankrupt through court liquidation. cities, primarily in Shenzhen, Beijing, (SIHC) was the first holding of its kind and Shanghai. It specializes in offices in the city. It became so huge that in Enterprise groups-one step down in the and residential homes. The many Vanke late 1996 the construction enterprises management hierarchy-hold shares in City Gardens-luxurious low-rise apart- and the trading companies were un- individual SOEs and are supervised by ment developments, with swimming coupled and grouped into two other their respective investment holdings. The pools and other amenities-are the separate holdings. Now all three have groups(themselvesholdings)appointrep- company's trademark. These apart- their own board of directors and super- resentatives to the boards of directors of ments, tailored mainly for overseas Chi- visory committees. The three holdings individual enterprises. Although enterprise nese valets, are 1 00-square-meter units are fully owned by the Shenzhen mu- groups do not usually participate in the costing on average 800,000 yuan (al- nicipal government and are entrusted- daily operations of individual enterprises, most US$1 00,000). Besides property as shareholders-with the management they are involved in outlining longer-term development, Vanke is also active in fi- of fully or partly state-owned enterprises business, financial, and marketing strat- nance, investment, retail business, the or enterprise groups. Representatives egies, research and development pro- manufacture of gift items, media adver- of the holdings sit on the enterprise grams, and staff training. Enterprise tising, and film production. groups' boards of directors and are in- groups can borrow money at their own volved in major business decisions. The discretion if the amount is less than 30 The company has quickly adjusted to holdings, which collect investment re- million yuan. If they want to borrow more, the new leaner environment. It radically turns from the enterprises, in propor- they must have the prior approval of the cut back on office tion to their shareholdings, have investment holding. Mr. Wang Shi construction and discretion over how much money turned toward more should be reinvested in the individual The New Entrepreneur affordable, lower- enterprise groups-making them ex- priced housing de- tremely powerful players. Founder-president-general manager of . velopments-under China Vanke, the dynamic 45-year-old 2 government con- Xia Deming, president of SIHC, is also Wang Shi is the archetype of China's new tract. In the coming the party secretary of the holding com- entrepreneur. He openly admits that years itwill concen- M TRANSITION, February 1998 © 1998 The World Bank One of Vanke's Home The latest economi9 signals are dis- o Developments quieting: 1998 will bring a definite eco- M lestones of nomic slowdown in the province. The intiute predicts a less-than-i 0 percent Transition inrase in exports and a net outflow . ' 2 | ! F - of foreign capital. Labor costs are in- creasing, relative to other provinces Central and Eastern Europe (officially, the average monthly wage for workers employed in the province European Commission releases its is about 800 yuan, less than $100). CEE forecast: growth and large trade deficits to continue, inflation to slow. The institute is calling for urgent action, The European Commission forecasts according to Jie Tang, professor and au- that GDP in Central and East European thor of several studies on issues involv- countries will rise by an average of 3.8 ing regional development and regional percent this year and 4.5 percent next trate its resources, limiting new housing disparities. The province's authorities year. Last year CEE economies grew an developments mainly to Shenzhen developments mainly to Shenzhe. 'shouldcounterthedangeroustrendswith average of 3.2 percent. Average infla- Beijing, and Shanghai, and will trim back increased tax incentives to foreign and tion is expected to slow from an aver- on advertising and film production, en- terprises that are far from its main line of domestic investors, and attract high-tech age of 53.8 percent last year to 15.4 activity. But the company remains faith- companies to the area, in order to percent this year and 11.6 percent in Tianjin change the labor-intensive character of 1999, due mainly to economic improve- fuVaonke faoerTedm, offspr ongthe na- the present production base. Such mea- ments in Bulgaria and Romania. Trade Vanke Soccer Team, which won the na-.. tional championship in its class. As the sures, adds the professor, will require deficits in the region are expected to glossy annual report put it: "The highly more sophisticated, more committed remain high. efficient management style of Vanke has market-oriented policies. revitalized the whole soccer team." Trade balance Will the reunited Hong Kong be the new aac Warning by Shenzhen's Think Tank testing ground for reform, Chinese style? GDP Inflation asa percent Warnng 3y henhen' Thnk ank My personal impressions were strength- Country '98(9 7) '98(97) of GDP These interviews had been organized by ened by a recent statement of Dong Bulgaria 12 (-74) 35.0 (1000) 27 (4.1) the China Development Institute, the first Fureng, the highly respected senior Czech R. 26 (12) 95 (8.9) -85 (-105) economist who is also Vice Chairman of Estonia 47 (52) 85 (10.8) -254 (-27S ncongovmisentalpthnkuan, fonde by the Economic and Financial Committee Hungary 3.8 3.1) 14.0 (182 -72 (-65) activists It has a staff of 70, with assets of the People's Congress (parliament): Latvia 41 m 70 m -221 (M.7) axctedivis I ha a staff o withi ass e "Political reform is inevitable and indis- Lithuania 54 P 86 (92 -21.3 (-187) exeopedatinig 100get miion yuan. Twothirdughse pensable." In an interview with the China Poland 47 6 16.0 (153 -10.0 (-9.8 its opkerting budgetsis, raisedthrough srel- Economic Times he urged the govern- Romania 22 (-3) 30.0 (125 -44 (-55) ingtmarketintanalysis,eeonomicefore ment not to intervene in areas that can Slovakia 45 (53) 70 (6.4) -9.1 (-96 be better managed by the market. He Slovenia 43 3.4) 89 92) -53 (-62 enterprises and government organiza- called for streamlining the bureaucracy, tions. The rest of the budget is still pro- strengthening the rule of law, making vided by the state. As Vice Chairman Li LuodLi andthestate.As Vice Direct hn Jn policies public and transparent, and pro- The European Investment Bank (EIB) eLu iain, theVinstite Disryntoru canvunc viding more market-related information. will grant a total of Ecu 7 billion in explain, the institute Is trying to convince loans over the next three years to ten both decisionmakers and the public that Great reform decisions are brewing in Central and East European countries restructuring industries in Guangdong China, and I was fortunate enough to aiming to join the European Union, as province cannot be delayed any longer, visit this compelling country at a critical against the oriainally planned Ecu 3.5 In this province 10,000 joint ventures of- moment in its history. billion. ($1 equals Ecu 0.9.) The EU will fer work to 4 million people. Here 5 per- provide a 70 percent guarantee on Ecu cent of Cliina's population produces 10 The contributions of Wai Sun Yung of the percent of the GDP and delivers one-third World Bank's Beijing Office, are greatly Continued on page 27 of the country's total exports. appreciated. O 1998 The World Bank TRANSITION, February 1 98 m Asian Lessons for the Transition Economies by Gail Buyske One lesson from the Asian financial cri- terest rates have scared them off and percent in dollar terms), with a further sis stands out for the transition econo- partly because Russian banks have found decline of more than 20 percent by early mies: without significant changes, the the Russian treasury bill market substan- February. structure of these economies can cre- tially more lucrative than lending. Stan- ate their own homegrown crisis. Russia dard&Poor's estimates thatyear-end 1997 After some initial delays, Russian eco- provides a particularly compelling ex- domestic credit to the private sector and nomic policymakers recognized the ample of this risk. public enterprises as a proportion of Rus- Asian threat for Russia and responded sian GDP was a mere 12 percent. This proactively, including negotiating a se- Russia's vulnerability to the Asian panic contrasts with 147 percent in South Ko- cret loan of almost $1 billion from West-, is an ironic version of capitalism's re- rea and 193 percent in Japan. ern banks. Additional support came from venge, so little did Russia share the char- the IMF with the release of a previously acteristics that sent Asia into a tailspin. And although foreign investment in Rus- delayed $680 million loan tranche (see The now troubled Asian economies had sia has been increasing, its starting box on next page). Ongoing crisis man- enjoyed years of phenomenal economic point was remarkably low. Except for agement efforts as of mid-February are growth. According to the World Bank the Macedonia, Russia had the lowest level focusing on supporting the ruble, be- eight high-performing Asian economies, of foreign investment per capita ($34) cause of the negative political and eco- which includes all of those currently suf- of 13 countries in the region for the cu- nomic ramifications of a devaluation. fering financial crises, experienced aver- mulative five-year period prior to 1997, age per capita real income growth of 5.5 according to the European Bank for Re- Nevertheless, it is critical to recognize percent every year from 1960 tol 990. Av- construction and Development. that the Asian lesson for Russia extends erage annual GDP growth for developing beyond crisis management. The deeper East Asia from 1990 to 1995 was ap- Despite these stark differences with threat for Russia-as for some of the proximately 8 percent. Asia, Russia has not been immune to other transition economies-is that the the emerging market virus. As a deputy structure of its economy will increasingly This growth was actively supported by central bank governor commented show evidence of the structural fault lines the state and financed by ever-increas- plaintively to the Financial Times, the in the Asian economies. The financial ing levels of domestic lending. Standard fundamentalsl are the same as they sector of the struggling Asian economies & Poor's reports, for example, that do- were three months ago, so what has was the lightning rod for their collapse. mestic credit to the private sector and changed? What changed is that jittery Already substantially overleveraged, due public enterprises in Thailand increased foreign investors suddenly cast a to rapid loan expansion and a failure to from 60 percent of GDP in 1988 to 130 harsher light on Russia's tax regime recognize bad loans, the banks had no percent in 1995. Rapid economic expan- problems, interenterprise debt arrears, cushion to protect themselves when their sion was also fed by high levels of for- and recurring budget deficits. Russia is home currencies plummeted. Not only did eign investment, which was attracted by particularly vulnerable to external sen- the banks' foreign currency obligations be- the unrelenting growth as well as by po- timent because foreigners account for come prohibitively expensive, but their litical stability and fixed exchange rates. an estimated 30 percent of its treasury own foreign currency borrowers became This go-go environment led to overpro- bill market, which finances close to 40 unable to repay the banks. How did the duction, overleveraged lenders and bor- percent of Russia's troublesome bud- banks get so far out on a limb? rowers, and inflated property values. get deficit. As a result of investor anxi- ety, treasury bill yields were forced up Three structural factors played a key role: The contrast with Russia is almost comi- from 17 percent to a peak of 47 per- * First, these economies are character- cally extreme. The paltry 0.4 percent cent. [Yields have since dropped to 30- ized by an intertwined relationship be- GDP increase in 1997 represented the 32 percent. The editor] The central bank tween the state and the private sector country's first year of economic growth has spent billions of dollars to support in which favors are exchanged behind since the demise of the Soviet Union. the ruble. In addition, Russia's stock closed doors. Russian companies are notably market fell almost 45 percent by year- * Second, the opaque financial and own- underleveraged, partly because high in- end (although it is still up almost 100 ership relationships within finan,cial-indus- M TRANSITION, February 1998 (© 1998 The World Bank trial conglomerates, such as the Japanese While Russia's central bank has made and poorly regulated relationships be- keiretsu and the South Korean chaebols, noteworthy progress in strengthening tween the state, the banks, and priva- make supiervision and regulation a major its position over the past year, its start- tized companies. Bulgaria and Ukraine, challenge. It can also be extremely diffi- ing point was very weak. Its hostile re- less far along on the transition path, pro- cult for outside investors or even rating lationship with the Federal Securities vide examples of countries that are only agencies to accurately assess the risk Commission continues to prevent com- beginning to face the challenge of es- profile of these conglomerates. prehensive and effective financial sec- tablishing transparent and arm's-length * Third, the financial supervisory bod- tor supervision. Meanwhile, there is a relationships between the state and the ies in these countries are dangerously bill pending in the Duma that would re- private sector, in particular the finan- weak. Why should a bank take govern- duce the central bank's financial inde- cial institutions. ment supervisors seriously when no pendence. Persistent rumors about bank within memory had been allowed problems at some of Russia's larger The most important lesson from Asia to fail-as in Japan-until November? banks also raise questions about so far is that growth built on structural whether they are being supported by fault lines eventually implodes. A les- The parallels with Russia are striking. The the central bank, potentially creating un- son that Asia might still teach us in the power of Russia's financial-industrial healthful precedents. future is equally important for the tran- groups, which typically combine significant sition economies: when the growth dis- financial, rnedia, and natural resource in- Russia's situation is not unique among integrates, social stability can be terests, is growing constantly. The close the transition economies. The Czech threatened as well. relationship between the state and the top Republic, for example, which until re- Russian financial elite has created the cently appeared to be in the transition The authoris aNew York-based consult- term semibankirshchina-the rule of the vanguard, suffered a government-top- ant specializing in financial sector reform seven bankers (see page 15). pling crisis in 1997 generated by opaque in transition economies. IMF Eases Lending to Russia Faced with reverberations from Asia, the International Mon- In 1996, thefirstyearof the IMF loan, the Fund targeted Russia's etary Fund plans to release another installment of IMF money budget deficit-one way to measure revenue collection-at 4 for Russia and extend by an extra year its three-year, $10.1 percent of gross domestic product. But the deficit swelled to billion Russian loan program, which had been scheduled to 8.2 percent that year. In 1997, by the end of September, the expire next year. (The credits available under the newly government had raised $29 billion in revenue, compared with a agreed '1998 IMF program would begin flowing after a regu- target of about $56 billion. In October 1997 the IMF suspended lar quarterly review. That means Russia is unlikely to re- the scheduled loan installment to Russia. Moscow met the ceive its; next quarterly loan tranche of about $670 million target in the last quarter of 1997 only because the IMF lowered before May.) The Fund relaxed its insistence that tax collec- the goal; even then the government had to employ an account- tion improve as a condition for further funds. ing gimmick, counting expected revenue as actually collected. Last December the IMF reinstated its lending after Russia made IMF director Michel Camdessus admitted during his Mos- new pledges to improve tax collection and cut government cow visit that the Fund would back down on demands that spending. The IMF also relaxed its ambitious revenue collec- Russia meet precise targets for increased tax revenues. tion goal for 1998 and told Russia to collect slightly more than The 1998 program would emphasize improving Russia's poor its poor performance last year. system of corporate governance and strengthening its pub- lic finances. "I am now in the business of seeing that coun- The IMF's decision comes in the wake of criticism from tries that could be targets of this still not totally understood other countries that have fallen on hard times, especially in contagion phenomenon try to better strengthen their de- Asia, and have been subject to its bailouts calling for bud- fenses," he added. The Asian crisis has led to a decline in get cuts, tax increases, and other steps designed to relieve the ruble, the central bank has been forced to raise interest the crisis. Several economists, finance ministers, and po- rates to 39 percent, Russian share prices have collapsed litical leaders have worried that the IMF's medicine may by nearly 50 percent, and foreign investment has declined. exacerbate the troubles rather than relieve them. The result has produced growing concern about the stability of the Russian economy. Based on news agency reports. C 1998 The World Bank TRANSITION, February 1998 C World Bank Official Spotlights*lax Dodgers in Russia The following article is a shortened version of the presenta- quickly generate additional revenues. Tax arrears of those tion by World Bank Europe and Central.Asia Chief Econo- who owe more than half a million dollars account at present mist Marcelo Selowsky at the recent U. S.