http://www.worldbank.orgfhtml/prddr/trans/WEB/trans.htm I 8 6 q THE NEWSLETTER ABOUT REFORMING ECONOMIES

TRANSITIONVolume 9, Number 5 October 1998

"We Did Not Neglect Institutional Development"Interview with World Bank's ECA Chief Economist Marcelo SelowskyThere are tremendous differences among the transition economies. Countnies in Central Europe close to EU accession are growingrapidly even faster than Westem Europe. On the other hand, the largest transition country, Russia, is in economic crisis. Whatcan explain this highly divergent performnance? What should have been done differently in Russia? Transition editor, RichardHirschler, posed these questions to Marcelo Selowsky, chief economist of the Europe and Central Asia Region at the World Bank.Mr. Selowsky has done extensive wnting on macroeconomic and debt issues, and for more than a decade, focused his researchon poverty issues and investment in human resources. He did pioneering work on the economic cost of infant malnutrition and drewattention to the need to integrate social programs for very young children into the overall investment in human capital. He servedas chief economist for the Latin America and Caribbean Region during that region's debt crisis.

Q. The 1998 World Bank4MF Meetings about 25-30 percent of their exports.were held in exciting times: the Asian Whatever happens to world prices of oil, W hat's Insidecrisis is far from over, a world reces- minerals, and cotton, it will also affectsion is looming; Russia's economy is their growth prospects. As far as Russiadisintegrating and the government is is concemed, inflation could accelerate Russian Crisis-Alternativestill looking for a suitable economic sharply as a result of monetary expan-policy. In light of all this, how do you sion to cover pension and wage arrears Davidson Institute Reports 13-16see the prospects for the transition and losses in the banking sector. It is System 13economies in 1999? crucial for Russia to strictly prioritize Workshop on Consumer behavior 14

government expenditures and quickly Bank Closures in China 17A. In Central Europe and the Baltics reestablish control of tax revenues. Thismuch will depend on growth in Western will allow the present inflationary burst New Global Monetary Consensus?Europe and on the price at which inter- to be a temporary one-aiming then to- 20national capital markets are willing to lend ward a gradually declining inflation rate. DHL Report: The Approachingto cover these countries' current account Millennium Bug 22deficits. Present growth rates will be af- Q. With hindsight, what do you think Readers Forum 24-29fected if an abrupt reduction in these defi- of the Kiryenko government's sum- Ruble Collapse Revisitedcits are necessary, as a result of lower mer agreement with the IMF, and the Inflated Stock Exchangesexports and difficulties in finding exter- subsequent commitment of the Bank Virtual Economy-Pro and Contranal finance. It is key for these countries to provide an additional $1.5 billion Milestones of Transition 29to intensify policy improvements to keep loan? With all signs indicating aattracting foreign direct investment (FDI) necessary ruble devaluation, why Conference Diary 31and accelerate the process toward EU was the financial community ready World Bank/IMF Agenda 32accession. Countries in the CIS border- to provide billions of dollars to post- New Books and Working Papers 33ing Russia will feel the effects of the pone the unavoidable for a few Bibliography of Selected Articles 39Russian crisis-Russia accounts for weeks?

Macroeconomics and Growth Development Research Group The World Bank

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A. The summer agreement tried to rees- ernments. Out of the group, only Japan trade primary products (oil, gas, min-tablish confidence in the markets by pro- contributed to the financing package. We era Is, timber) for food, consumerviding additional financing as well as needed four players-and we had only goods, and other manufactured prod-obtaining from the government a com- two. ucts. Of course, one cannot blamemitment to accelerate fiscal and struc- the international finance institutionstural reforms. Some of these reforms I believe that an early, orderly, and trans- (IFis) for all the problems. Neverthe-were to be instituted immediately and parent agreement with Russia's credi- less, do they bear responsibility forinvolve legislative passage by the Duma, tors on replacing short-term debt with these developments? What wouldparticularly on the tax front. long-term dollar obliga- the Bank do otherwise if it had theAs seen at that time, there tions, at interest rate chance to start over?was a chance-and one can spreads that were prevail-debate the magnitude of that ing before the East Asian A. Let me begin with some facts. Thechance-that fulfillment of contagion took hold, would transition economies in Central Europethe program could have con- have taken the pressure off and the Baltics that have undertakenvinced markets to reduce .n Russia's public finances market reforms have been growing fastthe extremely high-risk pre- and the ruble's exchange for several years-faster than Westernmium that investors were i rate, and helped to spread Europe. Those that have lagged in growth,demanding-interest rates these pressures over the such as Romania and Bulgaria, are pre-on the order of 100 per- medium term. Because cisely those that have also lagged in thecent-in return for refinanc- part of the short-term debt reform process. Bulgaria is now reform-ing the maturing treasury obligations. was held by domestic commercial banks, ing quickly, however. Countries in theThese maturing obligations, coming due the G-7 govemments' financial contribu- Caucasus and the Kyrgyz Republic alsoover the next 12 months, were quite large tion could have been used to shield de- are growing fast. So today Russia andrelative to GDP-around 10 percent- positors from a deterioration of the banks' Ukraine are more the exception than theand relative to the country's foreign ex- balance sheets. The breathing space rule, and the question is why growth haschange reserves. Hence, there was a could then have been used to consoli- not resumed in these countries.clear risk that the financing package date fiscal and tax reforms and help thewould not be large enough to bolster the country to move gradually toward an Reform in Russia and Ukraine has beenmarket's confidence. exchange rate realignment. In summary, interrupted abruptly several times during

we needed an early and orderly process the past six years in an atmosphere ofUnfortunately that risk did materialize. of wide burden sharing. very sharp confrontation between the ex-Although the Duma approved several tax ecutive and the legislative branches.measures, it failed to approve the overall As far as the World Bank is concemed, Many policy reforms have been imple-tax package, which then had to be as part of the summer package, only mented through presidential decreespassed through decrees. That reduced $300 million of the $1.5 billion commit- rather than through legislation, therebythe expectations of sustained improve- ted under the third structural adjustment reducing the expectations of sustainabilityments in revenues. In addition, during loan (SAL ll) was disbursed immediately. of such reforms.June, the Asia contagion reached its Future disbursements are contingent onpeak as a result of growing political and further progress on the structural front. Russia's initial conditions were also veryfinancial turbulence in Indonesia. Both different from those in Central Europe.factors turned market sentiments further Q. Many experts are blaming the Labor mobility and restructuring becameagainst Russia in spite of the summer international finance institutions much more difficult, due to the very largeagreement. because several transition econo- share of military output and negative

mies, primarily Russia, after six to value-added industries, and the domi-In my view, the summer agreement with eight years of experiments with nance of large company towns, the solethe Kiryenko government should have market-oriented economic policies, employers for a whole community,been a "general equilibrium agreement," are experiencing rampant poverty, artifcially located in remote regions, origi-incorporating not only the Russian gov- lawlessness, and corruption; their nally, for strategic reasons. This is com-ernment and the international finance banking sectors are weak, their fis- pounded by the absence of an inheritedinstituttions but also creditors holding cal imbalance chronic, their foreign legal framework that is supportive ofshort-term public debt and the G-7 gov- trade structure unhealthy; and they market development and property rights.

* TRANSITION, October 1998 © 1998 The World Bank

All these factors-erratic progress in This state of limbo is precisely what mo- front. But it is also an area where thereform and difficult initial conditions- tivates asset stripping-in the interim initiative for change basically musthave made it more difficult for these there is little interest in protecting the come from within the country-there iseconomies to rapidly respond to im- capital stock of the firm. This is exactly only so much that can be achieved fromproved incentives. This can be docu- what happened in Bulgaria prior to 1996. the outside. Civil society first must rec-mented clearly by the low level of foreign ognize the need for legal and institu-direct investment (FDI) and slow growth Also we have to accept that the Rus- tional reform. The Bank has supportedof small firms in Russia relative to other sian privatization had its own momen- reform in these areas but progress hastransition economies. tum at that time. First, an urgent need not been easy. Let me give you an ex-

to get state enterprises-particularly of ample: Since 1992 the Bank has beenWhat could have been done differently? small- and medium-scale enterprises- working with the authorities in develop-Several observers have suggested that off the books of public finances. Second, ing a better land code that would allowslower trade and price liberalization a perceived need to create rapidly a for unconstrained land ownership andwould have given money-losing enter- group of private owners. Should the re- freedom-for-land transactions. However,prises more time to restructure and ad- formers at that time have delayed so far no consensus has been achievedjust. But this would have also slowed privatization of small and medium-size between the executive branch and thedown the incentives for growth for those enterprises, waiting for institutional de- Duma that would have allowed for thesectors that had a true comparative ad- velopment and legislation in areas requir- passage of such legislation.vantage, but were repressed due to the ing parliamentary approval that mightoriginal price and trade controls. The have taken years? Was it realistic to Should price liberalization and the firstdownsizing and restructuring of firms- expect that privatization would have ad- wave of privatization have waited for atwhile incorporating social concerns- vanced without the support of workers least a minimum of progress on the in-can be better helped by direct budget and managers in those enterprises tar- stitutional and legal reform front? Cantransfers to the affected communities geted for privatization? Policymaking really market-supportive legal institu-than by slowing price liberalization or takes place in the context of windows of tions be created before the marketscovering losses of these enterprises. An opportunity and not in the context of a themselves begin to emerge? Oneimportant objective of reforms-sup- preprepared sequence that theoretically needs a minimum of private property andported by the World Bank from the could have been more appropriate. To a depoliticized markets to generate an ef-start-was to shift subsidization from large extent, these processes are be- fective demand for market-supportive in-enterprises to poor households and yond the influence of the IFIs-and they stitutions, such as independent courts,communities. I am still convinced that should be. transparent bankruptcy procedures, andthis is the way to go. the like.

Great concems did emerge, however, re-I am aware of the criticism of the fast and garding transparency, equity, and concen- What should the Bank have done differ-massive Russian voucher-privatization pro- tration of market power in the second ently? In hindsight there are three ar-gram of small and medium size enterprises stage of privatization-the loans-for-share eas in which the Bank probably couldwith heavy participation of insiders and its program for large enterprises. And the have pressed for stronger governmenteffect on the quality of govemance-and Bank made this known to the Russian action. First, faster reforms to unbundlethat perhaps the process should have govemment at that time. At present, the and demonopolize the oil and gas sec-waited for the development of capital mar- government is considering adopting a tors, to encourage new private investmentkets, better competition laws, legislation more elaborate form of case-by-case and entrepreneurship. Second, a tougherprotecting small shareholders, and so on. privatization for large enterprises which, stance on tax collection, particularly fromBut, whatwould have beenthe altemative? if implemented, should ensure much large tax debtors. And third, a faster im-To keep these enterprises longer in state greater transparency and competition. provement of the prudential and regula-ownership and move slower with tory framework governing commercialprivatization? What would have been the Another area of criticism is that exter- banks, including enforcement. But vestedeffect of that strategy? Under such cir- nal assistance focused too much and interests in these areas were known tocumstances enterprise managers would too prematurely on liberalization and be strong-bolder government actionshave become uncertain about the timing privatization and less so on progress would have required a consensus onand method of privatization-whether on the institutional and legal fronts. We several levels and a much stronger com-they would receive enterprise shares. all had wished for faster progress on that mitment to reform by the executive.

© 1998 The World Bank TRANSITION, October 1998

Q. In particular, a revision of the pose. We have used projects and ad- term financing. Creditors will wish to seeWashington Consensus emerged as justment operations intensively to a track record of servicing short-terman important part of the Bank's re- achieve such targeting, combined with loans before moving toward longer-termnewal process (see Transition, June technical assistance to the institutions ones.1998). It is hoped that, with a new in charge. We have been involved heavilyapproach, more appropriate tools in assisting pension reform and in pro- Finally, let me turn to institutional de-can be applied to many of the prob- tecting basic pension levels. We are velopment. We have not neglected thislems of the transition economies, also assisting the restructuring and area-and neither have other donors-including: more focus on the social downsizing process of some industries although I am sure we should do mucheffects of the stabilization- liberaliza- by setting up retraining programs for more. In Russia, the Bank has sup-tion-privatization triad, control of workers in the affected communities and ported reform in a wide variety of areas,short-term capital movements, con- helping local communities take over the including land registration initiatives, an-fronting other undesirable side ef- social services, previously provided by timonopoly legislation, shareholders pro-fects of globalization, and, greater such enterprises. The communities tection, and the like.emphasis on institutional develop- themselves are active in designing suchment. Do you agree with these? programs-they are not "predetermined" IFC-a member of the World Bank

in Washington. Group-has been heavily involved bothA. You ask me about the Washington at the policy and grassroots level, as-Consensus. As far as I know, the Wash- Let me discuss the issue of controls on sisting in reform of the Civil Code, Com-ington Consensus lately has become a short-term capital inflows. Everyone ac- pany Law, securities regulations andlabel for a strategy aimed at achieving knowledges that a buildup of short-term corporate governance training. IFC alsoprivatization, liberalization, fiscal deficit external debt by the government or the piloted a large land reform project. Soand inflation reduction as fast as pos- private sector made economies highly farthe Economic Development Institutesible, and also making the state as small vulnerable to volatility in capital markets' (EDI) has organized training coursesas possible-with little regard to social sentiments. When too much capital is for about 5,000 instructors in Russiaissues, human capital accumulation, and flowing to finance the fiscal deficit, the and for about 1,000 in Central Asia inprogress on the institutional side. De- solution is to reduce the deficit, not con- areas such as economics, banking,fined that way, I find it a caricature, and trol capital inflows. The situation is dif- social sector policy, and the environ-hence not a helpful starting point to dis- ferent when large inflows are being ment.cuss many of the policy dilemmas and channeled toward the private sectortrade-offs that are still on the table. Con- through the banking sector. In this case A specific project has assisted Russia'ssequently, I will address directly the three tight prudential regulations and limits on Security and Exchange Commission tospecific questions you have raised, par- short-term open positions or currency improve the regulatory framework of theticularly in reference to the transition mismatches of the banking sector are security market. Through a Legal Reformeconomies. the first line of defense. Enforcement and Project and the help of the Legal Depart-

depolitization of the supervisory agencies ment, we are assisting in drafting newThe social cost of stabilizaffon obviously are crucial. legislation and streamlining the legisla-can be reduced by higher levels of tive process; this project has an impor-concessional external finance-we all As I mentioned earlier, we need to in- tant training and education componentwish the amounts could be larger. But tensify our work in this area. The issue for judges, courts and law schools. Andsuch amounts are limited. We have been is, whether in addition, one should im- we are in the course of preparing similarvery active in mobilizing donor support, pose Chilean-style reserve requirements projects in several other countries in theparticularly for the low income countries that act as a tax on short-term flows. I CIS. All these initiatives will need timein the Caucasus, Central Asia and also believe such an idea has merits and to be effective-by their very nature theyfor the postconflict countries. should be discussed with govemments are aimed at profound change of behav-

as an option. There are some costs: ior and habits of many actors in the so-On the domestic side, slowing down imposingataxonshort-termflowswhen ciety. Political consensus becomes aprice liberalization is not a good vehicle the private sector is starting to attract fundamental prerequisite for progress. Asfor social protection. Direct budgetary such financing may prematurely kill the we move to a second generation of re-transfers through targeted social assis- learning process by which creditors forms, institutional change will increas-tance programs better serve this pur- gradually move toward providing longer- ingly become more important.

* TRANSITION, October 1998 (© 1998 The World Bank

Setting Russia's Economy on a New PathOne late October afternoon, a remarkable meeting took place at the World Bank A group of influential Russian and U.S.economists-including Oleg Bogomolov, Stanislav Menshikov, Michael Intrilligator and Nobel laureate Kenneth Arrow-metwith First Deputy Treasury Secretary, Larry Summers, and several Russian experts of the World Bank and the IMF Themeeting-chaired by Joseph Stiglitz, chief economist and senior vice president of the Bank-explored the causes of Russia'seconomic breakdown and the necessary policies to overcome the crisis. One group argued that demand-boosting measureswould break the vicious cycle, and Jift Russia out of its present quagmire. The critics, on the other hand, insisted that withinthe present economic structure, stimulating demand would lead merely to higher inflation, with no appropriate supply re-sponse. The views thus remained apart, but the dialogue continues, and hopefully will contribute constructively to the ongoingreassessment of Russia's economic policy. The following article by Professor Nekipelov, director of a major think tank inMoscow, introduces interesting new elements in the ongoing discussion. The Editor.

The Nature of Russia's Economic Catastrophe-An AlternativeDiagnosisby Alexandr Nekipelov

In accordance with the standard ap- existing macro- and microeconomic en- a financial crisis at least since the fall ofproach to macroeconomic stabiliza- vironments. 1997, and it entered its most acutetion 'radical reformers,' the govern- phase in August 1998. The main ele-

ments headed by E.Gaidar, V. Government expenditures, including ments of this crisis are the following:Chernomyrdin, and S. Kiryenko, had con- spending on human capital (science, * A permanent budget deficit and a re-centrated on fighting inflation at any cost, education, culture, and health care), fell sulting debt crisis.believing that when inflation was de- to 37.8 percent of the GDP in 1996 (and, * A crisis of the banking system, mainlyfeated, the economy would soon begin according to some estimates, to ap- linked to imbalances between foreignhealthy growth. When it turned out that proximately 35 percent in 1997), exchange liabilities and assets. Thestable prices and foreign exchange rates whereas GDP itself declined by 36.4 banks' balance sheets include significantare not sufficient for this purpose, it was percent during the years of 'radical re- investments in GKOs (Treasury bonds)accepted that fiscal policy had been too forms." For comparison: in OECD coun- that defaulted.soft and, as a result, private investments, tries the respective ratio is about 50 0 A foreign exchange crisis, (it mani-which are necessary for growth, were percent, and in the most successful fested the dependence of the moderncrowded out by the state. It followed then postcommunist countries-the Czech Russian economy on the in- and outflowsthat economic growth critically depended Republic, Hungary, Poland, Slovakia and of foreign short-term capital and the im-on fiscal austerity. Slovenia-it equals about 45 to 50 per- portance of the dollar as an asset in Rus-

cent. Thus the persistence of the bud- sia).The Kiryenko govemment hoped that bal- get deficit in Russia hardly can be 0 The constantly deteriorating financialancing the budget would not only have a attributed to the soft fiscal policy. Rather, position of the real economy.positive impact on economic growth, but the budget deficit turned out to be quitewould stop the outflow of foreign capital insensitive to cuts in expenditure. Of The government's debt crisis is a prod-from the short-term state bond market course, this could never happen in a uct of the budget deficit that accumu-and thus would help stabilize the foreign genuine market economy. lated over several years, as well as itsexchange market. The measures that the adventurist financing methods. But theearlier government took to increase tax Purely Financial Crisis? budget deficit itself is an intermediatecollection, were purely administrative, rather than a final cause. This is whyand the effect was negligible. Another The current crisis in Russia usually is trying to overcome the deficit by me-source of revenues-the privatization of characterized as a purely financial cri- chanically increasing budget revenuesstate assets-was nearly blocked be- sis since the market transformation of and slashing expenditures, will eliminatecause of previous scandals and a low the Russian economy was largely suc- consequences rather than causes.demand for productive assets under the cessful. True, Russia has suffered from Russia's financial crisis is not an autono-

