Public Disclosure Authorized

Transitionand Macro-Adjustment Division * CountryEconomics Department *The WorldBantk How to, Contain Eco-nomic InertiaG_ in tfhe.Tran-sitional 1Economies "No one said it, was going to be easy. antd no one was right.' "(President Georg Bush, aftr Yogi Berra) he restoration of capitalism ini- September 1992, Initial inflation,- of- srethfitsgnofecvyin

Public Disclosure Authorized tiated in Central and Eastern ten hyperinflation, has beEinbrouight Poland and Hungiiry-though recov- T Europe by the 1989 jrevolu- down but not defeated. ery still insufficient to reverse the tions, and in the former Soviet Union decline in GDP for 1992 as a whole- by the coup, countercoup, and then By the end olf1992 the first signs of a and forecast a resumption of growth revolhition in August, 1991, was ex- tuirnaround had appeared in Poland. in Bulgaria and the Czech Republic. pected to set the economies in the In September industrial output was region onto a path towar-dgreater ef- 9 percent higher than in September 'the UN Economic Commission for ficiency,technical progress, and pros- 1991, and industrial outeput in De- Europe was more pessimistic in its perity.A"shocktherapy"~-ofpricelib- cember 1992 was expected to be 13 latest forecast (seepage 19). It exp'ects eralization,, monetary and fiscal percenithigher than a year before. In Albaniak,Romania, and states of the austexity, opening up of the econoQmy October 1992 modest ind'ustrial formier Soviet Union to remain in a to unrestricted free trade, internal gr'owth res'umed in Hungary. The deep recession well into 1993.The re- currency convertibilityforresident-'- Washingtdni-balsed PlanEcon ob- structuring ofproductive capacity has was understood to requiire initial sac- rifices, but sacrifices that, thanks to' Public Disclosure Authorized stabilization, privatization, and other What'sinside... economicand political reforms, would be short-lived. ~~~Fact-FindingTour at Russia's In- Research Update: Intergovern- dustrial Fijrms mental Finance in Transitional Theseexpecationwerepremaure. WorldBankeconomnistsrecentlyvisitedEconomies (page 10) The fis w er fti hrp n severalRussian enterprisesto find out Central And Eastern Europe, and the aboutttheirsurvival strategies anidin- Milestones of Transition -(page11) firstte yerstate for of thenovative responses to the crises. firtfo ea te tats f heformer (ae4 ol aklFAed pg 2 Soviet Union, have led to a drastic (Pg4)WrdBak Aenapae12 deterioration ingen~erale conomic con- QtaIonof the Month: 'No Rkea- C'hallenges- Facing Hungary's Fi- ditions. Between 1989 and 1991 na- son to ExpectImnfation to Stabilize' nancial System tional income-inthe Central and E.ast.. Expertsof the Russian business w'eekldy Hungary's,bankingsy'stem is urgedto, emnEuropean. countries dropped on Commersant mull over the futureoof the perform an effective intermnediaryrole. average by about, 15 to 20, percent, Russian economy (page 6) (page 15) and industrial output by about,25 to 30. percent. Employment has fallen Thought Egxchange:Comment on Conference Diary (page 16)

Public Disclosure Authorized much more slowly,though fast enough George Sores's Proposal to TIrans- to create unemployment,of 8. to 12 fer Hard Currenjcy to Russia's -New.-Booksand Working,Papers percent or more of the economically Needy (page 8) (page 17) active population; in Poland unem- ploymnentmeasured 13.8 percent in Selected Articles (page-20) TheWodld Bank/CECTM hardly begun in the region and is Th failure to accelerate the liqui- =gameswithcentral planners-antici- delayed by' drastic investment cuts. dationandbainkr discipline, the patingth6eir demands-rather than In 1988-91gross fixed investment fell financialrestructuringof enterprises with potential competitors and cli- on average by about 37 percent. In and banks, and the antimonopoly ents. 1992 it continued to fall, more slowly measures in Poland and the CSFR but precipi- * the failure in government manage- In transitional economies managers tously in the former Soviet Union. ment ofthe state sector, evidenced by of state enterprises are gradually lib- Theseinvestment trends engender a instances ofexcessivetaxation ofstate erated from central controL Their sober view of the medium-run sus- enterprises, the continuedredistribu- dependence on branch ministries is tainability of incipient recovery. tion of financial resources from prof- loosened; direct commands are re- Supply inertia, not the desired sup- itable to unprofitable state enter- placed first by government contracts, Vplyresponse, has been the standard prises through credit policy, and the then by contracts with suppliers and predicament of transitional econo- neglect of intersectoral and inter- clients; and their subsidies are cut mies. regional supply links, including in- but they can fix their own output ternational supply links (see box). prices.Managersmustsearchfornew This state of affairs is not a necessary supply links and sales outlets; and concomitant of transition, nor a con- Managerial Behavior market prices for inputs and outputs sequence of shock therapyithat might create opportunities for profitable beeasedbyamoregradualapproach, Entrepreneurship, defined 0by input substitution and product but the unnecessary consequence of Schumpeter as a combination of or- differentiation.Their external finan- policy failures: ganizational skills and the ability to cial.resources are also squeezed: in- anticipate demand, is not absent in terest rates are raised substantially * The failure to modify performance state enterprises, even in centrally in nominal and real terms, and bud- criteria for the managers of state en- planned economies. It exists there in getary allocations become scarce. terprises, aggravated by the failure a modified form, oriented toward the to announce and consistently imple- securityof supply sources ratherthan In these new conditions state manag- ment a clear and coherent privat- the penetration ofmarket outlets, and ers are still not motivated to maxi- ization program directed toward playing strategic mize profits. There are no capital markets to assess an enterprise's value as a going concern. Even if SomeAre Overprotected,Some Are Overtaxed... managers wereconcerned with bank- ruptcy constraints, they would con- Governments of transitional economies paid interest and amortization on their tinue to be motivated to preserve have undertaken polices thathave con- outstanding loans. employment and output and to main- tributed to the supply inertia of state tai wages at levels far higher than enterprises. * Preservation of essential intersec- would maximize the value'of the en- Inmanftoralandinterregionasupplylinkshas terprise. Indeed, an enterprise could *Inmany instances taxation of state oftenbeen neglected. In the change from reach a point at which its net capital enterprises has been excessive. The tax direct or indirect central allocation to valueis zerbeyond which thebank- base has often been unrelated to enter- direct contacts between enterprises, r prise performance. For example, in Po- short-term profit opportunities have p land adividend"is leviedon statefirms been pursuedat the expenseof longer- erate. As a result, not much profit, let regardless ofactualprofits andrequired term supply links. alone amortization funds, will be reinvestment finance. The dividend is available for reinvestment. therefore a tax geared to the state's eq- The initial gross undervaluation of na-- uity stake in enterprise capital, re- tion-alcurrencies has diverted output to This situation will change only if valued in line with inflation. exports that will not remain interna- managers are subjected to effective tionally competitivein the medium run. control by financial markets through Cross-subsidization within the;state And it has disrupted traditional supply the exercise of shareholders' voting enterprise sectorhas continuedin most lines and led to either unused capac- rights, and the associated threat of postsocialist economies. It is no longer ity-due to input shortages-or to "dis- hostile takeovers. Neither the disper- effected through fiscal subsidies, how- tress imports" of crucial compo ents- sion of shares among a large number ever (though enterprises have been al- often identical to those that had been of uninformed private shareholders lowed to accumulate unpaid tax bills), sold as "distress exports. Thereis good nor the concentration of shares in in- but through monetary policy.Creditwor- reason to believe that the disruption of vestment funds is likely to achieve thy state enterprises have been pre- international supply links-within the such effective control; diffused share vented from gaining access to funds, ex-CMEA,ex-USSR, ex-CSFR, and ex- ownership will leave managers still while ailing state enterprises continue Yugoslavia-hasbeenanimportantfac- quite comfortable to exercise their to benefit from generous credits or offi- tor in the recession. discretionary powers. cial acquiescence to the buildup of un-

2 December 1992- January 1993 Transifon

Slow Implementation celed debt. Recapitalization of state not on the basis of historical capital, enterprisesandbanksshouldbeanet even if revalued in line with infla- The adverse effects of an unchanged claim on the state budget, competing tion). The accumulation of inter- incentive structure are amplified by with other claims. enterprise debts could be prevented the usuallyslow progress of essential by applying punitive interest rates reform steps-the breakup of mo- Policy Suggestions on such arrears (as attempted in Hun- nopoly power, the implementation of gary, though at too low a rate to make liquidation and bankruptcy proce- Supply inertiaisa distinctive feature a significant difference), or by the dures, and the financial restructur- ofthe stabilization and liberalization outright imposition of a cash prepay- ing-of enterprises and banks. experience of postcommunist econo- meit constraint. mies. To contain the resulting transi- Centrally planned economieswere tion costs, the following measures 4. Recapitalization of state enter- characterized by. extremely high should be considered: prises and banks should be an early industrial concentration, with single- and urgent undertaking. This merits product producers and producer asso- 1. After state enterprises have been Western support more than the ciations responsibleforsupplyingnot turned into joint stock companies, achievement of formal convertibility only domestic markets but often the managers could be# required tto fix at fixed exchange rates. entire CMEA and exports to the rest their companies' value (to be consid- of the world. Once enterprises are ered the selling price if bidders 5. Taxes on state enterprises should given autonomy in determining their emerge during privatization). Based relate to their real performance, at pricing and output, the monopolyand on this valuation, managers would rates that allow the firms to plough oligopolypower built into such indus- have to make a normal rate of profit profits back into restructuring both trial concentration and specialization thereafter (including subsequent diectly and through external funds. is bound to exacerbate inflationary capital growth), and would receive a Their access to finance should be and recessionary trends. predetermined share of profits above based on an evaluation of their gen- * Delaysinimplementatingliquida- that'norm. Workers would reeeive eral creditworthiness and the esti- tion and bankruptcy procedures are shares worth a year's wages at that mated present value of investment responsible'forenterprisesbbeing able valuation, transferable gradually to projects for which funds are sought. to pursue with impunity policies of "outside" holders over the next five greater disinvestment than those al- years. This structure would expose 6. The disruption of essential inter- lowed by a solvency constraint, and managers to a discipline equivalent sectoral and interregional supply tomaintainhigherwagesandhigher, to that of their capitalist counter- flows could be avoided by diffusing noneconomicemployment than would parts: they would benefit from prof- more information about enterprises' otherwise be possible. The lack of liq- itability- reinvestment, and growth, input requirements, without reinstat- uidation and bankruptcy procedures and would be subject to a takeover of ing any administrative planning ma- encourages enterprises to accumulate assets if their valuation was too low. chinery. Intemationally,introducing debt. Arrears owed the state budget Workers would have no incentive to automatic multilateral clearing-the and banks are equivalent to a mon- urge distribution of profits and 'as- transferability of bilateral trade bal- etary expansion. But interenterprise sets. In due course the development ances among trade partners within arrears reflect a redistribution ofprof- of a stock exchange could strengthen former trade blocs, even short of any- its from viable enterpris-es with this incentive structure and bring it thing as ambitious as the post-World growth potential to nonviable enter- closer to the standards of advanced War II European Payments Union- prises sustaining loss-making out- market economies. could help preserve or restore those put-and lead -to inflat-ionary dis- trade flows that, given the sunk costs investment. 2. Monopolistic behavior could be ofpastgood andbad investments, still * The enforcement ofliquidation and checkedby introducingexternal com- correspond at least temporarily to bankruptcy procedures requires the petition,evenwith-amoderatedegree comparative advantages. prior financial restructuring ofenter- of tariff protection; by splitting enter- prises and banks. Activities might be prise associations and multiplant en- Domenico Mario Nuti liquidated which, although unable to terprises; and by setting upper price Professor, University of Rome, and make enough profit to service past limits with direct reference to world Advisor to the Commission of Euro- debts, have a present value as a going price levels. pean Communities in Brussels. The concernhigher than their liquidation article is based on his paper 'Economic value. Thus, nonviable activities 3. Until liquidation and bankruptcy Inertia in the Ransitional Econo- should be closed down,,and viable ac- procedures are put into effect, dis- mies,"forthcomingin Impediments to tivities should if necessary be recapi- investment could be prevented by le- the Transition, EUI Monographs in talized through new capital injections gal obligations for enterprises to Economics, edited by E. Espa-andoth- or debt cancellation. Banks:should be ' maintain the level of their real capi- ers. Florence: European University recapitalized to compensate for can- tal (assessed as indicated above, and Institute, 1993. Volume3, Number11 3 TheWorld Bank/CECTM Fract-Finid:ingfTou:r ;:ctat Russia's< Industrial Firms EyewitnessReport