-Russian Investment for 70 percent of total tax arrears. There are 250 enterprises Symposium, held at Harvard University and well attended by that each owe more than $17 million in taxes-for a total of foreign investors and the Russian corporate sector. at least $4 billion, equivalent to 1 percent of GDP. Since last May the World Bank has sharply stepped up its 2. FDI in Russia-at about $3 billion a year-is still very assistance to Russia; total (cumulative) lending increased low relative to the size of the country's economy. Indeed, from $6.5 billion to $10 billion-a 50 percent increase in ex- it roughly equals FDI in Poland, whose GDP is only one- posure in just eight months. This support is a sign of the fourth that of Russia's. Annual FDI in Brazil is five times Bank's confidence that the Russian government and its eco- greater than in Russia, although GDP in the two countries is nomic team is strongly committed to sustaining the reform about the same. Private savings remain high in Russia (about process. To improve public finances, the Bank-working 20 percent of GDP), even if a significant slice of those sav- closely with the IMF-supports tax reform and the creation ings still ends up abroad. Thus, at least in the short run, sav- of a more transparent budgetary and treasury system. The ings are not constraining investment or output recovery. The Bank is also assisting more transparent case-by-case constraint is on the demand side: incentive or desire to privatization and increasing competition in the energy and invest in the domestic economy is still weak. Therefore, infrastructure sectors. The Bank is ready to provide private the privatization of large enterprises should be accelerated, investors with its new partial-risk guarantees against the risk with outsiders brought into the process. Open, transparent, of reversals in the government's regulatory framework. and competitive sale of large blocks of shares would send the right signal to both domestic and foreign investors. Al- The Bank has also been very active on the social front. though Russia today has a relatively open trade regime there During 1997 two large loans, each for $800 million, were is still room for increased competition. Barriers and red tape approved to support pension reform, better targeting of so- frequently prevent new firms from entering the market. cial assistance, and, particularly, relief for families affected by the downsizing of the coal sector. To encourage reform The World Bank will be working closely with the Russian at the local level, the Bank has been working with selected government to create a more favorable investment environ- regional and city governments who are ready to reform their ment and more transparent investment rules. We hope that utility and other services on a cost recovery basis. If the as a result, risk-corrected rates of return on investment in government's policy performance continues to improve, the Russia will increase. But we also expect support from the Bank will substantially expand its Russian program, and domestic and international private sector. Many of them are new commitments could reach about $3 billion annually over represented here at the conference. the next two to three years. These are not ordinary times for Russia, so let me be very What major challenges confront the Russian government candid: Russia's large corporations must honor their tax as it continues to reform, and what will this mean for World obligations. How can we expect emerging small entrepre- Bank support? neurs and enterprises to pay their taxes if the large enter- prises are not doing so? The domestic corporate sector 1. The new fiscal action plan needs urgent implementa- should not resist government efforts to ease market entry tion. Last year Russia's budget revenue declined to less by foreign entrepreneurs and promote competition. Foreign than 10 percent of GDP, down from 13 percent in 1996. The investors, for their part, should not pressure the govern- government, to meet fiscal targets, was forced to withhold ment for special tax exemptions such as low imports tariffs wages of public employees and cut expenditures across on their foreign purchases or higher protective tariffs aimed the board. A new draft tax code that is still under consider- at reducing foreign competition with their domestic sales. ation in the Duma has fewer taxes, lower rates, and fewer exemptions. It clarifies federal-regional tax assignment. It Only genuine partnership can assure what we all want: sus- also improves the transparency and uniformity of the tax tained recovery of growth and improved social well-being in system. Adopting sanctions against large tax debtors would Russia. * TRANSITION, February 1998 © 1998 The World Bank The Big Seven-Russia's Financial Empires Special Report of Radio Free Europe M any large banks in Russia Table 1. Capital Strength Table 2. Authorized Government Funds have major stakes in large in (January 1997, millions of rubles) (January 1997, millions of rubles) dustrial enterprises, usually Capital Rank Bank Gov't Funds Rank bundled together in holding companies called Financial-Industrial Groups Alfa 9.8 15 Alfa NA NA (FIGs). In the fall of 1996 former Se- Inkombank 22.2 3 Inkombank NA NA curity Council Secretary Boris LogoVAZ NA NA LogoVAZ NA NA Berezovsky, who heads LogoVaz fi- Menatep 12.2 9 Menatep 297 6 nancial empire, bragged that he and Most 11.0 11 Most 166 9 six fellow tycoons-the "Big 7"-con- Oneximbank 20.5 4 Oneximbank 2,100 1 trolled hallf of Russia's economy. The SBS-Agro 13.8 8 SBS-Agro 79 17 elite banks and their FIGs are also the NA Not available. NA Not available. key financial players in the constantly shifting, iniformal networks of compet- Authorized banks are entitled to handle usually transfer customs payments in ing alliances-sometimes called funds of central or local governments advance of actual delivery of goods, for clans-that dominate Russian poli- (table 2); for example, they may collect example, leaving the money in autho- tics. The Big 7 are considered and transfer to the state budget cus- rized banks for up to two weeks.) Ob- Russia's leading banks because of tomspaymentsandtaxrevenues.They taining status as a favored, authorized their overall clout based on political can make huge profits by delaying bud- bank is highly dependent on the politi- connections, industrial and media get transfers so that managers can use cal connections of the bank's manage- holdings, and financial capital (see the money to invest in the high-yield ment and is widely believed to have table 1). government securities market. (Firms fostered corruption. ii. Affa Gro-up (eight companies). Alfa owns an art deal- Russia's financial relations with China ership, a supermarket chain, and has its and is the authorized bank for the city Alfa Group is led by Chairman of the own brand of tea. It also exports orien- of Moscow. Inkombank actively seeks Board Mikhail Fridman and President tal carpets and is the major importer of to expand its regional presence and has Pyotr Aven (former Minister of Foreign liquor from Moldova and Ukraine. It owns 68 regional branches and agreements Economic Relations, Russia). Alfa Bank 38 percent of ORT Television. with 34 regional administrations and 11 grew out of Courier, a trading company city governments. Inkombank reportedly founded in 1987 by graduates of the 1. IflRomoan1 has ties to the defense, security, and Moscow Steel and Alloys Institute. Alfa law enforcement ministries. later thrived on foreign trade activities Inkombank is led by Chairman Vladimir and connections to the Ministry of For- Vinogradov. Inthe 1980sVinogradov, an A Kommersant Daily report in 1996, eign Economic Relations. In 1996 the economist at Promstroybank Rossiya, based on a leaked report by the cen- Alfa bank reaped large profits on gov- helped develop the commercial activi- tral bank, warned of liquidity problems ernment treasury bills (GKOs). It also ties of the Komsomol (Young Commu- at Inkombank and provoked a $39 mil- handles lunds of the State Customs nist League) through the Saburov Youth lion run by investors (15 percent of to- Committee. Construction Complex. Inkombank was tal deposits). Inkombank claimed the founded to service these commercial leak was in retaliation for its public criti- Alfa's key holdings and signature com- activities, with the help of the Soviet cism of loans-for-shares auctions. The panies are Alfa Eco Trading and Tyumen Finance Ministry and the Soviet State bank appears to have recovered from Oil. It is also involved in chemicals, phar- Bank. The bank was officially created in recent setbacks and made peace with maceuticals, food processing, glass, 1988. It handles accounts for the State former rivals Menatep and electricity, construction, and cement Customs Committee and some of Oneximbank. Its key holdings are © 1998 The World Bank TRANSITION, February 1998 3 Inkom Capital, Samara Aluminum, Technology Program, the local chapter.) grew wealthy in the early 1990s as the Babayev Food Processing, Menatep Group evolved from those busi- main authorized bank for the city of Mos- Magnitogorsk Steel, Nostas Pipe, and ness activities, especially through the trad- cow, especially by financing real estate Sokol Aircraft. It also controls 15 percent ing of computers. The bank was officially development in the city center. of the Russian confectionery market. registered in 1988. Its public offering in 1991 was the first since the Bolshevik In 1994 the bank was authorized to 3. LogoVAZ Revolution. The bank grew quickly after handle Moscow accounts for finance, 1991 on currency speculation. housing, licensing, and social protection, LogoVaz is led by founder Boris as well as the city's special services and Berezovsky (former deputy secretary, As the authorized bank for the federal international relations. Currently it is the Russian Federation Security Council). govemment, the bank supported several authorized bank for regional govern- Berezovsky, a mathematician and ex- federal programs, including the Chemobyl ments in Central and South Central Eu- pert on decision theory, began his busi- cleanup and a sugar-for-oil deal with Cuba. ropean Russia and the government of ness career in 1989 as general director The bank also distributed money for the Azerbaijan. The security forces of Presi- of LogoVAZ, the country's first capital- rebuilding of Chechnya. In 1996 Menatep dential Guards chief Aleksandr ist car dealership. By 1994 he had de- was the largest holder of Finance Ministry Korzhakov raided Most headquarters in veloped that into a media, banking, and guarantee papers, and in 1993 it was ap- December 1995 for reasons that have oil empire. AvtoVAZ Bank, a holding of pointed authorized bank for the city of never been explained. LogoVaz, is authorized to handle funds Moscow. Menatep also serves as the au- for Aeroflot. A 1996 Forbes magazine ar- thorized bank for regional govemments Most Group includes NTV-Holding Me- ticle alleged that Berezovsky used or- including Yaroslavl, Sverdlovsk, and St. dia Most, Most Investment, Most De- ganized crime to build his business Petersburg. velopment, and Most Engineering. empire. NTV-Holding, formed in 1997, combines Rosprom groups together the Alliance- Most media assets: NTV television net- LogoVAZ holdings and companies also Menatep Investment Bank, SKB Samara work, the satellite network NTV-Plus, include Obedinionny Bank, Oil Finance Bank,MenatepTradingCompany,Menatep radio station Ekho Moskvy, satellite Company, and Sibneft Oil. Aeroflot owns Impex, Yukos (oil), Koloss (food), Avisma company Bonum-1, and TNT Teleset, 8 percent of ORT Television. Obedinionny (titanium and magnesium), Apatit (fertil- which, as of January 1998, provided pro- Bank, affiliated with LogoVAZ, is part of izer), Orenburg (copper), Syktyvkar (tim- gramming and financing for some 50 re- a consortium of four banks that owns 38 ber), Ust-Ilimsk (paper and pulp), Russkii gional television stations. Most Group percent of ORT. The bank also owns 37 Tekstil, ORT Television (part of a bank controls 70 percent of the shares in NTV percent of TV-6, has a controlling stake consortium owning 38 percent), and and has a controlling stake in radio sta- in Nezavisimaya Gazeta through Literatumaya Gazeta (controlling stake). It tion Ekho Moskvy. Most also has full Obedinionny Bank, and owns shares in has a minority stake in Independent Me- control of Seven Days publishing the magazine Ogonyok. dia, which publishes the English-language house, which publishes the daily Moscow Times, the weekly Kapital, and Segodnya, the weekly Itogi, and the en- 4. Rospronn Group various entertainment magazines, includ- tertainment weekly Seven Days. Most (Menhatep) ing Playboy and Cosmopolitan. also has invested in weeklies Obshchaya Gazeta and Novaya Gazeta Rosprom is led by founder and former 5. Most Group and subsidizes the daily newspaper Chairman Mikhail Khodorkovsky. The Smena in St. Petersburg. Soviet Communist Party created tax- Most is led by founder and General Di- free Youth Scientific Technical Creativ- rector Vladimir Gusinsky. In the mid- 6. O4eximbaflk ity Centers in the mid-1 980s to engage 1980s Gusinsky, a former theater in commercial activities. In 1987 director, started cooperatives that sold Oneximbank is led by President Vladimir Khodorkovsky, a graduate student in office supplies. He later founded Infeks, Potanin (for a while Russia's first deputy chemistry and a Komsomol deputy sec- a legal and business consulting coopera- prime minister), chairman of the board. retary for the capital's Frunze district, tive, and won contracts to renovate of- Potanin started his career in the Soviet became the head of the local center. fice buildings. He bought factories to make Foreign Trade Ministry. In the early ("Menatep" is the acronym for Frunze's the supplies. Most Bank was established 1990s, with a $10,000 loan from his col- Inter-Branch Center for Scientific and in 1989 to finance these operations. Most leagues, he created his own frading firm. M TRANSITION, February 1998 .© 1998 The World Bank This evolved into the International Com- Russia's gross domestic product. Its hold- to 1989 Smolensky headed the pany for Finance and Investments ings and companies include: Interros (in- Moskva-3 cooperative. The bank is es- (MFK). The MFK thrived as the disburs- cludes more than 30 companies), pecially active with regional govern- ing agent for ruble credits to state- Intemational Finance Corporation (MFK), ments in South European Russia, the owned industrial firms. In 1993 Balt-Oneksim (St. Petersburg), Renais- Urals (Sverdlovsk Oblast), and West Oneximbank became the paying agent sance Capital, Norilsk Nickel (51 percent Siberia. The bank has increasingly fo- for Finance Ministry bonds and a ser- voting control), Zil Auto Works (26 per- cused on retail banking in Russia's re- vicing bank for the city of Moscow's cent), North West River Shipping (25 per- gions. The 1996 acquisition of the failing external economic activities. In 1994 it cent), Kuznetsk Aluminum, Oktyabrskaya Agroprombank gives it 1,500 branches became the depository and paying Railroad, Svyazinvest Telecommunica- in 62 regions. SBS had to give 24.5 per- agent for treasury obligations and in tions (25 percent), Sidanko Oil (85 per- cent of Agroprombank stock to the Ag- 1995 the authorized bank for the fed- cent),NovolipetskSteel(15percent),Lomo riculture Ministry as part of the deal. eral agency, dealing with bankrupt en- Precision Optics (40 percent), Perm (air- The bank also participates in a small terprises. It is the authorized bank for craft), Motors (27 percent), and the Cen- business loan program with the Euro- many regional governments, especially tral Army ice hockey and basketball teams pean Bank for Reconstruction and De- in Northwest Russia and the Far East. (75 percent). It also partly or fully owns velopment (EBRD). Its member- It holds seven accounts of the Finance Komsomolskaya Pravda (shares), Russky company is the Finance Oil Company. Ministry, c:ontaining government tax re- Telegraf (full control), Izvestiya (controlling The bank generally steers clear of in- ceipts totaling almost $150 million in stake), and Ekspert (34 percent). dustrial holdings. In the media it partly foreign currency. At the end of 1997 the or fully owns: ORT Television (38 per- Customs Service accounts, which had 7. SBS-Aar (to'erly cent), Stolitsa magazine, Kommersant helped the bank reap windfall profits ' stoBicS- Weekly, Kommersant Daily, and Dengi were transferred to the central bank. St business journal (through investment credits in Kommersant Publishing Oneximbanik is considered the most pow- SBS-Agro is led by President Aleksandr House). It also controls Domovoi and erful bank in Russia. The bank's status as Smolensky, an Austrian citizen whose Avtopilot entertainment magazines. the government's semi-official import-ex- family lives in Vienna. The bank had ties portbank,combinedwithitspowerfulback- to party and government financial Excerpted from the report of Donald N. ers in the Kremlin and the govemment, have sources during perestroyka. From 1987 Jensen, Associate Director of REF/RL. enabled it to grow faster than any other fi- nancial institution. Oneximbank was the Vladimir Gusinsky, head of the Most Group, campaigning originator of the 1995 loans-for-shares pro- against d abuse. posal under which banks lent money to the against drug abuse. govemmernt and took shares in large en- terprises as collateral. The bank was a major contributor to Yeltsin's presidential cam- paign. In July 1997 Oneximbank led a con- sortium that was awarded a 25 percent stake in Svyazinvest, Russia's largest-ever sale of a state asset. The outcome trig- gered attacks on the bank by media owned by losers 13erezovsky and Gusinsky, who claimed the auctions were rigged. Oneximbank was the first Russian bank approved by the U.S. Securities and Ex- change Commission to handle depository activities of U.S. investors. Business Week reports that the Group has . $38 billion in assets and had $16 billion in sales in 1996-nearly 10 percent of From the Russian daily The Moscow Times. C) 1998 The World Bank TRANS[T[ON,Februar) 1998 Economic Program of Hungary's Mainstream Opposition Interview with Economic Adviser Gyorgy Matolcsy Although the polls predict and medium-size enterprises, so inter- as shown in official statistics (the differ- in a comfortable victory for national companies would be able to ence being attributable to the vast un- the Hungarian Socialist rely on a broad network of Hungarian derground economy)-the proposed Party in the May 10 par- suppliers. govemment expenditures on health, edu- liamentary election, one cation, and the like are extremely low can never count out the element of sur- Q. It will be difficult to outshine the compared with other countries with com- prise, especially as one-third of the elec- Socialists in this respect-their policy parable per capita GDP levels. Research torate is still undecided. If the major toward the multis was extremely cli- and development expenditures, for ex- opposition force, the Alliance of Young ent-friendly.... ample, would be 0.7 percent, while the Democrats (FIDESZ)-Hungarian Civic OECD average for countries with simi- Party were able to form Hungary's next A. Nevertheless, we could offer them lar per capita GDP figures is 3.7 per- coalition government, in what way would new business opportunities. We are cent. Balancing the budget is important, they change Hungary's economic ready to initiate major public works to but the present government has over- policy? Gyorgy Matolcsy, top policy ad- build new highways, to develop the in- done it and persists with a restrictive, viser and co-author of his party's eco- frastructure in southern and eastern Hun- deflationary policy. As a consequence, nomic program, made it clear in an gary. Foreign direct investment has so at least 3 million people, one-third of the interview with Transition editor Richard far avoided these relatively underdevel- population, live around the poverty level, Hirschler that a FIDESZ-led coalition oped regions, primarily because of the and much of the middle class faces an government would protect foreign inves- lack of infrastructure. Most foreign in- uncertain future. tors, strive for EU accession, and keep vestment is concentrated in the great its NATO commitments. metropolitan area of Budapest and in Q. What is the FIDESZ attitude toward western Hungary. These extreme re- the IMF and the World Bank? Q. There have been reports in the gional disparities have to be narrowed, Western press that if FIDESZ wins the and clearly, foreign capital has a big role A. Hungary has terminated its borrow- Hungarian election, the new govern- to play in this. ing from the IMF, though-no matter ment would review contracts with for- what government comes to power in eign companies and renegotiate some Q. And how would you answer the May-consultations will continue. We privatization agreements. What is your claim that a FIDESZ-led government want to carry on with the World Bank comment? would ignore the policy advice of the programs. We have gained lots of expe- IMF and the World Bank, and would rience during our collaboration with the A. These are groundless accusations. start a careless expansive economic Bank; it would be worthwhile to engage No one in FIDESZ questions the policy that would generate inflation inadialogueaboutwhichprogramswere present ownership arrangements. I and a huge imbalance in the current successful and which programs didn't would dare to say that under a FIDESZ- account? meet expectations, and to shape our led coalition, multinational enterprises future cooperation accordingly. would enjoy more benefits than today. A. The truth is that we intend to pursue Our program is committed to a doubling responsible monetary and fiscal policies. Q. What major policy changes does of the gross national product in 10 We would keep government expendi- FIDESZ propose in its economic pro- years' time, which means annual eco- tures under control. That commitment is gram? nomic growth of 7 percent. This would not out of keeping with our plans to spend mean higher investment and greater significantly more on new housing de- A. Although Hungary's economy is on a consumption-and higher rates of re- velopments and-as I mentioned-to growth path, it does not seem to be sus- turn for foreign enterprises operating in expand investment in infrastructure. tainable growth. It is generated almost Hungary. The program would offer sig- Considering that Hungary's GDP per exclusively by foreign multinationals. No nificantly more support to local small capita is $6,000-$7,000-and not $4,000 question, the country has made tremen- * TRANSITION, February 1998 -© 1998 The World Bank dous strides: its obsolete industrial struc-- A. These ridiculous charges have clearly 43 percent of committed votes, while ture has been revamped. But it is dis- been concocted by the party's political FIDESZ, the second most popular quieting that three companies (IBM, opponents. Orban recently confirmed in party, trails behind with only 24 per- Phillips, and TDK) supply 20 percent of London that the opposition has no in- cent. Why? Hungary's total annual exports ($18.6 bil- tention of making any fundamental lion in 1997), and about three-quarters change in Hungary's European integra- A. Citizens are perhaps rightfully wary of econornic growth is generated by a tion policy. He has also been quite clear of another drastic change in the country's dozen or so multinationals. And regional that Hungary's commitments to both political landscape. Too, it is difficult to disparities, as I've mentioned, are a NATO and accession to the EU would mount an effective campaign when the problem. be sustained. It is true that in dealing economy is slowly picking up speed. But with our EU partners we would like an we believe that the country's potential Thus ours is a policy of inclusion: to en- agreement that clearly recognizes is much greater than is recognized by courage small and medium-size enter- Hungary's economic and political inter- the present coalition. And we hope to prises, neglected regions, and ignored ests. I'm afraid this is not the case with convince the electorate that our program, groups of the population to participate in the present government. based on dynamic growth and fiscal- efforts to accelerate economic progress monetary moderation, is the winning and share in the benefits of growth. We Q. Your program sounds quite im- proposition. The Polish election results- believe that 7 percent annual growth will pressive. Still, you lag behind the the ex-Communists seemed the sure win- allow us to get closer to the EU's devel- Socialist Party in the polls-the lat- ners, but they lost-give us hope and opment level. [In the European Union est shows the Socialists can count on optimism. average annual GDP growth is 3 to 4 percent. T he Editor.] We have to radically Tight Budget change our tax system, which currently takes an average of 35 to 40 percent of the Hungarian taxpayer's income. Our tax , reform proposal would significantly cut in- -v1. iJy come tax and social security contribu- iL tions; but it would also reduce indirect nI value added tax rates in order to lower X U Lb,.- labor costs and thus contain the tax avoiding second, or underground, _r economy.. Further, we would double ex- iX penditures on education, enabling an ad- _ ditional 40,000 high-schoolers to enter university-current university enrollment, AP 42,000, i's very low for a country of 10 million people, particularly in comparison _)M with the much higher corresponding fig- ures in the West. We would also signifi- cantly expand housing construction, and fE introduce mortgage-loans, to help LM~ homebuyers short of cash. _, -_ Q. Victor Orban, leader of FIDESZ, ...': * . has been demonized lately in the Hun- Police .; ' garian rnedia, depicted as a right- -oce , wing nationalist who, in power, would endanger Hungary's NATO membership and would make acces- "Chief, I can't pursue the bankrobbers. They took the toll road..." sion to the European Union more difficult. From the Budapest-based magazine Hungarian Economy. C) 1998 The World Bank TRANSITION, February 1998 They Are Watching-NGO Report on the World Bank's Latest Reorganization W ith East Asian markets in tur wherein Bank management spent inor- offs are estimated to number about 500 moil, debate has intensified dinate amounts of time and money get- to 700. overthe future role of the IMF ting projects ready for Board approval. and the World Bank. Even before the Little time or money was spent on imple- To understand why the Bank staff is crisis the World Bank had launched a menting and supervising projects. Presi- shrinking, it is necessary to understand host of new initiatives, which are part of dent Wolfensohn pledged to shift the how the reorganized Bank works. Newly President Wolfensohn's Strategic Com- Bank from an approval to an implemen- appointed managers run two compo- pact with the Board of Executive Direc- tation culture. nents of the reorganized Bank: tors. In the past, the lending process was * Country Management Units (CMUs) often criticized for the following reasons: The new initiatives would create stron- have control over the country budgets ger partnerships with groups outside the and are organized by six geographic re- * In many cases project completion Bank, reinvigorate middle management, gions (Africa, East Asia & the Pacific, took too long, and loan disbursements facilitate information and knowledge shar- Europe & Central Asia, Middle East & were too slow, especially in the early ing, decentralize operations to countries, Northern Africa, South Asia, and Latin phase of the project. In one extreme build professional excellence, and launch America & the Caribbean). They buy case, a.forest that a project was intended new products. A long-awaited cost-effec- services from the Sector Management to protect was mostly destroyed during tiveness review (CER) was jointly per- Units (SMUs) or other partners inside or the extended project preparation. formed by an independent firm, KPMG, outside the bank. *Assumptionsthataflawless"blueprint" and management of the Bank. The re- * Sector Management Units (SMUs), can be designed at project initiation, and view analyzes the lending decision pro- with large staffs and small budgets, are successfully implemented in a multi- cess, the performance of economic and organized into the following networks: year timeframe, may work for construct- sector work (ESW), and the functioning Finance, Private Sector & Infrastruc- ing a bridge, but it doesn't work for of the Bank's information systems. (One ture (FPD), Poverty Reduction & Eco- heuristic, participatory development in- finding of the CER is that the Bank con- nomic Management (PREM), volving constant learning and involve- sumes 900 million pages per year, or Environmentally & Socially Sustainable ment of the affected stakeholders (e.g., 90,000 pages per staff member. This level Development (ESD), Human Develop- postconflict reconstruction, urban up- of consumption translates into the felling ment (HDN), and Operational Core grading, dam construction, environmen- of 152 pulp trees per day.) The report Services (OCS). They supply the ex- tal protection). concluded that increased demand for pertise requested by the CMUs. * The "pulling the string" approach to improved Bank services could boost lend- lending assumes that World Bank ex- ing from the fiscal 1997 total of $19 bil- While CMUs usually employ few staff (a perts or consultants can pull the strings lion to $25 billion annually. country director, plus some assistants), of a project or program and make it they control most of the Bank's re- dance. But stakeholders, who are not Bank management has even more am- sources. The SMUs, which employ large inanimate objects, often rebel. Fre- bitious plans: to expand its overall lend- numbers of staff have a budget that is quently governments do not comply ing from $19 billion in fiscal 1997 to $33 usually only one-tenth that of the CMUs. with the conditions attached to the billion in fiscal 1999. Lending then con- Fiscal 1998 budget allocations make it loans. tracts moderately to $27 billion in fis- clear that CMUs hold the reins of power: cal 2000. (Source: World Bank Health, the regions and CMUs were allotted $776 The 1992 Wapenhans portfolio evalua- Nutrition and Population Sector Strat- million, whereas the Networks and SMUs tion pointed to the complexity of loans egy, 1997). The cost-effectiveness re- received $80 million. asanimportantfactorintheirfailure.The view shows that the Bank can save evaluation also stated that a principal $170 million per year by fiscal 2001, The CMUs and, ultimately, the country cause for poorly performing loans was and that about half of these savings can directors, have responsibility and ac- the "approval culture" of the Bank, be achieved by cutting staff costs. Lay- countability for the size and quality of * TRANSITION, February 1998 (D 1998 The World Bank Organizational Cht of the World Bank Januafy 1998 Board of Governors? Executive Directors Robeft P cciotto, DirertPor-Genra James D. Wolfenso l Operations ^, Evluatjon President Joseph E Stiglitz Ibrahim El. Jessica Einhomn Caio Koch-Weser Sven Sandtr6m Sheng Zban Sr. Vice President Shihata Managing lirectg D irector Director Manag Dir Managng Director Development Senior Vice gg Corporate Secretary Econonucs & Chef President and Economist General Counsel Hiroo Eukui Jules W Muis S Javed Burki Kenal Denns Mark Malloih Mark Baird Dorothy Hamrachi torporate Vice President Vice President Viae President Vice President roim Vice Presideat Ben y Seuretariat Resource and Ceontrller Latin Ainrica Middle East and Vice Presi St Vice ?resdent Mobiliatiw and and Caribbean I NorthEr Eternan Affairs ec Resources Cofinandng* Managenent Gary Perlin Dean wilssn Joliannes inn Mieko Mishinuzi Calisto Madavo Jean-Mchel Mohaed Muhsin Luis Desraice Vice President Vice Preident Vice President Vice President andjean-Louis Seweino CID Acting Director andTreasurer Financial Piicy Europeaand South Asia Sarbib Vice President Infornation Genera Services I and Risk tente Asia Vire Presidents East Asia and Sutions Grop Managenent Africa Pacific Isma Zi Eaddefnra jear.-Praiiais Measod uimed Vice esit David de Ferranti ResiHdernd Vice Presi dent& J.Grahan Ernesto Henriod 'Nun reenn it. ScethdIn ~ Head Vice President & Via President & Had jasclynre GrctKOr o dEnnortavirne -tally Heard Head Puarteyeduction Auditor Headuuarters and SoiAuuy Veunan finance, Priyate & EanDmnic Generna Internal Cntteuctecion Sustainable EedispnnenI Seaoir & Deelopanent Nectwork Ihastructure Managerent Audiing Netwerk Network Neatewk Kaerine Sierra Source: The World Bank Group Directory, January 1998. ODeatioald Coead We reprinted this World Bank organizational chart for the sake of Sersices lietwork our non-Bank readers. The World Bank Directory is available to the public. (See page 37 for ordering information.) (D 1998 The World Bank TRANsIrict, Februar i 1999S 8 all Bank-financed operations in a coun- * A * try. SMUs and, ultimately, sector heads, Loommg AIDS Epidemic in contribute to quality control by consti- tuting task teams with the requisite Transition Economies-Can it skills, designing and integrating sector strategies into country programs, and be Avoided? ensuring the integrity of quality assur- ance operations. by Martha Ainsworth For each country under its auspices, a As of the end of 1997, 30.6 million if concern is warranted, what priority ac- CMU-in close cooperation with the people worldwide were infected with the tions they should take? There are at least SMUs-drafts a country assistance human immunodeficiency virus (HIV), three important reasons why preventing strategy (CAS), which constitutes the the virus that causes AIDS. Nine of ev- AIDS is a priority in the transition econo- 'master plan" for policy reforms and ery 10 infections were in low- and middle- mies of Eastern Europe and Central Asia. project investments in the country. The income economies, and roughly half of CMUs use their budgets to contract with these were among women. Almost all Rapid social and political change spread individuals in the SMUs to carry out the infections are among prime-aged adults, HIV. Throughout the world, HIV is pri- master plan as outlined in the final CAS. the most productive segment of soci- marily a sexually transmitted disease If SMU staff fail to contract out fully their ety. There is no cure for HIV/AIDS and, (STD). It spreads rapidly among men yearly "staffweeks" (units of intra-Bank despite recent advances, AIDS remains and women who have many sexual part- settlements) with the CMUs-and that fatal. In the hardest-hit low-income coun- ners, who do not use condoms, and who can easily happen as contracts are tries, AIDS has already lowered life ex- have other sexually transmitted infec- awarded to the best bid in keen compe- pectancy by a decade or more. tions. HIV also spreads rapidly among tition between staffers and outside ex- people who inject drugs and who share perts-they could find themselves out So far, Eastern Europe and Central Asia unsterilized needles and syringes. While of their jobs. have not been greatly affected by the these behaviors, which are often clan- epidemic; fewer than 150,000 adults are destine, are difficult to measure in any According to the Bank's internal pricing thought to be infected in these regions, society, there is anecdotal evidence formula, the cost of hiring many staff- representing only 0.5 percent of world- that the vast economic and political ers is prohibitively high. It is not unusual wide infections. Western Europe and changes under way in many transition that many team leaders and task man- North America are more seriously af- countries are fostering an explosion in agers-instead of contracting Bank fected, with half a million and 850,000 prostitution and in injecting drug use, staff-are hiring outside consultants to infections, respectively. Two-thirds of all which make the region highly vulner- prepare and implement projects, some- infections worldwide-21 million-are in able to epidemics of HIV and other times without regard for qualifications Sub-Saharan Africa. Given all of the other STDs. and experience. pressing challenges faced by transition economies, why should policymakers be The clearest evidence of the change in Based on 'News & Notices for World concerned about an AIDS epidemic? And sexual behavior is the extraordinary in- Bank Watchers," No. 19, December Number of new syphilis cases in four 1997, published by the Development transition countries Bank Watchers' Project, Bread for the World Institute, 1100 Wayne Avenue, R a te p e r 1 0 0 0 0 0 ~~ MD ~~~~25 0 R u s s ia n Suite 100, Silver Spring, MD 2091. F e dera tio n To contact Director Nancy Alexander: 2 0 0 B e la ru s ncalexander@bread.org. Bread for the M o Id o v a World Institute's website: http:// 150 U k ra ine www. bread. org. 1 0 0 50 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 19 96 * TRANSITION, February 1998 C) 1998 The World Bank crease in the number of new cases of other STDs, such asvsyphilis and gon- Rapid Increase of HIV among Injecting orrhea. In Russia the number of new Drug Users syphilis infections has risen from 5 per hV prevalence 100,000 population in 1990 to more than 80% 263 per 100,000 in 1996 (see figure 1). 1 989 Syphilis rates in Belarus, Estonia, 70%00 Kazakhstan, Latvia, Lithuania, Moldova, 1 1990 1 989 and Ukraine have risen 20-fold to 100- 60% t 1996 fold since 1990. Higher STD infection rates not only portend a sexually trans- 50% mitted HIV epidemic: HIV is spread more 1988 40% efficiently among people who also have these "ialassic' STDs. 3 0% Ilnjecting drug use is on the rise through- 20% 1989 out the region. Needle-sharing among 989 addicts seems to be common, spawn- 10% ing epidemics of hepatitis and HIV. In 1988 198 1988 Nicolayev, Ukraine, the HIV infection 0 % rate anmong injecting drug users rose Yunnan Manipur Vyanmar Bangkok, Chiang Nikolayev Province, State, Thailand Ral, Ukra ne from less than 2 percent in early 1995 China India Thailand to nearly 60 percent in less than a year, which is similar to the experience in Asia (see figure 2). HIV typically spreads patients will be very expensive to treat. spread in a series of small, overlapping sexually from injecting drug users to their Because there is an average lag of about epidemics among people with the riski- spouses and sexual partners, then even- 10 years between HIV infection and de- est behavior, then outward to others who tually from infected mothers to their chil- velopment of AIDS, today's AIDS pa- practice lower-risk behavior. Therefore, dren. The number of new HIV infections tients are a small fraction of those programs that prevent HIV among people annually in Ukraine has risen from fewer already infected who will eventually with many sexual partners or who inject than 2,1)00 in 1995 to 12,000 in 1996 and need care. drugs indirectly prevent many infections more than 14,000 in 1997. Most new among the whole population: this is the cases are among young injecting drug Early action can forestall a widespread most cost-effective way of preventing users. epidemic. If transition economies act an epidemic in its early stages. now, there is still an opportunity to avert HIVIAIDS is a very costly disease. Newly an epidemic that will drain resources There are two successful strategies for developed "triple-drug" antiretroviral away from other pressing health and changing high-risk behavior. First, infor- treatments have extended the lives of development objectives. A new World mation about how to prevent HIV infec- many AIDS patients in industrialized Bank report, "Confronting AIDS: Public tion can be highly effective and is countries. In the United Kingdom the Priorities in a Global Epidemic," argues essential. However, information alone drugs and medical and diagnostic ser- that governments have a key role in isoften notenoughtoinducepeoplewith vices to support one AIDS patient cost fighting AIDS. They should give priority the riskiest behavior to change. A sec- roughly $20,000 peryear. Middle-income to funding activities essential to stop- ond strategy is to lower the costs of safer countries, like Thailand, have been able ping the epidemic that the private sec- behavior-through programs that subsi- to reduce the cost to about $10,000 per tor has insufficient incentive to provide dize condoms and popularize their use, year by negotiating lower prices with on its own. Two key activities are par- and through "harm reduction" programs drug coDmpanies. In contrast, the aver- ticularly important for preventing an epi- that encourage injecting drug users not age level of health spending from public demic in transition economies. to share needles and to use sterile equi,o- and private sources in Eastern Europe ment. Thailand, which adopted a pack- and Central Asia is only $138 annually 1. Preventing infection among people age of programs to raise condom use per person. Clearly, even a few AIDS with the riskiest behavior. HIV tends to among brothel-based sex workers and © 1998 The World Bank TRANS!TION, Fehruarv 1998S their clients to nearly 100 percent, has who are among the last to be infected in early stages in which most transition reduced the number of men with other an HIV epidemic-pregnant women, countries find themselves is to invest STDs by 90 percent and has halved the blood donors, and people in the general vigorously in improved information and prevalence of HIV among young army population-instead of those most likely strong prevention programs that encour- recruits, from 4 percent to 2 percent. to contract and spread HIV early in the age people to adopt safer behavior while epidemic. For example, of 22 transition protecting them from discrimination. Many countries have popularized the use countries surveyed, more than 90 per- These countries can learn from the ex- of condoms through condom social mar- cent monitor levels of HIV among preg- perience of others and act now to avert keting programs, which sell condoms at nant women, while only a third monitor a tragic and costly epidemic that will oth- highly subsidized rates and employ HIV among STD patients, a quarter erwise exacerbate social ills, drain gov- widespread publicity to popularize their monitor injecting drug users, and only ernment finances, and draw resources use. Among the transition economies, one country had information about infec- away from other important economic and only Albania, the Russian Federation, tion levels among prostitutes. social objectives. and Uzbekistan had these programs in 1996 and condom use throughout the Governments, in any circumstances, Martha Ainsworth is a Senior Econo- region was low. Programs that lower the have to make important investments in mist in the Development Research costs of safer behavior among those who the health system simply to maintain the Group of the World Bank. She is co- inject drugs have succeeded in keeping same quality of care as before the HIV author, with Mead Over, of Confront- HIV infection at less than 5 percent in epidemic broke out-training of medical ing AIDS: Public Priorities in a Global cities like Glasgow (Scotland), Lund staff, adopting universal precautions to Epidemic (Oxford University Press for (Sweden), Sydney (Australia), Tacoma prevent HIV transmission within the the World Bank, 1997). Summaries are (United'States), and Toronto (Canada)- medical care system, and ensuring a available in Russian and the book will while in neighboring cities without these safe blood supply. be available in Russian in mid-1998. programs, HIV infection has soared. For more information, see the 'Eco- To sum up, the key to reducing the im- nomics of AIDS" web site: http:// Many countries have also tried to reduce pact of the HIV/AIDS epidemic in the www.worldbank.org/aids-econ/. risky behavior by raising its costs-by increasing the penalties for prostitution and New World Order drug use and imprisoning those involved. While enforcement actions have some- times reduced these social ills-though not eliminated them-such policies can You, tighten your belt! actually increase the transmission of HIV You, pay down your debt! and other STDs. Those who continue to You, we'll bail you out! engage clandestinely in these risky be- You, scrap those tariffs! haviors will be more difficult to reach with prevention programs. Unfortunately, such policies are found in many transition economies and are likely to exacerbate, not reduce, the epidemic. 2. Collecting information on the preva- _- lence of HIV and risky behavior. Design- - = ing effective prevention programs depends critically on an understanding of the patterns of risky behavior and the prevalence of HIV and STDs. In fact, this information is almost nonexistent in the transition economies. Further, to the From the Andy/TheStar/Johannesburg and World Press Review extent that HIV infection is monitored, governments prefer to sample people Cartoon from South Africa-Blaming the Messenger M TRANSITION, February 1998 © 1998 The World Bank Trarnsition-A Mixed Blessing for Women W A ithen Maria Slavov, a Bulgarian ployed and have suffered job losses at shops, photo-processing labs, knitwear attorney, applied for a job a few about 10 times the rate of men, accord- and mushroom-growing companies-are years ago, shewastold, "You're ing to one government report. The lay- run by women. just going to marry and have children. If offs could be critical for the 2.5 million there's a male candidate, he'll get the single-mother families in Russia. About Women have received nearly half of the position no matter how well qualified you 80 percent of the newly unemployed are loans made so far to small Russian busi- are." Klelija Balta, a former hydrogeology women. Many highly educated women: nesses by a $300 million revolving fund engineer in Bosnia-Herzegovina, wanted often those with higher degrees in engi- of the European Bank for Reconstruc- to become deputy director of her mining neering and physics, are told to take tion and Development. A number of in- institute. C)ne of her male colleagues dis- jobs requiring lesser qualifications. ternational investment funds have taken couraged her: "You are good, but we need stakes in female-owned businesses, in- a deputy cdirector to be a strong man." To Under communism women worked cluding a $1.5 million investment by Brit- get a job, women in most East European mostly in manufacturing and agriculture ish financiers in a fashion-design countries have to answer ads that specify or in government-funded offices and company in the Urals. First Woman East, "attractive female receptionist" or "girl scientific research institutes. Now those a new venture capital fund in London, under25." Women sometimes must prom- jobs, once guaranteed by the state, ei- plans to target companies owned and ise not to get pregnant for five years-or ther no longer exist or have gone to men managed by women across Central and if they do, to leave "of their own volition." during downsizing and gender-based lay- Eastern Europe, with a special empha- Says Slavov, "Even if you're highly edu- offs. Available jobs are more likely to be sis on Russia. Businesswomen are serv- cated, you still have to bring the coffee." in trade and tourism or in information, ing up crucial goods and services: financial, and social services-all of bakeries, magazines, media companies, In postcommunist countries such dis- which require new training that women textiles, language schools, and training crimination against women at work has are less likely than men to get. As Rus- centers for accountants and secretaries. not been uncommon since the fall of sian Labor Minister Gennady Melikyan communism. As these countries have put it a few years ago, "Why should we Since most new businesses operated privatized industries and established employ women when men are out of by women cannot be nurtured in incu- new market economies, labor demands work?" In Russia women's wages were bators-and since women face so have shifted and competition for jobs- 70 percent of men's in 1989; in 1995 they much discrimination and have so few and economic survival-has become had slipped to only 40 percent. connections to get ahead-East Euro- fiercely aggressive. "Women gained po- pean women seem aware of the impor- litical freedom, but they have to struggle For entrepreneurial women a way out of tance of banding together. In St. just as hard for economic freedom and this situation is to start their own busi- Petersburg, where rents can cripple a for job opportunities," concluded a recent nesses, despite the difficulties in obtain- startup business, a group of women conference held in Vienna, entitled Vital ing credit and the risks of trying to formed the Apparel Innovation Center, Voices: VVomen in Democracy. About survive alongside the black-market where designers rent cubicles for $50 300 women from the East and West dis- "shadow" economy. Business incubators a month or studios for $1 50. Shared as- cussed common concerns, including can help-these are large facilities that sets include pressing machines, a li- earning a living in a male-dominated job provide low-rent office space with ac- brary, and a marketing department. The market. Perhaps most difficult for work- cess to computers, fax, and copying ma- center's 15 small businesses are help- ing women has been losing liberal ma- chines and provide consultants and ing create jobs and fill a clothing gap ternity leave and free child care, businesstrainingcourses.Onesuccess- left after the breakdown of the city's kindergartens, and health care, formerly ful incubator, founded in Russia's once-booming apparel industry. provided by the state. Volkhov region, was initiated by the Alli- ance of Russian and American Women In Moldova the 27 chapters of the Unemployment and poverty is rampant at the request of the female mayor of Women's Association, a national orga- among women. In Ukraine 80 percent of Volkhov, with financing arranged by the nization, are giving financial assistance the jobless are women. In Russia women U.S. Agency for International Develop- and technological support to female en- now constitute 62.5 percent of the total ment. About 60 percent of the Volkhov trepreneurs. In the Czech Republic number of the officially registered unem- incubator's businesses-bakeries, print women make up 15 percent of parliament. © 1998 The World Bank TRANSITION, February 1998 m In Lithuania, where women constitute envisages a set of measures to overcome Based on press reports and on presenta- only 7 percent of parliament, a strong discrimination in personnel policies. But tions by Yekatenna Lakhova, Chairperson Women's Party is emerging. At present in the Russian government itself there is of Russia's Presidential Commission for there are more than 400 women's orga- only one female minister, and women are Women's Issues, and of Grace Kennan nizations of various types officially reg- not represented at all in the Security Coun- Wamecke, Chairman of SO VUS Business istered in Russia. The Russian president's cil or the Defense Council, Russia's key Consultants, New York. decree on enhancing the role of women decisionmaking bodies. A Review of Women's Emancipation in Hungary: Limited Successes Offer Some Hope by Katalin Medvedev Women have always outnumbered men in Hungary. Yet women workers returning from matemity leave, in their original post historically have not been empowered by the strength of their or in a comparable one. Women could not just be laid off. numbers and have exerted little influence over the political In the 1970s participation in the semiprivate, second economy, decisionmaking process. At present only about 11 percent of ' a . . '. I as a means of enhancing economic well-being, became wide- parliamentary representatives are female. With the resignation of the labor minister, no woman currently serves in the national sad. ally ever physic cpble man moie '~ ~ ~ ~~~mr posi taking a second and even a third job to bring home more govemment. In local politics the picture is slightly more money. Women performed their regular jobs but also man- tive: women have been elected in relatively high numbers to aged the household and took care of the children. This divi- serve as mayors and have been appointed as senior officials, sion of labor was a logical extension of Hungarian patriarchal although only in small and less-developed cities and villages, society Thefamiliar patterns-women's lower earning power, Beginning in the early 1950s under communism women were coupled with women's entitlement to lengthy maternity leave, integrated into the wage-eaming labor force ever-growing num- that is, being paid essentially to be full-time mothers-was a bers. Industries needed cheap, unskilled and semiskilled la- convenient arrangement for the whole society, as it provided bor, and women-most of whom had stayed at home before "free" money for families and averted official unemployment. the war-were now forced to become second-wage earners. Thus women, entrapped in their biological role as mothers, Also during this period women attained the vote (1948), and cemented the traditional division of labor in families and con- the universities, which had discriminated against women for tributed to their own economic devaluation. When full employ- so long, finally opened their doors to female students. Thus, ment became a nuisance, beginning in 1990, women became paradoxically, in the midst of the darkest Stalinist oppression, the first targets of enterprise downsizing, and the longstanding for most Hungarian women the road to upward mobility and maternity leave payment, frozen in an inflationary environ- power opened up for the first time. Ovemight women became ment, practically lost any remaining value. professionals, leaders, and decisionmakers, performing high- And what is the situation today? An eight-member govern- profile, public roles without prior experience. Despite these in- ment commission was established in 1997 to guarantee equal roads, however, women's pay in the 1960s and 1970s-in the opportunities for women. As the new labor minister has ad- same job-was roughly 75 percent that of men, the largest mitted, even though discrimination on the basis of sex is disparity between male and female wages in Eastern Europe. illegal in Hungary, women still earn 10 to 15 percent less than men employed in the same positions. Two-thirds of women in Full employment (in reality, there was hidden unemployment the country work in so-called "female positions." Women, rela- within factories) was threatened in the late 1960s, when eco- tive to men, still play little role in public life and hold few nomic reforms forced firms to deal with the labor situation. leading positions. In business there is this encouraging sign: Women became most vulnerable to layoffs. The government about 40 percent of new businesses are being started by could not officially tolerate unemployment, however. Against women. But official support for the betterment of women's this background, perhaps the most important "Communist lives has been discouraging: efforts to combat poverty among privilege" women in Hungary enjoyed-the paid, three-year women, to improve health care and social welfare benefits for maternity leave-was introduced. It was cheaper for the state women, and to fight violence against women, were alloted a matenit leve-as ntrducd. t ws ceapr fr te satepathetic $160,000 in the 1997 national budget. to pay meager maternity allowances than to create jobs for women. On the positive side, however, this system did offer The author is Professor at the Teachers' Training College of job security. Employers were required to reemploy female the University of Sciences, "Eotvos Lorand," Budapest. v TRANSITION, February 1998 © 1998 The World Bank Milestones of Transition Continued from page 11 Albania conducted by the Center for Democratic Studies. Eighty-six percent of the re- 3.5 billion, but the second Ecu 3.5 bil- None of Albania's five largest pyramid spondents said bribes are essential to lion will be granted at the bank's own investment companies is able to pay obtain proper medical treatment. Sev- risk, EIB president Sir Brian Unwin an- back its debts, according to the French enty-four percent said bribes are readily nounced. auditing firm Deloitte & Touche. A report accepted by custom officers, while 63 handed to the government on February 2 percent named judges and 56 percent European Commission approved ac- concludes that 56 businesses belonging police as bribe-takers. Fifty-seven per- cession partnership programs that topyramidfirmsgenerateincomebut273 cent of the respondents believe "it is a will lead to EU membership, including do not. It notes that the pyramids as a waste of time" to report cases of corrup- special preparatory plans for the 10 whole continue to generate losses. The tion, while 31 percent said paying bribes Central and East European candi- VEFA investment company is losing was "bad, but unavoidable." dates. The individual governments $200,000 a month because of poor man- have until late March to approve na- agement. It has only $7 million in assets. Croatia tional programs that include a timetable It is believed to have received more than for implernenting measures necessary $300 million in recent years from some Croatia is to boost employment and to extencd the European standards to 90,000 investors. The French company ease tax burdens on the economy, such areas as liberalization of capital is investigating recent Albanian media Prime Minister Zlatko Matesa an- and financial services, consumer pro- reports that VEFA owner Vehbi Alimucaj nounced. Further reforms are in the pipe- tection, domestic and judicial policy, has $40 million in bank accounts in line to improve a fragile social situation. agriculture, transport, employment, en- Greece. Meanwhile, 200,000 creditors "We are working intensely on prepara- vironmental protection, and regional have reported their claims to a govern- tions for the reform of the pension sys- policies. ment office. tem which, I must stress, is vital for Croatia," he said, noting that improving Baltic banks grew in 1997. Banks got Bosnia-Herzegovina the status of some 900,000 pensioners bigger throughout the Baltics last year. hinged on revamping the whole system. The aggregate total assets of Estonia's First IGA Guarantee in Republika Another project being prepared involves commercial banks at the end of last Srpska. IGA, the Investment Guarantee changes to public health services that year was 38.76 billion kroons ($2.7 bil- Agency of Bosnia and Herzegovina, has focus on providing free basic care, par- lion), up 77 percent from end-1 996. The issued its first political risk guarantee for a ticularly to children and the elderly, total assets of Latvian commercial business transaction in Republika Srpska Matesa said, adding that both projects banks at the end of last year was 1.85 (RS). The DM 3.7 million guarantee has are being conceived in consultation with billion lats ($3.1 billion), an increase of beenofferedtoGermany'sSiemens,which the World Bank, which has promised 63 percent for the year. The total as- will provide medical equipment and sup- considerable funding to back up public sets of Lithuanian commercial banks at plies for several hospitals. IGA-an inde- sector reforms (although preparations the end of last September was 8.68 bil- pendent corporation owned by the have been very slow). lion litai ($2.2 billion), up 25 percent government of Bosnia and Herzegovina- from September 1996. In spite of the has offered 10 companies guarantees for Czech Republic rapid growth, the Baltic banking sys- a total of DM 23 million, including tempo- tem as a whole is still relatively small. rary import of machinery to rehabilitate the Modest 1.6-2.2 percent economic For example, the combined assets of Sarajevo Airport, power plant equipment, growth is expected in the Czech Re- Finnish commercial banks at the end parts for locally assembled radiators and public, in 1998, according to the Sta- of June 1997 was 515 billion Finnish heaters, and medical equipment. tistical Office. However, this year's trade marks, about $100 billion. At year's end, deficit is now forecast at 113-123 billion the largest Baltic bank in terms of total Bulgaria koruny ($3.2-$3.5 billion), as against the assets was the Estonian Hansapank, office's earlier 121-129 billion koruny fig- with a balance sheet of 9.6 billion kroon Corruption among Bulgarian officials ure. Although