C) 1998 The World Bank TRANSITION, October 1998 m

mous phenomenon; on the contrary, it ment to the insufficient money supply. ket) is constantly maintained due to themanifests in a concentrated form the The recipe, therefore, should be to sati- ability of the interest rate to react imme-main flaws of Russia's economic sys- ate the economy with the liquid means diately to any changes in the supply andtem. of payments, increasing the level of mon- demand of money balances and other

etization. financial instruments. The transmissionContrary to widespread opinion, the core mechanism (money supply-interestof the financial crisis is an extraordinary The radical reformers have always criti- rate, investment and some consumerlack of liquidity in the real economy, cized this approach, but they never put demand-prices, real money supply, in-rather than the budget deficit. According forward a satisfactory explanation for terest rate) ensures that all real variablesto official estimates, 75 to 85 percent of why the Russian economy gradually has return to their equilibrium positions in theall transactions in this sector are car- been transformed into a practically in- long run, whereas price is adjusted to aried out without using money-either in kind economy. The Kiryenko govemment new level of nominal money supply. Therethe form of barter, mutual nonpayments, blamed the insufficient amount of cred- is no place here for barter transactions,or with the use of money surrogates. This its to the real sector for the demonetiza- arrears, and money surrogates as sub-not only results in huge transaction tion of the economy. There was some stitutes for insufficient money supply. Notcosts, but also explains why it is im- logic to this position: lack of credit de- much will chang if we allow for the down-possible to have a major improvement in mand was a result of high interest rates, ward stickiness of prices in the Russiantax collection on the basis of adminis- which were rooted in the huge budget economy, because of its high level of mo-trative measures: no tax police can ex- deficit. This position supported the gen- nopolization. For instance in the case oftract taxes (at least in money form) from eral idea of concentrating all the efforts falling money supply, the differenceenterprises whose profits (if any) are the of the executive power on toughening the would consist of a smaller output andresult of a surplus of accounts receiv- fiscal policy. higher prices, as compared to a perfectable over accounts payable. And vice market structure, but not in a moneyversa, it is obvious that the state budget But it is easy to prove that this position shortage.would be funded with a massive inflow of is unfounded. First, it is difficult to com-taxes, if the lack of liquidity in the real prehend the mechanism that transforms The emergence of an in-kind economyeconomy were overcome. the lack of credits into the weak liquidity in Russia cannot, therefore, be explained

of the real sector. The fact that enter- on the basis of the theory of the marketMystery of Liquidity Crunch prise 'A" has not been granted a bank economy. This does not mean that the

credit to finance its current needs in no latter is false; the real sector, stripped ofThus the lack of liquidity in Russian en- way means that its suppliers should money, is a product of deep deforma-terprises, rather than the lack of politi- automatically extend this credit them- tions in the foundations of the Russiancal will, was the real reason for their selves. Second, bankers are aware that economic system, its quasi- (or pseudo)failure to consolidate the financial situa- their credit can help a customer buy the market nature. There is no need to denytion. In order to restore liquidity in the necessary inputs, but does not guaran- the facts: a gap between price level andreal economy, one has to understand the tee marketability to a product. Thus the money supply is a reality in Russia,origins of this phenomenon. Many be- lack of liquidity in the real sector is a whereas mutual arrears-bartertransac-lieve it is linked to insufficient money sup- very strong obstacle against moving loan- tions and the like-adjust our enterprisesply; there is too little money in the able funds there, rather than the other to demand constraints. But this type ofeconomy relative to the existing price way around-the lack of credit being the adjustment has little to do with the stan-level (holding the level of output and main cause of arrears. The radical re- dard behavior of market agents undermoney velocity as given). These schol- formers' explanation of insufficient liquid- similar conditions (letting prices down,ars usually refer to two major facts: a ity of the real sector is nothing more than reducing output, or both).drastic reduction of money supply in real a variation of the concept that the Rus-terms during Russia's reform process sian economy suffers from an exces- Consequences of a Quasi Marketand a very small ratio of M2 aggregate sively restrictive money supply.to GDP, as compared to developed mar- Demonetizing the economy (though oneket economies. From this perspective, In a genuine market economy such a of the most important) is only one mani-nonpayments, barter transactions, and phenomenon as 'shortage of money" is festation that Russia's economic sys-money surrogates are simply substitutes simply impossible. Equilibrium in finan- tem has a specific character. Underfor cash; they are results of the adjust- cial markets (including the money mar- normal conditions, the profitability of cur-

* TRANSITION, October 1998 C) 1998 The World Bank

rent assets is lower than that of fixed sia, property rights reform was pharac- They, therefore, consciously exploitedassets in enterprises functioning in a terized by: total and logically inexpli- the quasi-market nature of the economicmarket economy: otherwise nobody cable ignorance of the need to control system they created.would invest in fixed assets. For years these assets that still belong to the statethe situation in Russia has been totally and a purely political approach to Collapse Was Inevitabledifferent: the yield of marketable securi- privatization. A purely political approachties has been many times higher than to privatization meant that the reformers Almost all market institutions are for-the rate of return in production. Under attached maximum importance to the mally in place in Russia-a two-tierthese conditions, money has been speed of the process, believing thatwhat- banking system, all major financial andpumped out from the real sector of the ever was responsible for the primary dis- trade intermediaries, and stock and for-economy into the financial sector, but tribution of public wealth in private hands, eign exchange markets. But this mar-enterprises, manifesting a wonderful abil- after privatization the market mechanism ket infrastructure is little more thanity to ignore budget constraints, contin- would redistribute the rest to the most Potemkin's village. Commercial banksued to function. Taking this into account, capable entrepreneurs. The result was have never extended much credit to theit should be absolutely clear how inad- that the management staff of most big real sector of the economy. First theyequate are the proposals to satiate the and medium-size firms found itself un- were making money on high inflation andproduction sphere with money (no mat- supervised-a function of the owners of foreign exchange speculation, then onter how this aim is to be achieved- capital (either state or private). This ex- extremely profitable GKOs. Some ofwhether due to Central bank or plains the distorted economic behavior them (those belonging to the 'oligarchs")commercial banks' actions). of enterprises, including supplies of had the privilege of maintaining and ser-

goods against nonpayments or money vicing government accounts. By artifi-The quasi-market nature of the Russian surrogates. The asset-stripping epidemic cially slowing the settlement ofeconomy helps to explain its sometimes in both state and privatized firms payments, these banks gained additionalstrange reactions to standard applica- (criminalization of economic activity) is sources for short-term speculative in-tions of fiscal and monetary policy. Un- rooted in the inadequate corporate gov- vestments. The banks bought industrialder a market economy, reduction of ernance system established in Russia firms because of expectations of hugegovernment spending cannot lead to a during the reform of property rights. capital gains, resulting from the initialgrowing budget deficit (though it is ac- heavy underpricing of assets (often thecepted that the absolute volume of taxes Unusual behavior of the govemment (at privatization price was much less thancan decline, but to a lesser extent than the federal and regional levels) is also a the firm's liquidation price). The stockexpenditures). However, if a substantial specific feature of our economic system: market, in its turn, has never played anynumber of firms lack hard budget con- including the systematic breaching of its role in allocating resources-being astraints, the result of such fiscal auster- own commitments (huge arrears in pay- playground for speculation on the sharesity is not so obvious. A decline in ments of state orders, salaries of those of several dozen enterprises that producegovemment expenditures can produce a who work in the budget sphere, pensions, and export raw materials.surge in nonpayments and, as a result, and the like) and the coercing of busi-a much steeper fall in tax collecfion than nesses to supply goods or services to This was a consequence of a deeply er-in the case of a 'normal" market customers who do not have money to roneous strategy for market transforma-economy. pay for them. Nonpayments by the state tion in the Russian economy. It is

in large part caused the arrears in the impossible to maintain a normal finan-Naturally, to accept the existence of the real sector. If such government behavior cial infrastructure along with a demon-Russian market anomaly is only the first took place in a genuine market economy, etized real sector of the economy. Strongstep. More important is to determine the result would be mass bankruptcies incentives for the financial and tradingwhat factors generate it. The Russian of those enterprises that had contracts sectors to serve the process of wealthpostcommunist experience shows that with the govemment (as well as of their consumption (rather than wealth cre-under certain condifions, even privatiz- credltors) rather than demonetization of ation) and redistribution have been builting a significant portion of state assets the real sector of the economy. The para- into the system. It helps to understandmay not be enough to guarantee genu- dox is that based on their experience, the unprecedented high real interest rateine market transformation of the our radical reformerswere verywell aware that has been holding for years on a leveleconomy. As a consequence of the of the unusual reactions of Russia's real many times above the rate of return inmass privatization thattook place in Rus- sector to such government behavior. the real sector.

C) 1998 The World Bank TRANSITION, October 1998

Of course, such a mechanism of eco-nomic annihilation could not go on for-ever. The government increasingly was Blueprint of an Economic Strategyunable to finance basic social needs(along with drastically reducing expen- In light of the diagnosis, we are suggesting the following therapy.ditures) and was forced to lean heavilyon domestic borrowing. This pushed in- Changing the behavior of economic specially instituted state holding com-terest rates further up and made servic- agents and overcoming the crisis of pany (an alternative solution-by a num-ing of domestic debt increasingly difficult. arrears. ber of such companies). ConcreteIn order to make borrowing cheaper and mechanisms providing for this companythus facilitate the servicing of debt, the Among the measures necessary to pro- have been elaborated, following the tar-government and the Central bank, in vide for market transformation of the get of net worth maximization. It has also1996, decided to open the securities Russian economy, corrections in the been shown that such a state companymarket to foreign short-term speculative property rights aimed at establishing ef- should in never be subordinated to thecapital. So a strategic decision was ficient corporate governance should play executive power, rather, it should have ataken based on purely tactical consid- a key role. Putting the management of status similar to that of the central bank.erations. Though it was advertised as a joint-stock companies under the controlnew important step toward economic lib- of the owners of capital and making them It is also extremely important to changeeralization, it was in fact the last means maximize the profits (in the short run) radically the relations established be-of prolonging the existence of an absurd and the net worth of the firm (in the long tween govemment bodies at different lev-economic system. run) are subject to the solution of two els and economic market agents. True,

problems. The first one is the introduction very often authorities use their power inA massive inflow of foreign capital did of legal mechanisms providing for share- a way that is totally incompatible withoccur. Reserves of the Central bank in- holders to fulfill their functions as the principles of a market economy (thatcreased, the ruble supply began a bysubess owners. These mechanisms is, not respecting their own contractualsteady increase without any immediate are being instituted and the task is to obligations, forcing firms to supply goodsdanger to the exchange rate and price complete it successfully and quickly. The and services to insolvent, but "sociallystability (though without any positive ef- second problem is, under current condi- important" enterprises, executing admin-fect on the level of "monetization" of the tions, the main one, though not enough istratve pressure to prevent firms fromreal sector), interest rates began to fall. attention is being paid to it-the intro- reducing their personnel even when theyHowever, tax collection didn't improve. duction of a system that would guaran- have no possibility to sell their output,Commercial banks were quickly moving tee a market-compatible style of asset and so on) because they have no otherin a highly leveraged position, drawing management by a specific owner, the ways to address important economicheavily on foreign exchange borrowing Russian State. and social issues. This behavior, there-to finance ever-increasing investments in fore, turns out to be a natural way toGKOs. The government is still the main owner. operate in an irrational economic sys-

According to some estimates, up to half tem. But it is also true that continuingIt would be a great mistake to believe of all assets, including significant such actions can only freeze the exist-that if it were not for the Asian crisis, the shareholdings in privatized firms, belong ing impasse.economic situation would normalize in to the State. The absence of a rationalRussia. Not at all! The stock of short- system of state assets (in particular, It is justifiable to introduce a procedureterm foreign capital invested in govern- state-owned shares) management de- that would automatically trigger the print-ment securities would have stabilized at forms the behavior of large and medium- ing of money at those times when thesome interest-rate level, and the prob- size Russian enterprises. The usual federal govemment cannot honor its com-lem of financing the budget deficit would decisions of managers are often possible mitments. Such a measure would raisehave been reproduced at a new level. only because one of the biggest share- the govemments responsibility radicallyWithin the pursued course of reforms, holders-the State-shows no interest rather than lead to growing inflation. Itsooner or later, financial (or social, in the in how its capital is used. would create conditions for the Russiancase of excessive cuts in budget expen- economy to function according to mar-ditures) collapse would have become in- The situation could be remedied if all ket principles, and thus it would eliminateevitable. state-owned shares were managed by a the systemic causes of "demonefization"

a TRANSITION, October 1998 © 1998 The World Bank

of the real economy. Under rigid control procedure. Taking into account possible attitude toward banks' investments inof the owners of capital, firms will not inflationary pressure as a result of the the stocks of domestic and especiallysupply goods to insolvent partners; those overall arrears set-off, the following mea- foreign companies seems to be expe-who do will go bankrupt. sures seem useful: dient. The usefulness of banks' partici-

OFreezing prices for several months pation in privatization is often justifiedMeasures such as prinfing more money, *Restorating a foreign exchange rate by their ability to play the role of a stra-although necessary, are not sufficient. corridor to provide an anchor for domes- tegic investor and thus to provide effi-This is because 'reformed enterprises" tic prices cient corporate governance. Thiswill not be able to overcome the lack of * Adjusting the economy for inflation argument turned out to be false becauseliquidity in the real economy. Declaring through such measures as an inflation-ad- so far banks have invested in produc-bankruptcy can hardly solve the prob- justed accounting and tax system and the tive assets seeking huge capital gainslem: there was so much demonetization automatic indexation of nominal contracts. exclusively. On the other hand, the vola-in that it was leading to complete disor- tility of stock market prices makesganization and chaos. I do not believe Normalizing the financial sphere shares a risky investment and thus un-that a gradual saturation of the economy dermines banks' safety. It would, there-with moneythroughtheoperaffonsofthe It makes no sense to blame the finan- fore, be advisable if commercial banksCentral bank would solve the problem; cial intermediaries for the lack of credit concentrated on extending credit tothe economy can't wait. A radical deci- to the real economy when speculative firms to finance their working capitalsion is required: clearing the financial investments are not only much more prof- needs. The main problem with this ap-field with an overall mutual nonpayments itable, but less risky. The above-men- proach is that it needs a lot of moneyset-off in a one-strike saturation of the tioned measures aimed at genuine which, under the current fiscal crisis,real economy with money, according to market transformation of the Russian only can be printed. According to anmarket rules. Technically it means that economy and its "monetization," with the estimate announced by First Vice-Pre-mutual arrears of all economic agents aid of the overall arrears set-off can mier Maslyukov, approximately 60 bil-are netted out simultaneously. The ac- change this situation and overcome an lion rubles (about 2.5 percent of GDPcounts of those with a positive debt bal- abyss between the spheres of financial or 30 percent of base money) areance (receivables exceed payables) and trade intermediation, on the one needed to bail out a minimal number ofshould be automatically credited with the hand, and production, on the other. Un- big banks. That is why another approachrespective amount. If the debt balance fortunately, now we are facing not only deserves attenfion.is negative it should be transferred to the systemic financial problems, but crificalgovernment, which, in accordance with current issues linked to the collapse of *Taking advantage of Sberbank, aits industrial policy priorities and finan- the banking and, as a result, of the settle- unique quasi-state savings bank withcial resources, would decide whether it ment of payments systems that put the branches practically everywhere, a par-wants to transform it into long-term credit, economy on the edge of chaos. allel system for settlement-of-paymentsconvert it into ownership, or allow respec- could be quickly established. To maketive enterprises to go bankrupt. Strategically, two main approaches can it absolutely safe, a 100 percent reserve

be used now to remedy the situation: requirements for transferable deposits inIt is important to assure a simultaneous Sberbank could be introduced, which, ofclearing of wage arrears. Simple money *The first, standard one consists of ap- course, would mean that the clearingprinfing by the state, in order to pay wage plying selective bail out procedures to services would require payment. Partici-arrears of defaulted enterprises, could the banking system. Saving the mini- pation in this system ought to be volun-destroy the consumer market. In con- mal number of banks necessary to re- tary, with the old one remaining in force,trast to the real sector, this increase in store a normal settlement-of-payments based on partial reserves. This acfion isthe money supply is not a substitute for system may be accompanied by their designed to give the Central bank andnonpayments and money surrogates. temporary nationalization. Along with the government an opportunity to de-Therefore, noninflationary methods the introduction of a set of measures cide calmly what to do with the collapsedshould be preferred. For example, the elaborated by the Basel's committee on banking system without running the riskworkers (or special institutions acting on bank supervision (1997), some addi- of chaos. Its realization could drasticallytheir behalf) should be entitled to ex- tional steps probably will be necessary reduce the amount of money that mustchange wage arrears for stocks on a fa- to improve the safety of the banking sys- be printed just to restore the settlement-vorable basis or to initiate a bankruptcy tem. In particular, a reconsideration of of-payments system.

C) 1998 The World Bank TRANSITION, October 1998

Stabilizing the foreign exchange According to Chase Manhattan Bank, billion. Undertheseconditionsitseemsmarket from August 1998 to the end of 1999 the necessary to take urgent measures to

Russian government has to pay foreign stop foreign currencies (first of all, theCollapse of the foreign exchange mar- creditors $22.3 bililion, from August 1998 U.S. dollar) from being one of the mostket requires urgent measures. The situ- till August 1999, whereas for the same important assets in the Russianation is aggravated by the extreme period Russian commercial banks and economy and limiting their role to in-complexity of servicing the foreign debt. other economic units have to pay $16.4 ternational payments. An obligatory

Russia's Economic Program

Kommersant Daily, the Moscow-based business paper, pub- evasion.lished end-October the latest version of the government's lat- * A state-owned development bank will be set up-operat-estversion of the anticrisis plan It calls for some price controls, ing on a commercial basis-to finance projects in the realpayment of back wages to workers, and the revival of Russia's economy. A state-owned insurance and guarantee agencydepressed industries. Some major points of the plan: will back up this activity.

0 As of October the government will guarantee full payment* The ruble will have a floatng exchange rate. Economic of current wages and pensions. It will continue paying backand administrative measures will be undertaken against wages and pensions, and will pressure enterprises and indi-banks and other institutions that launch speculabive attacks viduals for timely payment of wages.on the ruble. * Price controls will be introduced, and the prices charged* Obligatory sales of hard currency by exporters will be raised by natural monopolies, such as heating, electricity, trainto 75 percent of their hard currency receipts. The time frame for fares, will be frozen until January 1 (variant-until April 1). Ahard currency receipts to be tumed in will be shortened for cap on price markups will be introduced on socially signifi-many sectors, including to 30 days for oil and gas exports. cant goods at 20 percent over wholesale prices.* From January 1, 2001, the Central bank will rescind * Shortages of medicines and food will be alleviated bylicenses of banks with capital of less than one million ecus granting credits for the purchase of essential goods and pro-and of nonbank credit institutions with capital less than viding state support to manufacturers of such goods. A pre-100,000 ecus. In the meantime, the commercial banking viously imposed additional 3 percent import duty on essentialindustry will be restructured. The central bank will issue cred- goods will be eliminated.its to banks that offer either hard currency as collateral or a * The government is expected to clear debts from state-controlling interest in their organizations. Hard currency op- controlled companies by allowing them to cancel out mutualerations of commercial banks will be strictly controlled. debts and use barter more extensively.* Russia's frozen state securities will be restructured andsecondary debt trading will resume.A unified system to moni- Russian First Deputy Prime Minister Yuri Maslyukov said, ontor and manage Russia's state debt will be established and November 2, that Moscow plans to print 12 billion rubles bywill include the debts of regional administrations, enterprises, year-end to pay overdue wages to soldiers, teachers, doctors,and banks. and others in the state sector. Maslyukov said also that the* All budget receipts will be transferred into a single ac- Kremlin will pnnt more money next year if intemational lenderscount under the control of a federal treasury. don't offer the govemment new loans. The Intemational Mon-* A restructured and simplified tax system will include: etary Fund (IMF) said that an economic program announced-Gradually reducing the value-added tax (VAT) and elimi- by Moscow does not go far enough to secure the new loans.nating it on purchases of foreign firms when advance pay- The IMF urged the govemment to come up with a realistic bud-ment is made to exporters get for 1999 before it would consider restarting the stalled dis--Cutting profit tax from 35 percent to 30 percent, with up to bursement of a $22.6 billion loan package agreed to in July.about one-fifth going to the regions (The IMF withheld a $4.3 billion loan due in September after-Eliminating tax on profits reinvested in industry Russia defaulted on domestic debt and imposed a 90-day-Introducng property tax equal to 0.5 percent of the moratorium on the payment of some private foreign obligations.)property's market value.-Imposing higher penalties for late tax payments and tax Based on news agency reports.

11 TRANSITION, October 1998 © 1998 The World Bank

sale by the exporters of all foreign ex- Transition to economic growth of pushing up government expenditureschange revenues at market rate ought or radically reducing the tax burden. Ato be introduced (according to Poland's The government traditionally has linked simple increase in money supply wouldexperience, existing foreign exchange economic growth to an increase in the immediately undermine the fragile sta-accounts could remain, but new inflows volume of investments. At the same time, bility on the foreign-exchange market andof foreign exchange should be ex- it is believed that under no circumstances quickly reduce the foreign-exchange re-cluded). Foreign exchange may be are domestic savings, even if completely serves of the central bank.acquired only against import contracts transformed into investments, sufficientand foreign exchange liabilities. In or- to settle the country's problems. That is What this really means is that in a two-der for these measures to be effective, why the government also strove to attract sector, (monetary and in-kind) Russianit is critically important to establish a large-scale foreign capital and seconded economy the standard multiplicationrigid control of current foreign exchange the openness of Russia's financial mar- mechanism does not work, as it wouldtransactions on the basis of reliable in- kets. in a genuine market economy: rublesformation flows between commercial spent by the government immediatelybanks and customs authorities. No ob- The Department of Economics, with its returns, either attracted by high inter-stacles to transactions with foreign ex- member research institutes at the Rus- est rates such as short-term Treasurychange by private persons should be sian Academy of Sciences are consid- bill (GKO) investment (before Augustimposed. ering a different pattern of transition to 17) or through foreign-exchange invest-

economic growth-and I share their view. ment (to the central bank). Once theTaking into account the extreme grav- According to this algorithm, initiation of economy becomes a genuine marketity of the current situation, it seems economic growth in the first stage should economy, the demonetization of thejustifiable to consider a forced transfer result from increased utilization of exist- real economy is eliminated, a naturalof all foreign exchange deposits of Rus- ing industrial capacity due to stimula- balance between the return on finan-sian banks with their foreign counter- tion of current expenditures. Such an cial instruments and production activ-parts to, say, Vneshtorgbank or approach is by no means directed ity is established, and the functions ofVneshekonombank (Foreign Trade against investments, including foreign the foreign currency are limited to in-Bank or Foreign Economy Bank). For- investments. The so-called 'paradox of ternational payments, the multiplica-eign investments by Russian commer- thrift' was formulated long ago by mac- tion mechanism can function again.cial banks should be forbidden, as well roeconomic theory. According to thisas their investments in foreign ex- theory, with the availability of free capaci- One of the government's counterargu-change. The government and the cen- ties, stimulating current consumption is ments is that no more free capacitiestral bank ought to discontinue their more useful than stimulating savings and are left that could be used efficiently in.good-natured" attitude toward liberal mforeign capital transfers. Aftertheex- investments. Although under such policy a market environment. True, under theforetign fcapi nta trasextrsaftrd thege- the ratio of savings falls, its overall vol- current openness of the Russianpirations ipof redont exgustradin regu- ume does not fall because total output economy nearly all our processing in-batiosefimpos ontroAugu 1 versitn mi increases as a result of better utilization dustry has become noncompetitive. ButTobin's tax to limit in- and outflows of of existing capacities. This is not an the country ought to make a choice:Torin'sttax torlimgn- speculand ou pitfo o abstract theory. In those postcommunist either to accept the fact that for a longshort-term foreign speculative capital.

countries that are now on the track of time it will be deprived of significantThese measures that lim.t the functions economic growth, the expansion began scientific and technological potential,of foreign exchange in the Russian before the increase in investments took or to pursue a serious industrial policy,

njarv ~~~~~~~which would include the well-devisedeconomy and the inflows of foreign short- place. and accurately administered protectionterm capital will by all means exercise

an effect on the rubles exchange rate. What must be done to stimulate current of national producers. This is of courseAfter finding its new equilibrium level, it consumption? A standard solution is to a normative choice, but the resistancewould be important for achieving macro- increase aggregate demand by loosen- that our "reformers" have encounteredeconomic stabilization by reintroducing ing somewhat the fiscal or monetary in this particular field since 1992,the foreign exchange corridor. This, of policy. Its inapplicability to the modern makes me believe that the societycourse, raises concern about the need Russian economy is obvious. The bud- would decide in favor of saving the na-to accumulate sufficient foreign ex- get deficit and the acute debt crisis of tional industry even at the expense ofchange reserves. the government excludes the possibility additional current costs.

(D 1998TheWorld Bank TRANSITION, October 1998

Industrial and social policy Efficient industrial policy involves the ap- tioned measures of selective structuralplication of extremely difficult decisions. policy, can sharpen the unemployment

In contrast to the executive power, the re- The economy has been so weakened problem. This means that the elabora-search institutes that belong to the Eco- that it has become hopeless to retain all tion and enactment of an efficient socialnomic Departmentof the RussianAcademy those industries which, under other cir- safety net is one thing that will deter-of Sciences have always opted for the ac- cumstances, could have been useful. mine the success of the new economictive involvement of govemment in the mar- The limited resources have to be con- course. Implementation of the proposedket transformation of the economy-for the centrated in those few areas that prom- approach to economic and social policyconcentration in the government's hands ise a chance for Russia to fall back into involves the large-scale redistribution pro-of seriousfinancialresourcesneededtopur- the ranks of economically developed cesses that can be carried out only bysue a well-designed industrial and social countries in the foreseeable future. A set the executive powers-both federal andpolicy. This position was not the old-fash- of industrial policy instruments ought to regional. That is why the need to increaseioned worshipping of the economic center, include state procurement orders (with significantly the government outlaysbutanacknowledmentofthedeeppagthat guaranteed payment), tax benefits and (compared to the GDP), should beexisted betweenthe actual structure of tech- subsidies, measures aimed at support- openly acknowledged. The rationaliza-nological and industrial potential inherited ing exports and tariffs, limiting imports tion of our economic system and over-from the Soviet Union and the market crite- in selected areas, providing incentives coming the liquidity crisis will enable usria for resource allocation. We have been for the formation of competitive financial to achieve this goal without increasingsure that rationally doling-out the impact of and production structures for the inflow the tax burden and exceeding a budgetmarket forces would not only reduce the of foreign direct investments, and so on. deficit that is acceptable from a macro-number of social conflicts during the trans- They will not undermine the market economic perspective.formation period, but it would also provide mechanism by reallocating resources.an adequate place in the intemational divi- Setting up high tariffs to protect selected Professor Nekipelov is director at the In-sion of labor for Russia, and make it pos- industries should come simultaneously stitute for International Economic andsible to preserve the bulk of human and with a firm time schedule for gradually Political Studies, Russian Academy ofphysical capital. reducing them to normal levels. Only in Sciences, Moscow, Russia.

this way will it be possible for the re-The research institutes mentioned above spective industries to adjust to, rather This paper was presented at the Sec-constantly warned about the strategic in- than be isolated from, the world market. ond Boston Seminar on Economic Glo-adequacy of focusing production on a raw balization, Boston, 23-25 Octobermaterial,whichwouldbecomeinevitable Genuine market transformation of the 1998, fax 095-310-7061, E-mail:if Russia followed dogmatically the prin- economy coupled with the above-men- nekipelov@transecon.ruciples of laissez-faire. We noted fre-quently that by refusing to participate in Announcing an Anti-Crisis Programthe process of economic and socialtransformation, the authorities doom ^/ themselves to playing the role of a fire . - -

brigade, rushing from one burning house Ito another. So many years of irrationaleconomic policy could not have passedwithout grave consequences. A lot of pro- ... -

duction sectors that, after adequate re - .

structuring, could have played an -- .-..-

important role in a new market economy,have been destroyed, others are on the )l(z 1 brink of disappearing. The risk of remain- &f4 1 A

ing for decades in the rearguard of theinternational community is a real possi- =4ability for Russia. Instituting radicalchanges in the country's economiccourse is the only way to resist it. From the Budapest-based magazine Hungarian Economy

* TRANSITION, October 1998 © 1998 The World Bank

William Davidson InstituteThe Dangers of Ignoring Russian Communitarianismby Charalambos Vlachoutsicos

here is mounting evidence that munity in the medieval forest depended elements evolved as a central distinc-Western management consult- on extraordinary group cohesion and dis- tive feature of Russian culture.ants, trainers, and businesses cipline. The members of each commu-

operating in Russia face serious, unfore- nity needed to band together to fell the The soviet system ursurped age-old in-seen problems in interactng effectively forest, till the soil, harvest the crops, and stitutions and tried to adjust them towith their Russian counterparts. Many protect themselves from invaders and suit their purposes. In many importantof these problems stem from mutual marauders. In the tight village commune ways the soviet system stifled the genu-misperceptions, which ensue from the each member being protected by fam- ine aspects of the communitarian valuefundamental differences in each other's ily and neighbors, felt safe and secure. system and, through the suppressiveeconomic and political systems, infra- The culture was marked by extreme aver- mechanisms of the Communist Party,structures, national and business cul- sion to change, risk avoidance and a eroded its grassroots participation intotures, as well as managerial values and strong tendency to maintain stability. As powerless, fake rituals. The soviet po-practices. The Russian communitarian a result, while the group took priority over litical culture that emerged was markedvalue system, comprising cultural values, the individual, each member was indis- by many features of the traditionalnorms of behavior, and political as well pensable for the survival of the group. communitarian value system that-al-as geopolitical pattems, proved to be an Therefore, the community had to strive though perverted -in some ways mayenduring feature of Russian society. It to balance the interest of all its mem- be seen as its continuation. The work-predated communism and has remained bers. ers' collectives instituted in Soviet en-a major social force in the terprises, by including everyone workingpostcommunist era. Industrious, efficient village house- in the enterprise, from blue-collar work-

holds, capable of surviving and improv- ers to top management, incorporatedIts roots date back to the Kievan ing their economic circumstances had the Soviet version of the principles andstate, which rose in the 9th century. The strict limits set on the extent of their self- practices of the Russian communitarianessential features of the Russian improvement. Those who were threat- value system. It constitutes an examplecommunitarian value system are derived ened by disaster, illness, or even of how the bolsheviks tried to capitalizefrom institutions that developed in re- character flaws and were, therefore, un- on the strength of the traditional valuesponse to the focal need for survival un- able to survive on the land originally allo- system.der the adverse geographical, climatic, cated to them by the village communeand economic conditions that prevailed (mir), were provided for with additional Belief in communism has since rap-in Kievan Russia. Kievan Russians in- means taken from the most successful. idly eroded, but the core of the originalhabited northern land covered by great Nevertheless, each individual was indis- communitarian value system persists.primeval forests, which concealed poor, pensable for the survival of the group, While the effectve power of the workersacid soil and a swampy terrain. Long, therefore, the community had to strive to initiate decisions is limited, their powerdark, and bitter cold winters were fol- to balance the interests of all its mem- to block them, especially in state andlowed by destructive spring thaws and bers. A unique and apparently contradic- privatized enterprises, still remains de-short summers with good weather spells tory combination of suppression of the cisive. Movements of the 'invisible hand"of unpredictable duration. The hardships individual and considerable freedom of of the market economy are beingcaused by scarcity have been greatly expression evolved: members openly thwarted by the 'invisible fist" of the tra-aggravated by Russians' isolabon from and uninhibitedly exercised their right to ditional communitarian value system.the outside world-either due to inac- articulate their interests and opinions Workers' tolerance, if not support, givescessibility because of prohibition of for- before decisions were made. However, top managers great political presenceeign travel. once a decision had been reached, they with central and regional governments.

were obliged to abide by it. Thus an ap- (Through stock accumulation, workerThe biological, economic, and social parently contradictory and unique com- proxies, and other means, managerssurvival of the individual and of the com- bination of centralist and grassroots have steadily increased their share of

( 1998 The Worl Bank TRANSITION, October 1998

ownership in most of the 126,000 enter- on how a target set by the leader can best ment system of Russian enterprises isprises pfivatized, which account for about be achieved. Therefore, such decisions are the panacea for all problems. Neither do70 percent of Russia's GNP. In 1997, very hard to finally implement. we advocate going back in history and40 percent of shares formally belonged ignoring the free market's signals andto employees, 18 percent formally be- Reputable Russian and Western econo- stockholders' individual profit motives aslonged to top managers. The real distri- mists vehemently denounce the the focal indicators of the viability of en-bution is estimated at 20 percent communitarian values as old-fashioned, terprises. Institutions do, however, influ-employees, 40 percent top managers.) obsolete, and obstructive to the trans- ence the incentive structure of a society

formation process of the Russian and, as a consequence, political andSoviet enterprise managers have tradi- economy. But their potency cannot be economic institutions are the underlyingtionally been expected to give a high pri- ignored. Whenever understood, these determinants of economic performance.ority to the well-being of all the members value do provide essential insights into Thus efforts to introduce market-orientedof their workers' collectives, in terms of attitudes and practices by workers, man- managerial practices in Russia will fail,the basics of life-housing, food, edu- agers, and enterprises in present-day unless the traditional management sys-cation, medical care, job security, and Russia. It comes naturally, to Russian tem is understood, and crucial elementsbenefits. These social expectations re- managers and workers alike, to identify of the the Russian Communitarian Valuemain especially strong today in hundreds with and practice this value system and System are incorporated into Westernof medium-size towns across Russia, to react negatively whenever it is chal- management methods.where economic life depends totally on lenged. Acknowledging this can help The author is Visiting Professor at thethe survival of only one or two big local Westem managers devise ways in which Athens Laboratory of Business admin-enterprises. Workers in state and priva- these values can work for-not against- istration, Greece.te enterprises continue to look to their change. For example, structuring thetop managers-not to their union lead- management system in such a way that His original paper, 'Russianers-as the protectors of their jobs. employees can express their opinion on Communitarianism: An Invisible Fist in theWorkers remain loyal to the old man- implementing a given business decision, Transformation Process" (Working Pa-agement by supporting it with the vote before it has been taken. per no. 192, July 1992), was presented atof their stock, in exchange for being kept the Davidson Institute Research Work-on the payroll, even part-time, and thus We do not claim that integrating shop, Organizational Change in Transitionthey continue to receive whatever fringe communitarian values in the manage- Economies, Ann Arbor, Michigan, 1997.benefts, services, and care enterprisesstill provide to the members of the work-ers' collectives. Workshop On Consumer Behavior

By ignoring the code of the traditional n July 24-25 1998, 16 dis and complexity. Russell Belk of the Uni-value system, Westemers often misun- tinguished marketing scholars versity of Utah discussed the apparentderstand Russian managerial practices from around the world met in anomaly of low-income consumers inand decisionmaking methods. Thus West- Ann Arbor, Michigan to exchange views transition economies spending money onem enterprise managers usually tend to on Marketing Issues in Transitional luxury goods. He reminded the audiencebe "democratic" early on in the decision Economies, as part of a Davidson Insti- that throughout history and acrossmaking process of establishing targets by tute research workshop. While several economies, luxury goods have alwaysinviting their direct subordinates' opinions papers were multicountry studies, oth- been in demand. The reasons for thison what should be done, before establish- ers focused on individual countries, such deman include their symbolic ability toing targets, while Russian subordinates ex- as China, the Czech Republic, Hungary, satisfy consumer's feelings of deserved-pect a good leader to be 'centralist" by Republic of Korea, Poland, Romania, ness, their need to feel like a part of theestablishing targets alone. On the other Russia, and South Africa. elite, and their desire for respectabilityhand, if Westem managers, decide how and dignity.to implement a set target, without prior The papers presented spanned five ma-consultations with their subordinates, Rus- jor themes. The first theme was the way Jan-Benedict Steenkamp of the Catho-sians, according to their traiditional deci- in which consumers in these countries lic University of Leuven, Belgium, pre-sion-making process, perceive it as were changing, as their marketing envi- sented data from South Africa thatviolating their rights, to submit their views ronments offered them greater choice examined the ways in which consumer

* TRANSmION, October 1998 C) 1998 The World Bank

Presentations for ASSAs Annual Meeting.During the forthcoming Annual Meeting of Allied Social Science Associations (January 1999) the following research fellowsand faculty associates of the William Davidson Institute will present papers:

Josef C. Brada, Arizona State University, and Ali M. Kutan, Jan Svejnar, University of Michigan and CERGE-EI and FransSouthem Illinois University, Money, Employment, Output, Spinnewyn, Catholic University of Leuven, Unionized Firmsand Regulation: EU Membership for Transition Econo- in Transition Economiesmies

Gerard Roland, Universite Libre de Bruxelles, Institutions,Daniel Munich, CERGE-EI, Prague and Jan Svejnar, Univer- Law Enforcement, and Transitionsity of Michigan and CERGE-EI and Katherine Terrell, Uni-versity of Michigan, Wage Determination Before and John P. Bonin, Wesleyan University and Istvan Abel,During the Transition in the Czech Republic Budapest University and National Bank of Hungary, Restruc-

turing in a Hurry: Hungarian Companies Attempt toJan van Ours, University of Tilburg and Martina Lubyova, Maintain Market ShareSlovak Academy of Sciences, Active Labor Market Poli-cies and the Transition Rate from Unemployment into Annette N. Brown, Western Michigan University and J. DavidRegular Jobs in Slovakia Brown, Stockholm Institute of Transition Economics, The

Evolution of Market Structure in Russia: ImplicationsMark Foley, University of North Carolina, The Transition for the Emergence of Competitionfrom Work to Retirement under Economic Uncertaintyin Russia Daniel Berkowitz, University of Pittsburgh and David N.

DeJong, Intemal BordersEnrico Perotti, University of Amsterdam and Stanislav Gelfer,RECEP, Investment and Financing in Russian Finan- Saul Estrin, London Business School, Privatization andcial-Industrial Groups Corporate Governance in Ukraine

Anna Meyendorff, William Davidson Institute, Credit Allo- John Earle, Stanford University, Stockholm Institute of Tran-cation in Russia: The Role of Financial-Industrial sition Economies, The Political Economy of MassGroups Privatization

Philippe Aghion, University College London and Steven Fries, Jan Svejnar, University of Michigan and CERGE-EI, Prague,European Bank for Reconstruction and Development, Bank Currency and Financial Crises in Eastem Europe andBailout Policy the Former Soviet Republics

'values priorities" differe by segment; the China and their modes of resolving dis- and reliable measurement of market ori-factors (such as gender and age) that agreements. entation among firms in several emerg-explain these differences, and the con- ing and transition economies, whilesequences of these differences on con- Three papers focused on measuring and Patricia Huddleston and Linda Goodsumption behavior. (This paper was improving the extent to which firms in found similarly satisfactory results in theircoauthored by Steven Burgess of the transition economies possessed a mar- study of retail firms in Poland.University of Witswatersrand in South keting orientation, necessary for survivalAfrica.) Segment differences were also and success in the more competitive The third theme was Branding Challengesthe subject of Bemd Schmitt's paper on postliberalization economies. Ron Savitt for local firms in transition economies.consumer segments in China (Profes- of the University of Vermont reported on The defensive perspective of ways insor Schmitt holds appointments at Co- his study of 76 enterprises in the Czech which they could fight global entrants intolumbia University in New York and at the Republic. His conclusion was that not their local markets given their own se-China Europe International Business enough progress had been made, de- verely limited resources, was discussedSchool in Shanghai). David Tse and two spite a lot of lip service to the concept. by Erich Joachimsthaler of the Univer-coauthors from the City University of Two other papers in this stream focused sity of Virginia, drawing from his researchHong Kong discussed research on gen- on measurement issues. John Farley of on European firms. Rajeev Batra of theerational differences over family purchase Dartmouth and Rohit Deshpande of University of Michigan took the offensivedecisions among women in mainland Harvard reported success in the valid perspective and reported on his study of

© 1998 The World Bank TRANsmioN, October 1998 Fe

brand-building challenges faced by firms nization and Mrinal Ghosh of the Univer- data comparng the market entry attrac-in the Republic of Korea as they tried to sity of Michigan presented exploratory tiveness of 18 Central and Eastem Eu-expand in Western markets. data from China on that country's con- ropean economies, while Yigang Pan

tinuing problems with distribution ar- from the City University of Hong KongTheme four was the evolution of distribu- rangements, and how local companies reported on analyses from China show-tion systems. Carmen Balan of theAcad- and multinational corporations were cop- ing that early entrants tended to do bet-emy of Sciences in Bucharest presented ing With them. ter, often using equity joint venturedetails of how the Romanian distribution arrangements. Several collaborative re-system was evolving and the challenges The Strategic Issues theme, included search projects are likely to emerge fromthat it still faced. Jim Gentry and Debra ways in which to choose which markets the conference, and an edited volume ofDahab of the University of Nebraska dis- to enter and decisions on timing and the presented papers is planned.cussed the continuing importance of re- mode of entry. Lalita and Ajay Manrai oflationships in the Hungarian distribution the University of Delaware (with Dana- Information: Professor Rajeev Batra.system. Louisa Ha of the Gallup Orga- Nicoleta Lascu of Richmond) presented Email: rajeevba@umich.edu

Recent Papers of the William Davidson InstituteCopies of the working papers are also available by contacting Sharon Nakpairat, Research Manager, 701 Tappan Street,9th Floor, Ann Arbor, Michigan 48109-1234, United States, tel. 313-763-5020, fax 313-763-5850, E-mail:sharonch@umich.edu; or davidson.institute@um. cc.umich.edu; Intemet: http://wwwwdi.bus.umich.edu. Following, is alist of some of the Institute's recent working papers.

Robert A. Roe, Irina L. Zinovieva, Elizabeth Customer, or Outside Ownership, WP 174, Evzen Kocenda, Accession and Real Ex-Dienes, and Laurens A. ten Horn, Firm own- June 1998, 32 p. change Movements: A Comparison, WPership and Work Motivation in Bulgaria 182, July 1998,16 p.and Hungary: An Empirical Study of the John BenneKt and James Maw, PrivatizationTransition in the Mid-1990s, WP 205, May and Market Structure in a Transition Janez Prasnikar and Jan Svejnar, Investment1998, 36 p. Economy,WP 175, June 1998, 37 p. and Wages during the Transition: Evi-

dence from Slovene Firms, WP 184, JulyIrina L. Zinovieva, Why Do People Work If Janos Vineze, Chronic Moderate Inflation 1998.They Are Not Paid? An Example from East- in Transition: The Tale of Hungary, WP 176,ern Europe, WP 206, May 1998, 19 p. June 1998, 29 p. Jozef Konings, Firm performance in Bul-

Derek C. Jones and Takao Kato, Chief Execu- Guido Friebel, Bureaucracies in the Russian garia and Estonia, The Effect of Competi-tive Compensation During Early Transi- Voucher Privatization, WP 177, June 199, 24 p. tive Pressure, Financial Pressure andtion: Further Evidence from Bulgaria, WP Disorganization, WP 185, July 1998, 21 p.146, June 5,1998, 21 p. Andrew Weiss and Georgiy Nikitin, Perfor- Laszlo Halpern and Gavor Korosi, Corporate

mance of Czech Companies by Ownership Lsl apr n ao ooi oprtRobert Letovsky, Reza Ramazani, and Debra Structure, WP 186, June 1998, 42 p. Structure and Performance in Hungary,Murphy, Environmental Protection and WP187,July1998,28p.Economic Development: The Case of the Chongen Bai and Yijiang Wang, InvestmentHuaihe River Basin Cleanup Plan, WP 147, Portfolio Under Soft Budget: Implications Daniel Berkowitz and David N. DeJong,June 1998, 32 p. for Growth, Volatility and Savings, WP 183, Russia's internal Border,WP 189, July1998,

Zuzana Brixiova and Wenli Li, Skill Acquisi- June 1998, 9 p. 15 p.tion and Private Firm Creation in Transi- Annette N. Brown and J. David Brown, Does Arthur Yeung and Kenneth De Woskin, Fromtion Economies, WP 162, June 1998, 28 p. Market Structure Matter? New Evidence Survival to Success: The Joumey of Cor-Morris Bornstein, Framework issues in the from Russia, WP 188, June 1998. porate Transformation at Haier, WP 207,Privatization Strategies of the Czech Re- July 1998, 40 p.public, Hungary, and Poland, WP 171, June Daniel Kaufmann and Dalia Mann, Disorgani-1998, 65 p. zation, Financial Squeeze, and Barter, WP Michael D. Kennedy, A Cultural Analysis of

165, July 1998, 23 p. Homosocial Reproduction and Contest-Chong-en Bai, Yu Pan, and Yijang Wang, ing Claims to Competence in Transitionallntragovernment Procurement of Local Haizhou Huang and Chenggang Xu, Financing Firms, WP 208, July 1998, 43 p.Public Good: Theory of Decentralization Mechanisms and R&D Investment, WP 180,in Nondemocratic Government, WP 173, July 1998, 25 p. Steven M. Burgess and Jan-Benedict E. M.June 1998, 24 p. Steenkamp, Value Priorities and Consumer

Lorand Ambrus-Lakatos and Ulrich Hege, Del- Behavior in a Transitional Economy: ThePatrick Bolton and Chengang Xu, Ownership egation and Delay in Bank Privatization, WP Case of South Africa, WP 166 August 1998,and managerial Competition: Employee, 181, July 1998, 30 p. 26 p. S

* TRANSITION, October 1998 C 1998 The World Bank

Rise and Fall of the Hainan Development Bankby Chi Fulin

T he Hainan Development Bank is Expansion came easily at first. The bank lion renminbi as well as bond issues andthe first bank in China to close soon had offices in six mainland cities shareholder funds.down in 50 years. It has attracted outside Hainan, including a full-service

worldwide attention, especially because branch in southern Guangzhou and 3,000 The forced merger came at the worstof Asia's severe financial crisis. staff members. In 1996 i made pretax time. The Asian financial crisis was be-

profits of 125 million renminbi ($15 mil- ginning to release its sweeping forces.The Formative Years lion) and boasted deposits of 4.1 billion Frightened depositors started to with-

renminbi. Despite the expansion, the draw cash from the banks. HDB not onlyBefore Hainan was declared a province bank's loan quality has not been very failed to pull the credit unions back fromand granted it special economic zone good. The bank's 1996 annual report the brink, but with small cash reserves,status in April 1988, only two nonbank- acknowledged that some loans had to it also sank into a severe payment cri-ing financial insttutions were operating be rescheduled. sis. Early this year HDB tried to floathere, on China's southernmost island. bonds on the capital market-there wereBy the end of 1992, 1,000 branch offices But it was a financial crisis involving no buyers. In desperation the Hainan pro-of the 5 big commercial banks, 24 trust Hainan province's 33 credit unions that vincial government pumped millions ofcompanies, and more than 30 urban pushed HDB over the brink and closer renminbi into the "blood vessels" of thecredit cooperatives, and several hundred to insolvency. As elsewhere in China- bank and made frantic efforts to reclaimrural credit unions, foreign banks, insur- as pointed out by Bruce Gilley, Hong large amounts of debt for HDB. It broughtance companies and securities agencies Kong correspondent for the Far Eastem more than 400 lawsuits to the court.were located in Hainan-altogether 2,068 Economic Review, in a recent article, These last-minute measures proved fu-financial institutions in a region with a tHtled "Breaking the Bank"-credit unions tile. By the time the closure was finallypopulation of 7 million. took a lot of business from banks begin- announced on June 21, no one in Haikou

ning in the late 1980s by offering better was surprised. HDB was put under theIn 1993 a number of trust companies service and high (often illegally so) inter- trusteeship of the Industrial and Com-came close to insolvency, along with the est rates for savers. In Hainan credit mercial Bank of China, which has to paydrastic cooling of the once-booming unions sat on deposits worth 33 billion out both individual deposit holders andproperty market. Seeking a way out, renminbi, or 51 percent of all deposits in overseas creditors of the bankrupt HDB.Hainan's provincial government re- the province at the end of 1996. Negotiations for a final settlement withquested and received the permission of institutional and enterprise depositors,the Peoples' Bank of China (the central The Hainan provincial government in- who provided the bulk of HDB's re-bank) to establish the Hainan Develop- structed the Development Bank, with the sources, including the amount of inter-ment Bank (HDB) by merging the suc- approvalofthecentralbank,totakeover est they should receive, are stillcessful Hainan Funan Trust and 28 of the 33 credit unions. The others continuing.Investment Company with four ailing trust were closed. The 28 credit unions cho-companies (Huaxia, Jiya, Shuxin, and sen had total assets worth 13.7 billion Reasons for CollapseZheqiong). In 1995, HDB started opera- renminbi (almost all loans) against totaltions as one of the first local commer- liabilities of 14.2 billion renminbi. The In retrospect, several factors accountedcial banks, or, as the media put it, "one central bank allocated 4 billion renminbi for the closure of HDB:of the few purely profit-driven banks" in to cover the bad loans of the creditChina. Its purpose was to finance the unions, or about a third of the total loans. *The three-year existence of the Hainandevelopment of the province. Hainan's But about two-thirds of the loans were Development Bank (1995-98) coincidedprovincial government put in 320 million nonperforming, leaving another 4 billion with the lowest annual economic growthrenminbi and became a major stock- renminbi shortfall on the Hainan bank's of the Hainan Special Economic Zone inholder, holding a 30 percent stake. Alto- doorstep. Before the takeover HDB's this decade. The province became thegether, 47 shareholders bought up stocks books showed assets of 11 billion laggard on the national ratings list. Whilefor a total equity value of 1.7 billion renminbi, about half of its loans. These the national savings for the first half ofreminbi. had been funded with deposits of 4 bil- this year-compared with the same pe-

© 1998 The World Bank TRANSITION, October 1998 I

riod last year-jumped by more than 15 taken over by HDB-were established OIn keen competition with other banks,percent, in Hainan savings nudged up- to finance investments in the fast-grow- HDB had to offer high interest rates and,ward by a mere 0.13 percent, and the ing (and later) "bust-going' property mar- hidden commissions to attract savingsvalue of outstanding loans increased by ket. "Once the property boom ended, the deposits. During its expansion drive it0.39 percent-also compared to the accumulated problems of many years accumulated a large stock of bad loanssame period last year. Local government burst into the open. Many financial insti- that eventually undermined its sol-officials, tend to blame the closure of HDB tutions got caught up in the property vency. Even if HDB's performance hadon the bursting of the 'bubble economy." craze in Hainan, resulting in illegal op- been better, insufficient capital andThe bubble economy did play a role, erations and loss of control," according questionable financial assets of the 28especially as most trust companies and to the People's Daily. However, this is merged credit cooperatives eventuallycredit-cooperatives-either merged or only part of the story. would have shaken its financial posi-

TICs in China's Financial System

When state-owned Guangzhou Shipyard Intemational parked been invested in real estate. "These TICs were born as asome of its cash in fixed deposits at a handful of China's kind of hidden reserve for provincial govemments," adds antrust and investment corporations last year, little did it know official at a tic in one of China's inland provinces. "They werethat it would have to sue to get it all back. Since the last of forced by local governments to make investments in localits deposits came due in July, $19.2 million remains out- projects or give loans to local enterprises. They also lackedstanding-about 10 percent of the company's net assets. self-discipline and monitoring by the central bank."Guangzhou Shipyard blames the high-flying trust and in-vestment corporations, or "TICs," for bad investment deci- In addition to moving into riskier activities, most TICs havesions and poor management. increased their off-balance-sheet exposure, mostly in the

form of loan guarantees. Some have created huge unhedgedTics are the most important of China's so-called nonbank foreign-exchange exposures. And while much of their lend-financial institutions, which offer alternative financing and other ing is denominated in foreign currencies, most of the bor-services that state banks can't provide. But most of the rowers have insignificant foreign exchange revenues.country's 243 TICs are faltering. (Of the total, roughly 100hold licences to raise capital overseas, these are the intema- For their part, Guangzhou Shipyard and other state-ownedtional TICs, or ITICs.) "According to international standards, companies listed on the Hong Kong stock exchange arethe majority are bankrupt in terms of their operations and seeking redress through the courts. In July Zhenhai Refiningdebt-to-equity ratios," points out an executive at a Zhejiang- & Chemical launched legal proceedings against the Chinabased tic who declined to be identified. The major barometer Orient Trust & Investment Corporation. in Beijing. When itsis the impact that collapsing TICs will have on the state banks. $20 million deposit came due on July 1, it was told that the

director of the capital department had "disappeared" and thatTICs represent only 3.3 percent of all assets held by the a "criminal incident" was under investigation.country's financial institutions, but their failure would be atremendous burden on the banks, which are unlikely to be According to Wang Songqi, vice director of the Finance Researchreimbursed for taking on the debts of these ailing institu- Centre at the Chinese Academy of Social Sciences in Beijing, thetions. China's state banks are obliged to come to the res- solution is to make ITICs and TICs private institutions in charge ofcue everytime nonbank financial intermediaries run into ther own lending and investment decisions as wel as their debt.trouble. That, in turn, perpetuates a moral hazard, econo- "That would avoid the current situation where once an ailing TIC ismists argue, encouraging risky lending and investments. bankrupt, the buck is passed to another state-owned financial

instibution or commercial bank," Songqi said. "But changing thatProblems started to surface in the 1 990s when TICs reduced mind set is going to take at least five years."their traditional lending and investment activities and in-creased their exposure to property development and stock Excerpted from Trish Saywell's recent article, Tic Fever:brokerage. Chen Yulu, a professor at Beijing's People's Uni- China's Shaky Trust and Investment Houses Start to Fall,"versity, claims that about half of the TICs' total assets have Far Eastern Economic Review, October 22.

M TRANSITION, October 1998 C 1998 The World Bank

tion. Surprisingly enough, these prob- The central bank, through its local ing region that borders Hong Kong. Itslems for a long time have escaped the branches,-should supervise and regulate investments included the Guangzhou-attention of individuals and depart- local financial institutions and, at the Shantou railway, power plants inments in charge. Some clients had same time if necessary, prevent local Dongguan, and the Shenzhen Scienceeasy access to multimillion-renminbi govemment from interfering in the admin- and Technology Park.loans. For instance, a private company istrative affairs of the local bank. In thisin Hainan received a 1.35 billion respect we should specify two major In recent years its heavy exposure torenminbi loan from three credit coop- problems: real estate in southern China went sour.eratives taken over by HDB. Soon GITIC's $2.4 billion in outstanding liabili-thereafter, the company applied for -The unequal relationship between the ties have been transferred to thebankruptcy. Before HDB's closure, the central bank's local branch and the local People's Bank of China, which prom-central bank shifted more than 3 bil- authorities. In most cases, local branches ises to repay principal and interest inlion renminbi as provisional loans to of the central bank can hardly veto deci- full-but only on legal debts. TheHDB, strictly for cashing in savings de- sions of the local government, some even People's Bank of China was drawing upposits. However, the majority of it was pursue the local government's agenda. In new rules to standardize the proceduresmisappropriated for other purposes. Hainan supervision and regulaton of HDB used to close GITIC.This chaotic situation undoubtedly has by the central bank's local branch hadbeen associated with corruption of one been relatively weak throughout the now- The author is executive deputy directorykind or another. closed bank's three years of existence. of the Haikou-based China Institute for

Reform and Development (CIRD), 57Lessons Leamed -Local branches of the central bank Renmin Ave., Haikou, Hainan, 570208,

lack the resources for effective probing, China, tel. 86-898-625-8793, fax 86-898-Since 1997 China's central govern- monitoring, and supervision of its op- 625-8777, E-mail: cird2@public.hkhi.cnment-while accelerating the country's erations. At present, there are morefinancial system reform-consented to than 200,000 financial institutions inand supported the locally established China that employ about 2.4 million A Hungarian Action-Thrillercommercial banks. The sad fate of people, while the supervisory and regu-HDB shows, however, that things can latory staff of the central bank and itsgo sour if a shareholder-be it a prin- branches only number 10,000. Thus al- -'

cipal investor, such as the local gov- though central bank branches at the pro- C -

ernment-goes beyond its designated vincial level are authorized to supervise Nrole and intervenes arbitrarily in impor- and regulate local financial institutionstant organizational matters and de- and report to the main office of the cen-cides-above the head of the bank's tral bank, the branches lack the effec-management-what projects should be five means, staff, and equipment to dogiven loans. If they want to succeed in so. Much of the supervision is based > t _

market competition, banks need a on reports of the financial institutions, - -

governance structure that corresponds some of which contain 'nicely pack- ;-to their joint stock company statute. aged" information, playing down the dif- _

ficulties, rendering a problem-free, .

HDB was established by the patching to- reassuring picture.gether of assorted banks, in order to helpthe poorly performing ones. As the bank After closing down the HDB, financial started to get out of difficulties, it had to authorities recently withdrew the oper- - c s "

take over 28 tottering credit unions, and ating license of the Guangdong Inter- - . r r

this sealed its fate. It was like rubbing national Trust & Investmentsalt in an open wound. Forcing viable Corporation. (GITIC), the nation's sec- "Hang in there Oscar, soonbanks to merge with the weak orthe bank- ond-largest trust and investment com- we will reach the tax freerupt can push otherwise healthy financial pany. GITIC was set up in 1980 to zninstitutions into bankruptcy and start an manage investments on behalf of zone.unwanted chain reaction. Guangdong province, the fast-develop- From the Hungarian magazine Hocipo.

© 1998 The World Bank TRANSrrION, October 1998 U

Defining the Post-Washington Consensus onMonetary Policyby Kurt Schuler

T wo articles in the June 1998 is- Goals of monetary policy: On the do- through inflation. Cutting deficits is thussue of Transition discussed the mestic side, inflation should be in the a precondition for successful monetaryemerging 'post-Washington low-to mid-single digits. The central reform. There are many potential

consensus" on economic policy recom- bank law should contain a clear com- sources of deficits, such as bank bail-mendations, especially as it applies to mitment to maintaining low inflation as outs, food subsidies, and grants to loss-former socialist economies. Notably ab- the primary goal of the central bank. An making state enterprises. Each is asent was any reexamination of monetary important secondary goal is to provide potential a precondition of monetary re-policy. Since the Washington consen- a safety net for the financial system by form. To make the real exchange ratesus on monetary policy has never been acting as a lender of last resort. On the competitive, a large initial devaluationarticulated as John Williamson did for international side, the real exchange rate generally is necessary. Large subse-the overall Washington consensus some should not diverge too far from funda- quent devaluations should be resisted,years ago, the first step in reexamina- mentals by becoming greatly over- or even at the price of high real interesttion is articulation. Judging from the poli- undervalued; note that, unlike the other rates, otherwise the central bank will notcies that the Washington institutions goals, this rarely appears explicitly in achieve credibility. In the early stages of(IMF, World Bank, Inter-American Devel- central bank laws. These goals may monetary reform a less flexible exchangeopment Bank, U.S. Treasury, and conflict at times. rate may be appropriate; later, the rateUSAID) have recommended overthe past can become more flexible. Large current-decade, the following propositions define Conduct of monetary policy: For account deficits signal that the currencythe Washington consensus on monetary larger countries, the preferred target is may be overvalued.policy. inflation rather than the exchange rate

or some measure of the money supply, For countries with moderate inflation of,Role of monetary policy: An appro- but even for them the needs of ex- say, 6 percent to 20 percent or perhapspriately managed monetary policy can change-rate management may some- even 40 percent a year, quickly reduc-offset financial shocks by providing a times trump the inflation target. For ing inflation to low single digits maysafety net for the financial system. smaller countries, targeting the ex- cause an unnecessarily large loss ofSuch a policy can also offset some un- change rate may be more technically output in the short term. The higher thefavorable real shocks by reducing the feasible than targeting inflation. For all rate of inflation, the lower the loss ofsuddenness with which nominal prices but the smallest countries, the current outputfrom quickly reducing inflation. Forneed to change. Low inflation helps to consensus-unlike the Bretton-Woods countries suffering from hyperinflation,make long-run economic growth less era consensus-is that the exchange quickly reducing inflation often stimu-volatile. rate should be somewhat flexible, lates output.

though not necessarily a floating rate.Monetary authority: In most indepen- Current-account convertibility should be The financial system: The main tooldent countries the monetary authority introduced quickly; capital-account con- for promoting sound banking is pruden-should be a central bank with a high vertibility is eventually desirable but not tial regulation. The threat of contagiondegree of independence from the rest of immediately essential. from systemwide bank runs is high andthe government, because that provides necessitates a lender of last resort.the greatest potential to manage mon- Monetary reform: Ordinarily (and the Opening the financial system to exten-etary policy free of polifical interference. Asian currency crisis is an exception), sive foreign competton is desirable, butCentral bank independence is desirable countries that get into monetary trouble not a high priority.in developing countries, even though re- generally do so because they accumu-search so far shows no clear link with late government budget deficits or quasi- Like the overall Washington consensus,inflation, as seems to exist for industrial fiscal deficits, thus then pressure their the Washington consensus on monetarycountries. central banks to finance the deficits policy is a series of measures usually