ow areRussian enterprises cop- in some cases, firms were able to pur- with suppliers and purchasers. This ing with their turbulent busi- chase large input stocks before the did not necessarily mean: a higher ness environment? How do tweityfoldprice hikesof1992;inother level of competition. Local monopo- firms and banks interact, and what cases, managers were able to buy out lies were common-sustained by tra- are the links between them? 71 find their firm using a combination of ac- ditional patterns of doing business out more about4the micro side of the cumulatedfiundsandmoney borrowed rather than overt regulation-and reform-program, a recently launched at 6 percent nominal.interest. were especially prevalent in construc- survey aims to couer as many as 100 tion-related areas, where inter- enterprises in seven cities across Rus- Privatization. Several of the firms enterprise links encompass a long sia. The survey is meant to cover as had been spontaneously-privatized vertical chain from sand and other representative a:sample as possible, prior to the passage of the Law on basic materials to the prefabrication based on the 1989 industrial census. Privatization, generally through some construction, and even purchase,- of As part of that survey, World -Bank 'top down" process involving their apartments. Firms were-beginningto staff recently traueled to Russia and detachment from ministries and as- switch.-product lines to consumer visited some. twenty enterprises in sociations. The price for such firms, goods in response to changing de- Moscow,Novosibirsk, and Sochi. The in retrospect,-was astonish'ingly low. mand. (The most remarkable case of visit was organized by U.S. research- At the time of the visit, firms were conversion encountered was the de- ers in collaboration with the Russian busy developing their privatization velopment of a silkworm "zapper' by host organization, the Central Eco- plans. .[See Transition, November a high-technology defense company nomics and Mathematics Institute 1992, p.6,:the Editor.] Although the to -save the silk that is lost when co- (CEMIJ, headed by Valery Makarov. distribution of shares had not been coons are immersed in water prior to (Data for -the survey are still being worked out in all cases, it was clear unwinding the silk.)- processed. A follow-up is planned for that employees(includingmanagers) summer 1993.) Two members of the expected to be in a very strong posi- Employmenthadfallen inmostcases, group, Alan Gelb and L J. Singh, filed tion, particularly in firms with good and there seemed to6be surprising the following report on their findings: prospects or with valuable assets, flexibility in labor allocation within notably real estate. One potentially firms and even 'some signs of move- It came as no surprise that the finan- adverse consequence appeared to be ment toward a more flexible labor cial situation of the, enterprises:we- the likelihood, that privatization market. Initial-employee reductions visited showed great diversity. Firms wouldresultin a pattern.ofquite con-' were often through early retirement that produce consumer goods were centrated ownership and control, at or voluntary resignation (including typicallyinabetterpositionthanthose least for existing firms. Itiwas also departures of some of the better em- that produce investment or military clear that rapid action was needed to ployees for the private sector), but goods or technical designs. Historical define and allocate property rights. there were also dismissals for drunk- accidents have also played theirpart: In the interim,.fmanagers faced little enness and in some cases for:lack of accountability.The firms interviewed productivity. Social and other services / /7 -y',f / /: . were generally independent of asso- were being cut (usually transferred // A.,,>, ciations, and although most manag- to local governments), butfirms often

* J; _- n :0-1 ers hadbeen elected to their positions still bought food and basic goods for ... . by, employees, organized labor was their employ'eies.Piece-rate and bo- surprisingly weak as com;paiedwith, nus systems were widespread. say, the situation in Poland. Infiation andprice liberalization. Production and employment. In In the firms surveyed, almost alltrade common with the rest of the Russian took place at liberalized prices and in economy, most of the firms had expe- a bargaining framework. Output - 4<'w) -rienced : ...... a drop in output, on average. prices were claimed to have risen less by perhaps 20 percent in the pasttwo'the sharply than costs of key inputs,

______' years. Yet the situation was not so so that profit margins would have

______. bleak for all firms. Oi4put had actu- been squeezed severely had the firms ally risen for some products. State not allrdinventorytushions. Contracts Fromthe Russiandaily Izvestiya Q 0 orders had essentially vanished, anzd were generally not, indexed (there, ______: _s firms had developed direct contacts wereacouple of rather sophisticated

4 0 0 0 \ \ -: December 1992- January 1993 Transiton exceptionsto this, however),pnddmost cludipgsophisticated systemspfbar- ownership laws. Earnings on depos- firms quoted prices on the basis of ter, transactions to offset one'another its were very low relative to inflation', cost plus a large preset margin, al- between states to avoid the need for but so were loan rates. Yet not all firms though this might be partly due to international settlement, import sub- indicated 'an unqualified desire to inadequate coverage of costs. Firms stitution within Russia, and even oc- borrow; friction about payments and were becoming conscious of the 'de- casional payments to 'grease the the high level of economic and politi- mand barrier" in setting prices, de- wheels" of commerce when needed. cal uncertainty created a certain spite still-limited domestic and for- Firms have shifted to a prepayment- amount of caution. eign competition. -Some firms were system, refusing, whenever possible, taking steps to develop more accu- to ship goods before settlement. - Taxes. In addition to complaints- rate costing and1to economize on in- - characteristic of taxpayers every- puts with sharply rising relative Toward OneFirm One-Bank? The' where-about the level of taxes and prices.; - - - number of banks in Russia has ex- government waste, a major problem ploded, from only a few in 1990 to cited was the frequency of changes in Interenterprise payments and about 1,500 in 1992. The survey shed the tax code and in tax administra- debts. Problems in the payments sys- light on the reason for this explosion tion. Furthermore, firms have had to temhavereplaced thefailedplanning and revealed,that it- is likely to con- shift to a prepayment system for system as the- major constraint on tinue until macroeconomic and regu- taxes, with penalties for underpay- interenterprise transaetions. Despite latory policies change drastically. Al- ment and no rebate of-overpayment. liberalization, it was not clear most all firms wanted a bank to call Thevolatileinflationarysituationhas whether the proportion of barter has their own, and many were already greatly complicated tax administra- fallen or risen. Within Russia there shareholders in at least one bank. tion. Experience in Eastern Europe seemed to have been an easing of the Owning a -bank provided many valu- has shown'thatthe corporate tax base payments crisis since June, with some able benefits. An equity stake was typically falls sharply in the second decline in the average time required exempt-from ithe 20 percent reserve year of reform-rather than immedi- to settle transactions, atleastbetween requirement on a deposit and was ately-and that some of this decline firms close to each other. This seems equally liquid since the bank would is due to improper inflation account- to have been partly due to policy mea- relend up to five times the capital con- ing. It was not clear whether the same sures aimed at reducing the overhang tribution. Ownership could provide pattern would be true for Russia. of interenterprise debt in the bank- privileged access to loans, as well as - - ing. system. Payments remained services, including the settlement of As a preliminary conclusion, our vis- drawn out between-the states of the transactions. There were also few its suggest that reforms in Russia FSU, however, with delays of three to other opportunities for the investment have left firms in an environment of four months and more being cited. offinancial surpluses, particularly as enormous uncertainty and high per- Innovative responses to this pay- real estate-although desirable-is ceived risks. Many firms are starting ments crisis are being developed, in- hamperedbyweaknessesinthe-land- to adapt, in the face of sudden infla- -~ -'- tion and large relative price shocks. From Siberia to Stalin'sDacha-Impressions -; - - Price liberalization has had some salutary effects on behavior. At the- rfravelingaroundRussiainthewinter- way, as mathematical theoreticians - same time, local monopolies, vertical time poses some -challenges;,including retool into bankers and consultants. integration, and problems in the pay- being deplanedbyAeroflot,withallyour - ments system slow the growth of com- luggage, ontoan apron.far from airport Sochi, on the Black Sea coast, was an., petition. Improving the payments buildings-at night, in the middle of a entirely different world from Siberia, - system is a top priority-although snowstorm! Our group stayed in- warm, with luxuriant palm trees and regularizing the settlement process Akademgorodok,aspecializedscientific othervegetatien. Sochi,beingafamous could cause a further real decline in town of some 40,000 near Novosibirsk resort area,ji also a center of light in- money holdings. There are strong and a center of scientific and technical dustry, including food processing.The forces urging integration of the en- research. This town evinced some of group stayed in the former Central terprise and banking sectors-an un- the paradoxes of today's Russia. Visi-. Committee hostel (the best food expe- derstandable response in the short torsfrom the mostprestigious reseaich rienced in Russia) and visited Stalin's term, but one that in the longer term institutes in the' West shared its only dacha for dinner. t . ;.- . . .. > * > .,. - ...... could make the-eco-lomystructurally hotel-and praised its scientific and = -technical expertise as second to none. Stalin's dachia-apaneledmanorhouse vulnerable in a crisis. Ownership and Yet the institutes are dying,'strangled that'boastsaprivate cinema(the feared control are evolving rapdly, and it -byloss oflfunds,-except for those that leader was an avid fan of American looks as though the "insiders" will are able to'sell equipment, such as par- movies), large bedroomsi-withsurpris- dominate in the foreseeable future. ticle accelerators, for hard currenby.A ingly small beds, and a conference cen- process of human' conversion is under terL'is being partly privatized. ' World ank e 3- . N .-r The World Bank