the weakening currency ($680 billlion). is rampant, suggests an opinion poll will boost exports, this appears unlikely © 1998 The World Bank TRANSITION, February 1998 m to compensate soon for the reduction in $306 in Hungary. Switzerland tops the eased to 10.5 percent, well below levels domestic demand that resulted from last list with $4,210 in 1995, followed by the in many European Union countries in- year's austerity measures and that will U.S. with $3,644 and Germany with cluding France and Germany. The cur- besustainedunderthenewgovernment. $3,089. Welfare Minister Mihaly Kokeny rent account deficit, at roughly 3.4 said health spending will not decrease percent of GDP in 1997, was below mid- Estonia in real terms this year and the ministry's year forecasts and its growth rate has long-range objective is to see that Hun- slowed. Foreign direct investment last Estonia's foreign trade deficit was up gary devotes at least 7 percent of GDP year hit $6.6 billion, an annual record for almost 66 percent last year, compared to health purposes, as in West European any country in the region. Poland has with 1996 levels. Exports totaled some countries. pulled in $20.6 billion in foreign direct 41.3 billion kroon and imports 65.3 bil- investment since 1989. Analysts expect lion kroon (the corresponding figures for Poland another big jump this year as the 1996 were 26 billion and 40.5 billion economy of 39 million consumers con- kroon). Estonia's main export partners Foreign capital inflows put pressure tinues to grow. were Russia (17.8 percent), Finland on Poland. Foreigners' appetite for Pol- (16.8 percent), and Sweden (13.4 per- ish investments has pushed up the zloty Romania cent), while most imports came from in inflation-adjusted terms this year. (The Finland (30.9 percent), followed by Rus- zloty ended 1997 at 3.51 to the dollar Romania's GDP declined by 6.6 per- sia (11.7 percent), Sweden (9.6 percent), and now hovers at around 3.54.) The cen- cent and industrial production by 5.9 and Germany (9.2 percent). Estonia's tral bank has intervened heavily to slow percent last year, data released Febru- main exports are machinery, electrical the currency's appreciation. A new bank- ary 9 by the National Statistical Com- appliances, and textiles. ing law that takes effect this spring al- mission show. Investments were down lows the central bank to slow portfolio some 19 percent. Inflation in 1997 was Hungary flows through compulsory bank depos- 151.7 percent, almost double the level its by investors and delayed redemption the previous year. The 1998 economic Budapest is among the world's cheap- of proceeds from short-term invest- program envisages an annual inflation est cities. The Economist Intelligence ments. So far this year, the Warsaw Stock of 37 percent (compared with 151 per- Unit found in a recent study that Budapest Exchange's WIG index has surged 14 cent in 1997) and a budget deficit equiva- is one of the world's cheapest cities to percent. International investors also lent to 3.6 percent of GDP (4.5 percent live in for those living on dollars, as the take advantage of the country's high in- in 1997). Prime Minister Victor Ciorbea cost of living here is 49 percent of New terest rates (52-week Treasury bills auc- announced that this yearwill see the end York levels. Budapest was 116th on a list tioned recently at a yield of 23 percent). of GDP decline and the start of eco- of 120 cities surveyed. The world's most The $4 billion that is now invested in nomic recovery, together with stabiliza- expensive cities are Tokyo, at 154 per- Polish equities and Treasury securities- tion and the acceleration of privatization: cent of NewYork prices, and Osaka-Kobe, writes Daniel Michaels of the Wall Street about 1,600 companies will be sold out at 148 percent. Only Tripoli, Bombay, New Journal-isn't huge by global standards, of a total of 2,744 (including the huge Delhi,andTehranarelessexpensive.The but relative to Poland's small capital state monopolies ROMTELECOM, EIU says costs of living are influenced markets, it is having a big impact. Ana- ROMGAZ, and the electricity company by such factors as imports dependence, lysts expect up to $3 billion more in port- RENEL), as will three large banks. Forty taxation, land prices, wages, population folio investments during 1998. percent of the budget outlays will be ear- density, economic development, foreign marked for social protection. exchange policy, and imports policy Limiting the 1998 budget deficit to 1.5 (whether imports can compete with do- percent of GDP and targeting GDP CIS Countries mestic products). growth at 5.6 percent, Finance Minister Leszek Balcerowicz recently pushed an Kazakhstan Hungary is last on an OECD list of austerity budget through Parliament. per capita health expenditure in 27 Poland'sgrossdomesticproductgrew6.9 Kazakhstan has halted oil and gas countries. The rankings, published in percent in 1997, its fourth straight year privatization until the government has the German medical publication of growth above 5 percent, while inflation selected a "strategic partner" for the na- Krankenpflege Joumal, show that annual dropped to 13.2 percent last year from tional oil company, Prime Minister Nurlan per capita spending on health is only 18.5 percent in 1996. Unemployment has Balgimbayev announced on February 10. * TRANSITION, February 1998 © 1998 The World Bank He deniedl that Kazakhstan is unable to Salo announced in early February that company by buying the output of their fill quotas for oil to the Caspian Pipeline production in the defense industry de- units at knock-down prices and resell- Consortium project, noting that the coun- clined by 16.4 percent in 1997 and pro- ing through the parent at world market try last year produced a record 27 mil- duction of arms and military hardware levels.) Sidanco is charged in a sepa- lion tons of oil and expects that amount by 31.2 percent. (Overall industrial pro- rate complaint with allegedly diluting to grow to 170 million tons by 2020. duction was up 3 percent for the year.) stock held by minority shareholders, Salo attributed the decline to govern- includingParibasandtheemerging-mar- Kazakh GDP grew 2 percent last year ment debts to the sector. He noted that ket fund, Hermitage Capital Manage- and reached 1.68 trillion tenge (about $22 spending on conversion programs for ment. billion), Yeryan Utembayev, chairman of defense enterprises totaled just 11 per- the Agency for Strategic Planning and cent of budget targets in 1996 and virtu- (Minority shareholders were excluded Reform, announced. Food production ally nothing in 1997. Duma Defense from participating in a le-bond issue last grew by 28 percent, ferrous metals by 24 Industry Conversion Committee Chair- December. Sidanco is 85 percent owned percent, and natura! gas by 20 percent. man Georgii Kostin said that output in by Oneximbank and affiliates such as Inflation last year reached 11.2 percent the industry has fallen elevenfold over the Moscow investment house, Renais- (17 percent had been forecast). However, the last six years. According to Izvestiya sance Capital Group. the Finance Ministry released data show- on February 14, the government is plan- ing production declines of 17.5 percent ning to reduce the number of defense Russia increased import duties on in the oil -efining sector, 14.7 percent in enterprises from 1,700 to some 600 by meat, meat products, pasta, certain milk electricity, 29.8 percent in mechanical en- the year 2000. products, fresh and canned vegetables, gineering, and 34.3 percent in the chemi- leather goods, knitwear and textiles, and cals sector. According to the same data, The proposed tax code would reduce kitchen utensils and bathroom fixtures. 55 percent of the country's industries the overall tax burden on the The duties are charged as a percentage made no profit in 1997. economy by 60 billion rubles ($10 of the declared price of the item, but at billion) or some 2 percent of GDP, no less than a specified ECU-denomi- Moldova Deputy Finance Minister Mikhail Motorin nated amount. The first such duty was pointed out on February 10. But applied in spring 1996, and such duties Of Moldova's 750,000 pensioners, 80 KommersantDailyarguedadaylaterthat now are applied to nearly all food im- percent receive pensions totaling a the proposed code would increase the ports. For example, the duty for beef is mere 60-1100 lei ($13-21) a month, noted tax load on most individuals by 3-5 per- presently taxed at a rate of 15 percent President Petru Lucinschi on February 9, cent. The newspaper noted that the code of the price paid, but no less than ECU calling on the public to render every pos- would maintain the value-added tax of 0.2 a kilogram. sible assistance to the elderly. He said the 20 percent on most goods and maintain Pension Fund was expected to have rev- or raise excise duties on alcohol and to- Russia's Duma approved an amend- enues of 3 million lei a month to pay out bacco products, gasoline, and some mentto the central bank lawthat would pensions but that it receives less than half automobiles. compel the Bank of Russia to retain that amount. Pensions arrears, which 12 partial ownership in Sberbank (currently months ago amounted to 315 million lei Russian oil firms face investigation holding 55 percent), Vneshtorgbank (97 ($70 million), were reduced by 90 percent, of alleged shareholder abuses. percent), and five banks abroad. The for- and the government hopes to make all Russia's Federal Securities Commission eign banks are Moscow Narodny Bank, back payments by the end of March. will investigate, in separate probes, com- London (89 percent); Eurobank, Paris (78 Lucinschi said that the situation can be plaints lodged by Western investors that percent); Ost-West Handelsbank, Frank- changed only after an improvement in the two of the country's leading oil holding furt (51 percent); Donau Bank, Vienna economy. It has become necessary to set companies-Yukos and Sidanco-are (51 percent); and East-West United up charity funds that will accept donations violating minority shareholders' rights- Bank, Luxembourg (49 percent). The from both Moldova and abroad, he said. reported Matthew Brzezinski of the Wall central bank would be free to sell shares Street Journal. Yukos is allegedly strip- in any of the above-mentioned banks, Russia ping assets from its subsidiaries. (It is including to foreigners, but would be re- common practice in the Russian oil in- quired to retain at least a 50 percent Defense industry in steep decline. dustry for holding companies to transfer stake in certain banks. Under the present Deputy Elconomics Minister Vladimir value from subsidiaries to the parent central bank law Russia's central bank © 1998 The World Bank TRANSITION, February 1998 0 should divest its holdings in other banks ing oil and gas projects were particularly Czech Republic fell to $1.1 billion. by the beginning of 2000. active last year. Investments in hydro- Ukraine, with just $466 million, also carbon resource development doubled seemed to lack investor appeal. FDI to Number of banks in Russia falls. At from the 1996 level, to exceed $5 bil- Romania ($1.3 billion) and Bulgaria ($681 the beginning of 1998 Russia had 1,675 lion, and was, forexample, the main rea- million) was up. In the Baltics, FDI lev- banks and 22 other credit institutions. In son for FDI flows to both Kazakhstan els continued rather stable, with Latvia 1997 the number of banks fell by 333, as ($3.5 billion) and Azerbaijan ($1.5 billion). receiving $142 million, Estonia $106 mil- large Moscow banks move into the re- Russia outpaced Hungary ($1.5 billion) lion, and Lithuania $46 million. gions to grab new business. Foreigners for the first time, with FDI inflows of $2.2 had participation in 145 credit institutions. billion. Poland continued to attract FDI We appreciate the contributions of FRE Of these, foreigners had 100 percent with $3.2 billion. Investments in the correspondent Robert Lyle. ownership of 16 credit institutions and a stake of more than 50 percent in 10 oth- ers. Many Russian banks are on a shaky World Bank/IMF Agenda footing. Russian Central Bank Deputy Chairman Denis Kiselyov said that 200- 300 Russian banks are "unstable, though Japanese Professor Appointed Chief commitments have totaled approxi- they only represent about 4 percent of Economist for East Asia Region mately $4.35 billion for 40 projects. the assets held by the entire Russian banking system. The assets are concen- Masahiro Kawai, Professor of Eco- ... And its Path Breaking Pension Re- trated in Russia's 200 largest banks, nomics at the University of Tokyo's In- form which control 88 percent of assets. stitute of Social Sciences, has been appointed Chief Economist of the Earlier, on January 27, the Bank ap- Ukraine World Bank's East Asia and Pacific proved a $150 million public sector Region (which includes China and adjustment loan (PSAL) in support Ukraine's Parliament ends freeze on Vietnam), and Sector Manager for the of Hungary's pension reforms. This privatization. Lawmakers on February Poverty Reduction and Economic involves a switch from a public pay- 13 approved a privatization program, Management (PREM) Sector Unit. as-you-go (PAYG) system to a three- ending a legislative ban on the sale of Professor Kawai's most recent book pillar system that will maintain a state assets. The program, submitted by is entitled: The New World Fiscal Or- downsized PAYG system and the PresidentLeonidKuchma,allowsforthe der: Implications for Industrialized network of voluntary pension funds privatization of the energy and telecom- Nations. His works have covered and will introduce a new pillar of pri- munications sectors but does not per- such diverse fields as international fi- vate pension funds that will be man- mit the sale of farmland. Prime Minister nance, open-economy macroeconom- datory for new entrants into the labor Valery Pustovoytenko said he expects ics, economics of commodity and force as of July 1, 1998. Employees privatizationto add about 1 billion hryvna futures markets, housing demand, who have already acquired pension ($521 million) to state coffers this year. and Asian money and capital markets. rights under the current system, and Parliament put a freeze on the those who enter the labor market by privatization process in November after World Bank to Support Hungary's July 1998, will have the option of several reports of inefficiency and cor- Higher Education... staying in the reformed PAYG or ruption. In other news, the National Sta- switching to the new system. The tistics Committee said on February 13 The World Bank approved February 26 new system began operating on thatUkrainereceived$760millioninfor- a $150 million loan to Hungary in sup- January 1, 1998. Workers will be eign investment last year. That is a 42 port of the government's comprehensive given two years to exercise their percent increase over the previous year. reform program for higher education. To right to switch to the new system. be eligible for support, universities and At present, about 250,000 people Transition Economies other institutions will have to introduce have chosen voluntarily to partici- a credit system, reduce compulsory lec- pate in the new system, Social as- Energy sector drives eastern FDI. The ture hours, impose tuition fees, and sistance will be introduced for those Economist Intelligence Unit estimates implement student financial aid. Since who do not qualify for a minimum that foreign investors involved in financ- Hungary joined the World Bank in 1982, pension. E TRANSITION, February 1998 (3 1998 The-World Bank Latvia Generates Methane from Land- tor, the World Bank on January 21 ap- adequate sanitation. The Bank's $30.96 fills proved a $199 million IDA credit. A por- million IDA credit (approved on Febru- tion, $10 million, will help restore ary 18) will address the inadequate and With the help of a $7.95 million World electricity distribution networks devas- deteriorated water supply system of Bank loan (approved on February 26) and tated by Typhoon Linda in 10 southern Cambodia's two largest cities, Phnom a $5.12 million grant from the Global provinces. Penh and Sihanoukville. Environment Facility Trust Fund (GEF) the Latvian government is developing a ... Ukraine, to Set Up Treasury System ...FYR Macedonia, to Restore Hydro- locally managed solid waste manage- Electric Power Plants ment system through the collection of To help design and implement a fully methane gas generated from landfills. functional, automated treasury system A $35 million World Bank loan ap- (As a result of decentralization, local that would serve as an effective instru- proved on February 17 will help governments are largely responsible for ment for budget execution and cash Elektrostopanstvo Na Makednoija providing municipal services, including management, the World Bank approved (EMS) restore the six largest hydro- water, sewerage, and solid waste col- on February 24 a $16.4 million loan. power plants in Macedonia, which rep- lection and disposal.) Using the gas as Since joining the World Bank in 1992, resent 91 percent of the country's an energy resource will reduce green- Ukraine's commitments have totaled hydropower capacity and begin the re- house gas emissions. Since Latvia over $2 billion for 13 projects, including habilitation of the electricity distribu- joined the World Bank in 1992, commit- 2 guarantees. (Ukraine's Deputy Prime tion system. Since FYR Macedonia ments have reached $253 million for 10 Minister in charge of economic reform, joined the World Bank in 1993, Bank projects. Serhiy Tyhypko, expressed hope that the commitments have totaled roughly World Bank will provide over $1 billion $375 million for 12 projects. Support to Armenia's Small Farms... in 1998 to help prop up market reforms in the country. "About $650 million will Recommendation to Slovenia: Speed The World Bank's new $14.5 million IDA go to cover our deficit, while more than Up Reform credit to Armenia (approved on Janu- $400 million will go to investment ary 27) will support private farming and projects," he asserted.) The IMF and the World Bank have rec- agroprocessing and strengthen agricul- ommended that Slovenia accelerate tural institutions and services. A net- ...Georgia,toPreserveHistoricSites... structural reforms to ensure steady work of village credit associations will growth in the future, Slovenia's Finance be set up to provide loans and financial Before independence, tourism in Geor- Minister Mitja Gaspari said, back from services to small farmers and rural gia, centered around the city of Tbilisi a visit to Washington. Slovenia should microenterprises. An estimated 35 per- and the Black Sea coast, attracted large begin privatizing public sector compa- cent of the credit proceeds will be numbers of visitors from Eastern Europe nies, accelerate pension reform, elimi- passed on to private banks for periods and the former Soviet Union. Since the nate the budget deficit, and liberalize of 10-15 years at a floating LIBOR- breakup of the FSU, Georgia's tourism foreign investment. The two institutions based interest rate for onlending to has collapsed and fiscal constraints also urged Slovenia to reform the insur- small-scale farmers and other rural en- have prevented essential maintenance ance and banking sectors, increase la- trepreneurs. The credit will be repayable of cultural sites and visitors programs. bor market flexibility and gradually open on standard IDA terms with a maturity A new IDA credit of $4.49 million (signed up to foreign competition. (Slovenia's of 35 yeEars, including a 10-year grace on February 18) will help the country to GDP is expected to have grown by 3.7 period. Since Armenia joined the World restore historic sites, including Tbilisi's percent in 1997. Inflation has remained Bank in 1992 and IDA in 1993, IDA com- old town. "stuck" in the annual 7-11 percent range mitments; have totaled approximately since August 1995.) $314.5 billion for 13 projects. ... Cambodia, to Provide Running Wa- ter, and ... World Bank Backs Bulgaria's Push for ... Vietnam's Electricity Sector... More Reform Water supply in Cambodia has been To improve Vietnam's electricity trans- devastated by years of war and neglect. Director of the World Bank's team for Bul- mission and distribution network and Only 32 percent of the population has garia, Kenneth Lay late January outlined support restructuring of the power sec- access to clean water and 16 percent to current priorities for the World Bank in © 1998 The World Bank TRANSITION, February 1998 @ support of Bulgaria's ongoing efforts to involved directly in development projects. On January 22 the Bosnian joint presi- foster strong, private sector-led growth The incentives for interested businesses dency and the World Bank signed two and a sustainable social safety net. would be to improve their standing with credit agreements, worth $27 million dol- These include: reform of the state ad- local communities and employees, rather lars, aimed at financing reconstruction ministration, legal and judicial systems, than to earn profits on the projects them- projects. The first agreement ($17 mil- creation of an efficient social safety net selves. The projects might also encour- lion) would back up investment in vari- and pension system, as well as nnea- age participating companies to adopt ous sectors in the Serb republic, such sures to reform the electric power indus- better practices on matters such as edu- as the reconstruction of housing, water try, and improve energy efficiency in cation and sanitation. Initially, the scheme supplies, sewerage systems, electrical district heating systems. The World Bank is to last three years, but the Bank hopes systems, and agriculture. The second will also be active in reform of the agri- the pilot projects will be followed by larger agreement, ($10 million) would be used cultural sector, urging the government programs. to repair the gas supply in Sarajevo, to lift remaining trade restrictions for land which was seriously damaged by the and commodities. The director also rec- Rory O'Sullivan: Bosnia Faces Cru- Serbs' siege from 1992 until 1995. ommended accelerated completion of cial Test in 1998 the privatization process, especially the Political Risk Guarantee for Albania sale of the five largest state banks. Bosnian political leaders must adopt sweeping economic reforms in 1998, in- A $10.25 million IDA credit, approved on Vietnam Debt Settlement cluding reforms of privatization, the fi- February 10, will help establish a politi- nancial sector, and public finance, to cal risk guarantee facility for enterprises To help finance a settlement between sustain a healthy postwar growth rate and their financiers that want to engage Vietnam and its London club creditors fueled by reconstruction aid, Rory in commercial activities in Albania. The signed in December 1997, the World O'Sullivan, head of the World Bank's government has established an indepen- Banking early January approved a $35 Sarajevo Office, noted. Bosnia's dent corporation, the Albanian Guaran- million IDA credit. Vietnam will settle all economy grew at a rate of 50 percent tee Agency (AGA), to manage the its outstanding private uninsured com- in 1996 and about 35 percent in 1997. facility. The project seeks to revive pri- mercial debt in arrears, totaling $797 mil- Some $1.5 billion in reconstruction aid vate manufacturing in Albania, which is lion. Bankers expect Vietnam to issue dispersed by industrialized countries recovering from a financial crisis, by re- Brady Bonds as part of the settlement. has been the primary catalyst for the ducing the risk to potential investors and Thus, major impediment to Vietnam's high growth rate. Bosnia still lacks ma- boosting investor confidence. Since Al- access to international capital markets, jor foreign direct investment. Only a bania joined IDA in 1991, 25 projects and particularly to trade credits, will be proper legal framework can attract that have gone forward with commitments removed. Vietnam's total hard currency investment and boost exports. totaling approximately $313 million. debt amounted to an estimated $5.4 bil- Privatization in Bosnia's Moslem-Croat lion, or about 23 percent of GDP, at the federation has been held up because end of 1996. Debt denominated in trans- political parties have yet to adopt for- I ferable rubles accounted for about TRIO eign investment legislation as well as billion and was owed mostly to the laws that would clean up the balances former Soviet Union. The government is sheets of insolvent state enterprises currently negotiating about this obliga- and banks. Auctions for small-scale __ tion with the Russian government. privatization in the federation could be- - gin as soon as April if the necessary / Business Partners for Development legislation is adopted, O'Sullivan pointed out. He added new progress is _4 British Petroleum is the first company to expected in the Republika Srpska in have agreed to join the World Bank's new 1998 following the appointment of a initiative, "Business Partners for Devel- dynamic new government headed by opment," which will initially involve Mr. Dodic. This part of Bosnia is now projects in education, youth, water, and expected to emulate the high growth 5calpel, forceps. . . sorry about the natural resources across 10 countries, rates achieved by the Federation in staffcutbacks." and will induce private enterprises to get 1996. From the World Press Review. M TRANSITION, February 1998 © 1998 The World Bank Conference Diary For the Record 3811-324-6041, fax 3811-324-0673, Registration is required. Email: ecpol@afrodita,rcub.bg.ac.yu Information: Dr. Adrian Smith, School of ECPD Permanent Study Group on Social Sciences, University of Sussex, Transition and Privatization Upcoming Falmer, Brighton, BNI 9QN, United King- October 24-25, 1997, Sveti Stefan, FR dom, tel. 1273-606755, fax 1273-673563, Yugoslavia Annual Meeting of the German Soci- Email: A.M.Smith@sussex.ac.uk Organized and sponsored by the Euro- ety for Research on Eastern Europe Change Management-Business Cul- pean Center for Peace and development March 12-14, 1998, Bremen, Germany tures for the 21st Century: Compar- (ECPD) of the University for Peace, es- . ing the European Experiences of tablished by the United Nations. Focus Organizer Deutsche Gesellschaft fuer Hungary, Poland, Czech Republic, and was on the results of privatization in the Lsteupakun. Germany East European countries and the former Lanuag: 9 german March 19, 1998, Kassel, Germany republic of Yugoslavia, in light of compara- Topics: Sociology of transformation in tive experience of privatization, with par- Eastern Europe: state and social di- Organizer: Ost-West-Wissenschafts- ticular reference to development and new mensions. zentrum. information available since the first meet- Information: Deutsche Gese/lschaft fuer Language: German. ing of the Group, held in December 1995. Osteuropakunde e. V., Schaperstr. 30, Information: Irma Rothley, Stephanie 10719 Berlin, Germany, tel. 49-30- Winterhagen, OWV4Z, HollaendischeStr. In assessing the advantages and disad- 21478412, fax 49-30-21478414, Email: 36-38, 34109, Kassel, Germany, tel. 49- vantages of different methods of dgo@zedat.fu-berlin.de 561-804-3609/3567, fax 49-561-804- privatization, the primary concern ap- 3792, Email: gorzka@hrz. uni-kassel. de peared to be minimizing social costs. Par- ta teb n Soc C in ticipants agreed that more research was the New Eastern Europe Energy in the FSU: Industrial Struc- needed in order to arrive at reliable com- March 12-14 1998 Bremen, Germany ture, De-monopolization, Corporate parative indicators of the relative effi- Governance and Financing-The ciency of privatized firms. They Organizer: German Society for East Microeconomics of Transition recognized that short-term results of European Studies. March 20-21, 1998, Oxford University, privatization could differ significantly from Topics: Categories and concepts in the St. Antony's College, United Kingdom discussion: revolutions and continuities- those obtainable in the longer term, partly tescial basior the considatiorn depending on the rate of progress of in- the social basis for the consolidation of Organizers: The Russian and East Eu- stitution building, which is essential for political systems in Eastern Europe; The ropean Centre, St. Antony's College, efficient functioning of a private sector- state dimension: the nation-state-power Oxford; and The Energy Institute, Col- oriented economy. A functioning capital structures and constitutionality based on lege of Business, University of Hous- market, reliable monitoring, and effective the example of Ukraine. ton; sponsored by British Petroleum. regulatory institutions were considered to Information: Deutsche Gesellschaft fuer be of decisive importance. The confer- Osteuropakunde e. V., Schaperstr. 30, The conference will bring together a mix ence participants agreed that strength- 10719 Berlin, Germany, tel. 49-30- of academic economists, consultants, ening corporate governance was 21478412, fax 49-30-21478414, Email: corporate representatives, and govern- indispensable for successful privatization. dgozedatfu-beriinde ment officials and advisers to discuss Foreign finance in the form of aid, credit, Regional Inequality in an Enlarged policy, update information, and suggest or investrnent is crucial. In some cases Re: Inequal inoan and ways of analyzing the impact of corpo- social assets were offered to foreign Europe Regional Performance and rate governance problems (including is- buyers at unjustifiably low prices with- Policy Responses sues relating to Financial Industrial out adequate transparency and ac- March 12-13, 1998, Brighton, England Groups and corporate finance) on the countability. energy sector of FSU countries. The Information: Ms. Gordana Hofmann, Organizer: Sussex European Institute's discussion will deal mainly with oil and ECPD Tsrazie 41 11000 Belgrade, tel. Centre on the Changing Political gas, because of the potential of these E D ra e 41,1100 Belgrae,tel Economy of Europe. "leading sectors" to promote economic (C) 1998 The World Bank TRANSITION, February 1998 U recovery, attract foreign capital, and Organizer: Hungarian Small Business Topics: Modernization of Management: create new corporate governance Association. Trends, Problems and Possibilities; Ser- structures. Fee: 250 ECU until Jan. 31 and 300 ECU vice Management and Marketing; The Information: Carol Scott Leonard, St. thereafter. Challenge of European Integration for Antony's College, Oxford OX2 6JF, tel. 44 Information: Hungarian Small Business Eastern European Countries: Research 1865-284767, fax 44-1865-310518, Email: Association, Szeherut. 7,1021 Budapest Needs and Policy Implications; Regional carol.leonard@economics.ox. ac.uk, or or P.O. Box 132, 1502 Budapest, Hun- Development: Cooperation by Universi- Paul Gregory, Department of Economics, gary, tel.fax 36-1-319-3159/275-3513, ties, Business and Government; Mod- University of Houston, Houston, Texas Email: soko@econ.core.hu ernization of Education for Knowledge 77204-588Z fax 1-713-661-1968, Email: and Information Society; Sociology's 74771.1300@Compuserserve.com; or Tenth Annual Bank Conference on Role in Restoring the Public Trust; Prob- Jochen Wernuth, Deutsche Bank, Mos- Development Economics (ABCDE) lems of Gender Equality in the Contem- cow, Russia, tel. 7-095-244-9538. April 20-21, 1998, Washington, D.C., porary World. United States Fees (paid upon arrival): Conference fee The Euro and Eastern Europe (includes participation, conference ma- March 23, 1998, Frankfurt am Main, Welcoming address will be given by terials, cocktail party, coffee breaks, Germany James D. Wolfensohn, President of the opera ticket): for students and partici- World Bank, the opening address by Jo- pants from Central and Eastern Europe Organizer: Hessian State Center for Po- seph E. Stiglitz, keynote address by $50, for other participants $100; Indi- litical Education. James Tobin, and tenth anniversary ad- vidual cultural program, May 3, $30; Language: German. dress by Stanley Fischer. The themes of Closing Gala Party, $30. Information: Hessische Landeszentrale the conference sessions are: Is Geogra- Information: Ruta Aidis, Email: fuer politische Bildung, Referat VI, phy Destiny? (Paul Krugman and John raidis@pub.osf.lt Rheinbahnstr. 2, 65185 Wiesbaden, Ger- Luke Gallup/Jeffrey Sachs), Competition many, tel. 49-611-99197-26. and Regulation Policy in Developing Coun- Poland: Legal Conditions for Invest- tries (Paul Joskow and Jean Jacques ment and Trade Has Russia Finally Turned a Political Laffont); Financial Market Liberalization May 7, 1998, Koblenz, Germany and Economic Corner? in Developing Countries: Theory and Prac- March 27-29, 1998, Harriman Institute, tice (Bruce Greenwald and Asli Demirguo- Organizer: East-West-Institute, Koblenz New York, United States Kunt/Enrica Detragiache);,and Ethnic University. Conflicts (Donald L. Horowitz and Paul Information: Anette Kasten, East-West- Organizers: Davis Center for Russian Collier). Participation by non-Bank and Institute, Koblenz University, Rheinau 1, Studies at Harvard and the Harriman non-IMF staff is by invitation only. The 56075 Koblenz, Germany, tel. 49-261- Institute of Columbia University. conference is sponsored by Joseph E. 9119-721, fax 49-261-9119-722. Topics: After Yeltsin, Who?; NATO Ex- Stiglitz, Senior Vice President Develop- pansion: What Next; The Economy: Is ment Economics and Chief Economist. Babson International Colloquium for the Worst Behind Us?; Operating in Rus- Information: Boris Pleskovic or Gregory Entrepreneurship Educators: The Art sia; Making Russia Safe for Investment; Ingram, Research Advisory Staff, World of Entrepreneurship Prospecting for Oil in the Former USSR; Bank, 1818 H Street, NW, Room MC4- June 22-26, 1998, Ljubljana, Slovenia Russia as an Emerging Market for For- 391, Washington, D.C. 20433, tel. 202- Organizer: Babson College, United. eign Investors. 473-1062, fax 202-522-0304. States. Information: Marshall Goldman, tel. 617- States. 495-4485; fax 617-495-8319; Email: The Role of Social Science in the De- Application: Open to educators, pro- goldman3@fas.harvard.edu; Internet velopmentof Education, Business and fessors, and program directors from http://www.fas.harvard.edu/-daviscrs/ Government Entering the 21st Century universities and institutions in Central ardenhouse.html April 30-May 2, 1998, Kaunas, Lithuania and Eastern Europe. Due February 15, 1998. SME Forum and Conference: SMEs Organized by Kaunas University of Tech- Fee: US$890 if paid by February 28. and SME Policy in the Central and nology, Central and East European Man- Call for papers: 15-line summary due with Eastern European Economies agement Development Association, application. April 2-4, 1998, Budapest, Hungary Norwegian Business School. Information: GEA College of Entrepre- a TRANSITION, February 1998 (D 1998 The World Bank neurship, Dunajska 156. 1000 Ljubljana, International Workshop: Transition and ers, and outlines of panels, consortia, Slovenia, tel. 38661-1687002, fax 38661- Enterprise Restructuring in Eastern and discussion sessions are due March 168-8213, Email: bicee6@gea-college.si; Europe 1, 1998, for final review. Program Coordinators: Dr. Larry August 20-22, 1998, Copenhagen Information: Professor George Tesar, Godtfredsen, Email: Godtfredsen@ Conference Chairman, College of BABSON.edu, Dr. Marjana Merkac, Organizer: Center for East European Business and Economics, University Email: Marjana.Merkac@guest.ames.si Studies, Copenhagen Business School. of Wisconsin-Whitewater, Whitewater, Topics: corporate governance; interna- Wisconsin 53190, United States, tel. European Integration Towards 2000 tionalization of business; management 414-472-4951, fax 414-472-4863, July 11-13, 1998, Lodz, Poland in transition. Email: tesarg@uwwvax.uww.edu, Call for papers: Deadline for abstracts http://www.fbm. vutbr.cz/czech/call Organizer: Foundation for European is April 1, 1998. call.htm; or Dean Karel Rais, Faculty Studies, European Institute. Fee: 1,000 DKK (approx. US$150). of Business and Management, Tech- Topics: The shape of the future Europe, Information: Administrator Christina Pind nical University of Brno, Technicka 2, enlarged to the associated Central and or Associate Professor Niels Mygind, CZ-616 69 Brno, Czech Republic, tel. Eastern European countries, in the per- Center for East European Studies, 4205-4114-2685, fax 4205-4121- spective of the year 2000. Copenhagen Business School, Dalgas 1410, Email: rais@fbm.vutbr.cz Information: Dr. Maria Karasinska- Have 15, DK-2000 Frederiksberg, Den- Fendler, GeneralDirector, Foundation for mark, tel. 45-3815-3030, fax 45-3815- The 14th International PROGRES European Studies, European Institute, 3037, Email: cp.cees@cbs.dk Seminar (Program of Research on the 2621264 Piotrkowska str., Poland, tel. 48- Economy of Services) 42-37-5047/5048, fax 48-42-37-0586, The Sixth Annual International Con- September 11-12, 1998, Geneva, Swit- Email: obeul@pInlo5l.bitnet ference: Business and Economic De- zerland velopment in Central and Eastern Program on Fiscal Decentralization Europe: Implications for Economic Organizers: Julian Arkell of International and Financial Management of Re- Integration into Wider Europe Trade and Services Policy and The gional and Local Governments September 2-3, 1998, Brno, Czech Re- Geneva Association. August 3-21, 1998, Cambridge, Massa- public Call for papers: see following topics. chusetts, United States Topics: the GATS framework; outlook Organizer: Technical University of Brno, for sectoral negotiations; schedules of Topics: Roles of Central and Subnational Czech Republic; Nottingham Trent Uni- specific commitments: how to make GovernmiBnts;TrendsinPolitical,Admin- versity, United Kingdom; Nicholas them more accessible and user- istrative and Fiscal Decentralization; Copernicus University, Poland; and Uni- friendly; review of service sectors un- Strategies for Effective Decentralization; versity of Wisconsin-Whitewater, United der Article 19 and services statistics; Joint Venture in Intergovernmental Co- States. lobbying for improved specific commit- operation and Administration; Public Topics: business and economic devel- ments on services; new wTO acces- Choice and Fiscal Federalism; Alloca- opment with emphasis on technological, sions: level of specific commitments tion of Expenditure and Revenue; Re- political, social, and legal issues unique undertaken. sponsibilities of Government Enterprises to these countries; comparative studies Information: Julian Arkell, The Geneva and Privatization Alternatives for En- between business and economic devel- Association, 18, chemin Rieu, CH-1208 hancing Resource Mobilization. opment in CEEC and EU; business and Geneva, Switzerland, fax 34-7135- Information: Dr. Roy Kelly, Director, Pro- economic integration into wider Europe 0845, fax 4122-347-20-78, Email: gram on Fiscal Decentralization and using theories developed in market arkell@infotelecom.es Financial Management of Regional and economies; and research methods in Local Govemments (PFD), Intemational business and economic development in 25th Seminar of the European Group Tax Program, Harvard Law School, 1563 the CEEC to improve business and eco- of Risk and Insurance Economists Massachusetts Avenue, Cambridge, MA nomic restructuring. September 21-23, 1998, Vienna, Austria 02138, United States, tel. 617-495-4748, Call for papers: One-page abstracts of fax 617-495-0423, Email: PFD@hiid. papers and proposals are due January Organizer: The Geneva Association. harvard.edu _PFD@hiid.harvard.edu_ 31, 1998. All material must be submit- Call for papers: Papers are welcome on ted in English. The final papers, post- any topic of economics, finance, or man- C) 1998 The World Bank TRANSITION, February 1998 agement science as related to risk and 228197, fax 370-7-203858, Email: concepts of marketing can be adapted insurance. The deadline is April 30. Edita-Slamaite@fc. vdu.lt for the cultivation of markets in econo- lnfonmation: Professozr Christian Gollier, mies undergoing transition. InstitutdEconomie lndustrielle, Universite The Use of Cultural Standards in des Sciences Sociales, Place Anatole Cross-Cultural Business Training and Empirical research, case studies, or dis- France, F-31042 Toulouse Cedex, fax 33- Education of Business Students cussion sessions are sought that ad- 5-61-128637, Email: gollier@cictr forPro- October 19-22, 1998, Burgenland, Ger- dress such topics as comparative fessorHeinrich Stremitzer, Department of many analysis of conditions of market entry Risk Management and Insurance, in CEE countries, market entry through Wirtschaftsuniversitaet Wien, Augasse 2- Information: Claudia Feichtinger, Re- exports versus market entry via capi- 6, A-1090 Vienna, Austria, fax 43-1-313- search Institute for European Affairs, A- tal investment, acquisitions as opposed 36-712, Email:stremitzer@wu-wien.ac.at 1090 Wien, tel. 431-31336-4141, fax to joint ventures in CEE, marketing 431-31336-752, Email: Feichtin@fgr.wu- strategies to reach CEE consumers, Institutions in Transition wien.ac.at marketing-mix decisions for markets in September 24-26, 1998, Lake Bled, CEE, financial strategies for opening Slovenia Regionalism in Europe CEE markets, case studies of CEE ex- November 1998, Bonn, Germany periences by Western firms. Organizer: Institute of Macroeconomic Call for papers: Abstracts of papers, in Analysis and Development. Organizer: ZEI - Center for European English, should be received by August General topic: transition as a complex Integration Studies. 31, 1998. process of institutional innovation in Information: Professor Juergen von Final papers must be ready by October which outcomes depend critically on in- Hagen, Zentrum fuerEuropaeische In- 31, 1998. For more information or terests and constraints of actors in- tegrations-forschung (ZEI), Walter Flex to send abstracts contact either of the volved. Specific topics: institutional Str. 3, 53113 Bonn, Germany, tel. 49- conference sponsors. innovations in particular countries, the 228-739199, fax 49-228-731809, Information: Prof. Dr. Reiner Springer, role of foreign advisers, European Union Email: vonhagen@ sfbb4.econl.uni- Wirtschaftsuniversitat Wien, Althanstr. enlargement. bonn. de 51, 1090, Wien, Austria, tel. 43-1-313 Information: Janez Sustersic, fax 386-61- 36/371, fax 43-1-313-36/751, Email: 1782070, Email: janez.sustersic@ Marketing Strategies for Central and springer@isis.wu-wien.ac.at; orProf. Dr. zmar.sigov.mail.si, Internet http:// Eastern Europe Petr Chadraba, Kellstadt Center for www.sigov.si/zmar/imad.html December 2-4, 1998, Vienna, Austria Marketing Analysis and Planning, DePaul University, I East Jackson Bou- Management of Organizations: Re- Organizer: Kellstadt Center for Market- levard, Chicago, Illinois 60604, tel. 312- gional Factors in the Process of Eu- ing Analysis and Planning, DePaul Uni- 362-6200, fax 312-362-5647, Email: ropean Integration versity, Chicago, and the Department of pchadrab @wppost.depaul.edu September 24-26, 1998, Kaunas, International Business Administration, Lithuania University of Economics and Business We appreciate the contributions of the Administration, Vienna. Cooperation Bureau for Economic Re- Organizer: School of Business and Man- search on Eastern Europe, Koenigin- agement, Vytautas Magnus University. A primary goal of the conference is to Luise-Str. 5, D14195, Berlin, Germany, Call for papers: 8-15 pages; deadline is promote an international dialogue. be- tel. 4930-8977708-68, fax 4930-897708- May 15, 1998. tween decisionmakers and business 99, Email: tribakova@diwberlin.de or Topics: genesis of the concept of orga- and government leaders from Central dbowen@diw-berlin.de. nization, organization and economic and Eastern Europe and Western indus- environment, management development trial countries. The conference will trends, organization in the process of in- present information about the process tegration. of economic transformation in CEE.and Information: Edita Slamaite, School of stimulation of entrepreneurial activity Business and Management, Vytautas and will contribute to the theory of glo- Magnus University, Daukanto 28, bal marketing. A central question raised Kaunas 3000, Lithuania, tel. 370-7- will be whether, and eventually how, the * TZANSITION, February 1998 C 1998 The World Bank Nev Books and Working Papers The Macroeconomics and Growth Group regrets that it is unable to provide the publications listed. World Bank Publications FDI Agreements in China in 1995, by In Poland between 1989 and 1997, Sector growth in money and wages fueled infla- To receive ordering andprice information (millions of U. S. dollars) tion and appreciation of the real exchange for World Bank publications, write: World Share rate lowered it. Large administered price Bank, P.O. Box 7247-8619, Philadelphia, Sector Value (percent) increases-associated with adjustment PA 19170, United States, tel. 202-473- in utilities and other sectors controlled by 1155, fax 202-676-0581;orvisit the World Total 91,282 100 the government-produced substantial Bank bookstores, in the United States Agriculture 1,736 1.9 upward inflationary pressures. Ideally, 701-18th Street, N.W, Washington, D.C. Instry 1,918 2.1 future administered increases should be or in France, 66 avenue d'lena, 75116 Construction 1,918 2.1 frequent and moderate to prevent the Paris, Email: books@world bank.org; Commerce 3,427 large price shifts that increase inflation. Internet: http://www.world bank.org. Transportation But because frequent price increases are lcommunication 1,700 1.9 likely to be politically unpopular, sizable Working Papers Real estate 17,835 19.5 increases may be called for so that the Other 3,018 3.4 current undervaluation of numerous ser- Harry G. Broadman and Xiaolun Sun, Source: China Statistical Yearbook, vices will diminish more quickly. Distribution of Foreign Direct Invest- 1996. To order: Luca Barbone, Room J7-133, ment in China, WP 1720, February tel. 202-473-2556, fax 202-473-8466, 1997, 20 p. Martha de Melo, Cevdet Denizer, Alan Email: lbarbone@worldbank.org To order: Joan Grigsby, 202-458-2423, Gelb, and Stoyan Tenev, Circumstance fax 522- 1556, Email: jgrigsby@world and Choice: The Role of Initial Condi- Discussion Papers bank.org tions and Policies in Transition Economies,WP 1866, December 1997, Aymo Brunetti, Gregory Kisunko, and China's 12 coastal provinces have at- 54 p. Beatrice Weder, How Businesses See tracted more than 90 percent of foreign Government: Responses from Private direct investment since 1989, most of it Initial conditions and economic policy Sector Surveys in 69 Countries, IFC going to Guangdong province. A possible jointly determine the large differences in Discussion Paper 33, 1998, 76 p. explanation is that coastal areas have a economic performance among 28 tran- higher level of autonomy when it comes sition economies in Asia, Central and Results of a survey of some 4,000 en- to investment, production, and other Eastern Europe, and the former Soviet trepreneurs from 69 countries (including economic policies. Tight cultural and lin- Union. Initial conditions dominate in ex- 6 transition economies), regarding ma- guistic links between southern China and plaining inflation, but economic liberal- jor obstacles encountered in their busi- the overseas Chinese communities ization is the most important factor ness operations, show that corruption, have also contributed to this pattern. determining differences in growth. But crime, and theft, as well as tax regula- reform policy choices are not exogenous. tions, present the most serious hurdles, Much of the private capital flows to Liberalization depends, in turn, on both blocking business activity. China is concentrated in the real es- initial conditions and political reform. tate sector, especially hotels and other To order: Cynthia Bernardo, Room MC2- Jeff Huther, Sandra Roberts, and Anwar tourism-related projects.Telecommuni- 501, tel. 202-473-1148, fax 202-522- Shah, Public Expenditure Reform cations, banking and insurance, ac- 1154, Email: cbernardo@worldbank.org under Adjustment Lending: Lessons counting and auditing, legal services, from World Bank Experiences, Discus- and computer processing-critical ar- Przemyslaw Wozniak, Relative Prices sion Paper 382, December 1997, 65 p. eas for building a modern industrial and Inflation in Poland, 1989-97: The economy-have attracted far lower Special Role of Administered Price Garry Christensen and Richard Lacroix, levels of foreign direct investment. Increases, WP 1879, February 1998, Competitiveness and Employment: A 41 p. Framework for Rural Development in ( 1998 The World Bank TRANSITION, February 1998 3 Poland, Discussion Paper 383, 1997, Key to the Bank's new approach is the in some areas of imports, reducing tar- 65 p. recently formed Poverty Reduction and iffs for most-favored-nation partners to Economic Management Network. The the level of the EU common external Technical Papers network has a Poverty Reduction Board tariff, getting rid of nontariff import barri- that has identified two changes in imple- ers, and eliminating remaining barriers Magda Lovei, Phasing Out Lead from mentation strategy: a. a shift away from to foreign direct investment. EU acces- Gasoline: Worldwide Experience and describing poverty and toward formulat- sion will require large infrastructure in- Policy Implications, World Bank Tech- ing strategies for reducing poverty-with vestments, mainly in environment- nical Paper 397, January 1998. work to be linked primarily to operational related areas, such as improving the wa- strategies in individual countries; and b. ter supply and sewerage system and Greg Felker, ShekharChaudhuri, Katalin a shift away from counting poverty-fo- fighting air pollution. Infrastructure poli- Gyorgy, and Melvin Goldman, The Phar- cused projects and toward assessing their cies will need to be harmonized with the maceutical Industry in India and Hun- impact on the poor (as part of a move EU's regulatory framework. gary: Policies, Institutions, and toward better evaluation of the impact of *Accelerating privatization, targeting Technological Development, World lending and projects on household wel- the large state-owned enterprises in in- Bank Technical Paper 392, December fare). The World Development Report dustries such as coal, steel, and chemi- 1997, 53 p. 2000, the institution's annual flagship re- cals. State-owned enterprises still search study, will focus on poverty. account for 36.5 percent of Poland's Other World Bank Publications GDP. Privatization of the coal industry Vinod Ahuja, Benu Bidani, Francisco should include closing down the loss- Branko Milanovic, Income, Inequality, Ferreira, and Michael Walton, Everyone's making mines and those with almost and Poverty during the Transition from Miracle: Revisiting Poverty and In- exhausted resources. Miners should re- Planned to Market Economy, World equality in East Asia, 1997, 116 p. ceive training in more marketable skills. Bank Regional and Sectoral Study, Feb- *Restructuring the financial sector and ruary 1998, 256 p. Poland: Country Economic Memoran- upgrading banking and insurance super- dum-Reform and Growth on the vision. This will help the banking sector The collapse of Communism proved to Road to the EU, 1997, 102 p. withstand the increased competition in be an epoch of great turmoil. The period the European single market. The lead- witnessed dramatic declines in income, A strategy of fast, sustainable growth ing rural bank (BGZ), the housing and growing poverty and unemployment, and could propel Poland smoothly into the savings bank (PKO BP), and the na- great uncertainty, but also the making EU. The overall savings rate should show tional insurance company (PZU) need of great fortunes, the availability of con- an increase of 5 percent of GDP annu- to be restructured. sumer goods of incomparably better allyoverthenextsevenyears,andpublic -Creating an efficient capital market. quality, and opportunities for people to expenditures will need to be cut by more Further privatization will raise the num- control and alter their lives. This book than 6 percent, from 48 percent of GDP ber of listed companies and attract more studies income, inequality, and poverty (the likely proportion in 1997). To reduce foreign investment. The development of during this remarkable period and the public expenditure, Poland will need to municipal finances, a fast-growing area "construction" of capitalism in 18 former reform its pension system, privatize and of capital markets, will require better socialist countries-from the Czech restructure state-owned enterprises and financial planning, greater reliance on Republic in the West to Kazakhstan and banks, and introduce regulatory reforms. own-resource revenues, better access Russia in the East. It examines what has Further steps include lowering income to long-term funds of domestic banks, happened with regard to the real incomes tax rates, eliminating preferential VAT and increased transparency of match- of the populations, the inequality with rates, and improving tax administration. ing grants. which incomes and expenditures are dis- Further goals include: -Creating Efficient labor markets, tributed, and poverty-and explores rea- *Improving the investment climate, which are crucial to absorb the outflow sons for these changes. through accelerated privatization and of employment from agriculture and reforms in the trade and investment re- heavy industry into higher-productivity Poverty Reduction and the World gime, as well as in the legal, institutional, areas of the industrial and service sec- Bank: Progress in Fiscal 1996 and and regulatory framework. That would tors. Active labor market policies must 1997, January 1998, 200 p. mean eliminating the bureaucratic focus on retraining. Reforms in hous- micromanagement that is still dominant ing and transport will be necessary to X TRANSITION, February 1998 © 1998 The World Bank increase labor mobility. G. A. Mackenzie, The Macroeconomic ductivity and human capital proxies in a -Shaping the new social security ImpactofPrivatization,Working Paper short (1990-95) panel of 85 countries. system in ways that will address the no. 97/9, November 1997, 17 p. Equilibrium dollar wages have appreci- problems of high and distorted payroll ated steadily in fast-reforming Central taxes (currently 48.5 percent of net It is tempting to treat privatization pro- and East European (CEE) transition wages), sector-specific privileges, ceeds as revenue. But privatization pro- economies, including the Baltic coun- large expenditures on survivor and dis- ceeds should be treated as financing. tries, but have been flat in most CIS ability benefits, generous old-age ben- Unlike taxation, privatization never re- countries. The 1996 actual dollar wages efits, and liberal early retirement. The duces private sector wealth. It should remained below estimated equilibrium government has proposed rationalizing not warrant a loosening of the fiscal dollar wages for most transition coun- the pay-as-you-go system by introduc- stance to maintain aggregate demand. tries covered. ing a multipillar system with privately In exceptional cases it may reduce the managed pension funds and creating propensity to invest and depress domes- Omotunde Johnson, Cooperation, Emer- an independent supervisory agency for tic absorption as would a tax increase. gence of the Economic Agency Role pensions. of Government, and Governance, Work- *Reforming the agricultural sector to Charles Enoch and Anne-Marie Gulde, ing Paper 97/150, November 1997, 45 p. raise the quality of products, improve the Making a Currency Board Operational, efficiency of land and rural financial mar- Working Paper 97/10, November 1997, Anthony G. Turner and Stephen S. kets, and harmonize the institutional 29 p. Golub, Towards a System of Multilat- framework with EU norms. The state eral Unit Labor: Cost-Based Competi- should eliminate price and production Successful establishment of a currency tiveness Indicators for Advanced, subsidies and instead enhance market board requires that, in addition to adopt- Developing, and Transition Coun- institutions, develop basic infrastructure, ing appropriate macroeconomic policies, tries, Working Paper 97/151, Novem- and provide training and income support the authorities make careful preparations ber 1997. schemes for the truly vulnerable, for the technical aspects of the transi- *Devising environment protection tion, such as changing the central bank Michael Sarel, How Macroeconomic strategies that concentrate on those law, reorganizing the central bank, de- Factors Affect Income Distribution: areas where the EU's requirements and vising new guidelines for reserve man- The Cross-Country Evidence, Working national priorities overlap. agement, and adapting the government's Paper 97/152, November 1997, 25 p. cash and debt management activities. Additional measures are required for Vincent Koen and Paula De Masi, Prices countries that recently experienced a in the Transition: Ten Stylized Facts, IMF Publications crisis in their banking sector. Working Paper 97/158, November 1997 To order IMF Publication Services, 700- Vivek B. Arora and John Norregaard, In- Ilan Goldfajn and Rodrigo 0. Valdes, Are 19th Street, N. W, Washington, DC. 20431, tergovernmental Fiscal Relations: The Currency Crises Predictable? Working United States, tel. 202-623-7430, fax 202- Chinese System in Perspective, VWork- Paper 97/159, December 1997, 19 p. 623-7201, Email:publications@imf org, ing Paper 97/129, October 1997, 27 p. Intemet:hftp://www.imf org Ramana Ramaswamy and Torsten Sloek, Kornelia Krajnyak and Jeromin The Real Effects of Monetary Policy Elaine Buckberg, Legal and Institu- Zettelmeyer, Competitiveness in Tran- in the European Union: What Are the tional Obstacles to Growth and Busi- sition Economies: What Scope for Differences? Working Paper 97/160, ness in Russia, Working Paper 97/8, Real Appreciation? Working Paper 97/ December 1997, 25 p. November 1997, 9 p. 149, INovember 1997, 55 p. The most critical reforms for promoting This study estimates equilibrium dollar private sector development include re- wages-interpreted as full employment CEPR Publications forming the tax system, reducing red wages, consistent with a country's tape and bureaucratic corruption, physical and human capital endow- To order: Centre for Economic Policy strengthening the judicial system, and ment-for 15 transition economies by Research, 90-98 Goswell Road, London improving capital market infrastructure. regressing actual dollar wages on pro- ECI V 7DB, United Kingdom, tel. 44-171- i) 1998 The World Bank TRANSITION, February 1998 m 878-2900, fax 44-171-878-2999, Email: new private owners are not the external Clemens Grafe and Charles Wyplosz, cept@ceprorg private actors or institutions typical of The Real Exchange Rate in Transition Western capital markets. Disproportion- Economies, Discussion Paper 1773, Bernard Hoekman and Simeon Djankov, ately, private ownership has gone into December 1997, 34 p. Competition Law in Post-Central the hands of insiders-managers, work- Planning Bulgaria, Discussion Paper ers, or both. Thus, in all privatized firms 1723, November 1997, 20 p. insiders on average hold 66.1 percent of shares, divided between workers with Katholieke Universiteit Leuven Pub- Bulgaria's competition office, the Com- 46.2 percent and managers with 19.6 lications mission for the Protection of Competition, percent. Outsiders hold only 18.9 per- has attempted during 1991-95 to concen- cent of all shares. An analysis of firms To order: Katholieke Universiteit Leuven, trate its efforts on nontradable sectors, according to dominant ownership (ma- Leuvens Instituut VoorCentraal-En Oost- targeting both cartels and abuses of domi- jority stake) shows that 50 percent of Europese Studies, Deberiotstraat 34, nant positions. The measures applied privatized firms are worker-owned, 15 3000 Leuven, Belgium, tel. 3216-326- appear to have been rather ineffective. percent are management-owned, and 598, fax 3216-326-599. Instead of taking a tough stance on be- only 9 percent of enterprises are out- havior aimed at thwarting competition, sider-owned. M. Jackson, Restructuring or Struc- the Commission has concentrated its tural Change in Industry of Transition attention on so-called unfair competition The main finding of this paper is that Countries: A Review of Issues, Work- (for example, false advertising, trademark private ownership does improve enter- ing Paper 63, 1997. infringement). Proposed amendments to prise performance, with ownership by the competition lawshould allowthe Com- managers and institutional investors M. Jackson and A. Repkine, A Compari- mission to strengthen the deterrent as- having the strongest effects. As the sec- son of Structural Changes among the pect of the law. ondary market becomes more estab- Branches of Industry in Seven Transi- lished and the capital market becomes tion Countries, Working Paper64,1997. Irena Grosfeld and Jean-Francois Nivet, more liquid, the relative weight of insti- Wage and Investment Behavior in tutional ownership will certainly increase. S. Janssens, The Effects of Product Transition: Evidence from a Polish Market Competition, Globalization Panel Data Set, Discussion Paper 1726, Lubomir Lizal, Miroslav Singer and Jan and Unions on Productivity-Survey November 1997, 30 p. Svejnar, Enterprise Breakups and Per- Evidence from Belgian Firms Export- formance during the Transition [in ing to Central and Eastern Europe, John S. Earle and Saul Estrin, After Czechoslavakia], Discussion Paper Working Paper 65, 1997. Voucher Privatization: The Structure 1757, December 1997, 31 p. of Corporate Ownership in Russian J. Konings and A. Repkine, How Efficient Manufacturing Industry, Discussion Alain de Crombrugghe and Gregory de Are Firms in Transition Countries? Paper 1736, December 1997, 96 p. Walque, Fiscal Norming of Wages to Firm Level Evidence from Bulgaria and Promote Employment with Monopoly Romania, Working Paper 66, 1997. A random sample of 439 state and pri- Unions, Discussion Paper 1766, De- vately owned firms conducted just after cember 1997, 25 p. Nick van der Lijn and Marno Verbeek, the voucher privatization program, com- Excess Demand, Repressed Inflation, pleted in July 1994, suggests that the Alain de Crombrugghe, Wage and Pen- and Forced Saving in the Soviet privatization process has transformed sion Pressure on the Polish Budget, Union, Working Paper 67, 1997. the balance between state and private Discussion Paper 1767, December ownership in Russia: from virtually a 100 1997, 46 p. percent share in the Soviet era, the state's average holding has fallen to 38 Jozef Konings, Competition and Firm United Nations Children's Fund percent across all Russian firms (includ- Performance in Transition Econo- (UNICEF) Publications ing the 27 percent of previously state- mies: Evidence from Firm Level Sur- owned firms that had not been privatized veys in Slovenia, Hungary and To order: UNICEF, Intemational Child by the summer of 1994), and to only 15 Romania, Discussion Paper 1770, De- Development Centre, Economic and percent in privatized enterprises. But the cember 1997, 30 p. Social Policy Programme, Piazza M TRANSITION, February 1998 © 1998 The World Bank Santissima Annunziata 12, 50122, Flo- Summary, The Monee Project, Regional relations, especially between countries rence, Italy, tel. 3955-2345-258, fax 3955- Monitoring Report Summary no. 4,1997, with common borders, such as Albania 2448-17, Email: ciusco@unicef-icdc.it 22 p. and Greece and Bulgaria and Greece. Developing cross-border cooperation is John Mickelwright and Gyula Nagy, The becoming a strategy of growth for the Implications of Exhausting Unemploy- region. This in turn gives added signifi- ment InsLurance Entitlement in Hun- Other Publications cance to interregional cooperation at gary, Occasional Paper 58, 1997, 28 p. both the national and local levels. Petr Chadraba, Proceedings of the 6th To order: University of Thessaly, Depart- Kitty Stewart, Are Intergovernmental Annual Conference on Marketing Strat- ment of Planning and Regional Devel- Transfers in Russia Equalizing? Oc- egies for Central and Eastern Europe: opment, Pedion Areos, Volos 38834, casional Paper 59, 1997, 46 p. December 10-12, 1997, DePaul Univer- Greece, tel. 30421-69781-4, fax 30421- sity Chicago/Reiner Springer, Austria. 63793. The impact of intergovernmental trans- To order: Gertrude.Seidelmann@wu- fers in Russia has been minimal. Lower- wien.ac.at. Russian Federation, OECD Economic revenue regions may have received Survey, 1997, 139 p. more in transfers than higher-revenue Maria Csanadi, Party-States and Their regions, but not nearly enough to offset Legacies in Post-Communist Transfor- Russia's economy will not take off with- the difference in revenue. The weakness mation, Studies of Communism in out further, deep reforms. Macroeco- of the system can be attributed to two Transition, Edward Elgar Publishing, nomic prospects largely hinge on how main causes: Inc., Massachusetts, 1997, 386 p. decisively structural reforms are pushed * The amount set aside for transfers is To order: Edward Elgar Publishing, Inc., through. In the shorter run financial sta- small. In 1995 transfers formed 12 per- 6 Market Street, Northampton, Massa- bilization requires urgent consolidation: cent of regional budget revenue, only chusetts 01060, United States. sticking to an ambitious monetary policy, half the share of federal grants in state streamlining the tax system, and phas- and local budgets in the United States. Anna Grimshaw (ed.), Special Delivery: ing out blanket subsidies for housing and * Too many regions qualify for transfers. The Letters of C.L.R. James to other services, replacing them with more In 1995 more than 90 percent of regions Constance Webb, 1939-1948, Blackwell targeted assistance. Revival and sus- qualified as being in need of support, Publishers, Massachusetts, 1996, 393 p. tained growth of the economy should be defeating the purpose of a system that To order: Blackwell Publishers Ltd., 108 supported through enforcing the rule of is by definition about relative need. Un- Cowley Road, Oxford OX4 IJF, United law, enhancing competition, improving less the transfer mechanism is revised, Kingdom, or238 Main Street, Cambridge, the budgetary process, strengthening public services in poorer and less suc- Massachusetts 02142, United States. capital markets, facilitating bankruptcies cessful regions will further deteriorate. and liquidations, reforming the tax sys- George C. Petrakos, The New Geogra- tem, and attracting foreign investment. Jeni Klugrnan, Decentralization: A Sur- phy of the Balkans: Cross-Border Co- vey from a Child Welfare Perspective, operation between Albania, Bulgaria Dr. Pyotr Joannevich van de Waal-Palsm Occasional Paper 61, 1997, 51 p. and Greece, Series on Transition in the and others, Understanding Russian Balkans, volume 1, University of Banking, Washington, December 1997, Suraiya Ismail and John Micklewright, Thessaly, Greece, 1996, 283 p. 300 p. Living Standards and Public Policy To order: Waal Palms HarborLights Build- in Central Asia: What Can Be Learned After years of separation, a large regional ing#103, 515 Lake Street South, Kirkland from Child Anthropometry? Occa- market of 70-80 million people in South- (Seattle), Washington, 98033, United sional Paper 62, 1997, 29 p. eastern Europe is shaping up, creating States, tel. 425-828-6774, fax 425-827- significant opportunities for cooperation, 5528, Email: russia@aa.net, Intemet: Amartya Sen, Mortality as an Indica- specialization, and trade. A regional mar- http.I/www.aa.net/-russia. tor of Economic Success and Failure, ket is gradually emerging in the Balkans, lecture, 1995, 31 p. driven by distance (from countries of the M. Mitchell Waldrop, Complexity: The European core region), size, and prox- Emerging Science at the Edge of Or- Children at Risk in Central and East- imity (to each other). This new market is der and Chaos, Simon and Schuster, ern Europe: Perils and Promises-A characterized by intensive economic New York, 1993, 380 p. © 1998 The World Bank TRANSITION, February 1998 To order: Touchstone, Simon & Schuster privatization, international trade, eco- pickpockets earn ten times more than Building, Rockefeller Center, 1230 Av- nomic reform] University Working Papers policemen, there can be no rule of law. enue of the Americas, New York, New 1-4, February 1998. Among the many obstacles to the cre- York 10020, United States. To order Curtin University of Technology, ation and maintenance of legality and Hayman Road, Bentley, Westem Austra- constitutionalism in postcommunist Iliana Zioch-Christy (ed.), Eastern Eu- lia, tel. 9266-3081, Email: simpsonj@cbs. countries, none looms so large as the rope and the World Economy: Chal- curtin.edu.au. interweaving of private-sector crime with lenges of Transition and Globalization, public-sector corruption. Edward Elgar Publishing, Inc., Massa- chusetts, 1998, 293 p. The principal task today of liberal reform- Newsletters/Special Publications ers throughout the region is to decrimi- The transforming East European coun- nalize the economy. So long as conflicts tries opened up their economies after CARD Report, a periodical of policy re- arising from private ownership are re- 1989 and are on their way to joining the search from the Center for Agricultural solved by violence and intimidation, out- integrated world economy. Economic and Rural Development. The winter 1997- side of official judicial and administrative development varies across countries and 98 issue, vol. 10, no. 2, contains the fol- channels, 'free markets" will not produce depends on institution building (private lowing articles: CARD Project in Ukraine; economic prosperity. So long as many property and market-based trade), ge- Highlights of CARD Initiatives in the businessmen believe that the best way ography (for example, their proximity to Former Soviet Union; State Grain Order to deal with their competitors is to use Western markets and their natural en- Is Subject of Ukrainian Policy Paper. plastic explosives, the competitive sys- dowments), history, and human capital. To order: CARD Report, Iowa State tem will yield few benefits to consum- Economic success also depends on the University of Science and Technology, ers. And so long as state salaries stay quality of governance, the international 578 Heady Hall, Ames, Iowa 50011- pitifully low while illegal payoffs dazzle economic environment, and whether the 1070, United States, tel. 515-294-7519, the eye, laws will never be fairly and re- conditions for a competitive market fax 515-294-6336, Internet: http:// liably enforced. economy are in place. To face these www.ag.iastate.edu/card challenges a strong but limited govern- To help re-elect Yeltsin, Chubais had to ment is needed. Government leadership EastlWest Letter, a bimonthly analysis rely on a clutch of robber tycoons, who is important in designing manpower poli- of economic and political issues in East- had waxed rich on asset-stripping, ex- cies, industrial (competition) policies, ern Europe and the former Soviet Union. port licenses, rigged privatization, and and socioeconomic policies. To order East/West Letter, Okno Con- control of the pet banks where public tax sulting, 1217 Olivia Avenue, Ann Arbor, revenues, federal and local, are depos- The book contains the following chapters: Michigan 48104-3934, United States, tel. ited even today. This did not prove to be Post-communist Eastern Europe: 734-995-5934, fax 734-995-6349, Email: a reliable basis for creating the rule of Privatization and the second fundamen- pubs@okno.com. law. A criminalized economy and a cor- tal theorem; A comparative analysis of rupt public sector are two sides of the privatization: A Chinese way and a Polish Eastern European Constitutional Re- same coin. It is useless to attack one way; Integration compatibility of the Hun- view, a quarterly publication of the New without attacking the other. garian economy; Economic conditions of York University School of Law and Cen- accession of the eastEuropean transform- tral European University. Volume 6, num- Horizonti, the magazine for the third ing economies to the European Union; ber4containsarounduptitledCrimeand sector in Georgia. The winter 1997 (no. Eastern Europe and the World Trade Or- Corruption after Communism. Articles 2) issue contains: Georgia's NGOs En- ganization: The present position and pros- include: State and Mafia in Yugoslavia; ter a New State; Civil Development pects of accession; and Industrial policy: The Criminalization of Russia's Political Trends in Czech Republic; World Vision: does Eastern Europe need one? Elite; Interview with a Hungarian Police A Bridge to Economic Freedom. To order Edward Elgar Publishing, Inc., 6 Investigator; Organized Crime in Bul- To order Horizonti, The Third SectorFoun- Market Street, Northampton, Massachu- garia; Tales of Corruption from the dation, 13 Zandukeli st., Tbilisi, Georgia, setts 01060, United States. Postcommunist Balkans; and Public tel. 995-32-933-007, fax 995-32-987-504, Theft in Early America and Contempo- Email:.presscenter@horizontiorg, Intemet: John L. Simpson, Communism to Capi- rary Russia. Stephen Holmes writes in http:/,v.wwhorizonti.org talism in Mongolia [foreign investment, his introduction to the Review- When M TRANSITION, February 1998 ( 1998 The World Bank Bibliography of Selected Articles Postsocialist Economies Asia Studies (United Kingdom) Kielbasa, M., and L. Konopielko. The Lib- 49(7):1187-1208, November 1997. eralization of Trade Policy Between Kaufmann, D. Privatization and Cor- Poland and the European Union-- ruption in Transition Economies. Jour- Bulgaria Implements Changes to the Trade Creation and Trade Diversion. nal of lntemationalAffairs (United States) Public Administration. Public Man- Joumal of East-West Business (United 50:419-58, winter 1997. agement Forum (France) 3(6):10-11, States) 3(3):1-25, 1997. 1997. Voropajev, V. Change Management: A Piazolo, D. Trade Integration between Key Integrative Function of PM in Coulter, F. Social Security Reform for Eastern and Western Europe: Policies Transition Economnies. Intemational Economic Transition: The Case of the Follow the Market. Journal of Economic Joumal of Product Management (United Czech Republic. Journal of Public Eco- Integration (Korea) 12(3):259-97, 1997. Kingdom) 16:15-19, February 1998. nomics (Netherlands) 66:313-26, Novem- ber 1997. Unger, B. A Ghost of a Chance: A Sur- Russia vey of the Balkans. Economist (United Czech Republic: Financial Times Sur- Kingdom) 346, special section:1-18, Linz, S. J. Innovation in Russian In- vey. Financial Times (United Kingdom), January 24-30, 1998. dustry: A Case Study of R&D in Tran- p. 1-5, December 1, 1997. sition. Economic Development and Asia Cultural Change (United States) 46:233- Davidson, H. Slovenia: Into the Future. 62, January 1998. Central European (United Kingdom) Beddoes, Z. M. A Caspian Gamble: A 7:22-25, November 1997. Survey of Central Asia. Economist (United Malmgren, H. B. Dark Clouds over Rus- Kingdom) 346:1-18, February 7-13,1998. sia? International Economy (United Dlouhy, M. Czech Taxes: Summary of States) 12:30-33, January-February Amendments Adopted in 1997. Tax Holzmann, K. China Offers Tariff Incen- 1998. Notes International (United States) tives to Revive Investment. Develop- 15:2125-29, December 29, 1997. ment Business: The Business Edition of Russia: Broadening Horizons. Development Forum/United Nations (In- Euromoney (United Kingdom) 345:71- Dudley, N. Velvet Costs Are Piling Up ternational) 479:1,3, January 31, 1998. 98, January 1998. [in the Czech Republic]. Euromoney (United Kingdom) 345:99-103, January Keenan, F. You're OK, I'm OK: Vietnam Central and Eastern Europe 1998. Reaches Out to Investors, but Not Far Enough. Far Eastem Economic Review Bilsen, V. Foreign Capital Inflow and Estonia-A Financial Times Survey. (Hong Kong) 161: 60, February 19, 1998. Private Enterprise Development in Po. Financial Times (United Kingdom), p. I- land: A Survey. Communist Economies Vill, February 24, 1998. Pomfret, R. Growth and Transition: andEconomic Transfornation (United King- Why Has China's Performance Been dom) 9:449-67, December 1997. Federal Republic of Yugoslavia: Finan- So Different? Journal of Comparative cial Times Survey. Financial Times Economics (United States) 25:422-40, Boeri, T. Learning from Transition (United Kingdom), p. 13-15, January 27, December 1997. Economies: Assessing Labor Market 1998. Shangquan, G. China's Economic Re- Policies across Central and Eastern Structuan, G.rCtural Econome- Europe. Journal of Comparative Eco- Jones, C. Blowing the Reform Horn. and Social Stability. China Economic nomics (United States) 25:366-84, De- Banker (United Kingdom) 148:31-33, Review (China) 8(1):83-88, 1997. cember 1997. January 1998. Yatsko, P. New Owners: Privatization Borish, M. S. The Evolution of the Jones, C. Overcoming Economic Woe Comes to China's Township Enter- State-owned Banking Sector during [in Bulgaria]. Banker (United Kingdom) prises. Far Eastem Economic Review Transition in Central Europe. Europe- 147:58-59, December 1997. (Hong Kong) 161:52-53, February 5, 1998. i) 1998 The World Bank TRANSITION, February 1998 M To our readers: TRANSITION Transition is saved for now, thanks to our friends in the Wodd Bank, whose arguments were bolstered by the tremendous outpouring of support from you, our loyal readers. Editor: Richard Hirschler Your letters, Emails, and telephone calls helped us secure one more year of World Fax: 202-5221152 Bank sponsorship, until July 1999. But, clearly, we have to create less transitional Email: rhirschler@worldbank.org conditions for Transition, and plan a budget for the next century, without endangenng our editoral independence and without charging a prohibitive rate for subscrption to Research Assistant: Jennifer Prochnow the newsletter. To achieve these goals, we have decided to enlarge our base of sup- Telephone: 202-473-7466 port, and to ask foundations, corporations, and research institutions to become our Fax: 202-522-1152 , ~~~~~~~~~~~~~~~~~~~~~Email: iprochnowwalker@worldbank.org partners and help sponsor Transition. Once we have secured a strengthened financial base, we will strve for maximum circulation, and as of January 1999, return to the free publication policy. To show our appreciation, we will send any paying subscriber-who so requests-all past issues of Transition, dating back to 1990, free of charge. Subscribe to TRANSITION Today The World Bank Subscribe to TRANSITION Today 1818 H Street, N.W Your subscription for calendar year 1998 will include six issues (February, April, June, Washington D.C. 20433 August, October, and December) at a rate of US$30. 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