* TRANSITION, October 1998 ©) 1998 The World Bank

recommended by Washington institu- it replaced the Russian ruble with its own cues suggests that closing banks istions rather than a list they adhere to rig- currency in 1992. Lithuania had a cur- more efficient than rescuing them.idly in all circumstances. But, in light of rency-board-style system from 1994 tothe actual performance of monetary policy 1997, and Bulgaria has had one since The Washington institutions have spentinformersocialisteconomies, it is strange 1997. Unlike the central banking systems large amounts of time, energy, andthat no post-Washington consensus has that preceded them, both Lithuania and money trying to improve monetarybegun to emerge as it has in privatization, Bulgaria have maintained stable exchange policy in former socialist economies.social services, and other areas. The rates. Latvia has a central bank that holds Despite it all, in most cases, monetaryAsian currency crisis and its worldwide roughly 100 percent foreign reserve back- policy in the recipient countries haseffects are making people think more fa- ing for the monetary base and maintains been much worse than it would havevorably about capital controls. But per- a stable exchange rate with the special been by simply importing sound mon-manent capital controls could fit into the drawing rights (SDR). Slovakia inherited etary performance through currencyconsensus with only small modifications a tradition of relatively tight monetary boards or dollarization, and importing aof the other elements. After all, Keynes policy from the Czechoslovak Central good banking system by allowing thefavored permanent capital controls, and bank, which it has continued. world's leading banks to buy or com-the IMF Articles of Agreement are worded pete freely with domestic banks. To me,to allow them. Monetary policy in other former social- this suggests that a post-Washington

ist economies has ranged from mildly consensus on monetary policy in formerAlmost all former socialist economies disappointing (Czech Republic) to socialist economies and other develop-have been receiving aid or advice on wretched (Belarus, Ukraine). Even those ing countries should contain the follow-monetary policy from the Washington countries hailed a few years ago for hav- ing propositions:institutions for at least five years. Many ing stabilized their currencies, such ascountries have not followed the advice the Czech Republic and Russia, have Role of monetary policy: A managedconsistently, but that in itself is telling. since experienced currency crises that monetary policy is more often a causeAs an indication of the effectiveness of have required either devaluation or ex- of shocks than a buffer, especially inadvice from Washington, consider the tensive foreign aid. former socialist economies and otherchange in exchange rates during the past developing countries. At least for suchfive years againstthe U.S. dollar, orwhat- The wide use of the U.S. dollar and the countries, the most appropriate mon-ever other currency is used as the an- German mark as stores of value and etary policy is a completely automaticchor. I have selected a period of five years media of exchange in most former so- one that leaves no room for local man-because by mid-1993 the former social- cialist economies is another indication agement.ist economies had enough time to re- of poor monetary policy. The value ofsolve the exchange-rate problems they trade in dollars purely within Russia Monetary authority: The monetary au-inherited from socialism. Since then, was estimated to be twice the value of thority should be an orthodox currencytheir problems have been of their own trade in rubles even before the latest board or, as in the case of a dollarizedmaking. Besides the exchange rate, one ruble crisis. system, no monetary authority at all.could look at inflation rates, interestrates, or convertibility, but they would tell In the wide sense, monetary policy also Goals of monetary policy: Monetarya similar story. The exchange rate is a includes bank regulation. In most former policy should have only one goal: togood shorthand view of the overall per- socialist economies the banking system maintain full convertibility at a truly fixedformance of monetary policy. remains fragile and rather backward. exchange rate with a sound major cur-

Governments restrictforeign competition rency, generally the U.S. dollar or Ger-4 The only former socialist economies that to protect market share for locally owned man mark.

have maintained stable exchange rates banks. By doing so, however, they slowduring the past five years are Bosnia, the pace of innovation and deny deposi- Conduct of monetary policy: A truly

t Estonia, Latvia, and Slovakia. Bosnia tors the stability that banks with inter- fixed exchange rate provided by a cur-has maintained a fixed exchange rate to national branches offer. Governments rency board or dollarization is sustain-the German mark, and has recently so- have chosen to rescue rather than close able indefinitely. The automatic characterlidified the rate by establishing a cur- many insolvent banks. Though there has of monetary policy means that inflation,rency-board-style system. Estonia has been no systematic study on the ques- interest rates, the real exchange rate,had a currency-board-style system since tion, the high cost of many bank res- and so on are determined by market

© 1998 The World Bank TRANSITION, October 1998 *

forces through international arbitrage CEE C ut d th Ye r 2000without centralized monetary manage- Ustoms an e eament. The currency should be made fully fconvertible immediately. Bug- Ready forMonetary reform: Generally, central the M lllennium? W

banking rather than bad fiscal policyis what gets countries into monetary by Peter Daviestrouble. Currency boards or dollarizedsystems cannot finance fiscal orquasi-fiscal deficits, so they tend to n recent issues of Transition, we high- technology systems vary. They performforce fiscal reform, rather than requir- lighted a number of problems that various tasks without the ability to shareing it as a precondition for successful businesses face in trying to get con- or transmit data. In some countries DHLmonetary reform. A large initial devalu- signments through customs in Central is often asked to manually duplicate theation of the exchange rate may not al- and Eastern Europe: lack of adequate electronic clearance process by produc-ways be necessary. There should be communication between customs ad- ing hard copy declarations. This bringsno attempt to defend the currency with ministration and the business world, little benefit to either the customs au-high interest rates; international arbi- sometimes overly rigid interpretation of thorities involved or to companies suchtrage will tend to push rates toward the the rules, a shortage of resources, and as ours that clear the goods.levels of the anchor currency. Under related to this, a lack of informabon tech-currency boards or dollarization, large nology systems capable of matching the Earlier this year The Gartner Group sur-current-account deficits are perfectly needs of businesses. The challenge cus- veyed countries around the world to as-acceptable and do not signal possible toms authorities face is not only to up- sess their computer preparedness forovervaluation relative to the anchor cur- grade information technology systems, the millennium. The survey gradedrency. butto prepare forthe "millennium" or "year countries from 0 (no action taken at all)

2000" (Y2K) bug. to 5 (completion of work on all sys-Even in countries with moderate infla- tems). The Central and Eastern Euro-tion there may be no loss of output in The status of customs information tech- pean states and Russia were assessedthe short term from establishing cur- nology capabilities around Central and at level 1 (basic recognition of the prob-rency boards or dollarization quickly, Eastern Europe and the CIS is very lem and the need for action), while mostbecause they have more credibility mixed. Some countries have developed of the CIS, outside of Russia, were as-than central banking in guaranteeing fully integrated systems and allow elec- sessed at 0.low inflation. tronic data exchange. Others have ab-

solutely no automation at all. Everything One reason for the lack of action so farThe financial system: A lender of last is done manually, which makes the cus- is, of course, cost. In August, Alexanderresort creates more problems than it toms clearance process very time-con- Krupnov, chairman of the Russian statesolves. Closing insolvent banks is pref- suming and costly. (At the same time, communications commission, estimatederable to rescuing them with govem- these are the customs offices that are that it could cost Russia $500 million toment funds. The financial system not worried about "year 00"). fix the problem. Another reason for lackshould be fully open to foreign compe- of action is simply a perception that thetition; "internationalization" makes the However, very few countries have in- problem will go away [This attitude is notfinancial system more robust and is vested sufficiently in customs informa- restricted to Transition countries, seemore effective than prudential supervi- tion technology. Many customs box. The editor.]sion at improving the average quality declaration systems have been devel-of domestically owned banks. oped with little regard for business re- Although DHL is investing $25 million to

quirements and future needs of the EU make sure its systems are Y2K-compli-Kurt Schuler, a monetary consultant, accession, the Y2K problem, and ant, it is vital that the systems used byis the author of Should Developing changes in computer technology, includ- customs authorities are able to functionCountries Have Central banks? (Lon- ing new computer languages. As a re- come January 1, 2000 (or earlier, in thedon: Institute of Economic Affairs, sult, in most Central and Eastern case of systems that forecast months1996). European counbies customs information ahead). If timely solubons aren't found,

* TRANSITION, October 1998 © 1998 The World Bank

the implications to the economies of the European Commission to deliver international codes and standards rel-Central and Eastem Europe, are enor- electronic customs declarabon systems evant to customs processing as estab-mous. Business Week has estmated that are Y2K-compliant, as detailed in lished by International Standardsthat the Y2K problem will cut half a per- their Blueprint for Accession document Organization (ISO), the World Customscentage point offtheir growth in 2000 and (see Transition, June 1998). Funding has Organizabon, and the United Nabons. It2001. been provided via the PHARE program, can be configured to suit individual cus-

with mixed results. toms regimes, national tariffs and cus-What is being done to help customs toms regulations, and legislation. Theauthorities in Central and Eastem Eu- The United Natons Conference for Trade express industry offered UNCTAD itsrope develop information systems that and Development (UNCTAD) worked out help to accelerate application of theboth can meet the needs of foreign in- a program-Automated System for Cus- package. Nevertheless, uptake has beenvestors and avoid any year 2000 prob- toms Data (Ayscuda)-to computerize slow so far, although customs authori-lems? Countries wishing to join the and simplify the customs process. The ties will have better opportunities to con-European Union are under pressure from Ayscuda system takes into account all trol exchange and commodity duty

Terminating the Y2K Computer Bug in Transition Economies

The century date conversion is at least a trillion-dollar prob- networks, the BIOS in PCs, and even the date-driven chipslem, but it could also be the tip of a computerized iceberg, that comprise embedded systems.with enough force to rattle businesses worldwide.

What's it all going to cost? Some estimates put $600 billionBecause of the high cost of memory and disk space in the worldwide as the cost of repairing applications, networks,early days of computing, programmers adopted a standard of embedded systems, and so on. While the cost of repairs willusing 2 digits (98) to represent four digits (1998) in date fields. be high, perhaps the most alarming threat is the cost of lifiga-This standard is still in use in many computer programs today. tion. The American Bar Association has projected an addi-As we approach 2000, computers will fail when they attempt to tonal $700 billion for lifigafion associated with the year 2000perform comparisons or arithmetic operations that use 00 as a problem. These lawsuits will be filed by clients whose financesrepresentation of the 2000 digit. This may cause unreliable or investments have been damaged, and by shareholdersresults in programs or outright failure of the computer systems. whose companies suffer from not making the transition.

Most business systems are time sensitive, which means The current state of readiness is troublesome. Anywherethat an estimated 85 percent of all programs may be af- from 40 to 60 percent of all U.S. companies have yet tofected. Currently, there are approximately 500 computer lan- begin addressing the problem. That's a startling statistic,guages in use throughout the world with the cost of identifying but one dwarfed by surveys coming out of Europe and Asiaand repairing the problem specific to each language. CO- where the century date conversion has barely registered onBOL, which represents the largest installed base, is sup- the spreadsheets of countries dealing with challenges rang-ported by a range of automated year 2000 tools. Similar ing from monetary union to economic collapse.solutions exist for RPG, Fortran, PUl, Focus and Natural.The most difficult common language to repair is C. The World Bank realized that there is a problem at hand. Its

Information for Development (info Dev) is providing grants toBut that is just the tip of the iceberg. Because we live in an transition economies, to address the problem, on a first-increasingly networked world, most systems exchange data come-first serve basis. The grant can range from $100,000with a variety of external entities, such as state and federal (for the development of national plans) to $500,000 (for imple-agencies as well as trading partners, using electronic data mentation of the Y2K adjustment). (See also the Bank'sto transfer invoices and purchase orders. If these organiza- Web site: http.-:/Awwwworldbankorg/y2k.)tions are not compliant, their data can act like a virus, spread-ing faulty information to interfacing files and databases. As (Contributions of Robert K S. Hoge from the Worid Bank'sfor hardware, the problem spans not only the mainframe and Information Solution Group and Miroslav Frick from themidrange worlds but also the servers, hubs, and routers in Budapest Regional Office, are appreciated.)

© 1998 The World Bank TRANsrTON, October 1998 U

rates, and offer automated clearance.Frequently authorities adopt only se- Readers Forumlected components of the UNCTAD pro-gram, reducing it to little more than an The Crisis and Its Roots-Ruble Collapseelectronic typewriter. RevisitedDHL is ready to provide assistance. The by Evan Scottstate customs office at the Warsaw air-port, for example, (together with our ncreasingly, the International Mon- 20 until the ruble's collapse, the centralcompany) is testing new software that etary Fund (IME) seems to be target bank had actually spent up to $3.8 billionwill speed up the customs clearance ing structural adjustment criteria to defend the currency, while the Financeprocess considerably. Once this sys- rather than stabilization criteria. This Ministry had used $1 billion to redeemtem goes "live" later this year, DHL's seemed to be the case in Indonesia, for short-term government debt. What thiscustoms agents will be able to trans- example, where the IMF program ap- means is that the IMF loan was effec-fer all shipment data to the customs peared to target the corrupt dealings of tively expended in a fortnight, as the Rus-office with a simple click of the mouse the Suharto regime by advocating in- sians tried to prop up the ruble by(a similar system already exists in the creased transparency in government spending more than $1 billion a week. ButCzech Republic). The customs officer contracting. Yet experts in this field tend there's more. Former Deputy Prime Min-will be able to process the documen- to agree that establishing a Western- ister Nemtsov alleged that during thistation and send it back to DHL with style rule of law in Indonesia could take period he tried to get the prime ministeranother click, a generation or more. How then, could to consider a devaluation, only to be told

these structural adjustments have been thatthiswasimpossible.Why? "BecauseThe express delivery industry has many considered effective for an economic sta- the IMF opposed it," said Kiryenko, ac-years of practical experience in the de- bilization program? cording to Nemtsov, who revealed this,velopment of automated customs dec- after President Yeltsin fired the entirelaration systems throughout the world. The lesson of the debacle that followed government.Customs authorities should be encour- in Indonesia could be that instrumentsaged to work in partnership with the in- must be matched to objectives, includ- How could this debacle happen? Indeed,dustry to implement state-of-the-art ing the time frame envisioned for the why was the IMF trying to prop up thesystems that are capable of handling objectives to be achieved. Unfortunately, ruble instead of quietly counseling abusinesses needs. Besides, the Y2K this lesson had not been absorbed by more flexible exchange rate policy? Itproblem has serious implications and IMF staff by the time the last IMF loan wasn't as if there had not been warningscustoms authorities are urged to act now to Russia was approved last summer. that this policy was folly on an immenseif they have not already. The record of the Russian debacle is as scale. In fact, my own article in the Au-

follows. gust issue of Transition, "Who BelievesThe author is DHL's director for Central the Ruble Will Not Be Devalued?" arguedand Eastem Europe and the CIS. In the first two weeks of August 1998 it the following: Why have officials of inter-

was already clear that Russian central national institutions and Western govern-DHL is both the leading air express car- banking authorities could not prevent a ments tied the future of reform in Russiarier in the CIS and the largest importer collapse of the ruble. And this was just to an overvalued exchange rate? Trying(measured in transactions) into Central weeks into a $4.8 billion IMF program, to maintain an artificially high exchangeand Eastem Europe as a whole. DHL is part of a $22.6 billion package of loans rate will only deplete the country's re-interested in hearing any comments from whose main goal was to support the maining foreign reserves, use up its linesTransition readers about customs pro- ruble, come what may. On August 17 of credit to international financial institu-cedures in the transition economies. the Russian government devalued the tions, and force it to stifle recovery withPlease contact Dirk Singer, E-mail: ruble and, in a potentially more damag- an exorbitant interest rate.dirks@redconsultancycom, tel. 44-171- ing move, mandated a general default on465-7700. Russian debt. The antecedents to the ruble debacle,

also covered in that article, are wellThe central bank Governor at the time, known. Russia had achieved a kind ofSergei Dubinin, disclosed that from July stability on the back of its oil exports,

M TRANSImON, October 1998 © 1998 The World Bank

which it ublized, in combinabon with the to achieve tax reform over the opposition ity had counseled from the beginning thatnonpayment of govemment wages and of the communist-dominated Duma, and propping up the ruble would not fly, andpensions, to compensate for its failure that achieving a timely outcome of this the $23 billion IMF-backed financial pack-to collect taxes. But when the price of longstanding struggle was inherently out- age ought to be used to bridge theoil fell by half, its oil income dropped. side the control of central banking authori- govemment's debt-payment obligations in

ties responsible for maintaining the value the short-term until those obligations couldWhen an unforeseen but apparently per- of the ruble. How much better it would be restructured.manent national income shock like this have been if the IMF and the Westernoccurs the prudent response is to reduce govemment officials who were interested The author is an international economist,the price of one's exports and increase in maintaining Russian economic stabil- based in Washington, D.C.the price of imports to regain stability.The way to do this is to let the currencydepreciate, withstand the upward adjust-ment of import prices that will follow by Institutdons Count More thanstanding fast against increased wagedemands and pleas for more subsidies, Liberalization Speedand just ride it out. by Vladimir Popov

In fact, this response is what the text-book IMF approach would indicate. IMF The conventional wisdom suggests while in the Baltics output fell in the earlyloans are supposed to help a country that differences in economic per- I 990s by 36-60 percent and even in 1996,ride out the stabilization period by pro- formance are associated mostly two years after the bottom of the reces-viding the foreign exchange it needs for with 'good and bad" policies-in particu- sion was reached, it was still 31-58 per-essential imports until the depreciation lar, with the progress in liberalization and cent below the prerecession maximum.causes exports to pick up. It is true that macroeconomic stabilization: Countriesa depreciation makes it harder for the that are more successful than others in Overall, attempts to link differences incountry to repay its foreign loans until introducing market reforms and bringing output changes during transition to theits exports have recovered. But that is down inflation are believed to have better cumulative liberalization index and toalso what IMF loans are supposed to chances to limit the reduction of output macro stabilization (rates of inflation)help with, by providing short-term liquid- and to quickly recover from the transfor- have not yielded any impressive results.ity to finance the increased cost of ser- mational recession. In general this may Decline in output is a supply-side phe-vicing foreign debts until export revenues well be true, but the devil is in the details, nomenon and is the result of a struc-pick up. which often do not fit into the generaliza- tural adjustment process that rectifies

tion and make the whole explanation look distortions of the centrally plannedInstead, somehow IMF staff were per- trivial. In Russia, despite the high degree economy, including restructuring an ob-suaded to tie short-term stabilization of liberalizabon and three years of mac- solete militarized industry, strengthen-goals to commitments to implement roeconomic stability (until the August cr- ing the weak service sector, andmedium-term structural adjustment mea- sis), the economic performance was poor developing a healthy trade pattem.sures. With oil and gas revenues hav- and ended up in a spectacular crash.ing severely declined, and with the The decline of noncompetitve enterprisesgovemment having already borrowed well The champions of liberalization and sta- and industries is not followed instantlybeyond its capacity, immediate reform bilization in the Eastem Europe-Central by an expansion of competitive indus-of the tax system, including reform of Asia region are the Baltic states (their tries and enterprises, due to barriers tothe tax collection institutions, became so-called ABRADE cumulative liberaliza- capital and labor flows, including thea prerequisite for the success of the IMF- tion index reached 2.4-2.9 by 1995), poorly developed banking systems andsupported stabilization program. whereas Uzbekistan (with an index of 1.1) securities markets, uncertain property

commonly is perceived to be one of the rights, the lack of easily enforceable andConsider a scenario in which a succes- worst procrastinators. However, in commonly accepted bankruptcy and liq-sion of Russian prime ministers, dating Uzbekistan the reduction of output in uidation procedures, the underdevelop-back to the earliest days following the 1990-95 totaled only 18 percent and the ment of land markets, housing markets,collapse of the Soviet Union, had failed economy started to grow again in 1996, and labor market infrastructure.

( 1998 The World Bank TRANSInON, October 1998 *

While initial conditions are important, much on the progress in liberalization Transition Economies: Factors of Changegovernment policy does affect perfor- per se. and Implication for Performance," Jour-mance. Policy measures are required to nal of East-West Business and 'Will thepreserve or create strong and efficient The author is at the Academy of National Russian Economy Get on a Fast Growthinstitutions that facilitate the market Economy in Moscow and is a visiting Track," Communist Economies & Eco-economy. In most CIS and Balkan coun- professor at Queen's University, Canada. nomic Transformation, E-mail address:tries the collapse of institutions is ap- His forthcoming articles: 'Investment in popovv,qsilver.queensu.caparent in the dramatic expansion of theshadow economy; the decline of govern-ment revenues as a proportion of GDP; Causes and Lessons of the Stodk Market Crsisthe inability of the state to deliver basicpublic goods and appropriate regulatory by Sandor Kopitsy and Gyorgy Matolcsyframework; the accumulation of tax,trade, wage, and bank arrears; the de- he present stock-market crisis matically. The public in the industrialmonetization, 'dollarization," and was caused primarily by countries holds about two to three times"barterization," of the economy; and the the monetary surplus that has ac- as much savings in stocks as 10 yearsdecline of bank financing as a propor- cumulated in the global economy. The ago.tion of GDP. It is also demonstrated supply of investment funds significantly * Compliance with the Maastricht cri-through the poor enforcement of prop- exceeds opportunities to invest, in other teria and the Brussels decision to intro-erty rights, the disregard of contractual words, monetary supply is greater than duce the euro propelled governments inobligations, the general breakdown of effective investment demand. The follow- the European Union to reduce budgetlaw and order and increased crime rates. ing are some of the reasons that explain deficits. As a result, the emission of gov-

this trend: ernment securities was cut back, andAccording to a recently conducted glo- o The rate of profits in the real economy the money, spent earlier on govemmentbal survey that questioned firms in 69 in the past two decades has been con- securities, was now flowing onto thecountries about their trust in state insti- tinuously lower than the interest rate and stock exchange.tutions, firms in the Commonwealth Of returns on securities' investment. This * Public companies have repurchasedIndependent States (CIS) had the low- trend has been unprecedented in 200 an annual $200 billion of their ownest credibility, below that of Sub-Saharan years of economic history, at least in stocks. During an across-the-board mar-Africa (1997 World Development Report, peacetime. Consequently, profit accu- ket upsurge, this proved to be a goodThe State in A Changing World). Espe- mulated in the real economy has drifted investment. Also, stock-buying optionscially striking was the gap between Cen- into the financial sector. have been playing an increasingly im-tral and Eastern Europe and the CIS. o Economic policies, driven bythe neo- portant role in compensating the top

classical liberal theory, accelerated the managers, so they became even moreThe share of state revenues in GDP can devaluation of the real economy compared motivated to maintain or increase thewell indicate the institutional capacity of with the financial sector. By the 1980s, value of their own stocks.the state-the financial strength of the monetarist economic policies had be-govemment. Though much has been said come predominant in developed market The neoclassical economic theory con-about 'big government" and too high economies. These policies declared in- siders only price increases in the goodstaxes in former socialist countries, by flation public enemy number one, and market as inflation. A steep increase ifnow it is rather obvious that the condoned financing of the budget deficit share prices is not considered a harm-downsizing of the govemment that oc- through financial market instruments. ful trend that needs countermeasures.curred in most CIS states during transi- Slower inflation brought interest rates And while stock prices often jumped bytion led to the collapse of the state down and lifted stock prices. 20-40 percent annually in the past twoinstitutions. * A rise in stock prices has attracted decades, especially in recent years, the

investors. Investing in shares proved to annual inflation in the goods market hasThere is enough evidence to show that be more profitable than keeping savings remained at 2-3 percent. Money, thoughdiffering performances during transiton, in banks, holding government securities, a particular commodity with a particu-after factoring in initial conditions and or putting money in businesses. Both lar market, is still a commodity and itsexternal environment, mostly depend on the number of investors and the amount price still moves according to the mar-the strength of institutions and not so invested on the stock exchange rose dra- ket laws where supply and demand de-

* TRANSITION, October 1998 C) 1998 The World Bank

termine prices. The two-digit inflation can be created. This economic policy The authors are Hungarian econo-that has became a permanent phenom- also increases domestic purchasing mists; Mr. Matolcsy is director of theenon in the capital market, meant that power through higher income and con- Economic Growth Institute, E-mail:stock prices have risen disproportion- sumption by expanding the workforce Property@Hungary.Netately, compared with both the price level which creates a higher added value.of other commodities and the rise inprofits. In the capital market, demandhas been significantiy larger than sup- Virtual Knowledge about Russia's Virtualply. From another angle: the supply of Economyinvestment money considerably ex-ceeded the supply 'of desired, accept- by Stanislav Menshikovable investment opportunities (that is,investment demand). wonder whether Ickes and Gaddy Probably not. In a deep contracton (Rus-

(Underneath the Formal Economy- sia lost half of its GDP in 1991-97, theThe present stock market crisis is differ- Why Are Russian Enterprises not Re- United States lost more than 30 percententfromtheoneduringtheGreatDepres- structuring,? Transition, August 1998, in 1929-33) widespread losses are tosion between 1929 and 1933. Back then, p.1.) have ever seen a Russian input- be expected. Yet, the same industriesthe snowball was set in motion by the outputtable? The latest one available for tend to recover and show large profitsbankruptcy of Austria's Creditanstalt 1995 shows that there were only four when deflationary gaps are closed.bank. It gained impetus afterward through industries in Russia that were net sub- Economists, in the 1930s would havethe crash of the New York Stock Ex- sidy receivers: coal, agriculture, commu- advised that scrapping most U.S. indus-change, and then spread almost instantly nal services, and science. All other tries would have been gravely wrong, toto the intemational financial markets. The industries were value creators under any put it mildly. Yet, making similar claimssituation of the 1990s is no less threat- valid definition of the term, whether it is vis-a-vis Russia today makes suchening and the risk of a financial crisis is gross value added to material (interme- economists famous and eagerly pub-no less serious than it was at the end of diate) inputs or in the more narrow sense lished in leading U.S. newspapers. Thethe 1920s. There are, however, several of covering labor costs, too. double standard persists.mitigating factors:*The intematonal financial system has This major statistical evidence is sup- Ickes claims: 'The whole point about thelearned its lesson from the great depres- ported by national accounts statistics, virtual economy is that if goods are notsion also available for 1996 when profts in exchanged at their true opportunity_The industrial economies are stable Russia deteriorated sharply. Even then, costs, we simply do not know which firms*The global information economy is more practically all branches of the economy are profitable and which are not, andlayered along center and periphery lines remained value creators, not value de- which are value creating and which arethanwasthe world economy inthe 1930s, stroyers. To Russian economists with a not." But if that is true with respect tothus the crisis can be isolated in time. first-hand knowledge of facts and figures, the Russian economy, his and Gaddy's

claims about value destruction as a gen- theories about the 'virtual economy" sim-The lurking financial crisis could be eral rule in Russia seem at best a wild ply have no logical foundation. When nochecked by strengthening the real fantasy. one (including themselves) knows whateconomy. If profit expectations improve, true opportunity costs are, how can any-money will flow from the stock market The Russian situaton is very similar to one seriously theorize about value de-to manufacturing and services. This pro- that of the U.S. economy in the Great struction in Russia?cess can be accelerated through the Depression of the 1930s. A look at His-encouragement and extension of re- torical Statistics (a classic statistical As a rule, in real life most firms in thesearch and development, innovation, reference source for that period and ear- West (as in Russia) measure their coststraining and other intellectual-cultural in- lier times) shows that gross value added and prices irrespective of true opportu-vestments. In the 'Visegrad econo- fell drastically in all industries, while quite nity costs (which are difficult and costlymies," if intellectual capital can be a few showed a net loss (rather than to calculate anyway), because profitsmade available to businesses that are profit) industrywide. Would Ickes and based on market prices (which do notlisted on the stock exchange, real foun- Gaddy claim that the U.S. economy was necessarily represent true opportunitydations for higher stock market prices a major value destroyer at the time? costs, either) are what count with share-

© 1998 The World Bank TRANsrroN, October 1998 x

holders and the stock market, not the is an important indicator for guiding cor- (together with the IMF) have practicallyabstract opportunity cost concept. porate decisions, its permanent zig- ignored the issue. The Primakov govem-

zags in market values and company ment shows signs of recognizing the im-Of course, all business executives, capitalization, with very little direct con- portance of these issues. I have towhether in the west or in Russia, in- nection to real value, make it no less conclude that, with all due respect, Ickes'sstinctively follow the rule of minimizing 'virtual' than Russia's predominantly and Gaddy's concepts on value destruc-potential losses, which lies at the heart barter economy. ton have little relation to Russian realities.of the opportunity cost concept. But inits pure form the rule of minimizing po- That is not to say that barter is admirable. The author is section head at the Cen-tential losses is good for the classroom, Of course, it is not. But unless the bank- tral Institute of Mathematical Econom-not for the corporation boardroom or for ing system in Russia is thoroughly re- ics (CEMI), Russia, and a research fellowthe floor of the New York Stock Ex- formed, barter and interenterprise arrears resident in Rotterdam, Netherlands.change. As for the stock market, which are unavoidable. The previous governments Email: menschivok@globalxs.nl

Response to Menshikov-The Causes of Crisisby Barry W Ickes

T he statistics that have been of- engineer; I certainly will avoid his bridges. ducers that cannot compete in an openfered to 'prove" that [Russian] en- I don't see why this logic is any more sat- economy. Without protection, Russiaterprises are not value destroy- isfactory for studying economics. exports commodities and imports con-

ers are uninformative unless we know sumption goods. Menshikov sees an in-the actual prices at which transactions Menshikov's argument seems to be that crease in nominal spending leading toare made. When transactions are re- measuring value added at world prices an increase in output as consumers buyported in ruble values but paid for with is of no relevance. He is correct to state the output of Russian industry. I see aninstruments that trade at a discount, the that no matter how inefficient is manu- increase in nominal spending leadingresulting figures cannot demonstrate facturing, Russia must have a compara- to increased purchases of imports andwhat people are claiming they do. I have tive advantage in some activity. But in a resurgence of inflation. Menshikovargued that you cannot simply add the that case Russia' comparative advantage sees an increase in credits to these in-ruble values of transactions that take may not be in manufacturing. If Russian dustries leading to a revival of produc-place with instruments that trade at dif- manufacturing uses energy less effi- tion. I see an increase in credit to theseferent discounts to each other. ciently than foreigners do, then the industries leading to more unusable pro-Menshikov apparently disagrees. theory of comparative advantage says it duction. The Russian government may

should export the energy and import the be about to conduct the experiment. WeMenshikov goes even further, however. He manufacturing goods. At world prices it will learn from the outcome of that.argues that it is logically without founda- may be that manufacturing is not com-tion to question figures when we are un- petitive, and that it can only survive if value The author is professor in the Depart-certain as to their actual amounts. It is as is redistributed from elsewhere. This can ment of Economics, Pennsylvania Stateif we must decide if a heavy load can safely take the form of protective tariffs or of University, University Park, PA. 16802make it across a bridge. When informed the virtual economy. USA, teL. 814-863-265Z fax 814-863-that the weight of the cargo may in fact be 4775, E-mail: bwickes@psu.edutwice what is recorded, and that the load- There are too many confusions in Intemet: http://econ.la.psu.edu/bbickes/bearing capacity of the bridge may be half Menshikov's comments on opportunity index.htm, and, The New Economicof what is reported, Menshikov would ar- cost to discuss here. The key issue be- School, Nakhimovskyprosp. 47 Moscowgue that the cargo should pass anyway: if tween Menshikov and myself appears 117418, Russia, tel.7-095-129-3722/we are not certain of the degree to which to be over the causes of the crisis in 3844, fax 7-095-129-3722, E-mail:the figures are inflated we cannot ques- Russia. Menshikov sees the output obudjko@nes.cemi.rssi.rution the safety of the trip. I don't think decline due to lack of demand. I see itMenshikov's logic makes for a good safety as the result of too many inefficient pro-

* TRANSmoN, October 1998 i) 1998 The World Bank

Shall We Forget tihe Latin American Precedents?by Katharina MuellerM , ichal Rutkowski provides a well-known scholar of Latin American borrowing from the Argentine precedent

good overall perspective on the pension reforms, had already coined the (even if, admittedly, the Latvian ex-recent pension reform trends label "mixed reform"forthis paradigmatic ample was also influential in the Pol-

in transition economies. However, I dis- choice (as opposed to the 'substitutive" ish context). Is this because it hasagree with his leitmotif that the 'new Chilean case). turned out that the (still radical) mixedgeneration" of pension reforms in this pension reforms sell better in the re-region is different from those in the ex- The parallels between the basic set up gion without explicit reference to Latinisting Latin American blueprints. When of the 'Argentine model" and the cur- American blueprints, given that Cen-predicting that "transition economies are rent Hungarian and Polish reform paths tral Europeans are very sensitive toincreasingly likely to end up with mixed are striking, and Dimitri Vittas, one of having any kind of Latin Americaniza-systems," that combine a public, pay- Mr. Rutkowski's colleagues at the tion proposed to them?as-you-go and a private, fully funded com- Bank, recently has stressed the rel-ponent on a mandatory basis, Mr. evance of the Argentine model for East- The author is professor at Frankfurt In-Rutkowski is right. However, this type of ern Europe. Therefore, I am very stitute for Transformation Studies at Eu-old age security reform was pioneered surprised that the former leader of the ropean University, Viadrina, FrankfurtlbyArgentina (1994)and Uruguay (1995). Polish pension reform team is unwill- Oder, Germany, Email: kmueller@euv-Consequently, Carmelo Mesa-Lago, a ing to acknowledge the conspicuous frankfurt-o.de

Milestones of TransitionCentral and Eastem Europe Central Europe-that have been doing a tries are Poland will have six projects,

good job. The Washington-based IIF has the Czech Republic seven, Bulgaria six,Crisis reduces private capital flows. a membership of 300 commercial banks, Estonia four, Lithuania eight, and LatviaThe world's financial crisis is expected investment funds, insurance companies, five. Called "twinning," the program aimsto reduce private capital flows into Cen- and pension funds worldwide. (From to pair bureaucrats and technical expertstral and Eastern Europe by 35 percent RFE/RL correspondent, Robert Lyle) from EU member states with counter-this year. The global organization of com- part officials in the Eastern Europeanmercial financial institutions, the Insti- EU advisers to boost East's adminis- host countries. The initial series of twin-tute of International Finance (IIF), says trative capacity. The European Union ning involves four key areas: agriculture,it expects private capital, which had is about to launch a new effort to help environment, finance, and justice andtopped $67.5 billion flowing into the re- the 10 Central and Eastern European ap- home affairs. (From RFEIRL correspon-gion in 1997, to drop to just over $44 plicant countries make the administra- dent, Breffni O'Rourke)billion this year. It projects that the flows tive reforms essential to their respectivewill improve only by $200 million, to memberships in the EU. Within the next Shakeout in Estonia's financial mar-$44.2 billion in 1999. In recent years pri- few months the EU Commission will kets continues. In early Octoberthe Es-vate capital has become the major send experts to each of the 10 coun- tonian Central bank honored the troubledsource of financing for emerging market tries to advise the host govemments on ERA bank's request to have its licenseeconomies around the world. In 1997 the how to make their administrative prac- suspended fortwo weeks. The ERA bankprivate flows into Central and Eastern tices conform to EU legislation. Under wanted to close its doors because itEurope were eight times the official flows the initial $80 million-phase of the pro- feared it could no longer guarantee thefrom other governments and international gram, almost 100 projects will start in deposits of customers. ERA bank de-institutions like the IMF and the World the first few months of next year. Roma- posits represent only about 2 percent ofBank. The IIF is urging investors to dif- nia tops the list with 19 projects, followed all Estonian bank deposits. The Esto-ferentiate between those countries that by Hungary with 16, Slovenia with 14, nian securities administration halted theare in trouble and those-primarily in and Slovakia with 13. The other coun- trading of eight investment funds. In all

VD 1998TheWorld Bank TRANSITION, October 1998 *

cases, the net value of the funds had Romania broad measures to expedie democrati-fallen below the minimum requirement zation. He proposed curtailing the pow-of 5 million koons. Most of the funds had Economic performance worsens. ers of the president and increasing thoseinvestments in Russia's financial mar- Romania's GDP dropped by 5.2 percent of parliament, making the governmentkets. Decline of the Estonian stock ex- in the first six months of 1998, compared more accountable to the parliament, en-change has been attributed mainly to with the same period last year, the Na- hancing the independence of the judi-upheavals in the banking sector and il- tional Statistics Board said on 30 Sep- ciary by appointing a separate head ofliquid markets. During the month of Oc- tember. The balance of trade deficit for the Supreme Court (that post is currentlytober uncertainty reigned in all three the same period has grown to $1.66 bil- held by the country's president), andBaltic financial markets. lion, compared with $1.36 billion in the privatizing some state-owned media.

first half of 1997. Exports dropped by 8.9Hungary GDP up 4.8 percent in first percent and imports by 12.8 percent. Ukrainehalf. Hungary's GDP was 4.8 percenthigher in the first half of 1998 than in the CIS Government restricts foreign cur-same period last year, the Central Sta- rency purchases. In a bid to stave offtistics Office reports. Exports of goods Azerbaijan the depletion of its reserves, the Ukrai-and services rose by 22 percent, imports nian National Bank (NBU) has sharplyby 25 percent and 11 percent more was Caspian pipeline decision imminent. tightened procedures for purchasing for-spent on investment projects in the first The Azerbaijan Intemational Operating eign currency as of October 1. The newhalf than in the same period of last year. Company (AIOC) will make its recom- rules stipulate that foreign currency canThe largest item in domestic consump- mendation in November on the optimal be purchased by authorized bankstion, personal consumption, rose by 2.9 route for the so-called Main Export Pipe- only if their customers produce the re-percent in the first half, and by 4.3 per- line for Azerbaijan's Caspian oil, Presi- quired documentation, which includecent in the second quarter. Consumer dent Heidar Aliev said in October. Aliev foreign-trade contracts and tax andprices rose by 15.3 percent in the first reaffirmed his determination that the customs clearance. Banks are obligednine months. Real wages rose by 3.3 route, leading from Baku to the Mediter- to provide the State Tax Administrationpercent between January and August. ranean port of Ceyhan in Turkey, should with information about customers' de-The current account deficit totaled $1 be chosen. (This pipeline avoids both sires to buy foreign currency, includ-billion in the first eight months, $285 Iran and the northern route through Rus- ing passport details of customers'million more than in the same period last sia and Georgia.) Aliev's son llham, who employers and accountants. Permitsyear. The general government deficit, not is deputy president of the Azerbaijan for purchasing foreign currency are toincluding local governments, was 350 State Oil Company SOCAR, also denied be issued by NBU regional depart-billion forints ($1.7 billion), in the first nine that Baku is contemplating an alterna- ments.months, 66 billion forints more than one tive oil route. American oil company ex-year earlier. ecutives and top U.S. government Asia

officials admitted at a special meetingSlovakia that the 1,080-mile Baku-Ceyhan pipe- Vietnam

line is not currently commercially viable.National chapter of Transparency They stressed, however, that it would be Government seeks boost in ruralInternational. The Center for Eco- built if Caspian oil exports grow suffi- economy. Vietnamese Prime Ministernomic Development, Bratislava, as an ciently. Persistently low oil prices over Phan Van Khai told the country's na-acknowledgement of is devotion in com- the past year, as well as a series of dis- tional assembly that his governmentbating corruption and supporting in- appointing exploration wells, have led to would attempt to tackle worsening eco-creased transparency, was entrusted to a downgrade of near-term estimates of nomic problems with a new emphasisorganize and be responsible for the lo- export volumes from the Caspian. on rural and agricultural development.cal chapter of Transparency Interna- Khai said that Vietnam would try to cre-tional. As of September 21, 1998, the Kazakhstan ate more than a million new jobs nextSlovakia chapter has been launched year and would aim for GDP growth ofunder the guidance of the preparatory Liberalization measures. In his annual between 5 and 6 percent.committee: Eugen Juryzca, Emilia address to parliament on September 30,Sicakova, and Rastislav Kovacik. President Nursultan Nazarbayev outlined

i TRANSITION, October 1998 © 1998 The World Bank

Conference DiaryMeeting of the International ECPD Information: EuroForum, tel. 440-171- Language: EnglishPermanent Study Group on Transi- 878-6888 or 440-171-878-6886, fax 440- Call for papers: Deadline's December31,tion and Privatization 171-878-6885, Internet: http://www. 1998.December 4-5, 1998, Belgrade, FR of mondaq.com Information: Enterprise in Transition,Yugoslavia Faculty of Economics, Radonanova 13,

International Conference: Recent De- HR 21000 Split, Croatia, E-mail: eitconfOrganizer: The European Center for velopments and Problems in the @efst.hr, Internet: http://www.efst.hrPeace and Development (ECPD) of the Transition Economies eitconflUniversity for Peace, established by the March 25-27, 1999, Skopje, MacedoniaUnited Nations. Summer Symposium for GraduateTopic: Recent lessons from Transition Organizer: Faculty of Economics, Sts. Students in International Affairsand Privatization-Problems of lnstitu- Cyril and Methodius University. June 10-15, 1999, Annapolis, MD andtons and Corporate Governance. The Information: Mrs. Valentina Ganzovska, Washington, D.C., United Statesgathering will bring together a mix of Faculty of Economics, Blvd. Krsteacademic economists, corporate repre- Misirkov bb, Skopje 91000, Macedonia, Organizer: Women in International Se-sentatives, and government advisers to tel. 38991 223-245, fax 38991 118-701, curity (WIIS).update information and review and gen- E-mail: valentina@eccf.ukim.edu.mk Topics: Citizens, Civil Society, and Con-erate some ideas on postprivatization flict; The Nuclear Cities' Initiafive-Eth-ownership structures and their impacts Passauer Workshop-Internationale nic Conflict in the 215' Century, the UNon enterprise performance, institutional Wirtschaftsbeziehungen and Civil Societies; Latin America: Poli-changes, corporate governance and re- (First Passau Workshop-Interna- fics for the 21s1 Century.structuring of large loss-making enter- tional Economic Relations) Open to individuals enrolled in a master'sprises, as well as the role of the financial April 15-17, 1999, Passau, Germany or doctoral program. Costs are coveredsector in promoting enterprise reform. by WIIS.Information: Gordana Hofmann, Euro- Organizer: University of Passau, Depart- Information: Women in International Se-pean Center for Peace and Development ment of Economics, Institute for Finance curity/CISSM, University of Marlyand,(ECPD) of the University for Peace, es- and Foreign Relations. College Park, MD 20742, United States,tablished by the United Nations, Applications including a 2-3 page sum- tel. 1-301-405-4020, fax 1-301-403-8107,Belgrade, Terazije 41, Yugoslavia, tel. mary of the planned lecture in German, E-mail: dsmith@puafmail. umd. edu,381-11-3246-041, 3246-042, 3246-043, name, title, key words, JEL classifica- http://vww.puaf.umd.eduMWIIS3246-044, 3246-045, fax 381-11-3240- tion and address and institutional affilia-673, 3234-082, E-mail: ecpd@afrodita. tion of the lecturer accepted until 31st National Convention of thercub.bg.ac.yu December 1, 1998. American Association for the Ad-

Information: Carsten Eckel, Lehrstuhl vancement of Slavic Studies (AAASS)Investment Opportunities in fuer VWL mit Schwerpunkt Geld und November 18-21, 1999, St. Louis, Mis-Kazakhstan: Exploit New Opportuni- Aussenwirtschaft, Universitaet Passau, souri, United Statesties to Realize Investment Potential 94030 Passau, Germany, tel. 49-851-December 8-9, 1998, London, United 509-2534, fax 49-851-509-2532, E-mail.: Organizer: AAASSKingdom eckel@uni-passau.de, Internet: http:// Information: http.//fax.harvard.edul

www. wiwi. uni-passau. dellehrstuehle/Organizers: State Investment Commit- ruebel/pwiw/home.htm 32nd National Convention of thetee of the Republic of Kazakhstan and American Association for the Ad-EuroForum. Third International Conference on vancement of Slavic StudiesTopics: Economic and Business Out- Enterprises in Transition November 9-12, 2000, Denver, Colorado,look: The Confinuing Role of the EBRD May 27-29, 1999, Split, Croatia United Statesin Kazakhstan; Investment and ExportProspects in the Oil and Gas Industry. Organizer: Faculty of Economics, Split, Organizer: AAASSLanguages: English and Russian. Croatia. Information: http.//fax.harvard.edu/

© 1998 The World Bank TRANSmION, October 1998 X

World Bank/IMF AgendaWolfensohn Outlines World Bank's heritage to ensure that development is ened by sudden loss of market confi-Development Strategy firmly based and historically grounded. dence be paid back within one to two-

and-a-half years and cost 3 percentageWorld Bank Group President James D. The Bank Helps Preserve Cultural points above market rates.Wolfensohn, in his speech to the 1998 HeritageAnnual Meetings of the World Bank and Public Information Center in Bosniathe Intemational Monetary Fund, called In the transition economies of Europefor a reform agenda that addresses is- and Central Asia, the Bank is working On October 9 the World Bank Perma-sues of governance and social justice on 11 cultural heritage support projects. nent Mission to Bosnia opened a Publicas well as far-reaching corporate and fi- The St. Petersburg project ($21 million) Information Center, which will offer infor-nancial sector reforms. He confirmed and the Georgia project ($5 million) are mation on Bank operations in Bosnia andthat, while private sector flows fall, the already being implemented. Nine other worldwide. The center is offering docu-Bank would continue to play its part by programs-in Albania, Azerbaijan, mentation on projects, sector studies,maintaining last year's higher level of Bosnia, Bulgaria, Croatia, Macedonia, and economic reports on Bosnia, as welllending in support of this agenda. He also Romania, Turkey and Uzbekistan-are as a small library allocated to publica-pledged more spending for immediate being prepared. As Maritta Koch-Weser, tions, dealing with countries in develop-social safety nets. The World Bank was director of the Environmentally and So- ment and transition. (Intemet address:moving toward a new approach, one that cially Sustainable Development Unit, http://www. worldbank. org. ba)would move beyond projects and, in part- Latin America and the Caribbean region,nership with governments and civil soci- pointed out, the Bank's initiative involves Ukraine and IMF at odds over theety-including the private sector, assistance for a variety of conservation restructuring of domestic debtrigorously pursue the social and struc- and support activities, working in closetural priorities. collaboration with nongovernmental or- The IMF suggested that the Ukrainian

ganizabons and other specialized agen- govemment would violate the agreed-onThe new framework of the Bank would cies such as UNESCO, the Council of three-year economic reform program if itembrace five guiding principles: Europe, and the World Monuments converted funds paid to foreign investors* Supporting good governance-trans- Fund. in hryvnias into dollars. The move, the IMFparency, the free flow of information, a noted, would drain Ukraine's foreign cur-commitment to fight corruption, and well- U.S. Funding Conditions to IMF rency reserves below the level agreed-trained, properly remunerated civil ser- on with the IMF. According to the IMF,vants The International Monetary Fund and its holders of such paper would have to agree* Supporting a legal system that guards biggest members, the Group of Seven to rolling over their earnings or acceptingagainst capricious actions-a modern, industrial nations, are likely to accept payment in hryvnias. However, at the endand transparent financial system that is the strings that Congress is attaching of 1997, the Ukrainian Central bank andadequately supervised, with internation- to the $18 billion U.S. contribution, ac- government issued a special resolutionally recognized accountancy and audit- cording to news reports. U.S. support to in connection with the bonds wherebying standards the IMF would be contingent on the chair- investors would be allowed to convert their* Supporting policies that foster inclu- man of the Federal Reserve and the sec- earnings to dollars.sion-education for all (especially retary of the Treasury certifying that majorwomen and girls), health care, social pro- IMF shareholders have agreed to: World Bank FY98: Declining Net In-tection, and early childhood development * Require borrowing countries to set come* Supporting public services and infra- schedules for liberalizing trade, eliminat-structure necessary for communications ing government-directed lending and ap- The net income of the International Bankand transport, as well as policies for cre- proving bankruptcy laws fair to all for Reconstruction and Developmentating liveable cities and addressing prob- creditors (IBRD), part of the World Bank, fell tolems of growing urban areas * Require the IMF to publish summa- $1.24 billion in fiscal 1998 from $1.29* Supporting environmental and human ries of board meetings, letters of intent, billion in the previous fiscal year, accord-sustainability that would including wa- and policy papers with exceptions ing to the Bank's annual report releasedter, energy, food security, and cultural * Requirethatloanstocountriesthreat- end-September. Modest interest rates

M TRANSITION, October 1998 I:( 1998 The World Bank

and higher loan-loss provisioning were Nmainly responsible for the decline last New Books and Workmg Papersfiscal year, which ended June 30, saidMark Malloch-Brown, vice president for The Macroeconomics and Growth Group regrets that it is unable to provide theexternal affairs at the Bank. (As a re- publications listed.sult, after the last fiscal year ended, theBank's Board approved a higher feeBank'str r Boaid atpimprovedahingther Ba World Bank Publications tel. 202-473-6896, fax 202-522-1159,structure aimed at improving the Bank's Inemt Itbd'olbnog ai

net income. The Bank increased the ~~Internet: Itabada@worldbank.org. DavidTo receive ordering and price informa- Tarr may be contacted at dtarr@world

spread that is charged to borrowers tion for World Bank publications (with bankorgabove funding costs to 75 basis points the exception of working papers), write:from 50 basis points, and It added a World Bank, P.O. Box 7247-8619, Phila- George R.G. Clarke and Robert Cull, Why

front-ppend-f .ofi10 bai points.) delphia, PA 19170, United States, tel. Privatize? The Case of Argentina'sStepedup povisionng to aosi- 202-473-1155, fax 202-676-0581; or visit Public Provincial Banks, WPS 1972,nificant amount of new loans to coun-'''tries in crisis also affected net income the World Bank bookstores, in the September 1998, 36 p.

In fiscal 199.prvis United States, 701 18th Street, N.W, To order: Paulina Sintim-Aboagye, Roomlofsses amounted trov$251miion, orlan- Washington, D.C., or in France, 66 av- MC3-422, tel. 202-473-8526, fax 202-522-losses amounted to $251 million, com-' '

pared to only .3 m n ienue d'lena, 75116 Paris, Email: 1155, Internet: psintimaboagye@ous fiscal year. books@worldbank.org, Intemet: http:// worldbank.org. The authors maybe con-

wwwworldbank.org tacted at gclarke@worldbankorg or

Vietnam Accelerates Assistance rcull~worIdbankorgImplementation Working Papers

Argentina, a leader among developing

The World Bank's Vietnam Country Dominique van de Walle, Protecting the countries in restructuring its bankingTeam met with officials from Vietnam's Poor in Vietnam's Emerging Market sector, privatzed roughly half of its pub-Ministry of Planning and Investment Economy, WPS 1969, September 1998, lic provincial banks. The provincial banks(MPI) at the end of October to discuss 39 p. that remained in the public sector didthe improving quality of Vietnam's invest- To order: Cynthia Bernardo, Room MC2- not demonstrate the same performancement portfolio and the Bank's new part- 501, tel. 202-473-1148, fax 202-522- gains as privatized provincial banks.nership program launched earlier this 1154, Internet:cbernardo@worldbank. Authors estimate fiscal savings associ-year. A joint project of the World Bank org. The author may be contacted at ated with privatizing the banks rather thanand Japanese trust funds to address dvandewalle@worldbankorg. keeping them public and later recapital-implementation obstacles of official de- izing them. The privatization process in-velopment assistance (ODA) in Vietnam, The very principles on which Vietnam's cluded setting up residual entities for theis near completion. (ODA to Vietnam highly decentralized, community-based public provincial banks' assets and Ii-now totals more than $10.8 billion in com- assistance and safety net system is built abilities that private buyers found unat-mitments and runs at more than $2.4 are threatened by the country's increas- tractive, and creating a special fundbillion annually for the past few years). ing household mobility, without which the (Fondo Fiduciario) to convert the short-The project provided training programs market system cannot function. Devel- term liabilities of these residual entitesfor government staff and improved the oping a reliable, effective system of re- into longer-term obligabons. The Fondo,policy environment for investments. (An distribubve transfers and safety nets to created through cooperation betweennual ODA disbursements have climbedsteadily to about $1 billion in 1997. The replace faltering local insttutions will be Argentina's government and the WorldWorld Bank has disbursed more than important if Vietnam is to make a suc- Bank,waskeyinmakingbankpivalization$700 million of its $2.1 billion in commit- cessful transition to a market economy. politically feasible.ments to date.) Under discussion werethe Bank's proposed Portfolio Improve- Thomas F. Rutherford and David G. Tarr, Stijn Claessens, Daniel Oks, andment Plan for FY99, which will focus on Trade Liberalization and Endog- Rossana Polastri, Capital Flows tocontinued assistance to Vietnam's gov- enous Growth in a Small Open Central and Eastem Europe and theernmentwith special regard to the grow- Economy:A QuantitativeAssessment, Former Soviet Union, WPS 1976,ing number of locally targeted rural and WPS 1970, September 1998, 49 p. September 1998, 44 p.social sector programs. To order: Lili Tabada, Room MC3-333, To order: Rose Vo, Room MC10-628,

C 1998 The World Bank TRANSITION, October 1998 *

tel.202-473-3722, fax 202-522-2031, transplant Western institutional and Financial integration does not make itIntemet: hvo1@worldbank. The authors regulatory norms of good practice into more difficult to achieve macroeconomicmay be contacted at cclaessens transition economies may produce dis- stability, although large short-term capi-@worldbank.org or rpolastri@world appointing, even counterproductive, re- tal flows can lead to misaligned assetbank.org sults. prices, including exchange rates. Finan-

cial integration, however, limits how farJyotsna Jalan and Martin Ravallion, Be- The safety of an individual bank depends countries can pursue policies incompat-havioral Responses to Risk in Rural on the bank's own internal information ible with medium-term financial stability.China, WPS 1978, September 1998, and information processing capabilities; This disciplining effect also applies-35 p. on the sophistication of the banking prod- through pressures on financial mar-To order: Patricia Sader, room MC3-632, ucts it offers; as well as on the external kets-to the private sector. Globalizationtelephone 202-473-3902, fax 202-522- operating environment that the bank is easing financing constraints and ex-1153, Internet:psader@worldbank.org. faces. Bank 'safety' is an elusive con- tending the time during which countriesThe authors may be contacted at cept in transition economies. A transi- can make adjustments.jjalan@worldbank.org or mravallion@ tional banking system may be quite To order: Bill Nedrow, Room G2-072,worldbankorg "safe" even though regulatory reform may tel. 202-473-1585, fax 202-334-8350,

have progressed only minimally. The Internet: wnedrowk@worldbank.org. TheGerard Caprio, Jr., Banking on Crises: analysis helps to account for several authors may be contacted at mdailami@Expensive Lessons from Recent Fi- paradoxes observed in transition bank- worldbankorg or nhaque@imf.orgnancial Crises, WPS 1979, September ing systems, including the relatively1998, 32 p. long-term survival of banks that, by any Discussion PapersTo order: Paulina Sintim-Aboagye, Room objective standard, are insolvent.MC3-422, tel. 202-473-8526, fax 202-522- To order: Diana Cortijo, Room H2-023, Laszlo Lovei, Energy in Europe and1155, Internet:psintimaboagye@world tel. 202-458-4005, fax 202-477-3288, Central Asia: A Sector Strategy forbank.org. The author may be contacted Internet: dcortijoiworldbank.org. The the World Bank Group, No. 393, 1998,at gcaprio@worldbankorg authors may be contacted at aroe 42 p.

cworldbank.org or psiegelbaum@Deon Filmer and Lant Pritchett, The Ef- worldbankorg Since the late 1980s the energy sectorfect of Household Wealth on Educa- in many countries in Europe and Cen-tional Attainment: Demographic and Mansoor Dailami and Nadeem ul Haque, tral Asia has been affected by excessHealth Survey Evidence, WPS 1980, What Macroeconomic Policies Are production capacity, lower-quality sup-September 1998, 38 p. "Sound?" WPS 1995, October 1998, plies, decreasing demand, and inefficientTo order: Sheila Fallon, Room MC3-638, 46 p. consumption. This report outlines thetel. 202-473-8009, fax 202-522-1153, four main reform objectives of the WorldInternet address sfallon@worldbank.org. In the new globalized financial market Bank: assisting governments to protectThe authors may be contacted at environment,wherevolatilityhasbecome the public interest, supporting economicdfilmer@worldbank.org or Ipritchett@ a fact of life, what broad principles should transition, facilitating private invest-worldbankorg guide developing and transition econo- ments, and promoting regional initiatives

mies' macroeconomic management- to increase energy trade.Alan Roe, Paul Siegelbaum, and Tim how can they assure steady growth, full

in employment, stable prices, and a viableKing, Analyzing Financial Sectors in external payments situation? Capital Mohinder S. Mudahar, Kyrgyz Repub-Transition: With Special Reference controls and foreign exchange restric- lic: Strategy for Rural Growth andto the Former Soviet Union, WPS tions have been dismantled significantly Poverty Alleviation (Russian), No.1982, September 1998, 55 p. in several economies. In 1970 only 34 394R, 1998, 167 p.

countries-30 percent of the InternationalThe economic transifion from a command Monetary Fund's membership-had as- Mohinder S. Mudahar, Robert W. Jolly,to a market economy is a complex, sumed Article Vil of the IMF Articles of and Jitendra P. Srivastava, Transform-messy process, during which the incen- Agreement, declaring their currency con- ing Agricultural Research Systems intives of economic agents may be signifi- vertible on current account transactions. Transition Economies: The Case ofcantly different from those familiar to By 1997 this figure had increased to 77 Russia (Russian Version), No. 396R,Western economies. Thus aKtempts to percent. 1998, 142 p.

* TRANSITION, October 1998 d 1998 The World Bank

Other World Bank Publicatfons This volume provides a comprehensive Alcira Kreimer, John Eriksson, Robertdescription of Hungary's experience Muscat, Margaret Arnold, Colin Scott,

Assessing Aid: What Works, What with public finance reform, including a The World Bank's Experience withDoesn't, and Why-A World Bank history of the reform process; an em- Post-Conflict Reconstruction-Opera-Policy Research Report, Oxford Uni- pirical analysis of trends in public tions Evaluation Study, Septemberversity Press (for the World Bank), No- spending and revenues; evidence of 1998,120 p.vember 1998, 160 p. Hungary's ability to move toward acces-

sion to the European Union (EU); a de- Gerard Caprio, Jr., William C. Hunter,Ismail Serageldin and Joan Martin- scription of policy reforms in the public George G. Kaufman, and Danny M.Brown (eds.) Ethics and Values: A welfare system; an analysis of the re- Leipziger (eds.) Preventing Bank Cri-Global Perspective-Proceedings forms in key social areas (such as pen- ses: Lessons from Recent Globalof an Associated Event of the Fifth sion, health care, and education), in Bank Failures, EDI Development Stud-Annual World Bank Conference on public management (treasury, local gov- ies, September, 1998, 392 p.Environmentally & Socially Sus- ernment, and wage and employment),tainable Development, ESSD Se- as well as in the tax system. John Nash and Wendy Takacs (eds.)ries, September 1998, 124 p. Trade Policy Reform: Lessons and

The World Bank Research Program Implications, 1998, 372 p.Nicolas Mathieu, Financial Sector 1998: Abstracts of Current Studies,Reform: A Review of World Bank October 1998, 184 p. IMF Working PapersAssistance, September 1998, 104 p.

A compilation of reports on 193 research To order: IMF Publication Services, 700Lajos Bokros and Jean-Jacques projects of the World Bank that have 19th Street, N.W, Washington, D.C.Dethier (eds.) Public Finance Re- been initiated, are under way, or com- 20431, United States, tel. 202-623-7430,form during the Transition: The Ex- pleted in fiscal year 1998 (which started fax 202-623-7201, Email:publicationsperience of Hungary, September on July 1,1997). The abstracts describ- @imf.org, Internet:http://www.imf.org1998, 596 p. ing the analytical methods used, the (Full text of working papers can be un-

findings to date, and their policy impli- loaded and printed free in PDF format,Public finance reform is simultaneously cations are grouped under nine main using Adobe Acrobat Reader 3.0).a process of fiscal adjustment and headings: transition economies, pov-structural reforms in the public sector. erty and social welfare, labor markets Peter F Christoffersen and Peter Doyle,Under socialist rule the concept of pub- and education, environmentally sustain- From Inflation to Growth-Eightlic finance was nebulous, since there able development, infrastructure and ur- Years of Transition WP 98/100, 1998,was no clear delineation between pri- ban development, macroeconomics, 36 p.vate and public sectors. Making the international economics, domestic fi-transition from a socialist economy re- nance and capital markets, and private Kalra Sanjay, Inflation and Money De-quires profound institutional changes, sector development and public sector mand in Albania, WP 98/101, 1998,primarily to create a government sec- management. 34 p.tor that is adapted to the marketeconomy. East Asia: The Road to Recovery- Helmut Wagner, Central banking in

A World Bank Study, November 1998, Transition Countries,WP 98/126,1998.The macro situation was not favorable: 170 p.the transition-generated recession, an in- Gunther Taube and Jeromin Zettelmeyer,creasing fiscal disequilibrium, compli- This comprehensive World Bank study Output Decline and Recovery incated the life of the decisionmakers. The takes a look at what happened to the Uzbekistan-Past Performance andstabilizaton program announced in March EastAsia miracle-to the region's trade Future Prospects, WP 98/132, 1998.1995 was accompanied by a wide rang- and competitiveness, its financial sec-ing structural reform program. Cuts in tor, the corporate sector's financial per- Jeromin Zettelmeyer, The Uzbekgovemment expenditure (from 60 percent formance and governance, the depth of Growth Puzzle WP 98/133, 1998.of GDP in 1994 to 50 percent by 1996) the social crisis, and what should bereduced the fiscal deficit, and in 1997 Hun- done to help East Asia on the road to Oleh Havrylyshyn, Ivailo Izvorski, andgary resumed economic growth. recovery. Ron van Rooden, Recovery and

C) 1998 The World Bank TRANsmoN, October 1998 *

Growth in Transition Economies Author analyzes and reconsiders one Lindenbornstr. 22, D-50823, Koin, tel.1990-97-A Stylized Regression of the great economic dramas of West- 221-574-70, fax 221-574-110, Intemet:Analysis, WP 98/141, 1998. ern history, the march to capitalism in http://mwww.uni-koeln.de/externlbiost

Russia, Hungary, Poland and the CzechAlexander Repkine and Patrick Walsh, Republic. The period is from 1989, after Stanislav Simanovsky, Science andEuropean Trade and Foreign Direct the fall of the Berlin Wall, when the lib- Technology in Russia: Problems andInvestment U-Shaping Industrial Out- erated countries rushed headlong into Prospects, no. 18, 1998, 41 p.put in Central and Eastern Europe- democracy and capitalism. Special em-Theory and Evidence, WP 98/150, phasis is on the role, often misunder- Gerhard Simon, Welchen Raum Lasst1998. stood, played by the International die Geschichte fur die Modemisierung

Monetary Fund and the World Bank. Ruilands? no. 19, 1998, 33 p.Carlo Cotarelli and Gyorgy Szapary (edi- They financed and guided the transition,tors), Moderate Inflation-The Expe- while issuing free-market strictures in Wolf Oschlies, Ursachen undrience of Transition Economies joint the process. Russia, in its agony, of- Kulmination eines alt-neuen Balkan-publication of IMF and National Bank of fers a laboratory for the conflicting Konflikts, no. 20, 1998, 29 p.Hungary), 1998, 283 p. claims of free-market theory against a

more pragmatic, experimental ap- Irina Smetanenko, Konversion inAuthors, including the editors, further proach. China's hybrid-capitalism is Rulland, no. 26, 1998, 32 p.Stanley Fischer, Stanislaw Gomulka, also analyzed and compared.Olivier Blanchard, and Janos Kornai, Heiko Pleines, Korruption undduring a recent seminar, held in Karen S. Vorst and Willadee Wehmeyer Kriminalitat im RussischenBudapest, under the title 'Disinflation (editors), Financial Market Restructur- Bankensektor, no. 28, 1998, 40 p.in Eastern and Central Europe" dis- ing in Selected Central Europeancussed issues related to moderate in- Countries, 1998, 272 p. Anatoliy S. Grytsenko, Defence Re-flation. Is moderate inflation a problem, form in Ukraine: Chronology of theand if so, how can it be reduced? How HOsnO Kizilyalli, Economics of Transi- First Five Years, no. 29, 1998, 38 p.can short-run costs of disinflation mini- tion: A New Methodology for Trans-mized? Should disinflation be gradual forming a Socialist Economy to aor rapid? The volume contains all the Market-led Economy and Sketches ofpresentations and discussions of the a Workable Macroeconomic Theory, Center for Social and Economic Re-conference. 1998, 608 p. search (CASE-CEU) Publications

The author puts forth a new forecasting To order: CASE-CEU, Bagatela 14, 00-and planning methodology for transform- 585 Warsaw, Poland, tel. 4822-628-0912,

Ashgate Publishing, Aldershot/ ing a socialist or closed and/or mixed fax 4822-628-6581, E-mail: case@Brookfield USAlSingapore/Sydney economy to a free market economy. The case.com.pl

methodology makes use of existingTo order: Ashgate, Old Post Road, structures and capital stock during tran- Ugo Pagano, Transition and the "Spe-Brookfield, VT 05036-9704 USA, tel: 800- sition, as opposed to a complete de- ciation" of the Japanese Model, WP535-9544 or 802-276-3162, fax 802-276- struction brought about under a "big 4, June 1998, 35 p.3837, Email: info@ashgate.comAshgate; bang" approach. Author analyzes weak-UK and Europe; Gower Customer Ser- nesses of other forecasting methods that Laszlo Urban, Trade-offs Betweenvice: Bookpoint Limited, 39 Milton Park, have been developed for transformation. Macro-Performance and Micro-Re-Abingdon, Oxon, OX14 4TD UK, Tel: 44- structuring in Transition Economies:235-827-730 fax: 44-235-400-454 E-Mail: Contrasting the Czech and the Hun-orders@bookpoint.co.uk or enquiriese garian Experience, WP 5, June 1998,bookpoint.co.uk BundesinstitutfurOstwissenschaftliche 35 p.

und Intemationale Studien, KoInIrving S. Michelman, The March to Maryla Maliszewska, Romanian Trade:Capitalism in the Transition Coun- To order: Bundesinstitut fur Ostwissen- Recent Developments and Simula-tries, 1998, 176 p. schaftliche und Internationale Studien, tions for 1998, WP 6, June 1998, 31 p.

* TRANSmION, October 1998 X) 1998 The World Bank

Stanislaw Gomulka, Managing Capital Simeon Djankov and Bernard Hoekman, The volume describes the radical restruc-Flows in Poland, 1995-1998, WP 7, Avenues of Technology Transfer: turing of the countryside in Albania, Bul-June 1998, 15 p. Foreign Investment and Productivity garia, the Czech Republic, Eastern

Change in the Czech Republic, no. Germany Hungary, Poland, Romania,1883, 1998, 20 p. Slovakia, and Slovenia. It examines the

economic and political history of Cen-Center for East European Studies Thesia I. Garner and Katherine Terrell, A tral and Eastern Europe, in the contextPublications Gini Decomposition Analysis of In- of the transition process. Restoration of

equality in the Czech and Slovak Re- property ownership meant partial resti-To order. CEES, Copenhagen Business publics during Transition, no. 1897, tution of former owners, and survival of aSchool, Dalgas Have 15, DK-2000 1998, 19 p. large number of cooperatives on volun-Frederiksberg, tel. 4538-153-030, fax tary basis, and on a reduced scale. State4538-153-037, Internet: h ttp:// Barry Eichengreen and Richard Kohl, farms were either dissolve or transformedwww.econ.cbs.dklinstitutes/cees The External Sector, The State and to joint-stock companies. In perspective,

Development in Eastern Europe, no. the challenge is to create competitiveSnejina Michailova and Graham 1904, 1998, 49 p. commercial farms. To retain viable com-Hollinshead, Developments in the munities, creating new employment op-Management of Human Resources in John Bennett and Huw David Dixon, Mon- portunities, in rural areas the serviceEastern Europe-The Case of Bul- etary Policy and Credit in China: A sector should be further developed.garia, WP 9, 1998, 28 p. Theoretical Analysis, no. 1906, 21 p.

Adrian Smith, Reconstructing ThePatrick Arens, Strategic Decision Mak- Jozef Konings and Patrick Paul Walsh, Regional Economy-industrial Trans-ing in the Transitional Economy of Disorganization in the Transition Pro- formation and Regional Develop-Romania: The Case of TAMIV S.A., cess: Firm-Level Evidence from ment in Slovakia, EE, 1998, 456 p.WP 11, 1998, 33 p. Ukraine, no. 1928, 1998, 31 p.

The author criticizing the shock therapy,Klaus E. Meyer, Multinational Enter- John Driffill and Marcus Miller, No Credit and argues that transition to a marketprises and the Emergence of Markets For Transition: The Maastricht Treaty economy cannot simply be achievedand Networks in Transition Econo- and German Employment, no. 1929, through filling the supposed vacuum leftmies, WP 12, 1998, 26 p. July 1998, 26 p. by the collapse of central planning. The

present mix of old and new institutionalKlaus E. Meyer, Ten Years of Foreign structures contribute to economic frag-Direct Investment in the Former So- mentation and divergence.viet Union: A Survey with Special Edward Elgar PublishingFocus on Kazakhstan, WP 13, 1998, Other Edward Elgar Publications39 p. To order: Edward Elgar Publishing, 8

Lansdown Place, Chettenham, Glos. Istvan Abel, Pierre L. Siklos, and IstvanGL50 2HU, UK, tel.44-1242-226-934, P. Szekely, Money And Finance Infax.44-1242-262-111; Email: Info@e- The Transition To A Market Economy,

CenterforEconomic PolicyResearch elgar.co.uk or: 6, market St., 1998, 210 p.(CEPR) Publications Northampton, MA 01060, tel: 413-584-

5551, fax: 413-584-9933, email: Authors, in their search for ingredientsTo order: CEPR, 90-98 Goswell Road, rhenning@e-elgar.com, web: http:// of a successful transition to a marketLondon ECI V 7DB, United Kingdom, tel. www.e-elgar.co.uk economy, are focusing on four major is-44-171-878-2900, fax 44-171-878-2999, sues of the monetary and financial sec-E-mail: cepr@cepr.org Studies of Communism in Transition tors that emerged in Central Europe:

*Removal of state intervention and itsMichael Burda, The Consequences of David Turnock (ed), Privatization in effect on liquidity, and the availability ofEU Enlargement for Central and East Rural Eastern Europe-The Process credits.European Labor Markets, no. 1881, of Restitution and Restructuring, EE, * Failure of credit markets (credit1998, 27 p. 1998, 448 p. crunch) and the implications for corpo-

C 1998 The World Bank TRANSITION, October 1998 m

rate finance. The Free Market Institute of Lithuania Child Development Centre (ICDC),*Role of property rights and the impor- undertook this survey form November Florence, Italy, 1998, 135 p.tance of bankruptcy in a well-function- 1997 to March 1998, interviewing abouting market economy. 50 entrepreneurs (from banks, industrial The report is published through the*Effects of separating the central bank and commercial businesses), to evalu- MONEE project (Monitoring Publicfrom its commercial lending functions, ate present economic situation and pro- Policy and Social Conditions in Centraland the consequences for implementing vide forecast for the year ahead. Some and Eastern Europe, the CIS, and themonetary policy. results of the survey: GDP growth in Baltics). The focus of this year's report

1998 will reach 5 percent; the shadow is education, including enrollment andKlaus Meyer, Direct Investment in economy will contract slightly, but still other measures of access, learningEconomies of Transition, EE (New will be above 20 percent of GDP, the av- achievement, schooling costs, and theHorizons in International Business Se- erage household income will also rise decentralization of educational systems.ries), 1998, 308 p. slightly, reaching 2,600 litas in cities, The free database of socioeconomic in-

and 1,150 litas in rural areas. dicators for 27 CEE/CIS countriesSten Berglund, Tomas Hellen, and Frank To order: Free Market Institute of (TransMONEE 3.0) allows the retrievalH. Aarebrot, (editors) The Handbook Of Lithuania, 56 Sirutes St. Vilnius 2004, and manipulation of economic and so-Political Change In Eastem Europe, tel.: 822-722-584, fax: 822-721-279,E- cial indicators updated through 1996,Edward Elgar, 1998, 416 p. mail:lfmi@Ilri omnitel.It from different Web sites.

For more information, access theJanine R. Wedel, Collision and Collu- UNICEF ICDC Web site at: http://sion: The Strange Case of Western www.unicef-icdc.it/information/data-

Other Publications Aid to Eastern Europe 1989-1998, bases/index.htm, or the Centre forSt.Martin Press, NewYork, 1998, 248 p. Europe's Children at http://

Adolf J.H. Enthooven, Yaroslav V.Sokolov, eurochild.gla.ac.uk, or contact: Eco-Svetlana M.Bychkova, Valery V.Kovalev, Privatization aid to many Central and nomic and Social Policy Programme,and Maria V.Semenova, Accounting, Eastern European enterprises proved to UNICEF ICDC Piazza SS. Annunziata,Auditing and Taxafion in the Russian be largely ineffective when its implemen- 12 50122 Florence, Italy, tel. 39-055-Federation-1998 Study, Foundation for tation ignored local authorities and or- 234-5258, fax 39-055-244-817 E-mail:Applied Research, The Institute of Man- ganizations. As assistance moved east, CIUSCO@UNICEF-ICDC.ITagement Accountants, Montvale, NJ and the same lessons had to be relearned inThe Center for International Accounting each new recipient country. Local offi- Kazimierz Z. Poznanski, Poland's Pro-Development, The University of Texas at cials in Ukraine voiced complaints almost tracted Transition: InstitutionalDallas, Richardson, Texas, 1998, 300 p. identical to those of Central European Change and Economic Growth 1970-To order: http.//Avww.rutgers.edu/Account- officials, expressed several years earlier: 1994, Cambridge University Press, Cam-ing/raw/ima/publications/newbooks.htm that donors sent fly-in-fly-out advisers bridge/ New York, 1996, 337 p.

who were burdensome, stayed in expen-Russian accounting had a 'glorious" past sive hotels, and knew little about the hostuntil 1917. The system that developed country (in Poland they were dubbed theafter1920,servedwelltheSovietauthori- 'Mariott Brigades"). In Russia, on the Newsletters, Web sitesties in their policy of centralized plan- other hand, donors preferred to workning, and administrative control. The through local elites who "could get things China Watch, a monthly analytical re-book analyzes new development in Rus- done" through their personal connections. port on politics, business and thesian accounting and auditing and also Thus donors have lent resources and economy in China. To order: Orbis Pub-describes major shortcomings of the tax legitimacy to communist-style organiza- lications, L.L.C., 3201 New Mexico Ave.,system-and collection. tions, undermining attempts to build in- N.W, Suite 249, Washington, D.C. 20016,

dependent institutions and fomenting United States, tel. 202-237-0155, fax 202-Guoda Steponaviciene and Ramunas resentment against the elite cliques that 237-0596, E-mail: orbis@orbispub.com,Vilpisaukas, A Survey of Macroeco- benefitted. Intemet: http://vww.orbis.pub.comnomic Variables in Lithuania 199711998, Lithuanian Free Market Institute, Education for All? Fifth regional Re- "Countdown" NewsletterVilnius, 1998, 119 p. port of the UNICEF International http:llwiiwsv.wsr.ac.at/Countdownl

* TRANSITION, October 1998 C 1998 The World Bank

Information about a fast-developing EU Bib 11h of Articlesdatabase-already 1500 bibliographical POLDuiographiy ofSelected Arileunits, more than 300 experts and nearly200 institutions are searchable in "Count- Postsocialist Economies efits: The Changing Nature of Non-down". It will include, in addition to the 15 employment Subsidies in CentralEU countries, data about the future mem- Exeter, J. The Post-communist Transi- and Eastern Europe. Empirical Eco-bers. The main partner in collecting lit- tion: Pattems and Prospects. Finance nomics (Austria); 23, No. 112:31-54,erature on eastem enlargement published and Development, A Quarterly Publica- 1998.in the EU countries is the German Insti- tion of the Intemational Monetary Fundtute for Economic Research (DIW, Ber- (Intemational) 35:26-29, September1998. Flanagan, R. J. Institutional Reforma-lin). It is expected that the Institute for tion in Eastern Europe. Industrial Re-Economics and Finance, University of Five Years of Reform: A Brief Retro- lations (United States) 7:337-57, JulyParma, taly, and the Department of Sn- spective. IDS Bulletin/University of Sus- 1998.ternathonal and European Economic Stud- sex, Institute of Development (Unitedies, Athens University of Economics and Kingdom) 29:10-16, July 1998. Holzmann, R. Market Opening in East-Business, Greece, will also join the em Europe: The Asymmetry of Tradeproject under the auspices of the Gorton, G. Banking in Transition AdjustmentofOECD.AussenwirtschaftCommission's INTERREG IIIC initiative. Economies: Does Efficiency Require (Switzerland) 53:257-87, June 1998.Information: 'Countdown" project man- Instability? Joumal of Money, Creditager: SandorRichter, Vienna Institute for and Banking (United States) 30, Part Jaruga, A. Polish Public Sector Ac-

ntational Economic Studies p wVVwc) 2:16211-55, August 1998. counting in Transition: Evidencehttp:Avww. wiiw ac.at/, Oppolzergasse 6. From The Mid 1990s. Financial Ac-1010 Wien, Austria, tel. 431-533-6610- Transition To What? Restarting De- countability and Management (United25 fax:431-533-6610-50, E-mail richter velopment After Communism. IDS Kingdom) 14:105-21 May 1998.@wsr.ac.at Bulletin/University of Sussex, Institute

of Development Studies (United King- Jones, D. C. Work Incentives andEnergy Frontiers, Newsletter dealing dom) 29:1-83, July 1998. Other Effects of the Transition to So-with energy and power opportunities in cial Assistance in the TransitionEastern Europe and the CIS countries. Central and Eastern Europe Economies: Evidence From Bulgaria.

Empirical Economics (Austria) 23, No.Coming issues overview of the Aimr , K. Central bank Independence 112:237-61, 1998.azakhstani Power GenerationIndustry, in the Baltic Countries. SuomenEIB Financing in Central European Coun- Pankki: Review of Economies in Tran- Asiatries for the Power and Energy Sectors sition (Finland) No. 4:[5]-34, 1998.Bosnia and Herzegovina Energy Sector, China's Economy: Red Alert. Econo-and Environmental Aspects of New Benic, D. Transition in the Croatian mist (United Kingdom) 349:23-26, Oc-Power Plant Development in Eastern and Economy: Some Early Experiences. tober 24-30, 1998.Central Europe. Politicka Ekonomie (Czech Republic)To order: 13555 Bishop's Court, 46, No. 1:81-92, 1998. Fries, S. Stress Test for the East.Brookfield, Wl 53005-6286, United Banker (United Kingdom) 148:18-20,States, tel 414-784-9177, fax 414-784- Bilsen, V. Job Creation, Job Destruc- July 1998.8133, E-mail: Idiefenbach@diesel tion, and Growth of Newly Estab-pub.com, Web site: wwwdieselpub.com lished, Privatized, and State-owned Payne, B. Emerging Markets: Evolu-

Enterprises in Transition Economies: tion in the East. RISK (United King-Horizonti, the magazine for the third Survey Evidence from Bulgaria, Hun- dom.) 11:56-63, June 1998.To order: Horizonti, 33 Gogebashivil a gary, and Romania. Journal of Com-Tbilisi,:Georgizo, tel399532Gogebashivil S parative Economies (United States) Pesonen, H. Assessing Causal Link-Tbilisi Georgia, tel. 995-32-29-29-55, fax 26:429-45, September 1998. ages Between the Emerging Stock995-32-98-75-04, E-mail: presscenter@ Markets of Asia and Russia. Suomenhorizonti.org, Internet: http://www. Boeri, T. Long-term Unemployment Pankki: Review of Economies in Tran-horizonti.org and Short-term Unemployment Ben- sition (Finland) No. 4:[47]-56, 1998.

(D 1998 The World Bank TRANSITION, October 1998 *

Radelet, S. The East Asian Financial We appreciate the continuousCrisis: Diagnosis, Remedies, Pros- support of our current sponsors: T RANSITIONpects. Brookings Papers on EconomicActivity (United States); No. 1:1-90, The William Davidson Institute, Telephone: 202-473-69821998. Fax: 202-522-1152

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* TRANSITION, October 1998 ( 1998 The World Bank