Volu-me3, NumberI11 TheWord Bank/CECTM Quotationof the Month: "No Reasonto ExpectInflation to Stabilize" Commersant ExpertsDiscuss Russia's Economic Future

ccording to Russia's state increased demand for cash, and the' lion ruble credit to Kuzbass to buy committee for statistics presses churned out an unprec- grain in Kazakhstan. The Sverdlovsk A (Goskomstat), in November edented 250 billion rubles. Excessive region was granted 6 billion rubles to the cost of living rose by one-third rubles held by the public accounted organize the Ural Military District. and real income may have dropped for 39 percent of their income, nearly On the eve of the congress, the gov- by as much as three-quarters over surpassing June's record high. emient expedited the release of 77 1992. The new rise in inflation rates billion rubles to' defense industries was spurred by a number of factors. Wholesale prices skyrocketed almost converting to civilian production. On overnight as banks issued an unprec- November 25, the central bank re- There has been an increase in cash edented 1 trillion rubles in credits in leased money deposited to account issued over the past 'few months- November,repre'senting a 70 percent 725, which is used for settlements 168 billion rubles in September, 194 increase over October. The burst of between debtor enterprises. In all, billion rubles in October, and 253 bil- credit extensions through November more than 100 billion rubles in frozen lion rubles in November-causing was the result of the Yeltsin govern- monetary assets was flushed into the prices to spiral once again. A rapid ment's eleventh-hour attempt to at- economy. rise in income played a significant role tract public and industry support be- in this jump. The increase in mini- fore the conveningofthe Congress of Therise ofthe average industrial price mum state pensions and seasonal People's- Deputies. In early Novem- index in November was largely ex- payments in agriculture dramatically' ber, the government granted a 4 bil- plained by higher prices for fuel and related products. In' October alone,

Price Ranges forOctober Someand ConsumerDecember 1992 Goods in Russiabetween ~~~~~~~~time,s.prices Afterforfl pricesproductsrose were raised, 2.13 the Octoberadnd D embeir,1992 u:: f 0 ; :: 0 - : f f ft- ;0:- gap 6between prices of primary and (rubles) intermediaryindustrialproductsdis- Comrodity End-OctoberXMiAdDecember: appeared, thereby producing aknock- Clothing on effect, especially, on consumer Men'sanorak 8,000 - 11-,50 5,500 - 20,000 goods production. According to Women'sraincoat 4,000- 5,500 3,600- 8,000 Goskonstat, afterfuelpriceswerelib- Women'sanorak 6,000 - 10,500 6,000 - 18,000 eralized, debts between enterprises Men's jacket 1,300 - 1,550 2,000 18,000 increased,and somewere even forced Fur coat 70o000 -w 130,000 55,000 -400,000 Men'spullover. 2,500 - 4,500 1,800 -< 9,000 to stop paying workers because of Womren'spullover 1,500 - 3,000 1,200 - 9,000 shortagesoffunds. Wormen'spanty hose 85 - 250 75 - 430 Between August and September, Footwear . firms owed each other and the state Men's high boots 5,000 - 9,000 10,000 - 23,000 about 1.8-1.9trillion rubles. By No- Men'sshoes 4,000° 6200 1,000 - 20,000 vebr 1, that sum had increasedto Women'sshoes 3:,000- 3,800 3,500 - 7,000 3.3trllionrubles,morethantheyhad Women'sboots high 8~~~,000- 13,000 5,000 7 25,000 Sneakers 4,500 - 6,500 4,500 - 11,000 owed each other when the debt crisis peaked on July. 1. The effect on the Durables economy was less devastating than in Imported refrigerator 102,000 - 150,000 105,000 - 190,000 the middle of the year, however, be- Drnesticrefrigerator -40;,000- 50,000 50,000 - 100,000 cause prices have more than doubled Importedwashing machine .95,000 - 140,000 80,000 - 318.000 sincethen.In addition,firmsandcom- Trv set(large screen) 150,000 - 300,000 194,400 m- 410,000c YCR 0 0 . \ 175,000 - 241,000 92,000 - 0,00, mercial banks deposited more money Cassette playerwithradio 40,000 - 70,000 57,000 - 130,00 in the central bank than previously Music center 85,000 - 110,000 110000 - 392000 In other words,this debt is not high VAZ 21074car (Lada) 1,600,000 - 2,000,000 250,000 - 3.100,00 enouto paralyze Settlements as was Note:Monthly average iridustrial wage in Russiawas 10,371 rubies, as of October192. the ce in June. But there is still a source:Commersant. threat .- that growingdebts will stall

6 0 0 0 December 1992-January 1993 Transition

settlements and lead to delays in cash peks to workers; in October this fig- enforced idling of industrial enter- payments to the public, and result in ure rose to 36 kopeks. Furthermore, prises. more centralized credits to inefficient industries are, for the most part, turn- firms. ing centralized credits into cash by Russia's government has two alter- increasing, social payments 'to work- natives for weathering the crisis. The In contrast to most Western econo- ers. first is the inflationary indexation of mies, which rely on a variety ofeequili- wages and social reimbursements, brating mechanisms such' as ratio- There is no reason to expect that in- which would require issuing at least nally balanced credit markets, the flation will stabilize in 1993.As Rus- 500 billion rubles monthly. The pit- absence ofRussian market regulators sia becomes more integrated into the falls ofthis approach are obvious:once has produced an irrational and infla- world economy,inflation is certain to the government embarks on the in- tionary price structure that6is under- rise even farther-as prices adjust up- flationary road, it will not be able to mining Russia's attempts at achiev- ward toward' world levels. Overall leave it for many years.to come. ing macroeconomic stabilization. money supply is likely to grow in the first quarter of 1993 to 8 trillion The other alt'ernative calls for freez- Although the central bank and' the. rubles, and the amountof cash in cir- ing prices for staples and reintroduc- government should get creditfor pur- culation to 3.5 trillion rubles. ing state orders for the production of suing ingenious tactics in reconciling a minimum volume of goods.Monopo- enterprise debts, many of their solu- [Russian] economists estimate that 'list producers of other commodities tions have been of the band-aid vari- the-'average 'monthly price increase will probably see their profit margins ety. Too often, these deficits were will be 45 to 47 percent in the first controlled. Imported goods would be shifted from one account to another, quarter of 1993. Higher eosts in agri- subject to excise duties equal to.those only to be written off by further cred- culture, higher procurement prices, applied to domestic products, and, its. And again, although both institu- and a higher dollar rate could push simultaneously, strict controls on re- tions deserve praise for stabilizingthe up the cost of living index by 55 to 60 tailers'write-ups wouldbe introduced. ruble on the currIencyexchanges and percent a month or 12 to 12.5 per- for lowering the budget deficit, their cent a week in the first 'quarter of Excerpts from recent articles in efforts have had little effect on keep- 1993. The rapid decline ofliving stan- the Russian business weekly ing inflation in check. dards is bound to heighten social ten- Commersant: 'Inflation Shows No sion, the more so since latent and de Signs of Slowing Down," by Nikita The circulation of the money supply facto unemployment is already grow- Kirichenko and others, and "Problems also directly affects inflation. Despite ing by.at least 20 percent a month as Still OutnumberSolutions,"byAndrei a steady increase of cash in circula- a result of mounting closures and the Shmarou and others. tion, there is still a powerful tendency against savings. Since interest rates for 'all deposits, when adjusted for inflation, are effectively negative, firms prefer to buy and sell, rather than hold onto money. This is what John Keynes called a "liquidity pref- erence"-the desire of the public to hold money in the form of cash as a I means of short-term hoarding. In .ri I 1992, the share of liquid assets has . increased steadily, from 64.5 percent 7- in January to 70.6 percent in July and to 84.2 percent in October. The . share of cash in overall money supply grew from 15.9percent in January to -. 24.1 percent in July and 26.8 percent . in October.

Industries are becoming increasingly wage-intensive. This dynamic is il- lustrated by comparing the earnings- to-wages ratio of major industries "Smile. The situation is serious." since the beginning of the year. In January 1992, for each ruble's worth Fromthe Czechdail Lidove Noviny ofproduct sold, industries paid 23 ko- FromIthe_Czech_daily_Lidove_Noviny

Volume 3. Number 11 7 TheWold Bank/CECTM ThoughtEchange-h A Casefor DirectAHardCurrncy::Transfersto Russ0sNedyV -Comment on -GeorgeSoros's Recent Proposaf ;I Our readers keep expressing interest whether privately or pubilcly owned, infrastrcture,(transportandq u- i.n a new forum, to discuss the most and the inabilitytoimport hesegoods ni,cation, housing, health and educa- burningissues ofiransition in afank because of the: lack of foreign ex- tio hinders the day-to-dayopera- and open way. Astopics are a;iundant, change. ,LAstyear,overall production tion and maintenance of essential we start our ThoughtExchangeright in Russia fell by 20 percent. For .the prouction lines. The easy way out awayquotng ideas and comments, average Russia.n family, not only are has been through government deficit ratherthanprices. (The Editor) - basicnecessities in psholy, so financig. But this has seriouslyde- are the raw matenrals, semifinished stabilz d the currency, resulting in $AtSpresent, there are two clea,rly dis- go,ods,and sparepartsthat are needed runaway inflation of 2',00 percent a 'cernible .threatsfacgpost-cold ,w,a,r tomaintain production, in the aging year. The result is-bound to-be er - attem,pts to ::make ecTonomic.reforms aictories and on farms. Already there sion ofconfidencein the economywith -and to nurture nascent democrDatic are, signg,of aanegative; employent drastic effects on-private savinpgsand institutions inMthe former Soviet multiplier," which will be character- investment. Union. irsti, the people face dire ized by massive layoffs- among sh:ortag,esof basic and essential goods Russia's roughly 70 million workers. Re Mr. G,eorgeSoros, an emi and services.The shortfall is mani- fr6oiHungary'who is abusinessman fested in the sharp reduction of do- Second,the lack of resources notionly andnumantanan, has come up with mestic production of certain goods s the newinves nrequred an i i deaffrWesternassis- across all sectors of the economy, to:modernize,plants:and rebuild the tance to the FSU (see bo2). Soros pro-

Summary of George Soros'sProposa0 i ...Tobe effective,[Western] help shoud e risesoperatingwithinegativ 4value implementedthe exchangerate might take the form of an internationally ii- addedJ were paid by foreigh'iasistance, fallhBut tht-is' a problem'that would : nanced safetynet, distributeddirectly factoriescouedbeidled and the eaw-mate- ariseonlyafterhyperinflationhadbeen in the formof hard currency-dollar or rials and energy that gointo production broughtunder colftroland the domes- Deutsche mark bills-to the unem- couldbe soldfor more than the output. ticcurrency stabilized.By that time the ployedand needy... Giventhe fact that governmentoughttuhavethevresources the minimumwage in Russia is $6 a * The introduction of a hard currency to take care of the needy and unem- month, the cost of such a scheme would would deprive the government of its abil- ployed. be wellwithin the range ofan IMF pro- itytofinancethedeficitbyprintingmoney. gram.Ibelieve $10 billion ayear would ...The government would have to balance Whereis the $10 billionto be found? be sufficientfor the entire former So- its budget.Given the benefitsof the assis- Theobvious place,is the International viet Union.The benefits wouldbe in- tance scheme, this would no longer be MonetaryFundbecause the IMFha"sa - comparablygr becausethescheme impossible.With a social safety net in mandate from the Group of 7. ...A would have-several multiplier effects place, commoditysubsidies could also be specialfacility [of the IMF] couldbees-.. and wouldzsetinto motion a virtuous '.reduced-people could be asked to pay tablished for countries,thathave frag- circle. morefor their bread and oil.At th-esame mented into many pieces.An inter- time,taxaindcustomsandexciserevenues governmentalararange entamong the * Themostimportantbenefitwouldbe couldbeprotectedbylevyingthemin'hardG-7 countries might also be feasible. the introductionrofahard currency.The currency. TheywouldjointlyguaranteeialObil- ruble neverservedasafull-fledgedcur- lion loan to the successorstates of the rency,and incipienthyperinflation has - ...The introductionof a hard currency SovietUnion. One couny-e united onlymadematters worse. In the absence couldgo a long way toward reestablish- States orGermany--couldvolunteer to of a mediumof exchangethe economy ing trade among the newlyindependent providethe cash that wouldbe distrib-- functionslargely by barter. And in the states.... uted, and the other countries would absenceof a storeofvalue there islarge- agree to share the burdeni iandwhen scale capitalflight.... Many of these advantages could be se- the banknotes were exported..... cured by simply recognizing a hard cur- ' The socialsafety net wouldalso pro- rency as legal tender, but that wouldbe (Ezxerptsfrom thezSorosproposa1, pub- : vide a powerfulincentive to shut down inconceivablewithout the scheme pro- lished in the WashingtonPost, Janu- loss-makingenterprises. If [workersof posedhere.... Ofcourse,ifthe scheme were ay 4, 1993,page A-21.)

8 December 1992 January 1993 -Transiflon

poses a massive injection of hard cur- jective of a massive infusion of hard the views of Joseph Schumpeter rency-$10 billion a year-to be paid currency into the economy of the (1883-1950), who considered private out directly to the netlyt in Russia .FSU-thatis,turningGresham's law credit the fuel that cap trigger and and other'successor states ofthe de- up'side dowti by usinig good-money to sustain economic growth and devel- funct Soviet Union. This externally. -drive'out bad money. There is~an ur- opment. financed 'social safety net" could: gent need to-testore- consumer and investor confidence,in the national Schumpeter recognized the dynamic * 'Geieate demhandibr domestic and currency, either by revaluing the ruble role of the capital market and credit foreign"goods and services withoUt orbyissing anew currency. institutidnsin financing innovation causing a-drain `on foreign-reserves. and development. At present, how- Check runaway inflaton and sta- This should allew Russians torqaich ever, private credit institutions and bilizer-the- uble, thus enabling under their pillogws anid convert banks are' sorely lacking in Russia uni apededdomesticflnaftcing of in- hoarded a-nest eggs" of lifetime sav- and other successor states of the vestiment from p-rivteiisources ings into development fihance. FSU. through the 1,500 commercial banks already'in' operation and through The alternative will be'massive capi- In combination with George Soros's other credit institutions. tal flight, and the eventual removal suggestions of creating a social safety -'ofexchange bariers and'controls and net and setting up a hard currency A smoother transition for the'former introduiction of'currency convertibil- 'zone within the Commonwealth of Soviet economies and a reversal "of ity will-prove tote too late. Independent States, the establish- the downward trend of the economy ment -ofeffective private credit insti- will be possible only if the popuilation To solve the unprecedented problems tutions could provide the basisfor the is cxishioned against extreme hXerd- oftransition in a Soviet-styleeconomy, economic growth of a free economyin ship. Apart from theeplan"s justifica- it is neither necessary nor sufficient the former Soviet Union. tion on humanitarian grounds,'it is to slavishly embradeAdam Smith'thand good econom'icsand gbod socialtpohcy the free market. Nor does one have to Abdul 0. Khan The well-being of the citizenry ought adhere to Keynesian deficit finance to be the central objective of all de- 'theory,'howevertemptingitmightbe, The author is Adjunct Professor of mocracies. if public investment is offered a's the Economies at; the Kogod School of only, .-.. alternativede.''- ,-' to economicstag&- B i,*ness,AmericanUniversity, Wash- Foreign economic assistance and tion. There are other alternatives, ington,D.C. Western involvement, includingmul- such,as the approach associated with tinational organiza- - tions, could be targeted to populations bearing - - AT'A ,-a7l/ J a disproportionately -- - - heavy burden of their countries'transitionsto market economies-a' process in 'which the foreign-aid community- also has abigstake. Di- rect trkrisf&rs of hard currency to'the popu- lace in sufficient ---- amounts, without We usual dithering, mighth effectively replace the vast and inefficient s-o- -- cial -welfare subsidy; z-_- -. stricture,which to-date' - has,been maintaianed - - )I-// * <5 y[ through inflationary - '- expenditures, invasive

regulations, and condi- ' / ' tionality. . - - V - ;. - There is another; equally important ob- FromCroat cartoonist Srecko Puntaric (Felix)

Vblume 3, Number l1 9- TheWorld Bank/CECTM Research Update Intergovernmental Finance in Transitional Economies -Broadening the Framework for Analysis

A new World Bank research project, bility. Several central govemments New Approach "Intergovemmental and Subnational are attempting to shift the deficit Government Finance in Transition down to ensure that they have ad- Traditional analysis of subnational Economies-Broadening the Frame- equate revenue flow, either by shift- finances-focusing on expenditure, work for Analysis," addresses inter- ingexpenditureresponsibilitiesdown revenue assignment, and transfers- governmental finance issues and or by retaining additional revenues, cannot be mechanically applied to explores the need for a broader frame- even if this severely impairs budgets economies in transition. Therefore, work of analysis for decentralization at the subnational level. The results, the research will focus on the follow- and intergovernmental fiscal issues ironically, could contribute to further ing major issues: in the transitional economies. instability: the softbudget constraint * Subnational governments, al- in these countries may allow sub- though mainly service providers in Not Just a Local Matter national governments to respond by market economies, play a pervasive accumulating arrears, borrowing role as producer and owner in post- An important and unduly neglected (strong-arming their enterprises to socialist economies. Thus, they can aspect ofthe transition in Central and finance public expenditures), or de- be either potential impediments to, Eastern Europe is the extensive de- veloping extrabudgetary sources of or supporters of, privatization. centralization, both political and fis- revenue. Pushing the deficit down * In most transitional economies, cal, that is taking place in many of doesnotnecessarilyreduceit-itmay government revenues are declining the countries newly emerging from merely repress it. more rapidly than governments are behind the socialist veil. Decentrali- able to divest themselves of expendi- zationrepresentsboth a reaction from 2. Some central governments may ture obligations, contributingto mac- below to the previously tight central wish to transfer responsibilities for roeconomic pressures. Subnational political control and an attempt from the social safety net to lower levels of governments must take over a wide above to further the privatization of government, but. an underfunded, range of expenditures-including so- the economy and to relieve the cen- subnational govemment cannotearry cial outlays-that were previously tral government's fiscal strain. The out those responsibilities effectively. financed by state. enterprises. That aspirations and roles of subnational If the safety net is considered critical will complicate attempts to cut sub- governments are becoming stronger to the success of the transition, and national expenditures, and couldlead in most ofthe transitional economies. therefore a national policy objective, to demands for increased transfers subnational governments should not from equally hard-pressed national The ongoing reforms in subnational be expected to finance it. But sub- governments. The level, design, and finance in these economies are much national governments, asAthey are effects of such transfers is thus a more important than :generally rec- closer to the people, might adminis-- critical aspect of the emerging inter- ognized. In some countries in transi- ter the safety net more effectively. governmental and subnational gov- tion, the subnationalgovernmentsare ernment finance systems of transi- quantitatively significant, accounting 3. The ownership ofmany enterprises tional economies. for a large (up to 50 percent) and of- has been transferred to the sub- * There is a need to coordinate user ten growing share of the budget. national governments, and the re- fee reforms with wage reform on the Within the fiscal sphere, tax reform, sponsibility for privatization of the one hand and general price reforms deficit control, and intergovernmental enterprises now rests with those gov- on the other so as to avoid excessive finance form a tripod: unless each leg ernments. They still rely on these impact on income and profits, and is properly set up, the entire struc- enterprises for profitst and tax rev- thus a fall in government revenues. ture may collapse. Intergovernmental enues. If the enterprises are pri- In the past, socialist governments finances will have an impoftant ef- vatized, not onlywill the governments applied fixed prices (including rents fect on the efficiency with which the lose a sourceof revenue, theywillhave and other urban user fees) and wage transitional economies6'perorm; on to assume the costs for nurseries, controls as'part oftheir distributional their macroeconomicstability, on their housing, and other services that the tool kit. They are now advised to 'get safety net, and on the success oftheir privatized enterprises will spin off. the prices right" by using tax policies privatization policies. Intergovernmental finances should and targeted subsidies. Changes in accommodate these shifts in expen- public sector prices could imply ma- 1. Fiscal balance at the subnational diture responsibilities and provide jor distributional shifts unless prop- level is critical to macroeconomic sta- corresponding revenues. erly coordinated with other reforms.

10 December 1992- January 1993 Significant changes in the economic Milestonesof Transition structure and in wages and prices imply potentially large shifts in the different tax bases. These shifts must Slovakia's share of foreign invest- owners to mortgage their property be taken into account when design- ment in Czechoslovakia was only 7.7 and to sell to individuals and corpo-. ing an intergovernmental fiscal sys- percent in the first nine months of rations provided there is no change tem. Central governments try to pre- 1992, according to figures released in in the use of the land. None of the serve degrees of freedom in dealing early December by the Slovak Na- other amendments, ineluding one with subnational governments and to tionalAgencyfor Foreign Investment. banning the sale of land to foreign- continue the negotiated tax-sharing In 1991Slovakia attracted 27 percent ers, was passed. systems of the past. Subnational gov- of the foreign capital. (Slovakia's ernments seek greater autonomy and population has been one-third of the Tatyana Paramonova, Deputy Chair- demand 'fair treatmente and equal- ex-CSFR.) man of the Central Bank of Russia, ization. A particular challenge lies in has stated that the settling of the developing an intergovernmental fis- The Czech Republic passed its first interenterprise debt accumulated cal framework of grants, shared rev- budget as an independent state-a before July 1992 (which amounted to enues, and discretionary tax powers balancedbudgetof342billion-crowns 3.2 trillion rubles) through the issu- that is sufficiently firm, but also com- for 1993. The government aims for ance of central bank credits is now patible with structural changes. economicgrowth of 1 to 3 percent in complete. She claims that the credits 1993,and, followingthe introduction required will amount to approxi- Methodology and Data of the value-added tax, expects infla- mately 181 billion rubles, to be paid tion to accelerate to 15 to 17 percent out by March 31, 1993,andnoted that The project will rely on a methodol- from the current 10.7 percent rate. this was much less than the 1 trillion ogy that combines empirical analy- rubles originally predicted. But the ses and case studies based on earlier ULkrainian consumers have found Central Bank's chairman, Viktor research on, among others, Hungary, their cost of living sharply increased Gerashchenko, has spoken of the Romania, and the 'federal" states of as the result of a government decree need for further credits to cover new China and Russia. The project will issued on December22. For example, interenterprise debts, arising since analyze the importance of ownership in Kiev, the price of bread rose six July, which now amount to 3 trillion for subnational governments, the re- times, a subway ticket ten times. rubles. lation between fiscal decentralization Ukrainians can expect further-price and privatization, the relation be- hikes at the start of the new year, Adraft charter ofthe CIS Interstate tween fiscal decentralization and the including a 50 percent rise in train Bank was approved at a meeting of safety net, and the development of tickets, a doubling of costs for com- CIS financial experts held December new systems of subnational govern- munications services, and a 60 per- 7-9. The main function of the bank is ment finance. cent increase in housing rents. to secure conditions for 'the many- sided clearing between banks in in- Preliminary investigation suggests Russia!s unemployment rate was terstate and other payments." It was undertaking systematic quantitative only 0.45 percent in October, but 50 decided that the means of payment analysis for selected countries, based to 75 percent of the unemployed are for the Interstate Bank will be the on cross-sectional data for sub- women, according to the Russian Russian ruble. Each state is to have national governments. Cross-sec- State Committee for Statistics one vote on the bank's managing tional data sets-sometimes for (Goskomstat). The number of regis- board, regardless of its economicpo- consecutive years-are currently tered unemployed was 367,500, of tential. The initial fund is expected available for subnational govern- whom 219,000 were receiving unem- to be 'no less-than 5 million rubles," ments in China, Hungary, Poland, ploymentbenefits. Every third unem- and Moscowwas considered the most Romania, and Russia. Additional ployedperson wasundertwenty-nine. appropriate location for the bank. fieldwork is expectedto produce more - data sets for Poland and the Czech On December 7Russia's Congress of Energy problems continue to plague Republic. People's Deputies approved the final Bulgaria. On December 11 the legis- version of a constitutional amend- lature approved an economic credit The project is scheduled to be com- ment to regulate the private -owner- package of 1.6 billion leva ($65 mil- pleted in December 1993. It is man- ship of land. The constitution had lion) for thermal power plants and aged by Christine Wallich, CECPE, contained no provision for private the coal-mining industry. The move the World Bank, and Richard Bird, landownership. There is a Russian will allow the energy industry to pay University ofToronto.(For additional law that permits private persons to off outstanding debts, and it appears informationcontact Christine Wallich, buy and sell land-but only in trans- that a rate hike for consumers has CECPE, the World Bank, tel: (202) actions with the state. The final ver- been averted as winter sets in. 473-7686.) sion of the amendment allows land- (continued on page 14) Vofume-3,Number 11 1 TheWodd Bark/CECTM

World Bark/IMFI Agenda-- - -.. ;

Russia to Join theIFC lion ini1992, .with .foreign direct in- country's .population is about 1L7; vestment and portfolio-investment. .:million);iRoughly one of every'four Russia's parliament adopted aresolu- showing the sharpest rise, according major roads and bridges iin.Hungary.,. tion advocating membership in the to World Debt-Tables 199249,3,:pub- ,urgentlyneeds repair. Th tersi International Finance Corporation. lished by the World Bank on Decem- ofthe coursnational -ads arestill IFCmembershipwilUgrantRussiaac- ber 17. .In 1992, aggregate net re- "uneve,wirth somedistress" and:al cess to foreign loans and investments, sourcef.lows increased.by 17 percent.- most half of theAvitally important speedpirivatization,andfacilitateere-- Stateso,f the former SovietUnion are bridges -need"urgent attention," . ation ofastockmarket. Russia's share: included for the first.time in the ag-X; World Bank studywarns.s The Board in the capital of the IFC will amount Dgregate statistics of the lTables.AThe-. approved the loan on December 22, to 3.42 percent, making it one of the World fBank stimates the xernal: 1992. - largest shareholders. Moscow would debt of the former Soviet Union to- s,i have to- pay .about $28. million to have been $75.4 billion at mid-1992. Mozambique to Receive 760 become a member and about $17 mil- . Repayment arrears at that time -=Million ;. lion more in the first year of member- amounted to$94 billion. Nearly 52- ship. The IFC has been-helping.with- percent-ofthe total debtisdue within.:- At a Consultative Group meeting in Russia's privatization program, which the next three years. (Russia has as- ; Paris sponsored .by,the; World s.ank, ,...-.

was launched last year as a key eleh- -sumed responsibility for repayment. -. Western donor countries nd inter- ment iAthe country's move toward a of thedetofthe former SovietUnion,: national-ancial instions promn- marketTeconomy. , - X -butd-. :was : able$o repayDnly about-$2- ised. $76( million in aid: to support billionin l992and haswarned thatit Mozambique's postwar economic rei. II)A Funds to be Replenished, can pay no more than $3-billion-inm:,.construction. The aidincludes-a$500 with $18 Billioni .1993.) The total-extemal debt of-all million emergency progrant fr, the. - - developing- counties, including the' periodMay 1993toApril 1994, cover- The International DevelopmenttAs- hard-currency liabilities ofthe formenr ing the cost of resett-lement, food.aid sociationannou,nced onDecember 15 SovietUnionosefrom$1.6 trillion a- and distribution, and short-term inBerne, Switzerland,thatitsth1ty- - year ago to $17 -tilionwat end-1992,- rehabiliin of agriculture. ,and : four donor cou es had agreedto increase,of.an 5.9 percent. For-the transport infr-astructu-te.-Mozam-. replenish.IDAfunds with about $18- first time ina:.ecadefwsofforeign 5:s bique's Finance Minister Eneas billionover threeyears beEgnningJuly: privatecapital to developingcountries -. Comicheexpressed hope for totalex- - 1, 1993.Combined with repaymrents exceededaid flows.The WorldBanka ternal-pportofa out$1.2billioiiin by IDAborrowers, this.latest replen-. cautioned,however, that recent lev- 1993, ncluding aParis ,Clubdebt.re-7 ishment:willfinance a total.of about -. els of privatetcapital flows-may;be.-,.scheduling. .The war-torn country,,- $22 billionin commitmentsfor devel- unsustainable. - now,rated by the WorldBank as the opment.projects.WorldBinkManag-- world'spoorest with a per capitaGNP ing Director-ErnestStern, Chairmann Road Lon to Hungay 'of $80,has to demobilize100,000 sol-. of the IDA-lOreplenishment negotia- .. 'diers andmilitia, andorepatriateand tions, .said the-willingness of -donor Hungary is, borrowing.$90 million. -.. resettlesome5-,millionpeople ,bout nations to contribute this sum-+a .fromthe-WorldBanktohelp fixroads- one-tof thecounrspopulation.. slight imcreasein real torms overthe - and bridges and replace outdated-- Separatelyflte IMF;has approved-a $15.5 billion agreed to'by donors in maintenance equipment with, new;, loanofabout$42 million, the lastloan the .ninth replenishment-was re- machinery.Theloan will also fund-aina$140million,three-yearenhanced markableat this-timeofsluggish eco- new national-roadsafety programand structural adjustment facility. The - nomic growth :and fiscal restraint. technicalaid for,thecountry'sJMinis- credit is to support the government's The IDAwouldfocus more on the poor- try ofTransport, Communications and - 1993.program,which-targets 3 per.t- . est countries of -SoutheastAsia, Af- - WaterManagement.The total cost of cent growth,29 perent inflation,and rica,andLatinAmerica,withparticu-. , -thes,eeffortsis$1l601-illin,with the an accelerationof privatization.

lar emphasis on poverty reduction, - differenceto be covered by the Hun- - ' - - - family.planning, and social services garian government.Fundingfor road& IMF:,Quota Reassignments of,

forwomen in these areas, Stern said. and bridge repairfell by one-,third in -..-,Yugoslavia.... ' - -1991;1990 and :'' but traffic-has-in- . -: New WorldDebt Ibbles - - creased-il percenta yeardurinigthe; r The IMF Executive-.Board-agreed to- -- past twenty, years. In 1970 only :-reassign YugoslaviaW&JMF quota of External resource flows to develop- 240,00carswere registeredinH,un-, 918.3 "lionoSDissuccessort ing countries-comprising debt, eq- gary;. by '1990 their number. had. states and; adopted measures,to ad- uity, and grants-reached $134 bil- jumped to almost 2 millio)nR.(The mittstatesasmembers. The Board. - 12:Decebe 92 Ju 1993:oard_ 12 :...... 1992 .- ...Jnr1993 : -December Transitiorin

assigned a 335.4 million SDR share equal to four months of imports, lib- ward the pr'oject, and tlheq,Europeaxn to "small" Yugoslavia, which includes eralization of the import regime, de- Bank for Reconstruction and Devel- Serbia and Montenegro, 261.6 mil- velopment of new private banks, and opment will provide about $43 mil- lion: to Croatia,, 121.2.million ito initiatidn;of-stes to`prvatization-of lion. Bosnia-Herzegovina, 150.4million-to the parastatal sector. Slovenia, and 49.6 :million ^ to,, Aid Consultations for Central Macedoniah.Tesu'ccessorstateshave- -Shoring.. up Shanghai Port Asian States

one -month to -onsent -to their IMF .. S shares ahd to the^shares- of Yugo On December 22 the World Bank ap- 'Mid-December meetings.'in; Paris of slavia's $217million6debt to the IMF,j proved a $150 million-loan to China donor nations and- intermational or- whieh 'will be split among them in * Atobeef-up-thecounty's principalport -ganizations set-the stage for-pledges proportion4otheir proposed quotas,. at Shanighai. The Shanghai Port A-u- of financial assistance to four former thority is spending $274 milli6n on Soviet republics..Ruassell'Cheetham, ...-and Czechoslovakia -the plan. Shanghaiboasts the'world's Director of the World Banlks Europe tenth largest:port,'with some 140 and CentralAsia Departmtent, chaired. As of Janimry 1, 1993, Czechoslova- >'^berths'running along 14 kilometers all four Paris meetings, sponsored by kia ceased to exist, and the IMF Ex` of the Huangpu River. The port has -the Bank.. ecutive Board has agreed to reassign failed tW'keepup with Chinas'srapid the ex-CSFR's assets, liabilitie's, and 'economic growth, however. As a re-- ; Highlights,from the meetings: quota: The' Czech Repoublicwill 'be sult, ships dockingin Shanghai must assigied 69.61 percent, and Slovakia- wait four to five-days-on averagebe- * Kazakhstan: The country's strong.- 30.39,percent Aco.rditngly,58976mil- . fore they can find a-berth. h -relieve agricultural economy-and its .petro- lions SDR, will be assigned to'the the ttanspor-t bottlenecks, China leum and other natural resources Czech- Republic, and 257A.4-million plans to make:the Shanghaiportmore could provide the means to finance a SDRs -to Slovakia. Czeclioslovakia's efficient, restructure some existing comparatively rapid economic growth. $1.54 billion debt-to. the- IMF will be facilities, and develop new.terminals Sufficient financing to support the split between' thetwo in pto'ortion to' to handle trade well into the twenty- government's program could be avail- their 'proposed quotas. first century. In another development, able over the next few.months. a new IDrAcredit of $50 million ap-. New IBRD Reprasentative In' provWd-inmid-Decemberwill be used * Kyrghyzstan: Output and co-n-' China.ei wOffice in Riga - bythe Chinesego6vernmentto bolster' sumption have dropped conside-rably agenciesresponsiblefor designingand since the breakup ofthe SovietUnion. The World-Bankhasiappointed a new carryixig out the-nation's -reform pro- Kyrghyzstan's. .financing needs for resident tepresentative for its office grams. : 1993could:be met, particularly if tra- in Beijing, China. Pieter,Bottelier, a ditional. financing flows within the Dutch national, took uphs post on. Rusgiato Receive $90 Million -formerSovietUnion were to continue. January 1.'And.the World-Bankis - for Privatization opening a -regional office in Rigai * Azerbaifan: Reforms-including a. Latvia, towork with the governments 'Russiawillmoveforwardwithitsplan stabilization program, basic struc- of Estonia, Latvia, and Lithuania. to privatize a number of state-owned tural reforms, and other actions in LarsJeurling4aSwedish national,hhas-;;enterprises 'with the -help*of a $90 such se-tors as energy, agriculture, been appointed chief of the new Re- 4: million World Bank loan approved on. industr.y, -and .infrastructure-have gional-Missioninwthe6Baltics. He also .December 17. The loan willhelp' the been accelerated. The country is ex- took.up his'post6on January 1.-- government set up a -privatization- pected-to need about $50 million in - -center" responsible for planning and-. technicalb assistance to move ahead IM Loan 1 Tanzania carryingout-enterprise-reforms. The with its reform program. loan willllsov-finarice&expertadvice- The IMF has approved an $89 million on rbforming-enterprises and-an in-- !' * Uzbekistan: The:government pro- loan to-Tanzania under.a'$253 mil- formation cam-paignto educate Rus,.--'gram includes a virtual'elimination lion, three-year enhanced structural - sians and potential-foreign investors ', of the state-order system, price liber- adjustment facility started in July about--the privatization plan and.the alization, reduction and elimination 1991. (The ESF .programallows ' -: 'swit:h toa 'market economy. Under ofmost subsidies, actions to promote concessional lending to low4ncome :the plan, up-to 25,0OOmedium-.and- privateentrepreneurship,andreform members at an interest rate of 0.5 large-scale enterprises couldbe pri- '.of the financial sector. The govern- percent, repayable over tenyears and vatiz*d.,In addition, 200,000 small ment is expected to need about.$80_ with a grace periodofiv e and=a half. manufacturing, retail, and otherbusi-. million in technical assistance to carry years.) Targets for!tanzania's: 1992- nesses under municipalzor regional out reforms:. : 93 program itcl-udeS percentgrwth, 'ownership will be privatized. Russia - 12 percent inflationh-foreign-reserves - -is contributing about $26 million1to- -

Volume 3. Number fTT - , - 13 The WodldBank/CECTM

Milestones (continued from p. 71)

Hungary's industrial production fell Romanians eat less meat, fish, sugar, ing ECUs will increase flexibility in by 22.2 percent in the first nine and fruit, and fewer eggs and pota- financing trade and halt the continu- months of 1992 compared with the toes. Expenditures on food, neverthe- ing- decline in trade volumes. The same period last year, according to less, grew among wage-earners from agreement will allow the participat- data of the Central Statistical Office. 51.6 percent in 1991 to 56.5 percent ing commercial banks to clear ac- The pace of decline has slackened, in 1992, and among retired persons counts with each other within twenty- however, dropping from 19.5 percent from 61.7 percent to 66.6 percent. four hours. A line of credit will be in the first quarter to only 5 percent opened by the European Bank for in the third quarter. Production in Viet Nam is expected to post a trade Reconstruction and Development to the pharmaceutical, gas, silk, and fur surplus in 1992 of $75 million. The guarantee all banks against default. industries fell, but growth was regis- trade ministry said that exports in Trade fell sharply in the region after tered in heavy industry and the 1992wouldhit$2.46billion(a 19per- the collapse ofthe Soviet trading bloc chemical, oil, and paper sectors. cent rise over 1991) compared with in 1989-90.Commerce between these $2.38 billion in imports. VietNam not countries is now conducted through Chinese banks will have made about only survived the cutoff of aid from barter. 400 billion yuan ($68.9 billion) in new the former Soviet Union but now en- loans in 1992's economic boom, un- joys stronger economic grow-th than Kazakh Prime Minister Sergei leashing a flood of cash that could it had hoped for, Prime Minister Vo Tereshchenko outlined a 1993-95eco- cause inflation, accordingto the Price Van Kiet announced. In 1992 GNP nomic stabilization and transition Information News, an official Beijing grew 5.3 percent, foreign investment program to parliament. To increase newspaper. Vice Premier Zhu Rongji, 73 percent, industrial production 15 its revenue, the government intends China's top economic policymaker, percent, and agriculture 4.4 percent, to introduce a general import duty, warned that the explosion of new and state revenues climbed 82 per- tax certain monopoly profits, and in- credit "reflects poor control and may cent due to better tax collection. Kiet crease some value-added and other lead to inflation." warned that VietNam would need to indirect taxes. Beginning in 1993, inject an estimated $40 billion into thehard-currencyretention quota will China plans to allow parliament to the economyover a ten-year period to be increased from the present 10 to take over from the cabinet the respon- fulfill its target of doubling 1990GNP 30 percent to 50 percent. The program sibility for the People's Bank of China by the year 2000, he added. calls for an end to centralized indus- (PBOC), strengthening the central trial investment and envisages declar- bank's role as an economiecwatchdog, Eastern Europe must underpin ing some unprofitable state enter- China Daily reported from Beijing. tight credit policies and strict budget prisesbankrupt. The final goal would be to allow the control with economic restructuring PBOC to use such tools as discount if reforms are to succeed, according to rates to influence money supply, the the semiannual economic outlook re- . paper added, quoting PBOC Vice port issued by the Organisation for President Zhou Zhengqing as saying EconomicCo-operation and Develop- - that the bank would control the ment. Although there are signs that economy indirectly. A draft national output had stopped falling and infla- banking law to be introduced in 1993 tion was continuing to decline in the l will eliminate central planning and countries farthest along in their re- allow banks to set interest rates and forms-Czechoslovakia, Hungary, make loan decisions independently. and Poland-stabilization was prov- ing harder in Bulgaria and Romania. k i The unemploymentrate inRomania In the FSU the prerequisites for ef- i R '<'6' has reached 9.1 percent, according to fective stabilization are not,yet in E data supplied by the Labor and Un- place, so that continuing declines in - employmentDepartment. The unem- output and rampant inflation are ... 1 - - ployedreceivingallowances,andthose likely. who are-no longer entitled to an al- lowance, together total more than 1 A consortium of ten banks from Bul- million. A study released by the Na- garia, Hungary, Poland, and.Rus- tional Statistics Board on December sia signed an agreement in mid-De- 14 shows that average monthly con- cember in Moscow for clearing trade j. sumption in the first half of 1992 was payments. Signatories hope that a lowerthan in the same period in 1991. multilateral clearing mechanism us- Fromthe Britishdaily The Guardian

14 December1992- January 1993 Transition Bad Loans:A Heavy Burden on Hungary's Financial System

Although Hungary has pursued a vatizing th- remaining firms. The erosion of the tax base from enter- "gradualist" path, avoiding the shock SAHC has been allocated 143 firms, prises would make it much more dif- therapy seen in Poland and Czecho- including such giants as the Malev ficult for the government to reduce slovakia, its GDP fell by 24 percent airline, the state oil monopoly, and the budget deficit. between 1989 and 1992, and unerrm- the Ikarus bus factory. SAHC hold- ploymenthas risen to 11 percent. The ings in these firms will range from 25 For commercial banks, the legislation governmenthas been unable to main- to 100 percent. has required new procedures for mak- tain a tight fiscal policy, due to social ing provision against bad loans, and pressure to maintain wages and ben- The banks have notbeen particularly has increased the reserve ratio to 8 efits and the growing burden of de- successful at steering the growing percent, Banks are now re(uired to funict state enterprises. The deficitwill domestic saNings (which have reached classify their assets as: be 210 billion forints ($3 billion) for 700 billion lorints) into the new pri- 1992-morethanthreetimesthelevel vate sector, preferring to lend to the * "Substandard" if they involve agreed to with the IMF. The total gov- government to finance the growing "large branch risks" ernment debt amounts to 2,140 bil- deficit. This is due in part to their lion forints ($27 billion), and the risk-averse inentality, and in part to * "I)oubtful" if the borrower made planned budget deficit for 1993 is 180 informal g(overnment persuasion. losses in the preceding two years or is billion forints. This deficit might Since 1989, companies have faced a more than sixty days in arrears crowd out private sector borrowing- mounting liquiuity squeeze. In addi- a troubling development, given that tion to losing paying customers in the * "Bad" if the borrower is in bank- about a third of state firms will have former Soviet Union, companies face ruptcy proceedings. to be closed down and another third rapidly increasing costs, and for the radically restructured. first time they have had to build up The legislation further requires that theirown workingeapital.Atthe same provisions be made against 20 per- Hungary has attracted more than half time the goNernment has attempted cent, 50 percent, and 100 percent, re- thedirectforeign investmentin East- to enforce a strict monetary policy, spectively, of the dubious loans in ern Europe to date-1992 investment, with the re,ult that real operating these three categories. Currently, including contributions in plant, credit shrank in 1991. some 40 to 50 percent of bank portfo- equipment, and know-how, reached lios fall into one ofthese three groups, $2 billion in 1992. But foreign inves- Elements of 1.henew accountancy leg- with somneestimates runninlg as high tors have been able to pick and choose, islation introduced in December 1991 as 70(percent. leaving Hungary's State Property and January 1992: Agency and banks holding onto the To generate reserves to cover these less attractive firms. The market * Establishng new, stricter accoun- bad loans, banks have been forced to value of the 90 percent of industrial tancy rules--conforming to Western maintain high interestrate spreads- assets remaining in state hands is standards-lor companies and banks. effectivelymakingnewprivateentre- estimated at a mere 400 billion forints preneurs pay for the burden of inher- ($5 billion). e Requiring any company with debt ited state enterprise debts. The banks payments more than ninetydays over- have also had to plough their profits Different proposals for divesting the duetofileforbankruptcyunderthreat back into operations, thus curtailing remaining firms have been made, in- of criminal proceedings against its their tax payments. Government tax cluding offering consulting firms managers. revenues from the banking sector are strong incentives-2 to 5 percent of dowi by more than half compared the sale price-to find domestic or * Requiringcompanies,overthenext with 1990 (when they accounted for Foreign buyers, and leasing the firms five years, to follow standard account- nearly 8 percent of government re- Lomanagers on a contract basis. But ingpracticef)r asset depreciation and ceipts). This too might increase the it is recognized that 30 to 40 percent to make provisions against dubious pressure on the private sector if it Dfassets will remain in state hands accounts receivable from pretax prof- results in higher taxes. For the foreseeable future. In June its. 1992 a new State Assets Handling Based on a recent report by Oxford Dompany (SAHC) was created to The phased introduction of these re- Analytica, the London Research. manage the firms that will remain quirementscoulddrasticallycutcom- Group. ,tate property, leaving the State Prop- pany profits for 1992-to only 20 per- ?rty Agency to concentrate on pri- cent of the 1 )91 level. The resulting

Volume3, Number I I5 The World Bank/CECTM Conference Diary

For the Record Seminar on Natural Monopolies Oil and Gas fransport and Joint Vienna Institute Security: Key to Investment in Small and Medium-Size Private August 31 - September 11, 1992, the Former Soviet Union Enterprises and Privatizat ion Vienna May 24 and 25,1993, London June 11-13, 1992, Stirin, CSFR The EconomicDevelopment Institute International conferences organized Organized by the 'Institute for East-, (EDI) of the World Bank and the U.S. by the Europe Energy Environment West Studies (IEW$), and attended Agency for International Develop- Ltd.- ' by government officials, business ment (USAID) sponsored a seminar Information: Verna Cappuccio, Eu- executives, and academics from East- on "Natural Monopolies:Regulation, rope Energy Environment Ltd, Lon- ern and Western Europe and the Struture, andPricingDecisions.The don, tel: (4471) 493-4918, fax: (4471) United States. The participants ana- seminar was attended by utility-ex- 355-1415. Iyzed themost important aspects of' ecutives, government executives, and developingsmall andmedium-size en- academicsfrom Czechoslovakia,Hun- How to Fund Exports and terprises (SM-Es)and pointed out that gary, and Polafnd'.Experts-including Investnments to Eastern Europe although SME development has been executives from both private and pub- and the Newly Independent spectacular recently in Central and lic utility companies, government of- States Eastern Europe, governments in the ficials, academics, technical stafffrom May 13 and 14, 1993, New York region should make further efforts to vafious organizations, lobbyists, and eliminate historical distortionsin the consultants-discussed theoretical Ajoint conference of the World Bank enterprise size structures 'in their and practical issues of regulating and theiEBRD. Participants will ex- countries. Other policyrecommenda-- natural monopolies.1 For example, plorepossibilitiesfo'rtapping into$24 tions include the following: participants simulated aU.S. congres- billionin WorldBank,'IFC,andEBRD sional rate hearing, witha testimony" contracts in Central and Eastern * Liberal legal regulations and poli- from utility executives, fconsumer Europe and the FSU. Speakers from ciesfor establishingnewfirms should groups, environmental groups, and: those international finance institu- be maintained. other intervenors. tions, from U.S. federal agencies, and * Reprivatization (restitution) from J.S. companies will speak about should not slow otherforms of priVat-- Forthcoming the pfocurement procedures and up- ization.` coming projects, and provide lessons * In the privatization of small firms, Public Finance Reform in the of experience. the sale of assets should be given CEE Countries Information: Bill Collins, Conference priority over leasing 'of assets, and February 19-21, 1993, Rez, Czech Re- Coordinator, ITC Consultants Inc., the process should be reasonably'de- public - tel: (813) 572-8035, fax: (813) 965- centralized. 2630. * Monopolies in trade and services International conferenceorganized by should be broken up., the Institute for East-West Studies. IMF-World Bank Annual * The privatization of medium-size 'Ibpics include the Polsh government, Meetings firms requires well-designed, decen-- budget stabilization, and sustaina- October 1994, Madrid' tralized methods. bility; implications of the Polish les- * The tax disincentive for expansion sons for Russian macroeconomic of privatebusiness should be elimi- policy;'the'lessonsfor Eastern Europe nated (such as excessive social secu- ofSpanish macroeconomicpolicy dur- M ritypayDments),dependingonthebud- ing transition; and comparative get situation. analysisand policyrecommendations. * Privatizationofthemajorcommer- Participants include Anders Aslund cial banks should be given priority. Kemal-Dervis, David Lipton, Jacek i F Cfi $ X o *Banks should make bureaucratic Rostowsky, and Jan Svejnar.~ 1 t procedures transparent for small Information: Jean dFougerolles, tel ti gs ust pn businesses. (212):557-2570, fax: (212) 949-8043 . * New credit guarantee institutions shouldbe setup to allocate irisk'a'mong Black Sea Oil and Gas: a d~ UhCSCk the banks, the SMEs', and'the guar- Emerging Opportunities - antee institution. April28 and 29, 1993, Istanbul fr

16 zDecember 1992-January1993 Transition

New Books and WorkingPapers * * The CECTM unit f the World Bank regrets that it is unable to supply the publications listed.

Cheryl W. Gray creatingasurgeofnewcasesentering. gence of.financial conglomerates,.'or TheLegalFrameworkfor-Private the courts. This surge is likely to be universal-type banks-in the face of Sector Activity in the Czech and exacerbated as. the current morato- limited managerial and institutional Slovak Federal Republic rium on bankruptcy claims against capability, limited capability for The World Bank, Policy Research state enterprises expires in 1993, and supervising financial markets, and WPS 1051, Washington, 1992,25 p.' as cases under the new intellectual extraordinary financial market property laws and commercial code risks-could be unfortunate if finan- After its "velvet" revolution in late come onstream. TheJudicial system, cial conglomerates simultaneously 1989, the Czech and Slovak Federal sufferingfromrecentpurgesofjudges pursue. onflicting,fundamental and Republic (CSFR) moved steadily to comprouiised by the former regime as transitional objectives. Therefore the create the conditions for developing a well as from generally low pay and emergence offinancial conglomerates private market economy..Not-onlydid prestige, appears ill prepared to cope should be delayed until skills are de- the CSFR ease the conditions for the with the skyrocketing demands ex- veloped.and market turmoil subsides. entry of new private firns, but it also pected in the newly reformed system. To order. Karin Waelti, the World tookfar-reachingstepstoreturnprop- To order: Maxine Berg, the .World Bank, Room N9-043, tel: (202) 473- erty to former owners and to privatize Bank, Room N11-021, tel: (202) 473- 7664. large parts of its state-owned indus- 6969. try. For this emerging private sector. Other Recent World Bank to thrive, there must be a clear legal David H. Scott Working. Papers: framework to provide decentralized Revising Financial Sector Policy "rules of the game." in Tkansitional Socialist Econo- Dmitri Steinberg, Economies of the mies-Will Universal Banks Former Soviet Union-An Input- Gray describes the evolving legal Prove Viable? Output Approach to the 1987 Na- framework in the former CSFR in The World Bank, Policy. Research tional Accounts, Policy Research several key areas: property, contracts, WPS 1034, Washington, 1992, 24 p. WPS 1060, 1992, 113 p. company law, foreign investment,- Tb order: Estela Zamora, the-World bankruptcy, and antimonopoly law.. Focusingon efforts under way in most Bank, Room S7-136, tel: (202) 473- The legal frameworks in the Czech transitional socialist economies, this 3706. and Slovak republics are essentially paper questions whether the banks the same, but they could diverge now emerginginthenewpolicyframework Dimitri Vittas and Craig Neil, Com- that the country has split. will prove viable or be supervisable. petition and Efficiency in Hun- The author offers a model of a finan- garian Banking, Policy Research The former CSFR differs somewhat cial sector structure designed to fos- WPS 1010, 1992,29 p. from its Central and Eastern Euro-. ter the development of a sound bank- 7b order: Wilai Pitayatonakarn, the peanneighbors, especially Poland and ing system., World Bank, Room N9-003, tel (202). Hungary, in that its prewarlegal sys- 473-7664. tem was more thoroughly abrogated Policymakers must strive to achieve during the socialist period. So, fewer two discrete and potentially conflict- MyT.Vu, Eduard Bos, andAnn Levin, people are familiar with market-ori- ingkinds of objectives. These are: Europe and CentralAsia Region, ented legal principles and practices. Middle East and North Africa Butin 1989 theCSFRhadthe advan- * Fundamental policy objectives Region Population Projections, tage ofstarting with-arelatively"clean (which includeestablishing and main- 1992-93 Edition, Policy Research slate" on which to craft modern laws. taining the integrity of the.payments WPS 1016, 1992, 203 p. In some areas of law-such as com- system and the safety of depositors,-L pany, contract, and antimonopoly: savings, and ensuring that money The world's population is estimated law-legal reform is relatively well markets function). to be 5.44 billion in mid-1992, and advanced and could serve as a model * Transitional objectives (which re- 6.17 billion 'by the year 2000. Cur-' for other reforming socialist econo- late primarily to the immediate task rently Asia has 59 percent of world mies. In others-including constitu- of privatizing and -restructuring en- population; Europe, 15 percent; tional and real property law-legal terprises). America, 14 percent; Africa, 12 per- reform is embroiled in politicaleontro- cent; and Oceania, 1 percent. Over versy and lags behind- developments Many transitional socialist econo- time, Asia's share is projected to re- in some neighboring countries. The in- mies adopt a policy framework that main fairly stable, but Europe's share terests offormer property owners are envisions universal banking. The will be almost halved and Africa's clashingwith those ofcurrenttenants, consequences ofthe immediate emer- more than doubled.

Volume 3. Number 11 17 The World Bank/CECTM

Tb order: Otilia Nadora, the World the intellectual gide. The Mongolian It was difficult to identify economic Bank, Room S6-066, tel: (202) 473- elite was educated primanily in Mos- agents or political parties opposed to 1091. cow,%with only a few going as far west price controls.. (Even the new private as Budapest. Mongolian educational entrepreneurs advocated price con- Nancy Birdsall, Another Look at institutions and their economics cur- trols.) This similarity of views across Population and Global Warming, ricula were based wholly on the stan- the political spectrum represented a Policy Research WPS 1020, 1992, dard Soviet model. deep commonality in the society on 45 p. the costs andbenefits of price control To Order: Soledad Rothschild, the Mongolian society, following the and alternative policies, a common- World Bank, RoomNil-051, tel:(202) country's first free elections in 1990, ality hardly ex:plicable independent 473-7460. was ready to move to a market from the economic history of economy and accepted that price con- Mongolia. The experience of Mongo- Zeljko Bogetic and Michael Conte, trols were inconsistent with such a lian price reform might be paradig- Privatizing Eastern European move. But when choices were made, matic-if somewhat extreme -of Economies:ACriticalReviewand when leaders were faced with a disas- what happens generally when a radi- Proposal, Report No. IDP 119,1992, trous economic environment, price cal reform is introduced in an unre- 30p. controls reemerged as the preferred ceptive and rapidlydeteriorating^eco- To order: Gracia Sorensen, the World policy tool. This occurred despite the nomic environment. Bank, Room H5-253, tel: (202) 473- government's avowed commitmentto lb order: Center for Institutional Re- 7088. radical reforms and despite external form and Informal Sector (IRIS), 7100 pressure' to follow those reforms. Baltimore Ave., Suite 510, College * * * V : : . g : park, MD 20740, tel: (301) 403-8153. Price reform started in earnest in Peter Murrell, Karen Turner Dunn, January 1991, and by March 1992, William H. Meyers and others and Georges Korsun after successive liberalization mea- Agricultural Transformation and The Culture of Policy Making in sures, only'flour products, transport, Privatization in the Baltics the Transition from Socialism: utilities, fuels, and medicines were CenterforAgricultural and Rural De- Price Policy in Mongolia supposed to be left under government velopment (CARD), Iowa State Uni- IRIS Working Paper Series, No. 32, control. In fact, public and private en- versity, Baltic Reports No. 92-BR-7, University of Maryland at College tities .were ordered to comply with Iowa, 1992, 59 p. Park, 1992, 25 p. rigid procedures in pricing all prod- ucts and services, whether or not they The Baltic states of Estonia, Latvia, The transformation from socialism remained under government control, and Lithuania have been undertak- gives economists a unique opportu- and local govemments gained new ing rapid economic and structural nity to observe the effects on policy of authority for controllingprices. In Oc- reforms that greatly affect the food culture-defined as a shared vision tober 1991 the government ordered and agricultural sectors. Of all the or model of the way the world should the confiscation of profits resulting states-of the FSU, they are progress- work. The paper, examining price from price increases deemed exces- ing most rapidly in the privatization policy in Mongolia, argues that the sive. of land and productive assets. Four culture ofpolicymakingthat arose and -papers in this report describe those took root under socialism has pro- Data show that among the prices that reforms and the progress made as of found implications for the transition were officially decontrolled, more than Spring 1992 in restructuring agricul- process. half shoDwed no change in the first ture and liberalizing prices and re- eight months, despite the severe mac- lated government regulations. For nearly seventy years, until 1990, roeconomic disequilibrium. Moreover, Mongolia was the de facto sixteenth the data show a divergence between Although the importance of agricul- republic of the Soviet Union. Its in- the capital city and rural areas in the ture in the economies of the Baltic ternational trade was carried out al- extent of price movement. (Prices not states has declined substantially since most wholly within the CMEA. subject to official controls, and there- their period of independence before Mongolia's industrial base was put in fore more subject to divergence in lo- World War II, in 1990 agriculture still .place by the Soviet Union, and its vi- cal controls, rose by 19 percent in the accounted for 17 percent (Estonia) to ability depended on continuing inter- rural areas and 32 percent in the ur- 25 percent (Lithuania) of GNP. The action with that country. During the ban areas in the same period.) The food industry adds an additional 11 1980s, international trade and gov- informal constraints on the movement percent(LiAthuania) tol5percent(Es- ernmentbudgetdeficitswerefinanced of prices seem tighter in the rural ar- tonia) to GNP, making food and agri- in large part by grants and soft loans eas, where local officials have been culture one-third or 'more of GNP in from the Soviet Union. The economic more isolated from the main currents all three countries. The share of labor isolation from the West and the sup- of reform policy established in the employed in agriculture and food pro- port from Moscow were mirrored on capital. Icessing ranges from 22 percent

18 December 1992- January 1993 Transition

(Lithuania) to 74 percent(Estonia) of 92-BR-8, An Analysis of Con- boorder:UNPublications, Sales Sec- the total food value of agricultural sumption and Expenditures for tion, Room DC2-0853,New York, N.Y production. The Baltic states sent as Lithuanian Households Using 10017, tel:(212)963-8302 or (800)253- much as half of their livestock and Budget Survey Data, Forthcoming. 9646. dairy production to other republics of lb order: Betty Hempe, Publications the former USSR. Secretary, CARD, Iowa State Univer- Defense Conversion: Achieving sity, 568 Heady Hall, Ames, Iowa, U.S.-Russian Cooperation for an From 1990 to 1992, all three states 50011-1070, tel: (515) 294-7519. Orderly Build-down and Eco- chose -to restore land or equivalent nomic Renewal-Fall 1992 Gate- compensation to previous owners, to * * * way Seminar Report, October 15- privatize theproductive assets ofstate 18, 1992, Geonomics Institute, and collective farms, and to permit Economic Commission for Eu- Middlebury, Vermont, 45 p. competition among a variety of own- rope: Economic Bulletin for Eu- 7b order: Geonomics, 14 Hillcrest ership and management systems. As rope, Vol. 44 (Chapters include The Aue.,Middlebury, VT 05753, tel: (802) a result, the number of small family ECE Economies in 1992; Foreign 388-9619, fax: (802) 388-9627. farms has been increasing rapidly, Trade ofthe Transition Countries; In- though-they still account for a small ternational Support for the Transi- Economic Policy-A European share of total farmland. Another im- tion Countries). Forum, No. =15,October 1992 (In- portant change is that-the personal United Nations, November 1992, cludes P. Bolton and G. Roland, plots operated (but not owned) by col- 125 p. Privatization Policies in Central and lective and state farm workers are - ' Eastern Europe; W. Carlin and C. allowed to be as large as 3 hectares, The recession in the CEE countries Mayer, Restructuring Enterprises in compared with only one-half hectare has continued in 1992. The rate of Eastern Europe; C. Senik-Leygonie during the Soviet period. decline in output is now slowing in andG. Hughes, Industrial Profitabil- those countries that started earlier ity and Trade among Former Soviet In July 1992, Estonia virtually elimi- and progressed more rapidly in the Republics.) CEPR, London, and natedthestatepricingsystemforfood transformation process. In Poland Maison de Sciences de l'Homme, and agricultural products, replacing industrial production has begun to Paris. it with a system of producer support grow again in recent months, but in 7border: Cambridge UniversityPress, prices-and retail markup restrictions Czechoslovakia and Hungary the de- 40 West20th St., New York,NY10011. that allows the market to function cline is still likely to be more than 10 4211. with relatively little government in- percent for the year. In Bulgaria and tervention. Latvia and Lithuania in- Romania industrial output fell by Istvan P. Szekely and David M.G. troduced similarpricinglaterin 1991. more than 20 percent in the first half Newbery, eds.- Producer prices in all three states are of 1992. Hungary-An Economy in Tran- set through regional consultations be- sition tween producers and processors, but A sluggish and uneven economic re- Cambridge University Press, Cam- thegovernmentshavevariousmecha- covery may now be in sight for some bridge, New York, and Melbourne, nisms designed to influence prices. CEE countries in 1993, according to forthcoming (1993) Since inputs were heavily subsidized ECE reports. Uncertainty about the duringthe Soviet period, input prices course of privatization may hamper Ewa Dzwonik-Wrobel and Zofia have risen far more rapidly than pro- investment, and the weakness of the Szpringer ducer prices. Although the largest world economy could reduce export Optimal Inflation Cost and Ben- price shocks occurred between 1990 growth, which is expected to be the efits of Disinflation [in Poland] and 1992, input prices continue to rise main engine of recovery. In Albania, Warsaw Institute ofFinance WPS No. more rapidly than producer prices. Bulgaria, and Romania further de- 25, 1992, 19 p. Both are still below-but moving to- cline in GDP is likely. The Czech-gov- 7b order: IF, Information and Publi- ward-world market prices. ernment predicts GDP growth of 1 to cation Section, Warsaw, Swieto- 3 percent in 1993;in Hungary predic- krzyska 12, Poland. Other recent papers from the tions vary between 1 and 3 percent Baltic Research Paper Series: growth, and positive growth is- ex- Dariusz K Rosati pected in Poland. Actual trends have The Politics of Economic reform 92-BR-5, Changing Ownership in tended to be worse than government in Central and Eastern Europe LatviathroughAgrarianReform, expectations, and a pessimistic sce- Centre for Economic PolicyResearch, September 1992, 48 p. nario, in which the recession contin- London, Occasional PaperNo. 6,1992, 92-BR-6, Latvian Price Reforms ues into 1993 is still possible. In any 25 p. and Their Effects on the Produc- case, it will take many years to re- lb order:CEPR, 25-28 Old Burlington tion and Sale of Foodstuffs, Sep- gain pre-1989 levels of output, says St.,London W1X 1LB. Tel:(4471) 734 tember, 1992, 12 p. the report. 9110, Fax:(4471) 734 8760.

Volume 3. Number 11 19 The World Bank/CECTM Bibliographyof Select Aricles Staff may contacttheJoint'Bank-Fund Library, (202) 623-7054.

Postsocialist Economies Rd., N.W., Suite 210, Washington, York,kNY10003,tel:(212)388-1500, D.C. 20009, tel: (202) 234-2138.) fax: (212) 254-3386.) Dlinopoulos,E., andD.T.Lane.Mar- ket i;berai nPolicies in a TajikistanLawon Foreign Invest- Gomulka, S. Polish Economic tReformingSocialist Economy. ments. interflo-Foreign Trade and Reform, 1990-91: 4Principles, I:MFStaffPapers (U.S.) 39(3):465- Investment News of the Former So- Policies, and Outcomes. Cam- 93, Septmbri 1992. viet Republics (U.S.) 12(1):3-7, No- bridge Journal ofEconomics (U.K) veiber 1992. (Information: P.O. Box 16:355-72, 1992. von Furstenberg, G.M.Generating 42, Maplewood, NJ 07040, tel:h(201) SupportforlRapid Privatization 763-9493.) Maillet, L.L. Tax Trends-Taxa- of Socialized Industry. Problems tionl in East Europe anid the Ex-o EofsonomicManagement-Science ¶brritorial Surveyofthe Russian LUSSRS.East/West Letter (U.S.) 1 Notes (Poland) 94:83-116, 1992. Far East. Special: Issue fof the Rus- (3):7-8, Summer 1992. (To order: sian Far East Update (U.S.), Decem-: NovEcon Consulting Group, 1217 :K0:: Suznetsov, 0 : E. Transition from a ber 1992. (InforInmation:el:(206) 44 7- :0OliiaAe.,Ann Arbor, MI 48104.) Neo-Schumpeterian Perspec- 2668,jfax: (206) 628-0979.) ti-ve:The Case of the; Forme Paczolay, P. Judicial Review of SovietUnion. CommunistEcono- the Compensation Law in Hun- i:Smies andEconomic Tr(nsformation Central and EasternEurope gary. Michtgan Journal ofInterna- (U.K) 4(4):469-99, December 1992.: tional Lawz (U.S.) :13 (4):808-31, Ash, T.N. Agricultural Reform in Summer 1992. Central and Eastern Europe: CIS and the Baltics Marketization,,Privatization,De- Rupp, K Democracy, Marketand velopingaNewlRole forthe State. Social Safey Nets: Implications Aleksashenko, S. Macroeonimic CommunistEconomies and Economic for Postcommunist Eastern Stabilization in the FormerSo- Transformation (U.K) 4:439-67, De- Europe. