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! BANKS UNDER STRESS
During the 1980s the banking indu¬ "«omufi*» stry underwent considerable struct¬ ural changes. New markets were - opened and competition intensified 1 as a result of deregulation, liberalisa¬ «sfes? tion, demand and supply changes and «Htës advanced communication techno¬ logies. After a period of rapid growth, strains have begun to develop. New fil *«*£SS88!f business opportunities have not always fulfilled the promises they seemed to hold, and market shares have been eroded BANq^ by bank and non-bank competitors. 1981.19SQ Although the deregulation of the past de¬ cade will not be undone, the fjture is likely to hold a shift towards respecialisation and stricter prudential regulation in the financial sector.
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BANK PROFITABILITY: Statistical Supplement Financial Statements of Banks 1981-1990 OCDE Trends in bank profitability and the factors affect¬ ing it are major indicators of changes in the state of health of national banking systems. These OECD statistics, based on financial statements of banks, provide a unique tool for analysing devel¬ opments in bank profitability from 1981 to 1990, up¬ SVQTFMir dating the OECD publication Bank Profitability, IOIOTIlVi Financial Statements of Banks - 1981-89. 1 74 tables. April 1992, 194pp., bilingual (2192 04 3) ISBN 92-64-03531-1 FF160 £21 US$37 DM62
SECURITIES MARKETS m SECURITIES MARKETS AND SYSTEMIC RISKS
IN DYNAMIC ASIAN ECONOMIES Dr. S. Ghon Rhee Director, Pacific-Basin Capital Markets Research Center, University of Rhode Island '«MKafft.MiJP ' This report examines the organisation and regulation of securities markets in - V < - the six 'Dynamic Asian Economies' (DAEs): Hong Kong, Korea, Malaysia, Singapore, Taiwan and Thailand. Specifically, it analyses the mechanisms \ - prevailing in the DAEs to counter systemic risks, that is, the risks of serious disturbances that might threaten or impair the functioning of the international financial system. In this context, it addresses issues such as market mechanisms, securities market supervision and the integration of the DAE &9 3q securities markets in the global financial system. An important guide for anyone interested in the internal workings of these markets. April 1992,96pp. (2192 01 1) ISBN 92-64-13638-X FF100 £14 US$26 DM42
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ate . i *?» , . -, (>3/ ton Z°?1 *&** y. .340 ass'* CON TENTS biotechnology BIOTECHNOLOGY, AGRICULTURE AND FOOD Published every two months in English Salomon Wald and French by the ORGANISATION urban affairs FOR ECONOMIC CO-OPERATION AND DEVELOPMENT. Editorial Address: THE CITY AND THE ELDERLY OECD Publications Service Château de la Muette Ariel Alexandre and Yuko Aoyama 2, rue André-Pascal economies in transition F 75775 PARIS CEDEX 16 Tel. (1)45-24-82-00 12 Fax (33-1)45 24 85 00 SWORDS INTO PLOUGHSHARES, TANKS INTO TELEPHONES Individual articles not copyrighted may be Tim Kelly and Martin Salamon reprinted, provided the credit line reads 'Reprinted from The OECD Observer' plus date 19 of issue and two voucher copies are sent to the SOUND BANKING FOR A STRONG MARKET Editor, with an indication of the circulation. Signed Hans J. Blommestein articles reprinted must bear the author's name. Signed articles express the opinions of the authors and do not necessarily represent the opinion of the OECD. 23 The Organisation cannot be responsible for returning unsolicited manuscripts. THE DEVELOPING COUNTRIES AND THE WORLD TRADING SYSTEM All the correspondence should be addressed Anne Richards to the Editor. environment Single copies E2.50 US$4.50 FF20.00 DM8.00 26 THE ENVIRONMENT INDUSTRY Annual Subscription Rates Candice Stevens £12.00 US$22.00 FF1 00.00 DM43.00 Tél. (1)45-24-81-66 29 Editor ENVIRONMENTAL POLICIES IN TURKEY Ulla Ranhall-Reyners Ferenc Juhasz Associate Editor Martin Anderson economy Assistants SPOTLIGHT ON Yannick Bultynck Carol Thornton 33 Art, Production and Layout Gerald Tingaud SWEDEN Photo Research Sveinbjôrn Blôndal and Thomas Egebo Silvia Thompson-Lépot 35 POLAND Grant Kirkpatrick and Val Koromzay 38 NEW OECD PUBLICATIONS centrefold OECD ECONOMIC OUTLOOK 177 August/September 1992 The quiet revolution of biotechnology is affecting three major sectors: health, the environment and agro-food production. Biotechnology, Aqriculture /cuid Food the OECD OBSERVER 177 August/September 1992 BIOTECHNOLOGY iotechnology, the last of the major Indeed, reducing the use of chemicals in are also growing links between animal and generic technologies of the 20th agriculture and food production has become human research, as genetically modified B animal models are in demand for elucidat¬ century, is not yet as pervasive as one of the main aims of biotechnology. information technologies. It will neverthe¬ ing the causes of human disease (for ex¬ Plants less profoundly modify at least three im¬ ample, carcinomas, leprosy, Creutzfeld- portant sectors: health, environmental Biotechnology can intervene in every Jacob Disease), and there is some con¬ protection and agro-food production. stage of plant life. Rapid tests to diagnose cern that certain diseases might be trans¬ It is in the last of these that biotechno¬ crop disease and to control seed and crop missible from farm animals to man. logy has met with most resistance, more quality aim to bring about safer and more Biotechnology can improve growth, so for reasons of politics, safety assurance efficient crop breeding and trade. far in cattle, sheep and pigs, through the and consumer acceptance than on grounds Novel genetic modification methods are administration of a pituitary hormone of technological or economic efficiency. adding new genes to crop plants much (somatotropin) manufactured by rDNA The public and policy-makers alike often more efficiently than traditional plant techniques and without adverse side- do not fully grasp the range and versatility breeding has done, thus enhancing plant effects; it can also increase milk yield. of the new options which biotechnology performance and resistance to viral and Genetic modification attempts to improve offers the agro-food sector. Many people other diseases as well as to drought, heat, both the usefulness and productivity of restrict their image of biotechnology to re¬ cold, salinity, and so on.2 Biotechnology animals. Research can take many direct¬ combinant DNA (rDNA) techniques, note can improve plant-breeding through In ions since farm animals have been bred that no major crop-plants, farm animals or vitro methods, saving time and money, for only a few characteristics, and a vast food genetically modified by such tech¬ and also plant production in the field number of animal genes of potential value niques can yet be found in large-scale where crop performance depends on have not yet been identified or exploited. commercial agriculture in the OECD area, numerous external factors. Many of these Many biotechnology products are already and hence draw the erroneous conclusion changes will help to reduce the use of in commercial use: new diagnostics, vac¬ that agro-food biotechnology has had little agricultural chemicals, thus reducing pol¬ cines and therapeutics, in vitro fertilisa¬ or no impact. Not so: the scientific and lution. tion, pituitary hormone for milk yield, ani¬ technological developments which under¬ A number of new biotechnologies are mal feeds and additives and genetically pin agro-food biotechnology have during already being exploited for commercial modified laboratory animals used as human the last years been exceptional. gain, particularly plant diagnostics, micro¬ disease models, such as the 'onco- bial insecticides, and In vitro and genetic mouse'.3 In the coming years, many new Four mapping techniques. A much larger number products, particularly health products and is ready, although not yet commercial, or feed additives, will be ready to be marketed. Categories will be finalised within the next two to The period after 1995 might see the com¬ three years, with a potential for far-reach¬ mercial development of genetically modified In spite of the large differences which ing technological change in agriculture. pigs and cattle with rapid growth potential separate the four categories affected by They include genetically modified potato and improved resistance to disease. biotechnology - plants, animals, food and plants, cotton, oil-seed rape, tomatoes, The commercial breeding of fish has a non-food products - there are also some tobacco and soybean that are resistant to short history indeed. This slow start, very important common themes. For exam¬ specific herbicides, viruses, insects or coupled with the large number of species ple, among the earliest, and most wide¬ have improved quality traits; they have available, offers considerable opportunities.4 spread, uses of biotechnology in all these already been successfully tested in small- 1. Biotechnology, Agriculture and Food, OECD sectors are health improvements, particu¬ scale field trials. Publications, Paris, 1992. larly through new diagnostics and prevent¬ 2. See Carliene Brenner, 'Biotechnology and the Animals ion, both in humans (food contamination) Developing World: Lessons from Maize', The OECD and in plants and animals. Another com¬ Biotechnology can make a dramatic impact Observer, No. 171, August/September 1991. mon feature is that the introduction of in controlling animal diseases which 3. See Bernard J. Phillips, 'The Patent Paradox in Competition Policy', The OECD Observer, No. 159, genetically modified end-products into the cause suffering and economic loss. There August/September 1989. market has often been delayed. In all four Salomon Wald specialises in biotechnology in the Science 4. See Carl Christian Schmidt, 'The Fishy Business of categories, the dominant trends in innova¬ and Technology Division of the OECD Directorate for Aquaculture', The OECD Observer, No. 154, October/ tion are manifestly environment-friendly. Science, Technology and Industry. November 1988. the OECD OBSERVER 177 August/September 1992 BIOTECHNOLOGY detergents, paints, lubricants, and so on), ornamental plants, grasses, tobacco, cotton, leather, wool, hair, silk, chemicals from plants. Because they are so hetero¬ geneous, it is insufficiently recognised that in value terms they already amount to more than 20% of OECD agricultural pro¬ duction. A central contribution of biotechnology could be to help produce more, and cheaper, wood and biomass, which can be transformed into various forms of energy and other products. To this end, biotechnology research is focusing on breeding, cloning and genetic modification of trees. Another, exciting, area of research is the production of new industrial prod¬ ucts from genetically modified plants or animals. Already, animals such as sheep and mice have been made to produce in their milk some rare and expensive proteins for human medical use. The time where other pharmaceuticals, as well as fine chemicals and enzymes, will simply be harvested (from genetically modified plants) may not be too far off. Computer-assisted protein engineering can be used to improve or modify the performance of enzymes and Old and New other proteins used in food-processing. Constraints Biotechnology promises important in¬ monoclonal antibodies or DNA probes are creases in efficiency through faster growth revolutionising the methods available to The advance from the scientific revolu¬ and reduction of diseases - not least identify, control or remove dangerous tion of biotechnotogy to an agricultural and bacterial and other infections - which are contaminants, such as salmonella and lis¬ economic one will be long and arduous. widespread among fish. teria. The technologies commercially available Many food biotechnologies - new are, at the moment, only a part of what is Food methods of testing, enzymes, flavours, already possible technically, and they The largest strides to date have been special nutrients, novel foods such as represent an even smaller fraction of the made in food manufacturing where, until meat-like protein foods derived from numerous options that could be developed recently, more biotechnologies have been lower-value materials, and others - are during the next ten years. in commercial operation than in other sect¬ already in commercial operation. No Where, then, are the obstacles, and what ors. Traditional' biotechnologies of fer¬ dramatic developments are to be expected causes the delays? There are, of course, mentation and enzymes are well established, in the coming years, although many addi¬ numerous scientific and technological bottle¬ and the modern processes that use these tional products in these categories will necks and fundamental gaps in knowledge methods were in use and widely accepted arrive on the market, including the first that still have to be overcome, as can be before the molecular biology and genetic genetically modified food product, a new expected of a technology that has been revolution. bakers' yeast. expanding so swiftly and in so many direct¬ New food biotechnology offers a very ions. But the main problems are to be found Non-food Agricultural Products wide range of options for improving the in industrial constraints, public perception quality, nutritional value, safety and pre¬ One goal of biotechnology that is both of the new technologies, requirements of servation of foods. No single biotechno- promising and essential is the promotion safety assurance, and agricultural policies. logical advance will have a dramatic impact of non-food uses of agricultural crops and across the food-processing industry - it is animals, simultaneously improving their Industry simply too vast and varied. Yet in some economic viability and avoiding food Translating the potential of agro-food cases biotechnology is already leading to surpluses. These include wood, starches biotechnology into products and processes radical changes (in testing for contamina- (for paper, textiles, adhesives), natural is, first and foremost, an industrial problem. tionr for instance). Rapid tests based on rubber and oil-bearing crops (for soap, Most agro-food biotechnology is domi- the OECD OBSERVER 177 August/September 1 992 BIOTECHNOLOGY An understanding of the genetic structure of bacteria will help scientists to produce flavour- generating enzymes and natural anti-microbial agents. acceptance of biotechnology varies signi¬ whether an organism has been modified ficantly according to country, sex, educa¬ by traditional breeding, or genetic en¬ tional achievement, religious conviction, gineering methods, but whether the final and so on. It is the most educated and products and applications offer a risk, in best-informed groups of the population which case only should they be regulated. which show the highest acceptance.5 The scientific community in all countries, Paradoxically, the most active political including Europe, does not see genetic opponents also belong to this segment of modification as such as a source of risks the population: environmentalists, 'Green and therefore overwhelmingly supports Party' adherents, animal-rights activists, the second position. critics of multinational corporations, reli¬ Agricultural Impact gious fundamentalists and others, often with clearly formulated aims and fears, but Agricultural policy-makers were quick to sometimes also with 'hidden' ideological seize on the usefulness of some biotech¬ agendas. nologies for farming and food production. Vocal opposition by these groups against Yet they were also concerned that others genetic modification has influenced the might disturb existing patterns of product¬ public, and has turned biotechnology ion, trade and employment and thus accel¬ safety into a major policy concern for virtu¬ erate the already difficult process of agri¬ nated, directly or indirectly, by multinational ally all OECD governments. Although the cultural adjustment. On these grounds corporations. Although several of these safety of genetic modification (mainly they have delayed specific innovations on have shown strong commitment to agro- rDNA) techniques in laboratory and con¬ several occasions. food biotechnologies, many others have tained industrial conditions is no longer in The best-known example is bovine been cautious, and a few have even with¬ somatotropin (BST, 'bovine growth hor¬ drawn from earlier interest or investment. question, problems remain with the large- mone'), the approval of which has been Their recalcitrance is not difficult to under¬ scale release of genetically modified or¬ deferred several times on both sides of the stand. ganisms into the environment. There are two positions. The European Atlantic. Although animal-welfare argu¬ From an industrial perspective, innova¬ Community view, influenced by environ¬ ments have been put forward, true or tion in agro-food biotechnology involves a mentalist pressures, is that all genetically alleged, the main reason is fear that the high degree of uncertainty. The vagaries modified organisms must not only be capacity of this new rDNA product to in¬ of consumer response, the safety debate evaluated for possible risks, but also regu¬ crease milk yields in cows could add to and the availability of numerous, and often lated. The position taken by the US and milk surpluses or agricultural unemploy¬ competing, scientific and technological Japanese governments is more pragmatic: ment. In another, earlier, case, the Com¬ options make decisions on investment diff¬ they emphasise that the issue is not mission of the EC imposed limitations on icult. In the OECD area traditional agro- food markets are stagnating; yet simul¬ The technique of embryo multiplication - which here has produced five genetically identical sheep could taneously a profound restructuring of de¬ allow farmers to select animals with sought-after characteristics and replicate them rapidly. mand is taking place, linking food to new and often contradictory demands of health, ecology, safety or convenience. The re¬ duction of these uncertainties requires particular responsiveness to end-user de¬ mand, whether the end user is another firm or the final consumer. Public Acceptance and Safety Assurance 'Biotechnology' is an umbrella term cover¬ ing a vast variety of processes and pro¬ ducts. The resulting confusion has led the public to identify biotechnology with genetic engineering or with human repro¬ duction techniques (test-tube babies, for example), or to associate it with unrelated food-safety or health problems. Public 5. 'Eurobarometer' survey in the 12 EC countries in 1991. the OECD OBSERVER 177 August/September 1992 BIOTECHNOLOGY will be linked to political decisions on sub¬ sidies, prices and agricultural reform. A re¬ duction of agricultural protectionism in countries or sectors where prices are high (milk and sugar, for example) could slow down the diffusion of biotechnology dur¬ ing a period of structural adjustment. Yet the resulting improvement in efficiency could lead to faster adoption of further innovations later on. On the other hand, biotechnology could considerably encour¬ age structural adjustment in agriculture by reducing both inputs and costs. In the longer term, and on a global scale, there can be little doubt that agro- food biotechnologies will be widely recog¬ nised as indispensable to feed a growing world population without doing irreversi¬ ble damage to the environment. Knowledge of the sequences that make up ONA and RNA underpins much research in food technolot OECD Bibliography molecular systematics, gene probe design, microbial genetics, pathogen detection systems. . . Biotechnology, Agriculture and the sale of isoglucose, an artificial logy does not have to increase production. Food, 1992 sweetener extracted from maize by enzyme Given the right policy framework, it can, Concepts and Principles underpinning Safety Evaluations of technology, in order to protect European and should be used to, reduce costs, thus Food Derived from Modern sugar-beet farmers. also reducing agricultural inputs, such as Biotechnology, forthcoming 1992 Attempts have been made to assess the water, pollutant agro-chemicals, as well Biotechnology and Developing economic impacts of agro-food biotechno¬ as waste. Indeed, it is environmental pro¬ Country Agriculture: The Case of logy. Studies commissioned by the Office tection that argues most strongly for many Maize, 1991 Carliene Brenner, 'Biotechnology and of Technology Assessment of the US agricultural biotechnologies, because of the Developing World: Lessons from Congress, by the Commission of the EC, their promise to make agriculture more ef¬ Maize', The OECD Observer, No. 171, and others, show that biotechnology has ficient, cheaper and less polluting. August/September 1991 indeed an enormous potential to increase What is true for the OECD area is even Competition Policy and Intellectual productivity in agriculture, by decreasing more true for many parts of the develop¬ Property Rights, 1989 Bernard J. Phillips, The Patent costs by unit of output, or by increasing ing world, particularly in regions where Paradox in Competition Policy', The yields per unit of input. Some of these large concentrations of population with OECD Observer, No. 159, August/ effects will be partly offset by an expected quickly growing food demands live in an September 1 989 decline in productivity increases derived environment that is threatened or fragile Biotechnology: Economic and from traditional technology. (South-East Asia, China, Egypt), not to Wider Impacts, 1 989 Economic assessments specifically for mention the eastern European countries Salomon Wald 'The Biotechnological Revolution', The OECD Observer, BST show that in the quota systems which where pollution has taken a dramatic toll No. 156, February/March 1989 exist in OECD countries to control milk on the environment, while agriculture has Aquaculture: A Review of Recent production, the main direct impact will be remained inefficient. Experience, 1989 in reducing costs rather than expanding Carl Christian Schmidt, 'The Fishy Business of Aquaculture', The OECD production. If there are to be production Observer, No. 154, October/November increases, they will not arrive suddenly, In the OECD area, some of the possible 1988 but gradually, within a 5-10 year period, effect of agro-food biotechnology might Biotechnology and the Changing and are likely to be in the range of 10- continue to give policy-makers cause for Role of Government, 1 988 15%. Only over a longer period could BST concern. Biotechnology will facilitate con¬ Recombinant DNA Safety Considerations, 1986 have a more significant influence on the centration and may add to agricultural un¬ F. K. Beier, R. S. Crespi and production and market structure of milk. employment an inevitable consequence of J. Strauss, Biotechnology and Patent This example illustrates an important, productivity increases. In the short and Protection: An International Review, and generally valid, principle. Biotechno medium term, the fate of biotechnologies 1985. the OECD OBSERVER 177 August/September 1992 URBAN AFFAIRS The City and the Elderly Ariel Alexandre and Yuko Aoyama The population of OECD countries is aging. Since most of the elderly live in cities, urban services and parts of the housing stock have to be adjusted to their requirements. How can cities better serve elderly people, most of whom prefer to live independently at home? Various programmes are being implemented in OECD cities.1 The aging of OECD populations is they form a vast potential political group, now a familiar story, although few which may increase pressure for housing, studies are available on how policy¬ health, social and cultural services better makers can formulate programmes that adapted to their requirements. As a con¬ respond effectively to this increasing seg¬ sumer group, they are also creating and ment of the population. As elderly people expanding markets for a variety of activities form an ever-larger part of the population and services, such as recreation and (projected to grow by almost 50% between health care. Yet it would be imprudent to 1980 and 2010 in the OECD area), issues conclude that elderly people in the future related to the care of elderly people is no will not require assistance. For instance, longer merely a family affair. Most large although the financial situation of many cities in the OECD countries already have elderly people has improved during the a higher percentage of elderly people than last decade, a large number would still not the population as a whole (many big be able to survive without the transfer in¬ cities have 50% more elderly people than come they receive; and some are poor the national average), and the inner cities even with their state benefits. The poorest generally have higher proportions of elderly are generally found among women, ethnic people than their surrounding metropolitan minorities and the very old. The very old, areas. And an increase in the elderly over the age of 75, will also increase the population is anticipated in most cities. In demand for social services, especially addition, more elderly people live alone in health care. cities, as opposed to rural areas where extended families are still widespread. What Can Many cities now offer services that are Cities Do? critical to the well-being of their elderly re¬ sidents; and they have begun to investigate the alternatives to institutional care of elderly Although it is national policies that deal with pension schemes and health insurance, people. Various measures to provide more urban policies have a direct influence on flexible, responsive, appropriate and afford¬ the quality of life of elderly people. Through able urban services are being indentified. both the decentralisation of authority to Although the approaches differ from city life of the elderly as active and fruitful as local tiers of government and the growth to city, some principles for policy devel¬ other parts of society in the elderly urban population, cities will opment are now common to many of them: encouraging the involvement of both have an increasing role to play in provid¬ enabling the elderly to live independ¬ the private and the voluntary sector in de¬ ing services for them. But these will have ently for as long as possible livering housing and urban services for the to be as diverse as the elderly population developing residential rather than institu¬ elderly itself. So a system of identifying the re¬ tional types of environments for those stimulating self-help on the part of the quirements of each elderly person would who require special care elderly and facilitating informal care by be the first step toward an effective policy creating local conditions to make the their families and neighbours. Many of the elderly people today are for the care of the elderly. Ariel Alexandre is Head of the Urban Affairs Division at the OECD Environment Directorate, where Yuko very different from those of the past. 1 . Urban Policies for Ageing Populations, OECD Aoyama is a consultant. Wealthier, healthier and better educated, Publications, Paris, forthcoming 1992. the OECD OBSERVER 1 77 August/September 1 992 URBAN AFFAIRS Elderly people Wealthier, healthier can give, as well and better-educated, as receive, the elderly form an assistance. ever more powerful consumer group. They are also encouraged to organise themselves and initiate self-help activities. In Canada, 'New Horizon Grants' are de¬ signed to encourage self-help initiatives among the elderly by providing funds to community organisations they run them¬ selves. These organisations develop pro¬ grammes for mutual support, such as makes it easier for everyone else. Simple telephone checks and adult literacy pro¬ improvements in design of hand rails, push jects. In the city of Augsburg, in Germany, buttons and seats in public transport do the 'Getting Older in Augsburg' programme not require much additional cost, but help has been developed with elected elderly the elderly to remain mobile. It is essential, residents making decisions on policy too, to ensure that they have access to priorities that affect them. In Norway the accurate information before and during Institutionalisation is neither desired by Project '67+' was instituted by the mayor trips, since their ability to react to unfore¬ the elderly themselves, nor is it a cost- of Oslo to enable elderly residents to provide seen circumstances is often limited. Un¬ effective solution for people who do not policy recommendations on such issues certainty, loss of confidence, insecurity require intensive care. To fulfill their desire as improving the accessibility of local and lack of information can prevent them to 'age at home' comfortably, increased transport. travelling even locally. attention is being placed on community- A number of programmes provides incent¬ Furthermore, every link in the transport based care. Yet implementing it is not ives for elderly people to shorten institu¬ chain has to function properly. Since easy: the funds may come from a variety tional stays. In Sweden, elderly persons every journey begins and ends on foot, of sources, and programmes have to be continue to receive allowances to main¬ improving walking routes is the first step well co-ordinated. tain their homes during an institutional toward accessible transport. Then public A number of innovative programmes stay, thus not only helping them retain transport also has to be better co-ordi¬ have been implemented in OECD cities to their own homes while they are in care but nated with urban planning. provide housing and social services for also providing the motivation to return the elderly. To assess the requirements of home. New technologies are also made Who Delivers available in a number of cities to offer elderly people more accurately, cities in Urban Services? Sweden, for example, collect detailed more security to the elderly (personal alarms, interactive video systems con¬ statistics on their living conditions - those There are five strategies to promote nected to a source of assistance, and so who live above the first floor in buildings 'aging at home': independent action, dele¬ on). In other cases, low-cost solutions without elevators, those who have difficulty gation, co-ordination, collaboration and climbing stairs, those who cannot walk have been found, such as voluntary ser¬ partnership. Each involves a different vices for health-care assistance or meal briskly for five minutes. These statistics degree of goal-sharing among national provide the basis to determine whether delivery. and local governments, the private sector each individual is capable of conducting and voluntary organisations. such daily chores as shopping - informa¬ Improving Independent action involves a minimum tion which is helpful in estimating what Mobility inter-sectoral co-ordination, and partner¬ home-delivered services are required. ship involves the highest degree of collab¬ There are also programmes that facilitate The growth in the size of cities with in¬ oration. One example of independent action the creation and maintenance of housing creasingly active elderly people suggests can be seen in a private-sector initiative in stock for the elderly. In Japan, where urban that they will be more mobile than once Japan, where home help is provided by housing is particularly expensive, loans they were. Transport provides the essen¬ some large corporations to their pension¬ are offered as an incentive to support the tial links for the elderly between home and ers as part of their employment benefits. so-called 'three generational' occupancy the people who provide care (relatives, Sweden has decentralised the responsi¬ of housing. In some cities in Denmark neighbours, friends, and so on), amenities bilities of housing and social-service pro¬ (Skovlunde, for example) and Sweden (such as libraries) and support services vision to city administrations, with the aim (Gothenburg), zoning regulations are relaxed (such as day centres). Elderly people suffer of providing less expensive - and more re¬ to build additional housing and provide reduced mobility not only because of diffi¬ sponsive - services without diminishing community centres for elderly people. Thus, culties in walking, but also through sensory the reliability or quality of coverage. A col¬ instead of being forced to move to special problems, such as deficiencies in seeing, laborative arrangement is used, also in housing in another community, these pro¬ hearing or speaking, which make it difficult Sweden, to improve the quality of housing grammes may help elderly people to re¬ to find one's way, select an appropriate and social services; it enables cities to main in the area they know and to main¬ form of transport, even buy a ticket. apply for national grants for neighbour¬ tain their existing social network. Improving transport for elderly people hood improvement plans while permitting 10 the OECD OBSERVER 177 August/September 1992 URBAN AFFAIRS ! 3 i» ! f ir- ? participation of elderly residents in the planning process. There are a number of co-ordinating projects between public and private or non-profit sectors that offer the possibility of improving administrative and financial efficiency. In some cities in the United States, utility companies for telephone, water, gas and electricity do not send dis¬ connection notices to elderly residents until the social service office has investi¬ gated. Such a simple arrangement enables cities to identify the elderly people who need help, and the utility companies are able to save the costs of pursuing unpaid bills. Who Should Pay? The overwhelming majority of elderly people do not live in housing units spe¬ cially designed for their use. An elderly Voluntary workers have often been prominent in the delivery of domestic services. person in an OECD city typically lives in the same dwelling she has occupied for forward purchase of social services by the that there is a tendency to consider that the previous 1 0 or 1 5 years and pays her recipient's household. Typically, pur¬ problems of the elderly are unsolvable, in¬ housing costs completely by herself. Yet chases are from private vendors. evitable - that there are no prospects for public assistance in housing services exists Some countries provide allowances for improvement. But this is not true: better in many OECD cities in various forms, in¬ elderly people to purchase these services. urban services and the proper co-ordina¬ cluding subsidised housing development, In France, for instance, the government tion of the public, private and voluntary rent supplements and mortgage insurance. assists elderly people for part of the ex¬ provision of services can bring enormous The sources of assistance for social penses incurred in receiving care from improvements to the daily life of the elderly. services for the elderly can be subdivided nurses or helpers by reimbursing social- But there is more. Elderly people them¬ thus: supported family assistance, publicly security contributions. There have been selves could play an important role in the provided assistance, help provided on a experiments with services received under welfare of cities - through young people. voluntary basis, fee-for-service purchased insurance schemes in countries like the Elderly people could help children con¬ by the household, and services received United States. By collecting capitated fronted with various socio-economic and under insurance schemes. Supported family fees from users, the Social/Health Mainte¬ family problems, bringing them affection, assistance includes direct payments, tax nance Organisation provides pre-paid patience and experience. Government, local exemptions and pension contributions to coverage of community and nursing-home as well as national, could take the neces¬ assist those who provide family care. care. This type of service is relatively new sary measures, institutional and practical, Although not widespread, some pro¬ and is still under evaluation, but early results to allow this kind of loosely structured and grammes exist in cities in Australia, Japan show that insurance mechanisms appear mutually beneficial exchange between and the United States. promising for funding either the full range generations. Publicly-provided assistance varies of longer-term care or for supportive ser¬ among OECD countries, on two grounds: vices only. how funding responsibilities are distri¬ buted among various strata of govern¬ a a ment, and whether services are funded through health care or welfare budgets. Elderly people are facing two apparent OECD Bibliography These differences tend to influence sig¬ paradoxes. The first is that, although they Urban Policies for Ageing nificantly the types and the combinations often live in crowded and congested cities, Populations, forthcoming 1992 Environmental Policies for Cities in of services offered. The voluntary sector is aging often means loneliness. In truth, the the 1990s, 1990 mainly organised for the provision of ser¬ elderly, because of that loneliness, need Urban Housing Finance, 1988 vices by non-profit organisations. Fee-for- exactly what the city can offer: opportunities, Ageing Populations: The Social service, on the other hand, is the straight- services, contacts. The second paradox is Policy Implications, 1988. the OECD OBSERVER 1 77 August/September 1 992 11 ECONOMIES IN TRANSITION Swords into Ploughshares, Tim Kelly and Martin Salamon One of the most pressing requirements in transforming the former Soviet Union to a market-based economy is the redirection of resources from the military and state-controlled sector to civilian and commercial use. What opportunities are there for conversion in telecommunications? The military sector in the former USSR produced a much wider range of goods and services than conventional images suggest. 12 ECONOMIES IN TRANSITION Tanks into Telephones The conversion of military/industrial in a region of high-tech military facilities In the Krasnoyarsk region, there are resources to commercial use has and enterprises, the recent cut-backs in three major military plants, with 9-10,000 been highlighted as one of the most military procurement have hit the city and employees each, which have already gone urgent claims for western assistance to its still-closed satellite towns hard. Diver¬ some way in the conversion process: the New Independent States of the ex- sification and the establishment of joint the Radio-Technical Plant, previously Soviet Union (NIS). Yet much of the debate ventures with foreign partners are being the major military manufacturer of radio has concentrated on the physical conver¬ pursued as ways of solving this problem, communications and satellite communi¬ sion of factories rather than meeting market by making use of the region's abundant cations equipment, and now producing demand directly. It was in an attempt to natural resources, cheap energy and con¬ satellite ground stations rebalance this focus that the OECD and its centration of highly educated manpower. the ISKRA plant which used to produce Centre for Co-operation with the European There were a number of reasons for military equipment for dedicated networks Economies in Transition recently held a examining the telecommunications sector as well as some civilian TV broadcasting seminar, on military/industrial conversion in particular: equipment and portable receivers in the telecommunications sector in the the gap between military and civilian the Scientific and Production Associa¬ formerly closed city of Krasnoyarsk, in activities - in functional, technical and tion for Applied Mechanics (NPO-PM), a Siberia.1 geographical terms - is arguably narrower in satellite manufacturer located in Kras- The meeting brought together around a telecommunications than in arms-production noyarsk-26, a city previously closed to hundred government experts and senior the demand for telecommunications foreign visitors and situated around 40 km businessmen from the telecommunications services is proven and by far outstrips the north of Krasnoyarsk itself (box, pp. 1 4-1 5). sector in OECD countries and the Russian supply - the waiting time for telephone in¬ The plant produces on average four civil Federation, as well as representatives from stallation in the ex-USSR, for instance, is telecommunications satellites and 15-16 other international organisations. It had more than five years military satellites per year. two main themes: to discuss general the telecommunications sector covers These enterprises are now looking for questions of military/industrial conversion, not only hardware but also services, which western partners to help them manufacture using telecommunications (strongly repre¬ were traditionally underdeveloped in cen¬ microwave, satellite and cellular radio- sented in Krasnoyarsk) as a special case trally planned economies and which are a based communications equipment for the study; and to bring together potential busi¬ major potential employer of surplus labour civilian sector (box, p. 18). ness partners from OECD countries with telecommunications services are highly It is estimated that the military sector their Russian counterparts for on-the-spot attractive to foreign investors, since they accounts for around 7.5% of the NMP (Net contacts and plant visits to facilitate the have proved profitable and relatively re¬ Material Product - a Comecon equivalent involvement of the western business com¬ cession-proof in western countries, even to GDP2) of the former Soviet Union. But munity in the conversion effort. The new Law to new entrants in the market. the military/industrial complex absorbs a on Conversion, adopted by the Parliament 1. The seminar was sponsored by the 'Know-how' much higher percentage of government of the Russian Federation on 20 March 1 992, Fund of the United Kingdom. spending (up to 47%, according to one was presented and discussed at the con¬ 2. See Derek Blades, 'The Statistical Revolution in estimate) and contributes a large part of ference by senior Russian parliamentarians. Central and Eastern Europe', The OECD Observer, the budget deficit. There is therefore a strong Five hours' flight and four time-zones No. 170, June/July 1991. incentive to reduce the size of the military east of Moscow, Krasnoyarsk received, Tim Kelly is a communications policy analyst and Martin sector and to redirect resources to civilian Salamon a consultant in the Information, Computer until recently, only limited exposure to for¬ and Communications Policy Division of the OECD production as part of any planned shift to¬ eign visitors and business interests. Located Directorate for Science, Technology and Industry. wards a market-based economy. the OECD OBSERVER 177 August/September 1992 13 ECONOMIES IN TRANSITION ences between the Slavic Republics (the Manufacturing Table Federation of Russia, Ukraine and Belarus) The most obvious opportunity is in the con¬ TELEPHONE MAINLINES which have more than 13 mainlines per version of manufacturing capability. The AND POPULATION 100 while the Central Asian Republics technical characteristics for military com¬ IN THE COMMONWEALTH (Turkmenistan, Uzbekistan, Tajikistan and munications are essentially similar to civilian OF INDEPENDENT STATES Kyrgyzstan) have less than 5. There are requirements - much of the hardware infra¬ Population Mainlines Mainlines also significant differences between urban structure in particular (for radio communica¬ 1 January 1 January % Republic per 100 and rural areas. In the Ukraine, for instance, tions, microwave, communications satellites 1990 1989 population thousands thousands the number of telephones per 100 inhabi¬ and fixed links, for example) is virtually tants is 30 in Kiev and 19 in other cities, but identical. There are, of course, a number The Russian Federation 148,041 20,201.0 53.8 13.6 only 6.5 in rural areas. of differences in the technical specifica- Ukraine 51,839 6,733.7 18.8 13.0 Uzbekistan 20,322 754.6 Kazakhstan 16,691 1,471.8 6.1 8.8 Krasnoyarsk-26 is a so-called 'closed city' of silicon and silicon plates of 125-200 mm dia¬ mostly military activities, founded on the meter is being developed. A department to 10,259 1,393.6 3.7 13.6 order of Stalin in 1950; it was indeed closed produce mono-crystalline gallium-arsenide is Azerbaijan 7,131 475.7 2.6 6.7 until recently, not only to foreigners, but also being built up, for a yearly output of 750 kg, 5,248 203.9 1.9 3.9 to Soviet citizens. '26' is the postcode; in or 15,000 plates with 60-76 mm diameter; a Kyrgyzstan 4,367 173.4 1.6 4.0 other words, the closed city is also a name¬ pilot plant for 250 kg annual production will less one. It does not exist on any map, yet it start in 1992. Moldova 4,362 377.3 1.6 8.6 is inhabited by almost 100,000 people; Once the production of super-pure gallium Turkmenistan 3,622 170.0 1.3 4.7 around 11 factories provide the jobs and with an annual production of 400 kg is Armenia 3,293 187.0 1.2 5.7 income. mastered, the output could be increased to CIS Total 275,175 32,142.0 100.0 11.7 10 tons a year thanks to the existence of Two Factories local raw materials. The present standard of Source: OECI), adapted from ITU and CIS sources The national experts, businessmen and spe¬ purity of the obtained gallium corresponds to cialists at the OECD seminar visited the first 6N, but will be increased to 7N. Production of It was announced in January 1989 that factory, the Mining-Chemical Integrated Com¬ super-pure aluminium is about 5 tons a year, military procurement would be cut by 20% plex, but were only shown the principal scheduled to be increased to 10 tons. The yearly production of tellurium is about 500 kg, by the end of 1991 (in the event, it fell by administrative building, and even that was guarded by three soldiers. It was soon obvious but volume of output could be increased 30%). The new target for procurement cuts why no visit of the factory was proposed: its several times if necessary. In 1993 the pro¬ is a massive 85% - which leaves defence main purpose is the production of nuclear duction of super-pure mono-crystalline ger¬ ministry officials with little alternative but fission materials, which is probably the manium will start. The technology and the to redeploy resources. reason that Krasnoyarsk-26 is also dubbed raw materials for the production of super- But it may not be easy. The military/ 'plutonium city'. (Since the visit, it has been pure quartz exist, but would need external industrial complex was probably more announced that two of the plant's three nuclear financing to be put into production. Finally, successful than other sectors of the eco¬ reactors producing plutonium will be shut the production of colour TV sets is being developed in co-operation with the South nomy in exploiting the system of centrally down this year.) At present, the company has 16,000 em¬ Korean firm Samsung. planned allocation of resources. And since ployees; 79% of its revenues come from military The Scientific and Production Association officials working in the military/industrial production, and 21% from civil products. for Applied Mechanics (NPO-PM) is also a complex are for that reason less aware of Since there is now 'a reduction of the main high-tech venture specialising in the design the urgency of change, it might be harder output', a programme of plant conversion and production of space communications to convince them of the virtues of a market- has started. The presence of highly skilled systems, TV broadcasting, navigation and based approach. chemists and physicists, a reliable infrastruct¬ geodesic systems; it is one of the leading ure of electrical power and clean air in the Russian companies in this field. The OECD Conversion enterprise area (in stark contrast to the polluted group was allowed to visit the part of the air in the industrial zones of many Russian plant that mechanically tests satellites, Opportunities cities) have induced the management to orient observing the testing of the precision mecha¬ the company towards the production of super- nisms that are crucial in the unfolding of Telecommunications in the former Soviet pure materials for micro-elecronics. A new plant wings of large solar panels that are necessary Union are chronically underdeveloped. There is being built in conjunction with the Krasnoyarsk to produce electricity on board satellites; they also saw the vibration testing of Horizon are around 32 million mainlines in the 11 non-ferrous metals plant. It will produce a range of materials that are pure, highly sought- telecommunications satellites. A large, rather Republics of the Commonwealth of Inde¬ after and difficult to manufacture. In 1994, modern hall had facilities for vacuum testing. pendent States (Table). This figure trans¬ the production of 200 tons of polycristallien The plant designs and produces all sorts of lates into a density of 11.7 mainlines per silicon is planned, using silicontrichlorohydride satellites; no information was given on how 100 inhabitants (there are 44 per 100 in and siliconmethane as a basis. Simulta¬ the production is split between military and the OECD area) or 35.5 million telephones. neously, the production of mono-crystalline civil purposes. They were further shown some Within the CIS, there are substantial differ 14 the OECD OBSERVER 177 August/September 1992 ECONOMIES IN TRANSITION tions (for radiation proofing, shock- and for short production runs and can there¬ and ministries already have their own net¬ weather-proofing, encryption characteris¬ fore absorb technological change more works which are of higher quality than the tics, wavelength use, and so on) which easily than mass-production factories. public network and are under-used; there may make it more expensive than civilian But it will be important to ensure that are examples in Aeroflot, the Ministry of equipment, but they nonetheless require international standards are adopted so Energy and the Ministry of Forestry. They relatively little adaptation. Many of the that export markets can be developed. have grown at the expense of the public inputs - factory plant, production and network: it is very common in offices in the Telecommunications Service Networks assembly equipment, semiconductor chips former Soviet Union to see more than five and boards, software, skilled manpower, Less obvious but arguably more signifi¬ telephones per desk, many of which have R&D - are broadly the same. Furthermore, cant in the long-term is the conversion of no dials and which are used only as 'hot¬ military factories are often more geared up service networks. Many large enterprises lines'. There is, moreover, little use of private KRASNOYARSK-26 assessment of plant value, considerations of for access to long-distance and international returns on investment, even the ability to set telephone communication will be formed, up credible business plans were not required and the capacity of the existing automatic Hans-Peter Gassmann until recently, although they will have to be dialling telephone system will be increased developed as a matter of urgency if these by 200,000 lines in Krasnoyarsk with digital firms are to survive in a commercial, civil exchanges. market environment This is an impressive and ambitious pro¬ prototypes of products for civilian use, such the same is true of the development of gramme indeed. The main question, of course, as kitchen robots or even a drink-cooler, all marketing skills, which were not required in is the financing of the project, which is evaluated made of aluminium, but probably so expensive the previous 'business' environment, since at some 80-100 million roubles in 1990-91 if actually produced that they would be un¬ the main task was to fulfil orders and plans terms. It is expected that sources of finance likely to enjoy commercial success. coming from the central ministries in Moscow. will come from selling or leasing the commu¬ It is probable that such an enterprise The managers still think mainly in volume nications channels, from the Territorial budget, would have some difficulty in entering into terms; prices play only a secondary role. A from a foundation to be established by the civilian joint ventures with western firms marketing department will have to be built up because of the military secrecy still surround¬ companies and firms participating in the project, rapidly. from a joint-stock company established by ing the plant. So the subcontracting of cer¬ lack of communications is a major obstacle users and producers of communications ser¬ tain high-precision parts is probably an to the linking of these remote production vices and products, and from foreign invest¬ easier form of co-operation, as would be the facilities to the rest of Russia and to the ment. selling of the services of the testing facilities, world. More generally, there is a plan (though at since they could probably be offered at much lower costs than in the West. But would a present it is more of a 'vision') to establish a Plans for the Future technopolis in the Krasnoyarsk area centred western high-tech enterprise transport their It is to improve communications that the 'Signal on radio-engineering, which could also com¬ satellites to Krasnoyarsk and back just for Project' - a co-operative effort of the firms in prise a teleport, constituted by the state testing purposes? It seems unlikely, as the Krasnoyarsk-26 as well as of other firms in companies in the Krasnoyarsk area, also transport costs would probably be higher the whole Krasnoyarsk area - is being planned. including the two firms described above. than the savings in the testing itself. More¬ It will involve two stages. These are enormous ambitions. It is a very over, the western side, too, would have to In stage I (1992-93), the existing cable positive sign that such plans are being drawn consider the issue of security. telephone and telex system will be upgraded up, as they symbolise a hope for a better future. Evaluation through the introduction of digital automatic Certainly, the demand for more efficient com¬ From these rather cursory visits and from exchanges and the expansion of multi-channel munications is immense throughout all the discussions the following impressions can be radio communication lines. The installation of NIS. And in the Krasnoyarsk area there are sketched: a cellular wide-area paging and radio-tele¬ two additional strong motives to develop there is no question that there are consi¬ phone system as well as of a wide-area walkie- communications: first, in view of the already derable scientific and engineering skills avail¬ talkie system and a digital radial cellular existing specialisation, it is hoped that existing able in Krasnoyarsk-26; indeed, they are prob¬ transmission system is planned. jobs can be maintained, perhaps production ably in over-abundant supply since, as every¬ In stage II (1993-95), a basic cellular expanded; second, communications are the where else in the Russian Federation, over¬ system of integrated radio communications main form of technology that will make South manning is rather obvious is foreseen, as is the development of a cellular Siberia less distant from the other parts of the existence of a reliable, adjacent source network of mobile radio communications in the Russian Federation, and the world. So of electrical power and the apparent abund¬ the GSM-900 standard; so, too, is the laying there are globalisation trends even in Siberia, ance of raw materials, as well as clean air of six or eight trunk fibre-optic communica¬ and the West should help as much - and as and agreeable surroundings are prerequi¬ tions lines in Krasnoyarsk and some other fast - as possible. sites of a high-tech production environment cities in the area, and the setting-up of a Hans-Peter Gassmann is Head of the Information, the culture of the managers is completely satellite television and radio transmission Computer and Communications Policy Division of technology-oriented; management skills such system and local broadcasting systems. Satel¬ the OECD Directorate for Science, Technology and as basic cost-accounting, financial planning, lite and radio-relay communications systems Industry. the OECD OBSERVER 1 77 August/September 1 992 15 ECONOMIES IN TRANSITION One of the buildings of the Mining-Chemical Integrated Complex in Krasnoyarsk-26 (left); the display unit above the door (enlarged above) indicates radioactivity. branch exchanges (PBXs) which allow new joint venture company, M-Bell, has in OECD countries as a way of allocating organisations to provide efficient access been set up between the Moscow Local this scarce resource. In the United States, to outside lines. City Network (MGTS) and Bell Canada to for instance, some 200 MHz of spectrum Many former ministry-run networks (such exploit the ISKRA network. A licence has is planned to be released from military for as those in St Petersburg and Kiev) already been obtained to connect to the inter¬ civilian use. Moreover, if a system of spect¬ operate with a high degree of indepen¬ national network, but congestion in the rum leasing (for instance, with a 20-year dence. The main requirement for military international gateway is a problem. licence) were used in the NIS, it would conversion, therefore, is to plan a better provide a valuable source of hard currency The Frequency Spectrum distribution and interconnection of existing to fund military/industrial conversion pro¬ ministry networks, possibly by bringing The conversion of the frequency spectrum jects in other sectors. them under civilian regulatory authority. offers further opportunities. Where the Satellite Capacity There are also opportunities for handing penetration of telephone mainlines which The decision of the Soviet government to over control to other operators, or gener¬ make up the fixed-link network is low, cell¬ follow the United States in the 'space ular radio technology can provide a short- ating competition by allowing new market race' proved costly, but it has, at least, term alternative for providing telephony, entrants in network and service provision. created a sector that is technologically The ISKRA private network, for instance, as in parts of the former East Germany. advanced and has considerable business which used to fulfill the communications The spectrum is therefore a valuable re¬ promise. The requirement here is not so requirements of Communist Party Officials, source, if used appropriately.3 much to 'sell' satellites (though that has is a high-quality network, in some parts Converting sections of the spectrum from been attempted, with limited success), but digital, which operates in parallel to the main government to business use would raise rather to use the facilities which already public network, serving around 4,000 users revenue, attract foreign investment and exist (transponders, launching capability, in the Moscow area alone and extending provide telephony. In Poland, for instance, ground control and satellite construction to cover some 200 other cities. It is based a consortium of Ameritech/France Télécom facilities, for instance) for commercial pur¬ upon Ericsson technology and was imported and the Polish PTT have bid $80-1 00m for pose^ from a manufacturing plant in Yugoslavia. the right to use a portion of the 450 MHz 3. See Tim Kelly, 'What Price the Airwaves?', The Plans are now underway to make it available spectrum for cellular radio. Spectrum OECD Observer, No. 173, December 1991/January to business users. In the Moscow area a auctions are also being used increasingly 1992. 16 the OECD OBSERVER 177 August/September 1992 ECONOMIES IN TRANSITION Satellite technology is particularly well that characterised research efforts in the suited to the former Soviet Union because USSR means that individual R&D labora¬ INFORMATION of its immense distances, even though the tories may not be able to operate inde¬ REQUIREMENTS FOR major demand is for voice communications pendently now that they belong to differ¬ EVALUATING CONVERSION rather than data. Furthermore, since the ent Republics. Their work, too, will have to OPPORTUNITIES NIS can use indigenous technology for be shifted away from long-term basic satellite communications, it will not have research to shorter-term commercial re¬ An inventory of assets including buildings, to rely on imported technology. quirements. New rules for protecting intel¬ machines, vehicles and other capital equip¬ lectual property rights will also be neces¬ R&D Facilities ment sary. a technology assessment, including the Many commentators have expressed con¬ age, type and function of industrial process cern that if former research scientists are Information and production equipment and the skills base not offered opportunities for productive of the workforce and well-paid employment, there will be a Requirements a statement of costs, including labour brain-drain out of the NIS, which may in costs, rent for land and buildings, maintenance, turn lead to a proliferation of nuclear- Many of these suggestions are founded outstanding contracts with suppliers, debts, weapon development and arms sales. Yet on the assumption that it will be possible tax and other continuing expenses the excessive degree of specialisation to restructure the telecommunications an assessment of the state of supply, in¬ cluding the current volume of production or service provision, historical trends, product¬ The participants in the OECD seminar were shown a wide range of both the military and commercial products made in the ISKRA factory in Krasnoyarsk, including truck-mounted satellite earth-stations. ivity measures, outstanding orders, waiting lists, a list of customers (both intermediate %":i. and final consumers) and suppliers, including the identification of areas of vulnerability (single-source suppliers, especially those now in other Republics) a financial statement including sales (turn¬ i| over), profit/loss, assets, liabilities and growth rates business plans for both the short (six months ahead) and longer term (five years "'. ! and beyond) including an assessment of risks " - .,.. a clear statement of the current ownership of the enterprise, including its legal position and the planned changes in this position; which layers of government (local, regional, national) have to be passed through to gain agreement on any changes to enterprise status an assessment of the legal position of any joint venture which might be established, in¬ cluding rules on direct foreign investment, the repatriation of profits, intellectual prop¬ erty rights, ownership of assets, and a 'sunset clause' to deal with the distribution of assets at the end of a contract. sector along market-oriented lines. But the conversion process poses difficult economic challenges, and has important social consequences. These include not only the retooling and restructuring of enterprises but the development, nation¬ ally, of appropriate market, financial and legal infrastructures and markets for labour and capital. In the course of the visits made during the seminar to enterprises undergoing conversion, it became clear that it will be necessary to introduce for 17 me OECD OBSERVER 1 77 August/September 1 992 ECONOMIES IN TRANSITION - eign partners who can provide marketing and management expertise, investment and technology transfer. One way in which western experts can play a role is in spelling out the type of information which western businesses would expect and require before they would be willing to commit money or staff (box, p. 17). In a market-based economy, the circulation of information is as impor¬ tant as the circulation of capital, and the 'alue of information as a resource can scarcely be underestimated. There is a ENTERPRISE AND OFFICIAL CONTACTS IN KRASNOYARSK ISKRA General Director: Lyudomir V. Stukalov Televizornaya Street 1 660028 Krasnoyarsk Telex: (064) 288 131 Tel: (3912) 452 406 A hydro-electric dam, one of the world's largest, provides power for the Krasnoyarsk region. Radio-Technical Plant General Director: clear clash of cultures here with the military Gennadiy M. Ragzin environment, particularly in a centrally Dekabristov Street 1 9 planned economy, where information is OECD Bibliography 660021 Krasnoyarsk often regarded as secret. Telex: (064) 288 164 Tel: (3912) 212 278 Enterprises in the military sector who Reforming the Economies of Fax: (3912)212 057 are looking for partners from abroad are, Central and Eastern Europe, 1 992 Tim Kelly, 'What Price the Airwaves?', Mining-Chemical Integrated Complex of course, perfectly entitled to expect their The OECD Observer, No. 173, General Director: partner companies to provide similar in¬ December 1991 /January 1992 Valéry A. Lebedev formation to them. Business partnership Telecommunications Equipment: Lenin Street 53 which is founded on openness and trans¬ Changing Markets and Trade 660033 Krasnoyarsk Structures, 1991 parency in the exchange of information is Tel: (3912) 321 251 Amy Plantin and Dimitri Ypsilanti, more likely to succeed than one which is The Scientific and Production Association Trends in Trade in Telecom', The based on ignorance and mistrust. for Applied Mechanics (NPO-PM) OECD Observer, No. 171, August/ General Director: September 1991 Mikhail F. Reshetnev Statistics for a Market Economy, 1991 660026 Krasnoyarsk A final element necessary in creating the Derek Blades, 'The Statistical Tel: (3912) 325 661 right environment for conversion is the Revolution in Central and Eastern Krasnoyarsk City Administration development of a middle-management Europe', The OECD Observer, No. 170, Chief Advisor to the Mayor structure that can collect and use informa¬ June/July 1991 (Valéry A. Pozdnyakov): The Transition to a Market tion and can plan activities without waiting Aleksander M. Izrailevsky Economy in Central and Eastern Town Hall for authorisation from top management. Europe, 1991 Karl Marx Street 93 That will require a change in the organisa¬ » Paul Marer, The Transition to a 660049 Krasnoyarsk tional culture of the enterprise and can Market Economy in Central and Eastern =urope, The OECD Observer, No. 169, Tel: (3912) 221 943 Fax: (3912) 222 512 therefore be expected to be much slower \pril/May 1991 than economic change - but it is no less Krasnoyarsk-26 Administration The Economy of the USSR, 1991 Mayor: Vladimir P. Kretov necessary. With sufficient retraining, a » 'Radical Reform for the Soviet Union', 660026 Krasnoyarsk new emphasis on management is likely to The OECD Observer, No. 169, April/ Tel: (3912) 722 074 Fax: (3912) 721 095 release considerable resources of native Vlay 1991 At present all telephone calls to Krasnoyarsk enterprise and initiative. And this is Trade in Information, Computer and Communication Services, 1990 have to be handled manually by the switch¬ perhaps the most fundamental form of board in Moscow. The Telecommunications Industry: conversion required in the New Indepen¬ The Challenge of Structural Change, dent States. 1 988. 18 the OECD OBSERVER 177 August/September 1992 ECONOMIES IN TRANSITION Sound Banking for a Strong Market Hans J. Blommestein An efficient banking system is the backbone of a free-market economic system. That is why one of the crucial challenges faced by the countries of central and eastern Europe is the establishment of a banking system that allocates savings to its most productive uses. Only a market-based system of financial intermediation will allow funds to flow from people and organisations with excess funds to those who require them - towards, in particular, private enterprises which require capital for their development, even their survival. 1 If the businesses of central and east¬ that the payment system will process With efficient financial intermediation of ern Europe are to be able to adapt transactions efficiently, on time, and free the type found in OECD countries, deci¬ themselves to their new economic of excessive risk. A sound banking system sions on lending and borrowing and, ulti¬ environment, they will require an efficient is crucial also in the conduct of efficient mately, interest rates are driven by market banking system - which, moreover, is vital monetary policy. forces. The repressed financial systems of to ensure the quick and reliable move¬ the central and eastern European coun¬ ment of funds through the economy. To Hans J. Blommestein works on the European tries (CEECs), by contrast, were charact- economies in transition in the Financial Affairs Division facilitate trade in goods and services, of the OECD Directorate for Financial, Fiscal and En¬ 1. Bank Restructuring in Central and Eastern payers and payees must have confidence terprise Affairs. Europe, OECD Publications, Paris, forthcoming 1992. 19 the OECD OBSERVER 177 August/September 1992 ECONOMIES IN TRANSITION erised by distorted real deposit and lend¬ ing rates, excessive reserve requirements, administratively determined credit ceilings and the planned development of 'privileged' financial circuits. In many cases, real inter¬ est rates earned by intermediaries have been negative, with adverse consequences on the development of financial markets.2 In addition, the development of a sound banking system is severely hampered by the overhang of bad loans to loss-making state enterprises, lack of capital, near- absence of competition, inadequate regu¬ latory and supervisory systems, archaic payment systems, and non-existent money The new stock exchange in Warsaw is one of the markets. institutions which will help made subject to general licensing require¬ Under these circumstances, financial the development of securities markets. ments and supervision. In addition, laws liberalisation by itself, by fully freeing in¬ on the enforcement of contracts between terest rates, is not the answer. For exam¬ ments is nonetheless necessary in build¬ market participants must be either put in ple, when the supervision of the financial ing confidence in financial markets - with¬ place or consistently upheld. system is inadequate, a jump in interest out which other financial reforms have rates after liberalisation may encourage little chance of success. Bad excessive risk-taking by undercapitalised Although the CEECs have made some banks by providing high-interest loans to Assets progress in improving bank supervision, customers with large outstanding debts. particularly in Czechoslovakia, Hungary Banks would thus perpetuate the misallo- Under communism, planned - largely and Poland, there are still substantial ob¬ involuntary - savings were directed through cation of credit, add to non-performing stacles. It is difficult - and very time-con¬ a mono-bank system4 to uses determined loans, and increase the dependence of suming - to obtain reliable information by government planners and politicians, weak banks on non-creditworthy custom¬ about the financial health of firms and with no regard to economic returns, risk ers. The likely result is an increase in banks. Experience in the risk analysis of and opportunity costs. Losses of enter¬ macro-economic instability and financial- potential borrowers is limited. Tax regimes prises were automatically financed by the market fragility. It is therefore necessary to to make provisions for losses on loans are state. And when the current state-owned address a number of key structural prob¬ inadequate. Experienced supervisors and banks were carved out of the mono-bank lems in tandem with the liberalisation of auditors are limited in number. And cur¬ activities in the financial sector. system, the new banks simply inherited rent supervisory practices are not fully in the existing stock of low-quality loans. line with international guidelines. Estimates of the volume of bad assets Regulatory Early in the transformation process, vary widely within each country and Weaknesses therefore, banking legislation and regula¬ across the CEECs, although it is largely tions must be adapted to ensure that agreed that the overhang of such loans Experiences in the OECD countries and banks manage their risks adequately and makes it virtually impossible for these many developing countries alike indicate that a bank's capital be sufficient to with¬ banks to start operating as market-oriented the importance of sound regulation in stand 'normal' losses on loans without entities that follow sound banking pract¬ minimising excessive risk-taking by finan¬ jeopardising its solvency. Regulations ices. cial institutions, especially if the macro- which specify the classification of assets 2. Hans J. Blommestein and Michael Marrese, 'De¬ economic environment is unstable. Efficient according to their likely collectability and veloping Competitive Markets', in Paul Marer and Sal- regulation is not easy, as is illustrated by the treatment of non-performing loans, vatore Zecchini (eds.), The Transition to a Market recent events involving massive fraud at contingent liabilities and other off-balance- Economy in Central and Eastern Europe, OECD Publications, Paris, 1991. the Bank of Credit and Commerce Inter¬ sheet activities, are particularly important. 3. Financial Market Trends, No. 50, OECD Publica¬ national, the Savings and Loan disaster in In addition, high priority should be given to tions, Paris, October 1991. the United States, insider dealing and training and empowering regulatory staff 4. The mono-bank system consisted of a central bank share-price manipulation in a number of to enforce the new rules. and departments or affiliates that performed so-called stock markets, the heavy losses incurred Regulations in all financial markets have commercial bank functions (for example, financing in¬ by several banks in the- Scandinavian to be established and co-ordinated. Rules dustrial or agricultural enterprises) and savings-bank activities. countries and elsewhere, and financial for protecting investors are of central 5. 'Bank Restructuring in Central and Eastern Europe: scandals in Japan.3 An effective regula¬ importance. Non-bank intermediaries and Issues and Strategies', Financial Market Trends, tory framework that meets basic require- all securities-related activities should be No. 51, OECD Publications, Paris, February 1992. 20 the OECD OBSERVER 177 August/September 1992 ECONOMIES IN TRANSITION A comprehensive strategy to address Where bad assets are too large, other ive separation of banking activities. So- these bad loans is therefore urgently re¬ capital-enhancing measures may be ne¬ called savings banks usually have a de quired. Experiences show that an ad hoc, cessary - for example, a one-off, recapitali¬ facto monopoly on the collection of savings 'wait and see' approach is unlikely to work. sation of banks from the state budget from, and lending to, households. 'Commer¬ Many banks are technically insolvent - through a capital grant. But this approach cial' banks, on the other hand, continue to they have low capital bases and much of may not be feasible where there are huge lend mostly to state-owned enterprises. their portfolios are of doubtful value be¬ volumes of bad assets and/or serious fiscal As a result, financial markets, and institu¬ cause they contain large exposures to vir¬ imbalances. A second consideration is that tions competing in them, are inefficient. tually bankrupt or non-competitive enter¬ such grants may send the wrong mess¬ Intermediation costs are high, savers and prises. age to banks and their clients about the borrowers are restricted in how they ar¬ As a first step, a special audit should importance of curing the structural prob¬ range and finance their investments, and assess the total stock of bad assets. It lems of loss-making firms. It may there¬ pressures to develop new financial instru¬ should be undertaken as quickly as possible fore be necessary to link additional capital ments are weak. This lack of competition and, in principle, it should be regarded as injections to restructuring plans of the en¬ also explains why administrative arrange¬ final. Any postponement increases moral terprises that are the clients of the banks.5 ments by central-bank authorities con¬ hazard for the banks and their customers; tinue to dominate the setting of interest in this situation, even healthy enterprises Lack rates. might have a strong incentive to default on The contribution of foreign banks to the their loans, seemingly without penalty, in of Competition development of competition has been lim¬ advance of a strict audit. ited, since they appear to be interested Effective competition between financial Thereafter, different financial restructur¬ primarily in wholesale banking and other institutions remains weak. The financial ing approaches should be considered to 'niche' activities that appear to offer rela¬ sectors of most of these countries are ensure that each bank's capital is suffi¬ tively higher returns. A 'big bang' ap¬ highly monopolistic, with a few state- cient to support its future operations, proach to restructuring the large savings- owned banks dominating the market. In either by increasing the capital or writing and-commercial banks may therefore be addition, there continues to be an effect off a higher percentage of bad assets in its appropriate, breaking down the separa¬ portfolio. Encouraging state-owned banks tion of banking activities aimed at house¬ to build up loan-loss reserves quickly will holds and businesses. Co-ordinating the mean permitting - on a temporary basis - 'big bang' with the cleaning-up of bank generous deductions of loss provisions balance sheets would enable the authorities from pre-tax profits. to make better judgements about the health of remaining banks. It would facilitate the transformation of state-owned banks into independent commercial entities and, ultimately, their privatisation. Archaic Payment Systems The efficient system for settling pay¬ ments that is vital to a free-market eco¬ nomy is also critical to the functioning of the banking system itself. The experience of OECD countries shows that an efficient settlement system lowers working-capital requirements, reduces transaction costs, and provides the necessary support for an active policy of asset and liability manage¬ ment. Until recently, payments were settled in most CEECs on an item-by-item basis, with no centralised netting and clearing arrangements. This cumbersome system made information about banks' net posi¬ tions hard to come by, and banks had neither the capability nor the incentives to the OECD OBSERVER 177 August/September 1992 21 ECONOMIES IN TRANSITION ment bonds and other securitised finan¬ cial assets take time to develop because they require the setting up of new institu¬ tions and trading arrangements. Potential customers, such as institutional investors, and banks and households, are inexperi¬ enced or may not yet be in the position to ^ " "" ffi J^SfcfcT< *5 âl^ttk MrS» build up significant financial portfolios. It is nonetheless expected that in the wake of the large-scale privatisation programmes, such as those in Czechoslovakia and Po¬ land, securities markets will begin to play ^ #J Ij-^k, J| ' .,t A a more important role. The challenges in creating an efficient system of financial intermediation in the countries of central and eastern Europe are enormous. A viable banking reform strategy must, therefore, be comprehen¬ sive enough to confront many structural problems. Banking reform itself will not guarantee the success of free-market in¬ b. 'v ;* -* * : itiatives in the CEECs. It is the package of economic, social and political reforms as a whole as well as the actions of policy¬ . V. makers, entrepreneurs and households, _ that will determine the course of events. An investment information counter in a Czech supermarket - but institutional investors will require the kind of On the other hand, a competitive, free- information that only securities markets can provide. .. and they require inter-bank deposits. market system cannot flourish without a banking system that effectively and effi¬ monitor their reserve positions. As a result, Underdeveloped Money ciently allocates savings to its most pro¬ ductive uses. liquidity management by banks, enter¬ and Securities Markets prises and households was very difficult. The efficiency of the payment systems Another major obstacle facing bank re¬ was very low, with large delays in clearing form in the CEECs is the lack of highly de¬ and settlement. Consequently, there was veloped money and securities markets. considerable net payment float - that is, The biggest components of liquid money the difference between total booked credits markets are generally inter-bank deposits OECD Bibliography and debits associated with payments was and short-term prime securities. At pre¬ Bank Restructuring in Central large. sent, there are no liquid inter-bank mar¬ and Eastern Europe, forthcoming 1992 Some countries, such as Czechoslovakia, kets in domestic currencies of any import¬ Financial Market Trends, No. 51, 1992 Hungary and Poland, have made progress ance in the CEECs, largely because banks Hans J. Blommestein and Michael in improving their payment systems. Their have only recently begun developing the Marrese, 'Developing Competitive inter-bank payments are settled in central- necessary communication networks and Markets', in Paul Marer and Salvatore bank funds, information about banks' net financial instruments that allow reserves Zecchini (eds.), The Transition positions is more frequently available, and to be moved easily from banks in surplus to a Market Economy in Central and Eastern Europe, 1991 plans for computerised, 'real-time' net¬ to those in deficit. In addition, banks in the Paul Marer, 'The Transition CEECs seem reluctant to deal directly work systems are well advanced. They to a Market Economy in Central also have plans to link domestic network with one another, possibly because of in¬ and Eastern Europe', The OECD systems to international clearing systems. experience in obtaining resources in this Observer, No. 169, April/May 1991 Yet many banks do not have the technical way and an unwillingness to disclose in¬ OECD Economic Surveys: Hungary, 1991 capability to process and monitor the formation about each other's financial OECD Economic Surveys: Czech positions. necessary information in a timely fashion, and Slovak Federal Republic, 1991 thus causing inefficient delays in clearing Securities markets, unsurprisingly, are Financial Market Trends, No. 50, and settling customers' transactions. equally undeveloped. Markets for govern 1991. 22 the OECD OBSERVER 177 August/September 1992 TRADE The Developing Countries and the World Trading System Anne Richards Since the beginning of the Uruguay Round, in September 1986, a steadily increasing number of developing countries have taken substantial steps to liberalise their trade regimes and to boost their participation within the processes of the GATT and thus in the world economy. This movement highlights a marked shift from protectionism, and offers hope for a lasting and equitable expansion of trade. ' For the first time in the history of the tries that are among the poorest and least since 1986) indicates a growing reliance General Agreement on Tariffs and developed joined those with higher per on the GATT: it is more than twice the cor¬ Trade - it was founded in 1947 - capita incomes. This trend is now affect¬ responding rate observed for the entire large numbers of developing countries ing the majority of GATT members (or history of the GATT before then. And the (LDCs) are liberalising their trade policies about 80 of the more than 108 sovereign new accessions - 1 1 developing countries within the GATT system. The striking di¬ states that are Contracting Parties to the have since formally acceded since Sept¬ versity of these countries merits attention. GATT) and may be one of the most important ember 1 986 and eight others are in various Countries whose trade regimes had been developments alongside the Uruguay phases of negotiating their accession - highly inward-oriented are joining those Round. involve even farther-reaching commit¬ already engaged in market-opening re¬ The rate of new LDC accessions (on ments than in earlier accessions to abide forms. Countries whose involvement in average, almost four countries per year 1 . Integration of Developing Countries into the the GATT had been marginal joined those Anne Richards is a senior economist in the OECD International Trading System, OECD Publications, already participating actively. And coun Trade Directorate. Paris, 1992. 23 the OECD OBSERVER 177 August/September 1992 TRADE by GATT rules and disciplines. These Over the last five years, no fewer than commitments, which are binding under 31 developing countries have notified the international law, cover, for example, the GATT of comprehensive tariff reforms; application of tariffs and non-tariff meas¬ and about one-third of them made commit¬ ures; notification and consultation require¬ ments to bind at least some portion of ments; and compliance with GATT rules their tariffs. This highly diversified group on anti-dumping, subsidies, and regional includes not only well-recognised liberalising or bilateral trade arrangements. countries such as Chile, Korea, and This process of integration into the Mexico but also countries that had previ¬ international trading system allows develop¬ ously maintained complex, inward-oriented ing countries to have a much bigger say in trade regimes and whose participation in shaping the rules governing world trade Round Codes and Agreements, which re¬ the GATT had been minimal, such as quires adherence to internationally agreed and to incorporate these rules in their own Bangladesh, Ghana and The Gambia. domestic policies. It comprises three types practices on dumping, subsidies, and In addition to tariffs, QRs have been government procurement, for example of steps (not necessarily distinct in time). used heavily by the large majority of de¬ voluntary reviews under the GATT's First, the rationalisation and simplification veloping countries to control imports. new Trade Policy Review Mechanism of import regimes turns cumbersome and These measures have hurt exporters and (TPRM). obscure import restraints into a simple consumers especially and have locked in structure of tariffs and other price based the transfer of rents from trade controls measures. Second, it means fuller partici¬ Steps into inefficient sectors that are frequently pation in the institutional GATT frame¬ to Freer Trade the preserve of a few privileged companies. work, especially adhering to the various Since such restrictions in most LDCs have Tokyo Round Codes and Agreements that What were the trade regimes against been overlapping and non-transparent are the principal GATT instruments for which these developments can be (making transactions in those countries promoting more liberal and uniform pract¬ judged? Most developing countries have much more costly than world prices would ices in special areas such as government tended to use high and wide-ranging call for), increased compliance with GATT procurement. Third, it liberalises trade re¬ tariffs, without setting limits on the highest requirements on notification (which makes gimes, lowering import tariffs to interna¬ permissible rates (known as 'tariff bind¬ import barriers explicit and thus exposes tionally acceptable rates and removing ings'), and without complying adequately them to international pressure), as well as export taxes. with basic GATT requirements on the notifi¬ the continuing liberalisation of QRs, are an The benefits associated with fuller inte¬ cation of tariff practices. As a result, heavy important sign of progress. gration - such as trade growth and a effective rates of protection have held Of the 28 countries freeing QRs, nearly much wider variety of goods and services back the buoyancy of their trade sectors. half have abolished their import-licensing available, and to more people - are spread to all participants in world trade, but accrue mainly and fastest to the inte¬ grating LDCs themselves. There are six types of trade policies and practices which most clearly indicate progress towards fuller integration: new accessions to the GATT, whereby countries agree to abide by GATT rules and disciplines the reduction and binding of tariffs, whereby they are lowered and ceilings set on maximum rates the liberalisation of quantitative restric¬ tions (QRs), eliminating export-constricting and, in particular, complex import-licensing schemes more disciplined recourse to GATT Article XVIII:B - a set of special rules that permit developing countries to apply temporary import protection in the event of severe balance-of-payments difficulties increased participation in the Tokyo 24 TRADE agreed legislation. All international trading partners thus gain from the stimulus to world trade that the wider application of consis¬ tent and liberal trading rules provides. The Trade Policy Review Mechanism, one of the results of the Uruguay Round in the first half of 1989, has established a regular process whereby the full range of a coun¬ try's trade policies and practices is evaluated for its impact on the multilateral trading system. After a first review, which is voluntary, a country agrees to undergo a cycle of regular reviews - every two years for the four largest trading entities (the EC counting as one); every four years for the next 1 6 largest trading entities; and every six years for all others except the least developed countries, which may apply a more flexible cycle. Since the TPRM began to function eleven LDCs have held a first review, and another eight countries are scheduled for examination shortly. Influential at home and abroad, these reviews have revealed the extent to which all these countries' policies and practices have been moving towards systems, which prohibited imports unless ever renounced this privilege before the more open markets. special, often costly, permits were acquired. Uruguay Round, this trend marks an un¬ These systems, a pervasive form of QR in precedented development. LDCs, curtailed both imports and exports, Most developing countries entered the worsened inflation, and expanded the Agreements 1980s with a legacy of heavily protect¬ scope for corruption. ionist trade regimes that constrained their One of the Articles of the GATT constitu¬ on Openness trade and growth. The extent to which tion - Article XVIILB - permits developing Another feature which enhances and they have turned to the GATT system to countries, if they respect certain conditions, broadens the participation of the LDCs in anchor their trade reforms is one of the to use QRs when they are experiencing the GATT institutional framework is their most important developments alongside balance-of-payments difficulties. In a increased adherence to its various Codes results of the Uruguay Round négociations. turn-around from previous attitudes, many and Agreements (such as the Code on Anti¬ The liberalisation process is a long one, LDCs are now agreeing to set time-limits dumping and the Agreement on Govern¬ and the risks of a setback are ever-present. on the duration of the restrictions imposed ment Procurement). These date from the But if this new trend can be sustained, the and to transform remaining QRs into Tokyo Round (1973-79) and are the only engagement of all the trading partners of price-based measures (such as tariffs that GATT vehicles for regulating and reducing the globe offers an enormous opportunity reflect changes in world prices). They are non-tariff barriers in certain areas. for the improvement of living standards also better disposed towards GATT rules Before the Uruguay Round, very few throughout the world. that call for increased reliance on macro- developing countries had signed even one economic and structural-adjustment poli¬ of the Codes and Agreements, most pre¬ cies - in place of import restrictions - to ferring to remain as observers in these address balance-of-payments difficulties. GATT bodies but unable to influence the Over the past five years 14 countries rules and decisions being made there. OECD Bibliography have informed the GATT of reforms to Now, nine countries have taken steps to Regional Integration eliminate QRs that were previously im¬ increase their participation in the Codes and Developing Countries, posed to help their balance of payments. and Agreements. forthcoming 1992 Integration of Developing Of these, six - Argentina, Brazil, Colombia, In the case of the Code on Anti-dumping, Countries into the International Ghana, South Korea and Peru - have for example, more active participation Trading System, 1992 agreed entirely to give up their right to use from LDCs brings their own domestic rules Trade in Services and Developing Article XVIIhB. Since only one LDC had against dumping in line with internationally Countries, 1989. the OECD OBSERVER 177 August/September 1992 25 ENVIRONMENT The Environment Industry Candice Stevens Industry has generally recognised that compliance with environmental regulations is a necessary part of doing business. Now it has become apparent that caring for the environment is also a business opportunity. 1 Global markets for goods and ser¬ monitoring compliance records, and testing for new products and technologies as easily vices for pollution abatement are products and processes for environmental as it can eliminate existing ones. estimated at $200 billion and friendliness. Yet growth is expected to be German expertise in equipment to treat growing. 'End-of-pipe' equipment ac¬ strong also in the production of equipment water and effluents, for example, is derived counts for over three-quarters of the value for treating water and effluents, controlling in large part from early, and stringent, na¬ of this output, and environment-related air quality, managing waste, restoring land tional legislation intended to control water services for the remainder. Environmental and reducing noise. pollution. The Japanese air pollution con¬ technologies which are incorporated di¬ The OECD countries account for about trol industry expanded rapidly in the 1970s rectly into industrial processes ('clean 85% of the world market for environmental and early '80s as a result of increased technologies') are another component, equipment and services. Markets reflect domestic demand, prompted by a change but their value is far more difficult to national trends in spending on pollution in the law, for equipment to desulphurise measure, even to estimate. control (such as the emphasis on clean air flue gas. In the Netherlands in the early The world market for environmental in Japan and on waste management in the 1 980s, a national effort to tackle land con¬ equipment and services is forecast to in¬ United States), which overall is now about tamination led to the development of ad¬ crease at an average annual rate of 5-6% 1.2-1.5% of GDP in the major OECD vanced technologies for 'soil remediation'. per year to $300 billion by the year 2000 countries. The amount spent to control In the United States, laws on cleaning up (Table 1). This volume can be compared pollution is generally a reflection of the in size to that for aerospace products, volume of industrial activity and the nature Waste management - the United States with markets estimated at $200 billion, of environmental policies and regulations and chemical products, calculated to be in different countries. worth $500 billion. Environmental services are expected to The Influence increase in importance as the move to¬ of Law wards clean technologies requires more engineering and analytical expertise and Against the background of rising public dampens demand for end-of-pipe systems concern, government regulation sets the of pollution abatement. Service firms act agenda on environment issues and stimu¬ as 'trouble shooters' for industry, solving lates demand for different types of equip¬ pollution problems that firms face, advising ment and services. The largest and most on the best available control technologies, technically advanced markets and indus¬ tries have developed in countries where en¬ 1. The OECD Environment Industry: Situation, Pro¬ spects and Government Policies, available free of vironmental regulations are most stringent. charge from the Economics Division of the OECD En¬ And although industry and local govern¬ vironment Directorate. ment are the primary consumers of environ¬ Candice Stevens is an economist in the Economics Di¬ mental products, it is central governments vision of the OECD Environment Directorate; she that provide the main stimulus: a simple worked formerly on industrial issues in the OECD Directorate for Science, Technology and Industry. change in regulation can create markets 26 ENVIRONMENT The market- leaders: water and effluent treatment - Germany Table 1 MARKET TRENDS IN THE ENVIRONMENT INDUSTRY 1990 2000 Growth Rate $ billion $ billion Equipment/Related Sen/ices 152 220 5.0 Water and Effluents Treatment 60 83 4.0 Waste Management 40 63 6.4 Air Quality Control 30 42 4.4 Other 22 32 5.1 General Services Total 200 300 5.5 Source : OECD , - Vj toxic waste sites created a huge market in Private expenditure for pollution control À technologies to deal with hazardous wastes. is estimated at between 2 and 4% of total 1 VI I manufacturing investment in the OECD The Pattern area, with a small number of sectors ac¬ counting for large proportions of it: chem¬ of Spending icals, and iron and steel, with oil refining, pulp and paper, and non-metallic minerals Table 2 Expenditures for environmental equip¬ also incurring high costs. MAJOR ENVIRONMENT ment are evenly divided between the public The green consumer movement has be¬ INDUSTRY FIRMS and private sectors in the OECD coun¬ come an indirect stimulus in the environ¬ firm Headquarters tries. The majority of public spending is by local governments or municipalities rather ment market in recent years. For many Water-treatment Equipment than central governments. The public sect¬ companies, having a responsible attitude Alfa Laval Sweden or typically devotes the largest share of towards the environment is becoming an im¬ Bilfinger and Berger Germany its expenditures (an estimated 65%) to portant element of establishing a reputable corporate image. The pressure to estab¬ Steinmûller Germany equipment to treat water and effluents lish green credentials is enhancing industrial Cie Générale des Eaux France and the smallest share to equipment to control air pollution (an estimated 5%) - demand for environmental technologies Lyonnaise des Eaux SA France on which, by contrast, the private sector and consulting services.2 John Brown Engineering United Kingdom spends the largest share of its environ¬ 2. See Jim Salzman, 'Green Labels for Consumers', Air-pollution Control Equipment mental outlays (estimated at 50%). The OECD Observer, No. 169, April/May 1991. Mitsubishi Japan Equipment to control air pollution - Japan Hitachi Japan Flàkt Sweden Handel Germany Lurgi Germany General Electric United States Waste Management Waste Management United States Browning-Ferris United States Laidlaw Transport Canada Edelhoff Germany Hoechst Germany Environmental Services Foster Wheeler United Kingdom Phillip Holzmann Germany Davy Corporation United Kingdom Dames and Moore United States Brown and Root United States Source: OECD the OECD OBSERVER 177 August/September 1992 27 ENVIRONMENT Table 3 PUBLIC -SECTOR ENVIRONMENTAL R&D EXPENDITURES, 1989 The environment industry includes both technologies, particularly those related to small entrepreneurial firms and large industrial pollution control and clean-up. multinational companies. It ranges from Most is directed to research on ecosystems high-technology producers of chemicals and natural resources.3 and instruments to low-technology Some governments are undertaking suppliers of recycling bins and services to economic evaluations of markets for en¬ transport waste. The OECD countries, led vironmental products and services and at¬ by the United States, Germany and Japan, tempting to provide commercial and market are the main producers of environmental information to their environment sectors. equipment and services, accounting for Others are initiating technology devel¬ 90% or more of the value of world output. opment or offering financial support In all, there are estimated to be 30,000 aimed specifically at expanding the en¬ firms in North America, 20,000 firms in vironment industry and its export potential. Europe and 9,000 firms in Japan involved Countries which lag behind in develop¬ in some way in the environment business, ing these products and services may find with no fewer than about 1.7 million em¬ themselves with both substantial deficits ployees. in this type of trade - and a lower quality The highest value-added producers are of environment. Governments which view pollution-control technologies for their the large companies which have diver¬ the environment industry in more strategic own operations, increasing the return by sified into both equipment and services terms may be better placed to realise the licensing them to other companies for (Table 2). The largest firms in the market ecological and economic benefits of a production and sale or for internal use. for water-treatment equipment are Euro¬ competitive environment sector. Environment firms, led by the large multi¬ pean (in Sweden, Germany and France). nationals from Europe and the United Leading the market in equipment to con¬ States, are now embarking on globalisa¬ trol air pollution are Japanese firms, which tion strategies. International acquisitions Further development of the environ¬ license their technologies, particularly for and joint ventures are becoming more evi¬ ment industry, particularly an evolution acid emissions, to other firms. North dent, with waste management as the most from end-of-pipe equipment to clean American firms are more advanced in the internationalised segment of the industry. technologies, will contribute both to the waste-management segment of the indus¬ expansion of trade and the protection of try. The environmental-services segment How Much the environment. Governments can facili¬ is dominated by the large engineering tate the growth of this sector - through firms which provide technical engineering Government Involvement? funding research and development on en¬ and consulting services on using 'environ¬ vironmental technologies and through The environment industry is a relatively mentally friendly' processes. infrastructure support to help the com¬ new sector, with fragmented markets, Germany leads the trade in environ¬ petitiveness of the industry. International high research and start-up costs, and lim¬ mental products and is believed to be the ited co-ordination. Yet it is a sector whose co-operation may be required to develop world's largest exporter, selling abroad statistics and improve data bases, to technology and products, beyond their about 40% of the value of production. The remove unnecessary barriers to trade in contribution to preserving the world's en¬ United States exports an estimated 10% environmental products, and to develop vironment, are important to improving of its environmental products and imports innovative technical approaches to performance in many industries. Indeed, waste-collection and -treatment systems ecological problems. the environment industry has all the char¬ from Europe and air-pollution control acteristics of a strategic sector - a sector equipment from Japan and South-East whose development is important not only Asia (particularly from Taiwan and Hong in terms of its own contribution to national Kong). Japan is assuming more of a pre¬ economic growth but also through its sence in environment-industry trade as its effects on the competitiveness of other OECD Bibliography large diversified firms establish divisions sectors; it can thus also enhance trade which specialise in exports of environ¬ balances. Environmental Change and S&T mental technologies for air, water and Institutions, 1992 Government support to the development waste management. Martin Brown, 'Science, Technology of environmental technology is growing. It A substantial part of international trade and the Environment', The OECD is estimated that about $2 billion a year is Observer, No. 174, February/March takes place through the licensing of tech¬ spent on environment-related R&D in the 1992 nology rather than the direct import and Environmental Labelling in OECD OECD area or an average 2% of total gov¬ export of equipment. Many firms develop Countries, 1991 ernment research spending (Table 3). Yet Jim Salzman, 'Green Labels 3. See Martin Brown, 'Science, Technology and the Environment', The OECD Observer, No. 174, only a small share of this sum goes di¬ for Consumers', The OECD Observer, February/March 1992. rectly to the development of environmental No. 169, April/May 1991. 28 the OECD OBSERVER 177 August/September 1992 ENVIRONMENT Environmental Policies in Turkey Ferenc Juhasz Economic and demographic Turkey is a large country: with annum, the highest for any OECD country. developments in Turkey 800,000 km2 it is bigger than France Turkey's population of 57 million is expected and the United Kingdom combined. to reach 65 million by the year 2000, and during the 1980s have It is the major land link between Europe 92 million by 2025. Its rapid population revealed, despite some and the Middle East. It is the major eastern- growth - an annual average of 2.2% over progress, shortcomings Mediterranean country, with international the last ten years - combined with heavy in Turkey's environmental responsibilities for the waters of the Medi¬ migration from the countryside, means terranean, the Aegean Sea, the Straits that all urban areas are undergoing major policy. Its improvement of Bosphorus and the Black Sea. The expansion, often through large-scale un¬ is crucial for the welfare Euphrates and Tigris both flow through authorised construction. of the Turkish people, Turkish territory. It also lies on one of the This urban growth, combined with in¬ for the future economic major routes for migrating birds. dustrialisation, has led to air and water Economic growth during the second half pollution, as well as to the generation of development of the country, of the 1980s averaged over 6% per waste and noise. In many cities the quality and for the Mediterranean 1. Environment Policies in Turkey, OECD Publica¬ Ferenc Juhasz is a consultant in the OECD Environ¬ area as a whole. 1 tions, Paris, forthcoming 1992. ment Directorate. 29 the OECD OBSERVER 177 August/September 1992 ENVIRONMENT of the ambient environment is so poor that the required standards (Turkey aims at EC standards) will not be met before the year 2000 (the EC S02 guidelines for winter months were exceeded in 24 cities). Although 56% of the urban population is served by sewerage systems, moreover, only 6% has adequate treatment of waste¬ water. By contrast, the air quality in parts of Ankara has been improved considerably through the introduction of natural gas for domestic heating. Coastal areas, Turkey's main natural re¬ source (coastal provinces provide 60- 70% of GDP), are developing fast through urbanisation, industrialisation, tourism and shipping. Population density in the coastal areas, between 130-40 people per km2, is twice the national average and is growing twice as fast. Net tonnage of goods landed in Turkish harbours has doubled over the last ten years. Coastal waters near major settlements, particularly in semi-enclosed bays and estuaries, are badly polluted by domestic waste, indus¬ trial discharge, agricultural run-off and ballast water from shipping. Pollution from industrial activity has reached critical limits in some areas such as Izmit, Izmir on the Aegean coast and Iskerendum on the Mediterranean. Fish catches in recent The South-east Anatolia Project takes shape. years have declined dramatically, largely a total of 14 dams and 11 hydro-electric maintain the operation of outdated, pollut¬ because of the pollution of the Black Sea. plants and covers an area equal to Belgium ing plants, particularly in areas of high un¬ In addition, the number of foreign tourists and the Netherlands combined), the total employment. arriving in Turkey has increased fivefold - irrigated land area of Turkey will increase The Environmental Law of 1983 provided to 5 million - since 1 982, adding consider¬ by 40%, and hydro-electric capacity will the basis for a range of regulations to con¬ ably to the pressure on coastal areas.2 double. trol air and water pollution, and to limit Turkey is well endowed with water re¬ noise and solid waste. Since then other sources - unevenly distributed, perhaps, What laws have been passed, to govern water but enough for hydro-electricity to provide products, tourism, conservation of cultural more than 40% of total electricity supply. Progress? and natural assets and the coast, that are Water use per capita is relatively low by The Turkish economy has a tradition of intended to be complementary - yet in OECD standards: it is, for example, less substantial governmental involvement in some cases they are contradictory or in¬ than half of that of Spain or Italy. The all sectors: governmental planning in compatible with the initial set of environ¬ largest use of water is for agricultural irri¬ economic development, and a sizable mental policies. Other important regula¬ gation. Over the next ten years total water degree of state ownership in industry, tions, on the assessment of environmental withdrawals are estimated to rise by about mining, transport, energy, and all economic impact and on the handling of hazardous 140% (average annual growth in con¬ infrastructure. During the 1980s, there¬ waste and chemical substances, are under sumption in the OECD area is about fore, a major effort was made to liberate preparation. 1.1%), in large part because of the pro¬ market forces and to decentralise govern¬ The Prime Ministerial Undersecretariat jected South-eastern Anatolia Project mental power. The high degree of centrali¬ for Environment, first created in 1978 with (GAP), which is intended to develop the sation allowed a legislative framework of a simple co-ordinating role, was up-graded basins of the Euphrates and Tigris rivers. environment policies to be developed in 1991 to become the Ministry of the En¬ When the project is completed (it involves rapidly. Yet the state ownership of industry vironment. It is expected that its duties will 2. See Sergio Arzeni, Tourism in Mediterranean simultaneously retarded the implementa¬ be diversified and expanded to supervise Cities', The OECD Observer, No. 1 64, June/July 1 990. tion of environmental regulations, partly to and implement policies aimed at controll- 30 the OECD OBSERVER 177 August/September 1 G ENVIRONMENT ing and preventing pollution and conserv¬ ing natural resources. The passing of environmental legislation and the creation of the Environment Ministry are examples of the adoption by the Turkish government of sustainable development as the guiding principle of their environ¬ mental policies. Progress towards sus¬ tainable development has also been achieved with the design and launching of major development projects in water re¬ sources; with initial investments in sanita¬ tion and waste-water treatment facilities; with reinforcing public transport as a major mode of urban transport; with sub¬ stituting natural gas for dirty fuels; and with rehabilitating inner cities. What Change? A report prepared by the OECD offers a set of recommendations for consideration by the government of Turkey, and suggests that recent environmental measures be followed up - by integrating environmental and more specifically economic policies in all sectors of the economy - and by vigor¬ ously implementing existing laws and regu¬ lations through institutional and financial improvements. These recommendations, when put into practice, would lead to a significant improvement in policy formula¬ tion and implementation. Policy integration could reduce economic and environmental loss now and provide preventitive policies for the future. And in Turkey, with the prospect of high popula¬ tion and economic growth, preventitive policies are even more important than in other OECD countries. The relentless pursuit of tourism in coastal areas, for example, is already in conflict with industrial devel¬ opment and has produced environmental degradation that threatens tourism itself. The integration process would have to be carried out at various levels of the state. First, the central government would have to demonstrate its commitment to sustainable development by adopting for¬ mally a number of explicit principles of en¬ vironmental policy and concrete object¬ ives in the reduction of air and water pol¬ lution, possibly in the framework of a 'White Paper on Environmental Strategy'. Such a document, covering a ten-year 31 the OECD OBSERVER 177 August/September 1992 ENVIRONMENT perspective as a minimum, would set out vironmental resources, by improving both emphasising preventitive policies in order strategic planning (for land use, for exam¬ the existing mechanism for implementation to minimise financing requirements in the ple); project planning (for the GAP, for (through monitoring and enforcing regula¬ future. Second, funds could be released instance); recommendations on the state- tions) and the finance of environmental for environmental purposes by abolishing enterprise sector; and proposals for inter¬ protection and conservation. uneconomic subsidies to industrial and national action (not least for the Mediter¬ Improving the technical ability of the tourist developments - which also con¬ ranean Sea). Ministry of the Environment will not be tribute to pollution. Third, full financing of Second, the respective impacts of enough; institutional changes are re¬ the investment required could be obtained economic and environmental policy would quired. Various options might be pursued through user-charges for environmental have to be reconciled in the Cabinet itself, to this end. One is to expand the scope of services by charging the long-run social for instance through the systematic par¬ its current enforcement agencies and its costs of supply. The capital and operating ticipation of the Minister for the Environ¬ supervisory role. The second is to transfer costs of water and sewerage systems, for ment in all Cabinet committees that deal all regulatory and enforcement powers to example, should be covered by charges with economic development. the Ministry and enlarge its responsibili¬ that also take into account the depletion Third, economic and other forms of expert¬ ties for legislation and integration. Re¬ costs of water resources and the environ¬ ise should be used to reinforce the abilities gional directorates of the Ministry can be mental costs of building the dams and of the Ministry of the Environment to help created, as could agencies for managing pipelines involved. This would mean a it fulfil its role in integrating environmental river basins. Management councils for substantial increase in present charges for with other government policies: evaluating coastal zones could be established, with water, sewerage and waste treatment. the economic impact of environmental the Ministry as the main agency charged The use of public/private partnership policies and vice versa; maintaining a con¬ with the implementation of integrated poli¬ could be extended from transport projects tinuous working relationship with the State cies, thus overriding administrative and to environmental investments (reforestation Planning Office and the various economic institutional boundaries. and sewerage, for instance). Alternatively, ministries (of Finance, Reconstruction and The existing mechanism for implement¬ these public services could be privatised Housing, Agriculture and Forestry); and ation could be strengthened by clearly with government control over price and servicing the inter-departmental commit¬ defining the enforcement roles of the quality. The 'Polluter-Pays Principle' would tees. Standing or ad hoc inter-departmental appropriate agencies and making them have to be applied to new plants - includ¬ committees should be further established accountable to parliament and to local ing state enterprises. Turkey could also as the venues for integration. The environ¬ and regional elected bodies for their per¬ make fuller use of official international mental expertise of the State Planning Office formance. The range of economic instru¬ lending facilities for environmental invest¬ should be strengthened and environmental ments used could be enlarged - their en¬ ment. considerations incorporated into major vironmental application is currently rather public-investment projects before approval limited - through more use of pollution In the aftermath of the Earth Summit in by the Planning Office. charges, user-charges, resource pricing, Rio de Janeiro on 'Environment and Devel¬ Fourth, to ensure policy integration in fines and fees.3 the country as a whole, the governor's office The Environmental Impact Assessment opment', Turkey could show an example of each individual province should be Law should now be implemented as a matter in implementing a model of 'clean and green' strengthened with environmental expertise. of urgency, particularly where major development for countries experiencing Current laws governing co-ordination be¬ changes in the use of land and industrial, rapid population and economic growth. tween the central government and muni¬ energy and tourism developments are in¬ cipalities and between municipalities them¬ volved. Resource development should from selves should be re-examined for their now on be based on economic demand effectiveness, and associations of muni¬ which takes account of the environmental cipalities be created to improve co-oper¬ cost of these developments. Mechanisms OECD Bibliography ation between them. for public participation (through public Environment Policies in Turkey, hearings, for example) could be extended forthcoming 1992 without undue cost or legal obstacles (by Tourism Policy and International Pursuing Sustainable Tourism in OECD Member Countries, providing access to courts or legal appeals). 1990 Development The Environmental Information System, Sergio Arzeni, Tourism in which is already in place, collecting environ¬ Implementing policies that promote Mediterranean Cities', The OECD mental data, should publish relevant and Observer, No. 164, June/July 1990 sustainable development could be consider¬ timely information. Economic Instruments for ably strengthened in Turkey by institu¬ Environmental Protection, 1989 Financing pollution-control measures tional changes in the management of en- Jean-Philippe Barde, The Economic and environmental infrastructure (water- 3. See Jean-Philippe Barde, 'The Economic Approach Approach to the Environment', The treatment and sewerage systems, for ex¬ to the Environment', The OECD Observer, No. 158, OECD Observer, No. 158, June/July June/July 1989. ample) is crucial. Turkey should first aim at 1989. 32 the OECD OBSERVER 1 77 August/September 1 992 ECONOMY Spotlight on Sweden Sveinbjôrn Blôndal and Thomas Egebo The 'Swedish model', which empha¬ employment; employment in the private to maintain once Sweden became more sised full employment and 'big govern¬ sector evolved much in line with that in integrated with the neighbouring econo¬ ment' regardless of costs, is no more. other countries. But the expansion of the mies, as people and capital would be free to Instead, Sweden has adopted a European public sector required higher and higher move to countries with lower taxes. model in which price stability is an absolute taxes, undermining the incentives to work The exchange-rate policy of the past, priority. This change was made in October and economic dynamism in general. More¬ accommodating domestic cost increases 1990, when the social-democratic govern¬ over, very high tax burdens could be difficult and even expanding employment, may also ment demonstrated clearly that they have undermined the growth potential of the would stick to their commitment of fixed INDICATORS economy over the longer run. The large exchange rates even if it would cost jobs. devaluation of the krona in the early 1980s GDP CONSUMER PRICES1 The pegging of the krona to the ECU in gave Swedish producers an unprecedented May 1991 further underlined the author¬ change from previous year competitive advantage, which was reflected ities' commitment to price stability.1 in some employment creation in the private % After the general election in September 25 sector in the short run. But with producers 1991 the incoming government, a coalition obtaining satisfactory rates of return through 20 of 'centre-right' parties, has been imple¬ increased prices in domestic currency, menting a change in course in the social 15 pressures to upgrade production facilities transfer system which is shaking the found¬ and product ranges were reduced, thus ations of the old model. These changes weakening dynamism in the economy. in economic policy have taken place at a ll . The new economic policy implies that time when Sweden is experiencing its most |y|hfa liiUl fil economic growth and employment creation severe recession for decades and when in the future will have to be based on the unemployment rate, modest though it expansion in the private sector, rather than on a growing public sector and currency may look, is unprecedented since the end -10 devaluations. This will involve an increase of the Second World War. 25 The fundamental change in economic in joblessness in the near term, but there 20 policy and economic-policy thinking reflects are reasons to be optimistic in the longer increased recognition of the costs of the 15 term. The Swedish labour market has shown old model, and also the realisation that it itself to be flexible in the past, which has 10 was no longer tenable with Sweden becom¬ often been credited to centralisation of ing more and more integrated in the world wage bargaining and the long-standing use economy. The expansion of the public of active labour-market policy. Although sector undoubtedly helped to keep the the importance of these features of the unemployment rate low from the mid-1 970s, labour market in maintaining low unem¬ at a time when many European countries ployment may have been exaggerated in -10 saw steep increases in joblessness. In the 14 85 86 87 88 89 90 91 92 93 84 85 86 87 88 89 90 91 92 93 the past, there are reasons to believe that event, the counterpart of the outstandingly they have contributed to high employment UNEMPLOYMENT 2 CURRENT BALANCE low unemployment record was an out¬ growth and flexible real wages. Continued % of labour force % of GDP standingly rapid expansion of public flexibility in high real wages will help to reduce unemployment in the future. But Sveinbjôrn Blôndal and Thomas Egebo are specialists 1 . Private consumption deflators. in the economies of Sweden and Denmark in the 2. National definitions. I OECD average Country Studies branch of the OECD Economics 1 . OECD Economic Surveys: Sweden, OECD Publi¬ Department. cations, Paris. 1992. 33 the OECD OBSERVER 177 August/September 1992 ECONOMY much will also depend on the government's mental to efficiency and growth has become competition and improve their management. two main structural reforms, first, to a priority. The tax on commercial property The private sector is also under scrutiny. relieve the tax burden and therefore to cut has been abolished, and the wealth tax is Prices in construction, food and transport, government spending, and second, a pro¬ to be phased out in three stages. The flat- more or less shielded from international gramme of deregulation and privatisation rate tax on investment income will be cut competition, and even those of cars, house¬ designed to intensify competitive pressures. from 30% to 25% and the maximum rate hold appliances and certain building ma¬ of inheritance and wealth-transfer taxes terials, are relatively high. This is probably Reducing from 60% to 30%. The self-employed will due mainly to government regulations limit¬ Transfers be exempt from the tax they used to have ing competition (especially for food, build¬ to pay on their working capital. Overall, ing and transport), but also to intense hori¬ the various reforms in Sweden's tax system, zontal concentration and a very marked The dramatic deterioration in public partly introduced by the previous govern¬ degree of vertical integration. Several finances in recent years has made it ment, have reduced the highest rates of measures are under way to increase the essential for the government to contain income tax (including social security con¬ discipline of market forces in the private the rise in public debt, thus limiting the tributions) from 88% in 1983 to 63% in sector. The agreement in the European room to reduce taxes. In the 1 992/93 budget, 1992. Economic Area (EEA) between the EC and announced in January and revised in April, In order to approach EC rates of indirect EFTA countries on the establishment of a spending cuts amount to nearly SKr 15 bil¬ taxation, the authorities have cut VAT common market for goods and services will lion. But almost half of that is offset by tax from 25% to 18% on certain goods and entail de-regulation of several activities. A reductions. Most of these measures will services. The 1992/93 budget proposals Competition Act significantly tighter than not take effect until 1993, which means include a reduction in the general VAT rate at present will be proposed in the autumn. that the full year outcome (1993) will be to 22% and re-casting of energy taxes. SKr 27 billion on the expenditure side and SKr 13 billion in lower taxes. The govern¬ Strengthening ment has announced its intention to cut The Swedish economy is going through public spending by some 2% of GDP up to Competition a difficult adjustment phase after over¬ the mid-1 990s. Even so, official calculations heating during the late 1980s. Short-term show that the financial position of general Privatisation proceeds, which could earn growth and employment prospects are not government will not improve before then. the government from SKr 10-15 billion particularly bright, but the longer-term Reductions in public spending will be per year, are intended to fund spending on outlook does give grounds for optimism. concentrated on the costly social trans¬ public infrastructures, especially motor¬ But the authorities will have to stick fers, and in particular where inefficiencies ways and railways, which Sweden sorely firmly by their commitment to stabilise are most apparent. Some measures have lacks. This is the only spending which the prices, and to avoid any measure which already been implemented. Until April government plans to increase over the might jeopardise fiscal consolidation. The 1991, sick leave gave entitlement to a years ahead. But the privatisation pro¬ government should closely follow its pro¬ 100% benefit. That has now been cut to gramme's ultimate aim is not to raise gramme of improving the functioning of no more than 75% for the first three days funds. It is rather to improve efficiency, markets, facilitating the flow of resources and 90% thereafter. This has contributed eliminate management constraints and the to their most productive uses. The proposed to a 15% fall in sick leave as from last competitive distortions that state owner¬ Competition Act will be an important step year. Furthermore, it is now the employer ship tends to generate. towards a stronger competitive framework, who has to cover sickness benefit for the This goal of enhancing efficiency does but much remains to be done to deregulate first fortnight, a measure intended to not apply only to state enterprises. It applies markets in the private sector. encourage employers to check up on claims to the whole of Sweden's vast public sector, The most effective way of strengthening more strictly. For 1993, it is proposed that the most extensively developed in the market discipline, stimulating innovation sickness benefit should only be paid out OECD area, accounting for one-third of and making the economy more dynamic is after two full days of sick leave. There are total employment, of which 80% is in to open it up to vigorous foreign competi¬ also plans to reform the work-injury insur¬ Sweden's districts and communes. This tion. The EEA agreement and the pro¬ ance system, under which the amount of 'core' public sector is responsible for spective accession of Sweden to the EC benefits paid out rose steeply during the health care, child care, assistance for the are important moves in that direction. 1 980s. The government is planning to reduce elderly, education, housing and cultural housing support: interest subsidies and activities. The absence of competition in grants will be cut, and eventually abolished these activities, each user being attached completely. Changes are also under con¬ to a service unit, is reflected in production sideration in the public pension system costs that can be three times as high in and the unemployment insurance system. one commune as in another. As of January OECD Bibliography On thé revenue side, the removal of 1992 a Local Authorities Act is tentatively OECD Economic Surveys: Sweden, taxes considered to be particularly detri encouraging local authorities to introduce 1992. 34 the OECD OBSERVER 177 August/September 1992 ECONOMY Poland Grant Kirkpatrick and Val Koromzay m II * 's difficult to find examples in tinct decline in popular support for the help enterprises to come to a true aware¬ H economic history where so much change and an increasingly precarious fi¬ ness of the reality of budget constraints 8 has been accomplished in such a nancial position for enterprises, banks and and hence to recognise the importance of short time.' This is one of the opening re¬ the central government budget. The per¬ a tight wages policy. marks in the economic survey which the sistence of major structural blocks has After a very good start, matters deterior¬ OECD and its Centre for Co-operation with meant that macro-economic equilibrium is ated also on the fiscal front. By the end of European Economies in Transition has de¬ far from being achieved. 1990 the budget was already back in deficit voted to the Polish reform under the Part¬ as a result of higher welfare expenditure ners in Transition Programme - a reform The 'Shock Therapy' and declining tax revenue, because of the boldly launched on 1 January 1990 which, and its Effects recession and an increasing incidence of in two years, has produced such import¬ tax arrears. In 1991 the budget deficit ant changes that a reversal of the process amounted to 3.8% of GDP. The programme of transition to a market is out of the question.1 The performance of the Polish economy economy aimed also to achieve economic Five examples will show how much pro¬ stabilisation. To control inflation that had was severely affected by the reform pro¬ gress has been made. Shortages have been gramme. Sales by state-owned industrial been aggravated by two 'systemic breaks' - eliminated: the stores that once were des¬ enterprises fell by 30% in the first two price liberalisation and a new, steep devalu¬ perately empty, and outside which endless months of 1 990. Over the year as a whole, ation of the zloty - the authorities opted for queues used to stretch, are now plentifully the fall in GDP was 11.6%, with declines two anchors: convertibility of the currency stocked with a variety of products; and of 9% in investment and 13% in consumpt¬ and control of nominal wage growth. A new shops are changing the look of Polish ion. The surge in prices had the effect of hardening of monetary and fiscal stance towns. Inflation, running at 600% in 1989, reducing real wages in the state sector by was clearly essential in order to maintain is now down to 40%. The convertibility of one-third. They caught up modestly (+2%) these anchors for any length of time. The the zloty has been established and main¬ in 1991 as inflation eased. Because of simultaneous removal of all import restrict¬ tained, with a resulting surge in trade with this, and also reflecting a fall in household ions was another weapon in the fight western countries. The national currency savings, consumption picked up last year against inflation. has also become a credible savings instru¬ (6-8%). But another decline in investment The policy of fixed exchange rates, es¬ ment since interest rates are sufficiently (down 8%) and a fall in net exports caused sential during the first year of the reform high to prevent the erosion of the real value GDP to shrink by a further 8% in 1991. as a curb on price expectations, was main¬ of zloty deposits. Finally, the private sector The recession would have been deeper tained until May 1 991 , when the zloty was is asserting its presence in a growing had it not been for the rapid emergence of devalued by 1 6%. In October 1 991 , a 'crawl¬ number of sectors of the economy. a private sector, whose output grew strongly ing peg' system was introduced, consisting This spectacular progress is the result in 1990 and '91. Unemployment sky¬ of an automatic monthly depreciation of of a radical policy of transition to the market rocketed, its rate rising from 0.3 to 1 1 .4% 1.8%. All the same, and even allowing for economy, conducted at three levels. First, in two years. But this does not seem to the new 12% devaluation in February 1992, the legal framework, through the establish¬ have made any real dent in overmanning the zloty has appreciated steadily in real ment of property rights, competition and in the large state enterprises, since mass terms since January 1990, making it diffi¬ labour legislation, new laws on commerce, redundancies accounted for only about cult for enterprises to maintain their exter¬ banking, and so on. Second, the institu¬ 23% of the jobless total at the end of 1 991 . nal competitiveness. tional framework, through the introduction Understandably, therefore, the top Control over wage growth proved to be of a system of social insurance and un¬ priority of the government formed in De¬ of only limited effectiveness. The excess employment compensation, and the cember 1 991 is to put an end to the recess¬ wages tax (Popiwek), which penalises pay emergence of such new actors as private awards above the norms set for each state ion. For 1992 this will mean achieving zero insurance companies and financial inter¬ growth of GDP and real wages while bring¬ enterprise, was made the object of numer¬ mediaries. Third, instruments of economic ing the average rate of inflation down from ous exemptions. The fact that firms which policy, through the emergence of a genuine had exceeded the norms in 1990 had 70% last year to 45% this year (that is, system of regulation by prices, a modern 36.5% over twelve months). This goal will higher ceilings applied to them the follow¬ tax system, monetary control and trans¬ require a much tighter fiscal stance. ing year further reduced the credibility of parent budget processes. The 1992 budget bill aims to limit the the Popiwek. More generally, the feeling The magnitude of such an undertaking budget deficit to 5% of GDP (65,000 trillion that financial failure was unlikely did not implies countless difficulties and uncertain¬ zloty). On the revenue side, pending in¬ Grant Kirkpatrick is an economist in the Central and ties, and many problems remain unresolved. troduction of VAT at the beginning of 1 993, a Eastern Europe Division, of which Val Koromzay is Recently, clouds have been gathering over Head, in the Country Studies and Economic Prospects 1. OECD Economic Studies: Poland, OECD Publi¬ the Polish reform programme, with a dis Branch of the OECD Economics Department. cations, Paris, 1992. the OECD OBSERVER 177 August/September 1992 35 ECONOMY broadening of the tax base and higher turn¬ such a scale takes time. The new economic in rescheduling tax arrears, and the banks over tax and excise duty rates are policies mean an unprecedented shock, generally continue to lend to loss-making planned; and improved tax collection pro¬ to which Polish firms must respond although firms - they even capitalise the interest cedures are to be implemented. Income they lack the financial, technological and, when instalments are not met - counting tax should also produce some additional above all, human resources necessary to on the government to provide assistance revenue. break the straitjacket of structural rigidities eventually.2 On the expenditure side, the govern¬ bequeathed by forty years of central plan¬ Another obstacle to the restructuring of ment intends to make savings on welfare ning. state-owned enterprises is their decision¬ programmes by reviewing the rules of Price liberalisation, the sharp reduction making procedure. During the 1980s the pension eligibility, creating selectivity in of subsidies and the convertibility of the power of the workers' councils increased unemployment compensation, managing zloty have brought about a complete up¬ considerably, to the detriment of manage¬ the distribution of subsidised medicines heaval in relative prices, driving some up ment which, in the absence of a real repre¬ more efficiently and charging for certain (clothing, textiles, electronics and precision sentative of 'capital' in the enterprise, did medical services that used to be supplied equipment) and others down (food, non- not encourage the adoption of profit- free. Lastly, the automatic index linking of ferrous metals, energy). The rise in relative maximising strategies. To overcome these civil service pay to enterprise wages is to prices of fuel and power alone was a par¬ short-term or systemic handicaps, the end. ticular shock to Poland's energy-hungry government has firmly opted for a rapid But there are reasons for asking whether industry. The surge in interest rates, further¬ development of the private sector, both the fiscal goal can be achieved. Parliament more, has made borrowing unaffordable through the creation of new enterprises has still to complete its work on the meas¬ for firms whose own output prices are flat and through the privatisation of state- ures required to implement the budget, or falling. owned firms. and other measures will be necessary to In an economic environment that in many take account of some rulings of the constitu¬ aspects has deteriorated sharply and in The Expanding tional tribunal that have adverse budgetary any event is much more uncertain, Polish Private Sector implications. More generally, further pro¬ enterprises are further hampered by two In the event, the expansion of the private gress in structural reforms will be required specific handicaps: a comparatively old if the programme is to move ahead satis¬ capital stock (the proportion of equipment sector has been spectacular: there were factorily. under five years of age is even smaller than 11,700 private enterprises in 1989 and al¬ in the other ex-Comecon countries), and a most 41 ,500 by September 1 991 , while the Resistant serious lack of competitiveness. (This number of unincorporated entrepreneurs rose from 81 3,000 to 1 .4 million. This shift Enterprises second handicap, temporarily obviated by the initial steep devaluation of the zloty, to the private sector was concentrated on The ambitious macro-economic pro¬ resurfaced with the rise in nominal wages those sectors in which earnings were likely gramme that has now been under way for and the further decline in productivity as¬ to grow most rapidly. Private-sector acti¬ two years is far from achieving all its aims, sociated with the fall in output during the vity accounted in September 1991 for 75% largely because, at the micro-economic past two years.) The wide dispersion of of trade, 45% of construction and 80% of level, enterprises have not adapted them¬ activities undertaken within enterprises is road transport. selves adequately to the new conditions. another obstacle that bars the way to effi¬ More often than not, the emergence of Business management has not had the in¬ cient management. For example, firms the private sector has been through 'small centives to behave in a manner that would have to provide their employees with a privatisations', which have made for a normally be considered rational in a free- wide range of social services (housing, rapid transformation of retailing in particu¬ market system. Faced with a steep fall in recreation, health care). Finally, there is lar - an activity in which Poland has a big lead over the other central and eastern profits, state enterprises have paid far too the regional dispersion of industry which little attention to cutting costs. They have often produces 'one big firm in a small European countries. The communes usu¬ barely reduced overmanning and have put town'. In political and social terms, there¬ ally turned small shops over to their em¬ up little resistance to wage demands. Yet fore, the adjustments to be made are painful. ployees, renting or leasing but not selling they have seldom hesitated to raise their These handicaps are all the more difficult them, which made these privatisations prices. As a result, increasing international to overcome in that Poland's state enter¬ somewhat precarious. competition, as witnessed by the surge in prises are only partly conscious of the In 'large privatisation' Poland has opted imports in 1991 , has meant that they have urgency of adjustment. Budget constraints for a flexible, multi-track procedure. The had to reduce their output. At the end of often remain theoretical since the liquida¬ first approach, privatisation by 'liquida¬ 1 991 , out of 1 ,800 firms under the super¬ tion of enterprises is rarely initiated and, tion', has already moved into an opera¬ vision of the Ministry of Industry, 71 8 were even when it is, it seldom leads to their tional phase, with nearly 500 enterprises in a difficult, even desperate, financial closure, and bankruptcy is seen as an im¬ (mostly SMEs) privatised in 1991. Liquida¬ tion can take one of three forms: sale of situation. probable menace. The authorities have often Obviously, a process of adjustment on shown themselves to be accommodating 2. See pp. 19-22. 36 the OECD OBSERVER 1 77 August/September 1992 ECONOMY assets; contribution of all or part of the Persistance terest due. The savings bank will have to assets and liabilities to a joint venture set become more independent and adapt hous¬ up with a Polish or foreign partner; sale of and New Fronts ing loans more closely to its own resources. assets and liabilities to a new firm estab¬ Where taxation is concerned, the object lished by management and workers (buy¬ Poland is irreversibly committed to the is to introduce VAT without further delay out). This last method has accounted for process of transforming its economy, but and to improve direct and indirect tax col¬ 90% of privatisations-through-liquidation. is still in mid-stream. To avoid becoming lection.3 Improving the efficiency of mone¬ It usually involves some form of leasing, bogged down, and to ensure that it reaches tary instruments by strengthening the for which favourable financial arrange¬ the other side safely, it will have to speed banking system is also essential. ments are available. To ensure their up the structural changes while at the As for privatisation, the range of avail¬ effective participation, the new owners are same time persisting, of necessity, with able procedures means that the general required to put up a sum equal to at least macro-economic stabilisation. framework is satisfactory. The public 20% of the capital of the former enter¬ First, fiscal control. The officially fore¬ could nonetheless be better informed, and prise. cast deficit for 1992 (5% of GDP) must be the rules on sectoral privatisation clarified. Second, there is capital privatisation. seen as an absolute maximum, in particular The mass privatisation of the 240 enter¬ Since 1991 , fewer than twenty firms have because increased debt service, stagnant prises already selected should be launched been privatised in this way because the growth and positive real interest rates as soon as possible, since their current in¬ flotation of shares has proved to be difficult. make an explosive mix. termediate situation is not conducive to In fact, capital privatisation has mostly Second, inflation has to be further re¬ sound management. Similarly, liquidation taken the form of direct sales to investors, duced. The year-on-year target of 36.5% procedures should take less time. the majority of them foreign. by end-1992 represents an improvement, Finally, the growth of foreign investment After a few months' experimentation, it but it is not sufficient in terms of lowering depends more on stable rules of the game became clear to the Polish authorities that interest rates and curbing speculative be¬ than on preferential and discriminatory the various methods proposed were not haviour. In this respect, there is little room conditions which, since they inevitably going to lead, within a reasonable period, for macro-economic policy manoeuvre - proliferate, would run the risk of distorting to a massive transfer of medium-sized and, whence the importance of improving con¬ the liberal trading system now prevailing above all, large enterprises to the private trol over wages. Amending the Popiwek in Poland. sector. Whence a third approach: mass system (the tax on excess wages) to favour privatisation, whose implementation has the extension of bonuses and remuneration so far been delayed by the lack of political linked to the performance of the enter¬ Although Poland is at present going consensus. At all events, under this scheme prise would help. Yet the best instrument through a period of uncertainties, particu¬ the government will initially keep 30% of for reducing inflation would seem to be larly political, there is no cause for excess¬ micro-economic measures that aim at the capital of the firms selected, with em¬ ive pessimism. Brisk development is within ployees being allocated 10% of the shares cutting production costs. For example, the compass of the country, which for the through their free distribution. The remain¬ employees could be more directly involved past two years has been engaged in far- ing 60% are to be shared between some in improving their firm's profitability by reaching and courageous reform, provided 15 to 20 National Investment Funds. establishing a clear link between the increase the Polish authorities abide by the princi¬ The Funds will function like holding in value of the firm and the participation of ples which have guided their efforts thus companies and are to be run by manage¬ workers in its capital at the time of privati¬ far and persist in adopting a pragmatic sation. ment firms with foreign professional part¬ approach to the difficulties that arise. This At the same time, a number of specific ners; initially, each fund will receive an is the way the Polish government has been structural measures are advocated. First, equal portion of 27% of the capital of all proceeding, and its efforts deserve the with regard to pensions: to prevent an erupt¬ companies. After assessing the prospects recognition and support of the international ion of the deficit of the social insurance of each firm, the funds will then bid, by community. auction, for additional shares, enabling funds, the conditions of entitlement to full- them to obtain 33% of the capital of specific rate disability pensions have to be tightened companies (twenty on average), the re¬ and the maximum retirement pensions paid maining shares being spread among the by the state gradually lowered so as to en¬ other funds. The second part of the pro¬ courage saving through complementary OECD Bibliography cess will involve the distribution of shares insurance schemes. Second, in housing in the funds to all adult Polish residents. finance: costs are too high because the OECD Economic Studies: Poland, 1992 These shares will be tradable only after existing system of repaying loans from the Tax Reform in European publication of the first yearly results for savings bank involves a ceiling on pay¬ Economies in Transition, 1991 each fund. ments by households, with budgetary Jeffrey Owens, 'Options for Tax support from the government covering the Reform', The OECD Observer, 3. Jeffrey Owens, 'Options for Tax Reform', The OECD Observer, No. 170, June/July 1991. gap between the ceiling and the total in I No. 170, June/July 1991. 37 the OECD OBSERVER 177 August/September 1992 New OECD Publications SUE FILL IN THE FORM WITH THIS ISSUE FILL IN THE FORM WITH THIS ISSUE FILL IN THE FORM WITH THIS ISSUE FILL IN T 'Labour Markets and the Transition in Central AGRICULTURAL POLICIES, Economy and Eastern Europe'. MARKETS AND TRADE: (13 92 18 1) ISBN 92-64-13665-7, 230pp. OECD ECONOMIC OUTLOOK No. 51 FF120 £15 $25 DM47 MONITORING AND OUTLOOK 1992 1 992 Subscription (June 1992) (May 1992) (No. 18 Spring to No. 19 Autumn): (12 92 51 1) ISBN 92-64-13669-X, 230pp. In its fifth annual report on agricultural policies, (13 00 00 1) ISSN 0255-0822 FF110 £13.50 $24 DM43 FF205 £25 US$44 DM80 markets and trade, the OECD assesses agri¬ See centrefold of this issue of The OECD Observer. cultural and trade policy developments in mem¬ 1992 Subscription: LONG-TERM PROSPECTS (12 00 00 1) ISSN 0474-5574 ber countries in 1991. These developments are FOR THE WORLD ECONOMY FF185 £22 US$40 DM72 evaluated against the reform principles agreed (June 1992) OECD ECONOMIC OUTLOOK by OECD Ministers in 1987 to improve the market As the 21st century approaches, attention is in¬ orientation of agricultural production and con¬ HISTORICAL STATISTICS 1960-1990 creasingly turning to the world economic and sumption by progressive and substantial re¬ (May 1992) Bilingual social environment in which governments, ductions in protection and assistance. As part The Statistics Directorate of the OECD publishes businesses and individuals will be operating statistics on the main subjects influencing the over the next decade or so. The contributions development of the economy such as national presented in this report review the prospects of New on Diskette accounts, foreign trade, labour force, leading the world's major regions, assess the principal indicators and short-term statistics. Most are factors likely to affect the world economy over TABLES OF PRODUCER available as printed publications, on magnetic the longer term, and explore the implications of SUBSIDY EQUIVALENTS tapes, and on diskettes, and, in the case of foreign a wide range of questions - e.g., the North AND CONSUMER trade by commodity, on microfiches. In particular, American Free Trade Agreement, economic and SUBSIDY EQUIVALENTS these statistics allow the macro-economic pro¬ political integration in Europe, the dynamism of This set of diskettes contains detailed PSE jections which the Economics Department pro¬ the Asia-Pacific region, global environmental and CSE tables for the period 1979-91 for duces for the OECD Economic Outlook, twice issues - that are set to shape the international 10 OECD member countries (Australia, a year, to be related to historical statistics cov¬ policy agenda of the 1990s. Austria, Canada, Finland, Japan, New ering a long period. (03 92 03 1) ISBN 92-64-13675-4. 204pp. (12 92 01 3) ISBN 92-64-03541-9, 168pp. FF145 £20.50 US$34 DM60 Zealand, Norway, Sweden, Switzerland, FF120 £17 $28 DM49 the United States) and the European Com¬ OECD ECONOMIC STUDIES munity; reference prices and exchange rates used in calculations are also included. No. 18 Spring 1992 Agriculture The diskettes, which complement the (June 1992) information contained in highly summa¬ This issue contains the following chapters: MEAT BALANCES rised form in the report Agricultural Poli¬ 'Régionalisation and World Trade' IN OECD COUNTRIES 1984-1990 cies Markets and Trade : Monitoring and 'Institutional Commitments and Policy Credi¬ (May 1992) Bilingual Outlook 1992 thus provide the most up-to- bility' This publication presents international com¬ date source of data in the PSE/CSE data 'What is Households' Non-market Product¬ parisons of production, trade and consumption base, to be used for reference and docu¬ ion Worth?' for each category of meat for 1984-1990. It mentation. The data, revised annually, are 'Wages and Wage Policies in Market enables the commodity analyst to follow, for provided on 3" or 5" HD diskettes. Economies: Lessons for Central and Eastern each OECD country, the flow of meat by category Price: FF630 £70 US$115 DM190 Europe' from production to consumption. 38 the OECD OBSERVER 177 August/September 1992 of the report's assessment of policy devel¬ '10BESTELLERS' ADJUSTMENT AND EQUITY opments, producer and consumer subsidy To order, please use the form IN DEVELOPING COUNTRIES: equivalents are estimated for 1990 and 1991. inserted in this issue A NEW APPROACH (51 92 04 1) ISBN 92-64-1 3655-X, 452pp. FF215 £28 $50 DM84 1. EXTERNAL DEBT: François Bourguignon and Christian Morrisson See Gérard Viatte, 'Agricultural Reform - An Integrated Ap¬ (June 1992) DEFINITION, STATISTICAL proach', The OECD Observer. No. 176, June/July 1992. (41 91 22 1) ISBN 92-64-13664-9, 111pp. COVERAGE AND METHODOLOGY FF13 £17 US$31 DM50 Development (43 88 02 1) ISBN 92-64-23039-4 ADJUSTMENT AND EQUITY FF60 £7.00 US$12.00 DM26 Development Centre IN CÔTE D'IVOIRE 2. STRATEGIC OPTIONS DIRECTORY OF DEVELOPMENT Hartmut Schneider in collaboration with FOR LATIN AMERICA RESEARCH AND TRAINING INSTITUTES Winifred Weekes-Vagliani, Paolo Groppo, Sylvie IN THE 1990S Lambert, Akiko Suwa, and Nghia Nguyen Tinh IN AFRICA (41 92 04 1) ISBN 92-64-23634-1 (May 1992) (May 1992) Bilingual FF175 £22.00 US$42.00 DM68 This series represents a complete departure This Directory, produced in collaboration with from past efforts to analyse the effects of ad¬ the Council for the Development of Economic BANKS UNDER STRESS justment and stabilisation policies. Rather than and Social Research in Africa (CODESRIA) in (21 91 04 1) ISBN 92-64-23631-7 focusing on individual aspects of the problem, Dakar, Senegal, provides detailed information FF140 £19.00 US$35.00 DM56 the authors examine the economic, political on 641 research and training institutes in 49 REFORMING THE ECONOMIES and social costs together, making it possible African countries, on their development re¬ OF CENTRAL for the first time to estimate the social cost, in search and training programmes, and other re¬ AND EASTERN EUROPE terms of unemployment, inequality and pov¬ lated activities. The information is part of the erty, of each macro-economic stabilisation International Development Information Network (11 92 01 1) ISBN 92-64-23613-9 FF80 £11.50 US$21.00 DM33 measure. Seven country studies - covering (ON) database created by the Inter-regional Chile, Ivory Coast, Ecuador, Ghana, Indonesia, Co-ordinating Committee of Development As¬ THE TRANSITION Malaysia and Morocco - demonstrate, thanks sociations (ICCDA), with the OECD Devel¬ TO A MARKET ECONOMY. to their new approach, that adjustment policies opment Centre. This publication is an updated VOLUME 1 -THE BROAD ISSUES do not automatically increase inequality and version of the Directory published in 1986. VOLUME 2 - SPECIAL ISSUES (40 92 02 3) ISBN 92-64-03539-7, 248pp. produce negative effects on the poor; their im¬ FF170 £24.50 US$40 DM80 (CCEET) pact varies widely from case to case. The conclusions from the country case studies DIRECTORY OF NON-GOVERNMENTAL (14 91 06 3) ISBN 92-64-03520-6 are drawn together in this synthesis volume ENVIRONMENT AND DEVELOPMENT FF300 £42.00 US$72.00 DM125 which uses their evidence to make recommen¬ ORGANISATIONS SHORT-TERM dations for the formulation of equitable adjust¬ ECONOMIC STATISTICS. IN OECD MEMBER COUNTRIES ment policies. (May 1992) Bilingual CENTRAL AND EASTERN (41 91 17 1) ISBN 92-64-13654-1, 172pp. FF130 £17 US$31 DM50 This specialised Directory provides information EUROPE (CCEET) See Christian Morrisson, 'Balancing Adjustment and Equity'. on 649 non-governmental organisations (NGOs) (14 92 01 3) ISBN 92-64-03523-0 The OECD Observer, No. 172, October/November 1991. in OECD member countries that focus on envi¬ FF120 £16.00 US$32.00 DM48 8 volumes in the series (Ecuador, Chile, The Ivory Coast, ronment and development. Profiles of the NGOs Ghana, Indonesia, Malaysia, Morocco and synthesis volume): SCIENCE AND TECHNOLOGY (419100 1) FF835 £110 US$198 DM320 describe their aims, education work and actions in POLICY. developing countries. Cross-referenced indexes COMPETING IN THE ELECTRONICS 1991 REVIEW AND OUTLOOK provide access to information on 'who is doing INDUSTRY: THE EXPERIENCE what and where' in this field. (92 01 1) ISBN 92-64-23626-0 OF NEWLY INDUSTRIALISING FF250 £32.00 US$60.00 DM97 Documenting the wide variety of NGOs under¬ ECONOMIES taking environment and development action THE OECD DECLARATION Dieter Ernst and David O'Connor and education, this Directory serves as a AND DECISION ON (May 1992) unique and comprehensive guide for devel¬ INTERNATIONAL INVESTMENT Electronics has been the major growth sector in opment practitioners and planners, as well as AND MULTINATIONAL the world economy over the past two decades. for those interested in the environment. ENTERPRISES. 1991 REVIEW Leading computer, consumer electronics, com¬ The compilation of this new Directory was ponent and software firms in OECD countries undertaken as a collaborative effort between (21 92 02 1) ISBN 92-64-23629-5 have been the principal beneficiaries of that FF70 £10.00 US$18.00 DM30 the international non-governmental organisa¬ growth. As technologies and markets have tion, ENDA Third World, and the OECD Devel¬ GLOBAL ENERGY. rapidly evolved, new actors have been able to opment Centre. It complements the Directory THE CHANGING OUTLOOK enter, most significantly a growing number of of Non-Governmental Development Organi¬ (61 92 01 1) firms from the newly industrialising economies. sations in OECD Member Countries, pub¬ FF170 £22.00 US$40.00 DM66 Starting out in many instances as assembly lished in 1990 by the Development Centre. subcontractors or original equipment manufact¬ (40 92 03 3) ISBN 92-64-03536-2, 410pp. 10. INTEGRATION OF DEVELOPING urers, some are emerging as strong inter¬ FF300 £38 US$68 DM112 COUNTRIES national competitors. Yet they - and others INTO THE INTERNATIONAL Development Centre Studies who would follow in their lead - face growing TRADING SYSTEM Series 'Adjustment and Equity difficulties in the years ahead as barriers to in Developing Countries', (22 91 02 1) ISBN 92-64-23616-3 entry rise and access to critical technologies FF130 £18.00 US$33.00 DM51 General Editor: Christian Morrisson and markets threatens to become more re 39 tire OECD OBSERVER 177 August/September 1992 stricted. This book explores how NIE elec¬ development and demonstration. It makes re¬ tronics companies can rise to the new chal¬ commendations for specific technology areas Employment, Labour lenges of the 1990s. as well as general suggestions for improving and Social Affairs (41 92 01 1) ISBN 92-64-13650-9, 304pp. such collaboration. The report outlines the FF180 £20 US$35 DM62 See Martin Bloom, 'Technological Change in Korean Elec¬ progress made, summarises new multilateral TRENDS IN INTERNATIONAL tronics', The OECD Observer, No. 175, April/May 1992. projects, and lists all of the international agree¬ MIGRATION ments established since the IEA initiated this TECHNOLOGICAL CHANGE IN CHINA Continuous Reporting System international collaboration in 1975. Richard Conroy (61 92 09 1) ISBN 92-64-13661-4, 240pp. on Migration (May 1992) FF190 £27 $44 DM77 (June 1992) This study examines in detail how China, in laying NEA (Nuclear Energy Agency) All OECD countries are now affected by inter¬ the foundations for rapid industrialisation in the national migration. The increase in the flows of next century, is coping with the opportunities NUCLEAR ENERGY DATA 1992 immigrants, asylum-seekers and populations and challenges posed by the new global tech¬ (June 1992) Bilingual with ethnic ties with certain member countries nological and economic environment. Drawing Nuclear Energy Data is the OECD Nuclear is in large part due to the recent changes in on a thorough analysis of China's science and Energy Agency's annual compilation of basic central and eastern European countries, the technology policies, institutions and man¬ statistics on electricity generation and nuclear continuing demographic and economic imbal¬ power, it examines the reforms introduced in power in OECD countries. The reader will find ances between North and South, and employ¬ the past decade to improve both the domestic quick and easy reference to the present status ment opportunities in certain industries and supply of new technology and to stimulate its of and projected trends in total electricity gen¬ occupations in the OECD area. diffusion. The study analyses China's capacity erating capacity, nuclear generating capacity, This new annual report gives an account of to assimilate foreign technology as a way to and actual electricity production, as well as on the magnitude and composition of migratory accelerate the industrialisation process. Be¬ supply and demand for nuclear fuel cycle ser¬ movements and their global and regional cause successful technological change is vices. patterns. It shows the part played by immigra¬ closely tied to economic reform, the conclusion (66 92 08 3) ISBN 92-64-03680-6, 48pp. FF60 £8 $14 DM23 tion in the growth of the total population and situates all these factors in the context of wider labour force of host countries, and examines economic reforms. URANIUM: RESOURCES, the position of immigrants on the labour mar¬ (41 92 03 1) ISBN 92-64-13652-5, 280pp. FF220 £28.50 $54 DM86 PRODUCTION AND DEMAND 1991 ket. Special attention has been paid to recent A Joint Report by trends in migration policies and to the economic the OECD Nuclear Energy Agency ties between immigration and emigration coun¬ Energy tries established through international trade and the International and emigrants' remittances. Alongside this IEA (International Energy Agency) Atomic Energy Agency general review, individual notes set out the (June 1992) COAL, THE ENVIRONMENT salient features in each country. This year, for The uranium supply aspects of the nuclear fuel AND DEVELOPMENT: the first time, the report considers the emigration cycle have undergone considerable change TECHNOLOGIES TO REDUCE and immigration situation in Hungary, Poland during the last few years. Nuclear power gener¬ GREENHOUSE GAS EMISSIONS and the Czech and Slovak Federal Republic. A ating capacity can continue to expand only if (June 1992) statistical annex gives times series on stock there is confidence in the final supply of Technologies which reduce greenhouse gas and flow data for various categories of migrant uranium. This report presents governmental emissions from coal use can help reconcile this populations. compilations of uranium resource and production 90 tables and 8 graphs fuel's fundamental role in economic devel¬ data, as established in 1991. It also presents (81 92 03 1) ISBN 92-64-13663-0, 160pp. opment with environmental concerns about its FF190 £27 $44 DM77 short-term projections of the nuclear industry's use. The papers in this set of proceedings See Jean-Pierre Garson, 'International Migration: Facts, Fig¬ future natural uranium requirements and re¬ ures, Policies'. The OECD Observer, No. 1 76, June/July 1 992. evaluate the performance of new and improved views the status of uranium exploration, re¬ coal-use technologies. They indicate strategies NEW DIRECTIONS sources and production throughout the world. industrialised and developing countries may (66 92 07 1) ISBN 92-64-13662-2, 280pp. IN WORK ORGANISATION: FF250 £34 $60 DM112 adopt to advance and apply these technologies. THE INDUSTRIAL RELATIONS The issues are assessed in a global context IN-CORE INSTRUMENTATION RESPONSE with an emphasis on near- and medium-term AND REACTOR CORE ASSESSMENT (June 1992) applications. Long-term prospects are also re¬ The organisation of work is becoming an increas¬ viewed. The countries of the Asia-Pacific re¬ Proceedings of a Specialists' Meeting ingly important means of ensuring innovation gion, an area of high current and projected coal Pittsburgh', USA, 1-4 October 1991 and productivity. Recent organisational change production and use, are the subject of special (June 1992) Bilingual stresses increased worker involvement, improved attention. Information on the conditions in the reactor channels of information and communication, (61 92 08 1) ISBN 92-64-13657-6, 880pp. core is essential for the safe and economic and investment in further education and train¬ FF350 £49 US$82 DM166 operation of nuclear reactors. These proceedings ing. This volume provides detailed information COLLABORATION review the important aspects of measurement on labour-management co-operation and IN ENERGY TECHNOLOGY: and interpretation of reactor core parameters. Contributions from industry and research labo¬ negotiation concerning issues of work organi¬ 1987-1990 ratories in a number of countries cover sensor sation, and on the role of legislation and gov¬ (May 1992) ernment involvement in these processes. It dis¬ technology, measurement methods and core This report contains an assessment of the Inter¬ performance evaluation. cusses management's evolving attitudes towards national Energy Agency's programme of inter¬ (66 92 04 3) ISBN 92-64-03682-2, 400pp. labour utilisation, the varying responses by national collaboration in energy research, FF280 £40 US$67 DM133 trade unions, and the relative importance of co- 40 the OECD OBSERVER 177 August/September 1992 Vacancies occur in the OECD Secretariat in the following areas: Public Administration Balance of Payments National Accounts Agricultural Economics Development Economics operative and adversarial elements in OECD pursued in many OECD countries during the Energy Economics countries' industrial relations systems. past decade, with the aim of improving and Industrial Economics (81 92 01 1) ISBN 92-64-13667-3, 308pp. increasing consumer welfare. This report docu¬ Labour Economics FF210 £26.50 $48 DM82 ments the nature and effects of these reforms, Monetary Economics noting the important influence of competition Environment Econometrics in improving performance and emphasising the Environment ON CLIMATE CHANGE: ECONOMIC importance of active competition policies to Urban Studies ASPECTS OF NEGOTIATIONS ensure the full benefits of deregulation and pri¬ vatisation. Fiscal Policy (June 1992) (24 92 01 1) ISBN 92-64-13666-5, 136pp. Nuclear Engineering Lengthy international negotiations recently led FF130 £18 US$31 DM55 Macro-economics to the signing of a Framework Convention on See Eric Lacey, 'The Sectoral Impact of Deregulation', The Climate Change (Rio de Janeiro, June 1992). OECD Observer, No. 175, April/May 1992. Nuclear Physics Although the Rio agreement is an important CODE OF LIBERALISATION Education Policies step forward, it is clear that the real process has OF CAPITAL MOVEMENTS Social Affairs only just begun on the hard issues of im¬ (June 1992) Statistics plementation. Typically, these discussions will This volume contains the full text of the Code Computing and Communications centre around the economic conditions facing of Liberalisation of Capital Movements undei national governments. which OECD members have accepted legally Qualifications: This report examines three important economic binding obligations. The Code is regularly questions likely to be involved in these discuss¬ relevant university degree; at least two or updated by Decisions of the OECD Council ions. It first looks at how the choice of particular this edition incorporates all changes in the obli three years' professional experience; very policy instruments might affect the number and gâtions and positions of members as at 1s good knowledge of one of the two official type of countries that would choose to partici¬ March 1992. It allows a comparison of th( languages of the Organisation (English and pate in the accord over the longer term. It then degree of liberalisation achieved by each OECE French) and ability to draft well in that examines how the possibility of international re¬ country in regard to capital movements coverec language; good knowledge of the other. source transfers ('side-payments') might influ¬ by the Code. ence overall participation. Finally, it offers some (21 92 05 1) ISBN 92-64-13658-4, 148pp. Initial appointment: suggestions on how the 'free rider' problem FF130 £17.50 US$31 DM52 (where one country is able to reap the benefits See Pierre Poret, 'Liberalising Capital Movements'. The OECC two or three years. Observer, No. 176. June/July 1992. of an agreement, without having to incur the Basic annual salary: costs) might be minimised. CODE OF LIBERALISATION This volume is one of several studies on the OF CURRENT INVISIBLE OPERATIONS from FF 252,000 to FF 329,000 (Adminis¬ economics of climate change to be published (June 1992) trator) and from FF 363,00 (Principal by the OECD. This volume contains the full text of the Code ot Administrator), supplemented by allowances (97 92 07 1) ISBN 92-64-13668-1, 100pp. Liberalisation of Current Invisible Operations FF90 £13 US$23 DM43 depending on residence and family situation. under which OECD members have accepted Vacancies are open to both male and female legally binding obligations. The Code is regu¬ Finance candidates from OECD member countries. larly updated by Decisions of the OECD Coun¬ INSURANCE AND OTHER FINANCIAL cil; this edition incorporates all changes in the Applications, in English or French (specifying SERVICES: STRUCTURAL TRENDS positions of members as at 1 st March 1 992. It area of specialisation and enclosing detailed (May 1992) allows a comparison of the degree of liberalisa¬ curriculum vitse), should be marked 'OBS' This study provides an overview of the salient tion achieved by each OECD country in regard and sent to : regulatory and economic aspects of the relation¬ to the international transactions covered by the ship between insurance and other financial ser¬ Code, including services related to business, Human Resource Management vices in the OECD area. Following a survey of industry and foreign trade, transport, insurance, OECD the regulatory framework, the study identifies cinema and television, and travel and tourism. 2, rue André-Pascal the factors behind the process of convergence (21 92 06 1) ISBN 92-64-13659-2, 128pp. FF130 £17.50 US$31 DM52 75775 PARIS CEDEX 16 among various segments of the financial ser¬ See Pierre Poret, 'Liberalising Capital Movements', The OECD FRANCE vices industry. It also covers the structural Observer, No. 176, June/July 1992. strategies of financial institutions, in particular in the context of the penetration of the insur¬ Industry ance sector by banks, and the evolution of the THE PULP financial characteristics of insurance products. 12ASLMI AND PAPER INDUSTRY - 1989 26 tables and 3 graphs (21 92 03 1) ISBN 92-64-13653-3, 160pp. (May 1992) Bilingual FF120 £17 $28 DM60 This publication provides annual quantity data irm in rm i See André Laboul, 'The New Frontiers of Insurance and Financial on production and consumption of pulp and Services', The OECD Observer, No. 173, December 1991/ January 1992. paper products, on production capacity and utilisation and on foreign trade for 33 pulp and REGULATORY REFORM, paper products or groups of products by partner PRIVATISATION country. 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Directeur: Lucien Dantin Printed in France 42 S3 s OECD Economic Outlook Highlights A cyclical recovery of OECD activity is now taking shape, driven in particular by sustained disinflation and interest-rate reductions. The pick-up should become increasingly firmly established without any further policy action. However, improving the basis for economic performance over the longer term - and durably reducing unemployment - will require additional action, of a structural kind, including budget consolidation and an acceleration of moves to achieve existing micro-economic objectives. The Table 1 Outlook GROWTH OF REAL GNP/GDP IN THE OECD AREA1 seasonally adjusted at annual rates ( %) Recession has been avoided for the OECD eco¬ T Share in nomy as a whole. Nonetheless, during 1991 and into change from previous year change frorr previous half-year total 1992, activity was weak in virtually every OECD OECD 1991 ! 1992 1993 country, and fell in some. Recently there have been 1987 1990 1991 1992 1993 11 i I II I II signs that the situation is improving and the forces United States 36.0 1.0 -0.7 2.1 3.6 1.5 1.7 3.7 3.6 3.5 necessary to bring about a recovery are beginning to Japan 19.2 5.2 4.5 1.8 3.1 1.7 1.5 2.4 3.1 3.6 be felt, in particular in the United States. By 1993, 8.8 4.5 3.1 1.3 2.3 -1.4 2.2 2.1 OECD output could be expanding at around 3% Germany 2.5 2.3 (Table 1). The weakness of activity over the past year France 7.0 2.2 1.3 2.0 2.6 2.9 1.7 2.0 2.7 3.0 or so has led to rising unemployment in most coun¬ Italy 6.0 2.2 1.4 1.5 2.1 1.2 1.5 1.7 2.2 2.3 tries; the average OECD rate of unemployment could United Kingdom 5.5 1.0 -2.2 0.4 2.6 -0.5 -0.1 2.5 2.6 2.7 run at 7% during the course of 1992 - compared Canada 3.3 0.5 -1.5 2.3 4.3 1.3 2.0 4.1 4.4 4.3 with just over 6% in the first half of 1990 - before Total of above countries 85.8 2.5 1.0 1.8 3.1 1.2 1.6 2.9 3.2 3.2 falling somewhat in 1993 (Table 2). Inflation has Other OECD countries2 14.2 2.9 0.6 1.7 2.6 0.7 1.8 2.4 2.7 2.7 eased in most OECD countries and should continue Total OECD 100.0 2.5 1.0 1.8 3.0 1.1 1.6 2.8 3.1 3.2 to do so; by the end of next year average OECD Four major European countries 27.3 2.7 1.2 1.3 2.4 0.4 1.4 2.1 2.5 2.5 inflation could be running as low as 3% (Table 3). 39.7 2.8 1.1 1.4 2.4 2.1 2.5 Economic recovery in the OECD area has been OECD Europe 0.6 1.5 2.5 slower than generally expected. From the outset, the EC 34.2 2.9 1.4 1.5 2.5 0.7 1.5 2.1 2.6 2.6 US economy was not expected to exhibit a sharp Total OECD less recovery, given the shallowness of the recession, the the United States 64.0 3.4 1.9 1.6 2.7 0.9 1.6 2.3 2.8 3.0 limited scope for short-term fiscal support in view of Industrialproduction the already-large Federal budget deficit and high Major seven countries - 1.9 -0.6 0.5 4.1 1.2 -1.2 3.4 4.4 4.1 indebtedness of the business and household sectors. Total OECD - 1.9 -0.7 0.7 4.0 1.0 -0.7 3.4 4.3 4.0 The pick-up of US activity was predicted to be slow and hesitant and it has proved to be so. Elsewhere, business and households remain cautious in Share in several factors have operated to delay the recovery: many countries. Financial uncertainty and fear of un¬ total % change from previous year in Japan, unexpected sluggishness has resulted OECD employment may be adversely affecting confidence. from an abrupt end to the long boom of private fixed 1987 1990 1991 1992 1993 In addition, a renewed widening of budget deficits in investment; this has followed a marked erosion of Austria 0.9 4.6 3.0 2.1 2.5 many countries and the lack of apparent progress in business confidence, partly associated with a con¬ 1.1 3.7 1.5 1.6 2.3 a number of important areas of structural reform, Belgium tinued unwinding of speculative activities in asset Denmark 0.8 1.7 1.0 2.1 2.9 particularly the Uruguay Round, may be contributing markets Finland 0.7 0.4 -6.1 -1.3 3.3 to a climate of uncertainty inflationary pressures in Germany have led the Greece 0.4 -0.1 1.5 1.4 2.1 the current patterns of external balances and Bundesbank to push up short-term interest rates, Iceland 0 0.1 0.9 -2,6 0.5 exchange rates for major countries are not matters most recently in December, and interest rates in Ireland 0.2 8.3 2.3 2.4 3.1 of serious concern (Table 4). However, if the most other countries with exchange-rate links to Luxembourg 0 2.3 3.1 3.2 3.5 Japanese current account surplus were to come to Germany have followed; this has tended to dampen Netherlands 1.7 3.9 2.0 1.2 2.1 be perceived as 'excessively large', or if financial- domestic demand Norway 0.7 1.8 1.9 2.0 1.9 market developments were to result in downward in the United Kingdom, the recession was deeper Portugal 0.3 4.2 2.2 2.8 3.3 pressures on the yen, protectionist pressure in other and longer than projected because of sharper than Spain 2.3 3.7 2.4 2.6 3.2 countries could intensify, hampering free inter¬ expected adjustments in business and household Sweden 1.3 0.5 -1.2 -0.3 0.9 national trade and hence economic performance. debt positions. Switzerland 1.4 2.2 -0.5 0.9 2.0 A number of risks, concerns and uncertainties Turkey 0.5 9.2 1.5 5.1 3.7 weigh on the present outlook: Maintaining Total of above countries 12.4 3.1 1.0 1.6 2.4 further reductions in inflation are necessary in Sound Monetary Policy Australia 1.6 1.7 -1.9 2.6 3.7 many countries, including Germany, implying the New Zealand 0.3 0.5 -2.1 2.0 2.4 continuation of policies that could restrain demand The firming of monetary conditions that began at Total of above in the short term the end of the 1980s has been successful in contain¬ 17 countries 14.2 2.9 0.6 1.7 2.6 the financial adjustments that have depressed ing and reducing inflation in most countries. Inflation /. Aggregates were con puled on he basis of 1987 GNP GDP //eights activity in a number of countries may have further to is now at or below the lowest rates in two or more expressed in 1987 US d liters. 2 Half-yearly data must be mierprt ted with are. go decades in many OECD countries. Monetary policy ECONOMIC OUTLOOK adopted. While volatile asset markets have created a Table 2 difficult climate, it is important that monetary policy UNEMPLOYMENT IN THE OECD AREA should maintain its medium-term orientation toward national definitions price stability as asset markets adjust. 1991 1992 1993 1990 1991 1992 1993 In Germany, monetary policy must continue to bear II I II I II down on inflation. With the large unification-related Unemployment rates (%f fiscal deficit, interest rates are high and may ease United States 5.5 6.7 7.1 6.5 6.9 7.2 6.9 6.6 6.3 only moderately over the next year. In many other Japan 2.1 2.1 2.2 2.3 2.1 2.2 2.2 2.3 2.3 European countries, inflation still has to be subdued Germany 4.9 4.3 4.7 4.8 4.4 4.6 4.9 4.8 4.7 and monetary policy must remain restrained; the France 8.9 9.4 9.8 9.8 9.6 9.9 9.8 9.8 9.7 appropriate setting of monetary policy is reinforced by participation in present exchange-rate arrange¬ Italy 11.1 11.0 11.2 11.5 10.9 11.1 11.3 11.4 11.5 ments in Europe. In some other European countries, United Kingdom 5.9 8.3 9.8 9.7 8.9 9.8 9.8 9.7 9.6 where inflation is already low and the credibility of Canada 8.1 10.3 10.4 10.0 10.4 10.5 10.3 10.0 9.9 monetary policy appears to be increasing, oppor¬ Total of above countries 5.6 6.4 6.7 6.5 6.5 6.8 6.7 6.6 6.4 tunities that arise to reduce interest differentials Other OECD countries 8.6 9.6 10.2 10.2 9.9 10.2 10.3 10.2 10.2 further vis-à-vis Germany should be taken. Total OECD 6.2 7.1 7.5 7.3 7.2 7.5 7.5 7.4 7.2 Four major European countries 7.5 8.0 8.7 8.7 8.2 8.7 8.7 8.7 8.7 Improving OECD Europe 8.0 8.7 9.3 9.3 8.9 9.2 9.3 9.3 9.3 Public Finances EC 8.4 8.8 9.4 9.4 9.0 9.4 9.5 9.4 9.3 Total OECD less the United States 6.6 7.2 7.7 7.7 7.4 7.6 7.7 7.7 7.7 Sound public finances are essential to satisfactory Unemployment (millions) economic performance. It is particularly important that the financing of public-sector budgets should North America 8.0 9.9 10.4 9.8 10.0 10.6 10.3 9.9 9.6 not pre-empt private saving and that the composition OECD Europe 14.4 15.7 16.9 17.0 16.1 16.8 17.0 17.1 17.0 of budgets should contribute to an efficient function¬ Total OECD 24.4 27.9 29.9 29.4 28.6 29.9 29.8 29.6 29.2 ing of the economy. Use of budgets for short-term economic management should be consistent with % 1990 1991 1992 1993 medium-term objectives. These widely accepted Austria 3.3 3.7 4.0 4.2 conditioned by two sets of factors. First is the principles have in particular been translated into Belgium 8.7 9.3 9.7 9.6 strength of the recovery. Second is a range of uncer¬ commitments to reduce budget deficits, which, how¬ Denmark 9.5 10.4 10.7 10.2 tainties concerning the implementation of monetary ever, have not been fully implemented. In the late Finland 3.5 7.6 11.3 10.9 policy. These include: the implications of the struct¬ 1 980s, although budget deficits did generally fall, the Greece 7.0 8.2 9.4 10.3 ural changes of the past decade, especially in finan¬ possibilities provided by buoyant growth to improve Iceland 1.8 1.7 2.6 2.4 cial markets; the way economies now respond to public finances were not fully exploited. In 1990/ Ireland 13.7 15.8 16.9 16.6 disturbances; and the effects on economic activity 1991 , budget deficits increased as a share of GDP in Luxembourg 1.3 1.4 1.4 1.3 of a given change in interest rates, and the time nearly all countries - and in most countries not solely Netherlands 6.4 5.9 6.5 6.9 pattern of these effects. This is the background because of the weakness of activity. This year, a Norway 5.2 5.5 5.8 5.3 against which monetary policy makers must maintain, further widening of the budget deficit is likely in most Portugal 4.7 4.1 5.0 5.4 and reinforce, their credibility. In this regard, policy countries. Spain 16.3 16.3 16.1 15.5 decisions must take into account an important asym¬ While budget deficits have widened, longer-term Sweden 1.5 2.7 4.5 5.2 metry: credibility is difficult to build but easy to pressures on fiscal policy have not abated. Health¬ Switzerland 0.6 1.3 2.5 2.5 undermine. care costs, environmental protection and infrastructure Turkey 10.0 11.5 11.8 12.2 In North America, the threat of rising inflation has investment in particular will put public expenditure Total of above been contained and, with recovery reasonably certain, under additional pressure, while relatively little offset countries 8.8 9.6 10.1 10.2 the stance of monetary policy should now be attent¬ can apparently be expected from the 'peace dividend'. Australia 6.9 9.6 10.4 9.9 ive to the speed with which slack is being taken up. The likely impact of aging populations on public fi¬ New Zealand 7.8 10.3 11.8 12.0 It is important to avoid the risk of impeding recovery nances points to a need to build up public-sector Total of above by reversing the current stance of monetary policy surpluses that have to be set aside now as income- 17 countries 8.6 9.6 10.2 10.2 I too quickly. However, the authorities must be mindful producing assets to be drawn on in the future. The 1. As percentage of labour force I of an upside risk to activity and inflation in North timing of this requirement differs by country; in many America: if the current recovery developed along the it should be a matter of serious current concern. The should continue to be conducted within a medium- lines of historical experience, it would be substan¬ setting of fiscal policy must contend not only with term framework that accords priority to achieving tially more vigorous than projected. these pressures, but also with the concern to reduce price stability. Monetary policy settings in individual In Japan, inflation is low and a more accommoda¬ public borrowing in order to avoid the risk of 'crowd¬ countries in the period immediately ahead will be tive stance of monetary policy has recently been ing out' more productive uses of saving. Global capital ECONOMIC OUTLOO government surplus. Nonetheless, any scope will re¬ Table 3 main limited given the demands of a rapidly aging PRIVATE CONSUMPTION DEFLATORS IN THE OECD AREA1 population and concern that, even if expansionary percentage changes; seasonally adjusted at annual rates measures were intended as temporary, it would 1991 1992 1993 prove politically difficult to restore spending disci¬ 1990 1991 1992 1993 II I II I II pline in a timely manner. In any case, the issue of United States 5.1 4.0 3.1 3.2 2.8 3.1 3.4 3.2 3.0 whether policy should be eased further will arise only Japan 2.6 2.6 1.4 1.6 1.2 1.5 1.5 1.6 1.7 if it starts to appear that the economy is not recover¬ Germany 2.6 3.6 4.2 3.5 6.2 3.5 3.4 4.0 2.7 ing as projected. France 3.0 3.1 2.8 2.6 3.2 2.7 2.6 2.6 2.5 More rapid progress towards fiscal objectives would also help to reduce pressures on monetary Italy 6.3 6.7 5.3 4.2 8.2 4.4 4.3 4.2 4.1 policy transmitted through exchange markets. United Kingdom 5.6 7.4 5.6 3.8 8.3 5.0 4.4 3.7 3.4 Speedier fiscal consolidation in Germany could pro¬ Canada 4.2 4.8 2.4 2.4 1.7 2.6 2.6 2.4 2.1 vide room for less stringent monetary conditions 4.2 4.0 3.1 2.9 2.9 3.0 2.7 Total of above countries 3.5 3.0 both there and in countries with formal or informal Other OECD countries2 7.8 7.7 6.6 5.7 7.2 6.5 6.1 5.7 5.3 exchange-rate links with Germany. Significant steps Total OECD 4.7 4.5 3.6 3.3 4.0 3.4 3.4 3.3 3.1 to reduce the United States Federal budget deficit Four major European countries 4.1 4.9 4.3 3.5 6.3 3.8 3.6 3.6 3.1 would moderate interest-rate increases during the OECD Europe 5.3 5.9 5.3 4.3 6.8 4.8 4.5 4.4 3.9 US recovery. In addition to the domestic benefits of EC 4.3 5.0 4.4 3.7 6.1 4.0 3.8 3.8 3.3 such a move, it would also lessen the risk of unwel¬ come exchange-rate developments, especially a Total OECD fessthe United States 4.5 4.8 3.9 3.4 4.7 3.6 3.5 3.4 3.1 strengthening of the dollar against the yen, which could heighten protectionist tensions. Responding to 1990 1991 1992 1993 consolidation contrasts with actual and prospective such a risk through a change in the fiscal-monetary Austria 3.2 3.3 4.0 3.6 developments in many OECD countries. In the United policy mix in Japan (towards fiscal expansion and Belgium 3.5 3.3 2.9 2.9 States, the 1992 Federal budget deficit will be sub¬ monetary tightening) will be circumscribed by fiscal Denmark 2.1 2.5 2.2 2.2 stantially larger than projected only two years ago, consolidation objectives and lingering financial fragility. Finland 5.6 5.5 3.8 2.8 even excluding temporary factors related to the re¬ Greece 19.7 18.6 15.2 11.4 cession and deposit insurance. Furthermore, insuffi¬ Iceland 14.8 6.8 4.5 4.5 Reducing cient relief is in sight: the Congressional Budget Ireland 2.5 3.1 3.6 3.3 High Unemployment Office projects that the ratio of gross Federal debt to Luxembourg 4.2 3.2 3.6 3.4 Netherlands 2.3 3.4 3.1 3.8 GDP is set to rise steadily over the coming decade, The slowing of OECD growth has been accom¬ Norway 4.3 3.6 2.6 2.0 reaching its highest level in some 50 years by the late panied by a significant increase in unemployment Portugal 13.6 12.0 9.0 7.6 1990s. In Italy, persistent slippage with respect to over the past two years, to a level of about 30 million Spain 6.4 6.3 5.9 4.9 budget-deficit objectives has locked the country into people. The costs of having such a large number of Sweden 9.7 10.2 3.2 2.7 a situation in which growing debt and rising interest men and women unemployed go beyond losses of Switzerland 5.4 5.9 4.3 3.5 obligations feed on each other, despite substantial output. Unemployment creates social dislocation Turkey 60.3 66.0 68.0 54.8 reductions in the deficit excluding interest payments. and has a negative impact on the skills, motivation Total of above countries 8.0 8.4 7.1 6.1 In Germany, the deficit is of recent origin, and can be and future prospects of the unemployed themselves. Australia 6.2 3.5 2.8 3.2 wholly attributed to the demands of unification; indeed, Achieving permanent reductions in unemployment New Zealand 6.4 2.8 2.2 2.0 public expenditure unrelated to unification has been must be a high priority in nearly all OECD countries. Total of above significantly restrained. There are ambitious plans to Today's unemployment appears to be largely 17 countries 7.8 7.7 6.6 5.7 reduce the deficit over the medium term, but the attributable to deeply-rooted, non-cyclical factors. 1. Aggregates were computed on the basis of 1987 GNP/GDP weights immediate prospect is for the general government Indeed, structural unemployment seems to have expressed in 1987 US dollars. 2. Half-yearly data must be interpreted with care. deficit to widen in 1992 and hardly change in 1993. been increasing for as much as two decades in many The United Kingdom has gone from a general gov¬ OECD countries, particularly in the EC. Long-term ernment surplus in 1 988 and 1 989 to a deficit likely to and youth unemployment are very high in many shortage may not appear critical at the moment, with run at close to 5% of GDP this year; while between countries, and it is probable that some potential demand for investment subdued after a fairly sus¬ two-thirds and three-quarters of this deterioration workers, discouraged by failure to find a job, have tained period of investment boom in the latter half of appears to be due to the cyclical weakness of acti¬ left the labour force. Improved macro-economic con¬ the 1980s, but the enhancement of OECD saving to vity, the underlying situation has also worsened. ditions alone are unlikely to do much to ameliorate secure funds for capital investment within and out¬ Problems of inadequate fiscal consolidation also this situation. The underlying causes, which differ in side the OECD area will very likely become a pressing characterise many smaller OECD countries. their specific features across countries, appear to be issue once OECD consumption starts to pick up At first sight, only Japan among the major coun¬ related to institutions and structural policies that again. tries appears to have scope for easing fiscal policy, impinge on labour markets, and that may have much The widespread need to strengthen efforts at fiscal given low net genera! government debt and a general to do with the pervasive effects of a 'dependency ECONOMIC OUTLOOK culture'. During the 1970s, transfer mechanisms in Table 4 the former socialist economies and in the developing many countries were made more generous with the world. CURRENT BALANCES object of helping the unemployed wait for a recovery The opening of OECD markets to non-OECD OF OECD COUNTRIES of employment. But such transfers appear to have countries must remain even-handed. It is clear that $ billion reduced the incentives for retraining and search for the reform process in central and eastern Europe, newly emerging jobs and skills. Furthermore, high 1990 1991 1992 1993 aimed at establishing viable market economies, is costs of hiring and firing, minimum wage require¬ United States -92.1 -8.6 -41.1 -49.2 proving to be an extremely difficult task that may ments and wage-bargaining systems unsuited to require support by OECD countries for a number of Japan 35.8 72.6 92.6 93.4 local market conditions seem - in spite of sporadic Germany 47.1 -19.8 -15.6 -13.1 years. Apart from assuring that the vast array of reforms -to remain obstacles to prompt labour-market France -14.9 -6.3 -1.7 -1.2 Western technical assistance now envisaged is pro¬ adjustments and thus to the creation of jobs. Achiev¬ Italy -14.4 -20.5 -23.6 -26.6 vided as efficiently as possible, a key aspect of support ing permanent reductions in structural unemploy¬ United Kingdom -27.4 -7.8 -14.8 -19.2 will be ensuring that these countries have better ment requires policy actions that deal directly with Canada -18.9 -23.4 -26.6 -26.9 effective access to the markets of OECD countries. these causes. The OECD is launching a study aimed Total of above countries -85.0 -13.7 -30.9 -42.8 This is particularly important in light of the fact that at identifying specific policy changes that would be Austria 1.2 -0.2 -0.7 -0.5 many of these countries have established iiberal particularly effective in reducing unemployment. Belgium-Luxembourg 3.7 4.0 5.5 7.5 trading regimes and are seeking to maintain them. At Reinforcement of the arrangements to build skills Denmark 1.3 2.2 3.1 3.5 the same time, opening of OECD markets to exports through formal education and professional and voca¬ Finland -6.9 -5.8 -3.8 -2.2 from central and eastern Europe should not come at tional training would appear to be an essential part of Greece -3.6 -1.5 -1.7 -2.0 the expense of market access for other countries. any set of policy measures in this area. Iceland -0.2 -0.3 -0.3 -0.3 Ireland 0.9 1.9 2.3 2.4 Netherlands 10.5 11.7 13.3 15.7 Making More Use Reversing the Erosion Norway 3.6 5.3 4.7 5.2 of Economic Instruments of the Multilateral Portugal -0.2 -0.7 -0.7 -1.0 in Environmental Policy Spain -16.9 -15.4 -16.1 -18.3 Trading System Sweden -6.4 -2.2 -1.6 -0.3 Environmental problems, especially those of Switzerland 8.6 9.1 9.2 10.1 The increasing erosion of discipline in the applica¬ global scale, are receiving much attention with the Turkey -2.6 0.4 0.6 0.7 tion of the basic principles and rules of the GATT, Earth Summit in Rio de Janeiro. Lying behind many Australia -14.3 -10.3 -9.6 -10.7 particularly with regard to transparency of govern¬ of these problems is the fact that resources such as New Zealand -1.4 -0.5 -0.2 0.1 ment assistance, is a serious concern. During the last air, land and water are not properly priced. Even Total OECD -107.6 -15.8 -26.6 -32.7 decade, the share of trade affected by non-tariff barriers where charges are imposed, as for instance with irri¬ Four major European gation systems, they are often not set to reflect the in most OECD countries, notably the EC and the countries -9.7 -54.3 -55.7 -60.1 full environmental costs of the resources' use. Indeed, United States, has risen significantly. Only a few OECD Europe -16.7 -45.6 -41.8 -39.5 member countries have moved clearly towards trade EC -13.9 -52.0 -50.0 -52.1 prices charged are often even below the out-of- liberalisation. Distortions have been largest in agri¬ Total OECD less pocket costs of making the resources available. And, culture, where overall assistance in the OECD area the United States -15.5 -7.2 14.5 16.4 where the use of such resources is subsidised, for has reached record levels, while non-tariff protection example, as a result of sectoral policies in agriculture, in manufacturing has spread from declining industries energy and transport, the problem is aggravated. even to those experiencing rapid technological optimism in this respect. Failure would not only mean Some environmental problems - emission of atmo¬ change and where growth prospects are strong. Further¬ that potential improvements in key areas being spheric pollutants, for example - have been dealt more, the retreat from the principle of non-discrimi¬ addressed in the Round would not be realised, but with through direct government regulation, which nation has continued, as recourse to 'voluntary export would also create a risk of the multilateral trading typically is not cost-effective. There is increasing re¬ restraint' has persisted, and administrative measures system being further undermined by reactions of cognition that further reliance on economic instru¬ such as anti-dumping have sharply increased. While countries that find the status quo unacceptable. ments - such as charges, taxes and tradable permits - tax reform has led to some overall decline in sub¬ However, even full implementation of the agree¬ can lead to environmental problems being solved at sidies to manufacturing, there has been a shift away ments currently proposed in the Round would not lower cost. The results of steps in this direction have from broad, general support schemes and towards eradicate all trade distortions. Liberalisation in areas been encouraging and provide important lessons programmes that are more focused on subsidising such as agriculture, textiles and clothing, and steel about the scope for price incentives to work even in specific industries and types of expenditure. This would be phased in only progressively. In addition, areas where property rights are difficult to define, shift can affect resource allocation adversely and in¬ new, existing or potential distortions are emerging as allocate and enforce. However, these instruments troduce new distortions, both domestically and inter¬ markets become more globalised and an increasing still play too limited a role, and meanwhile there are nationally. range of domestic policies are found to impinge on mounting pressures for direct regulations to be applied Against this background, the immediate priority trade and international economic relations. Acceler¬ internationally, both through inter-governmental con¬ has to be to bring the Uruguay Round to an early and ated action to tackle these distortions would secure ventions on environmental targets and through the successful conclusion - and developments at the deeply needed gains in flexibility within the OECD use of trade measures for environmental ends. time of writing may give grounds for some cautious area, while contributing to the success of reform in 3 June 1992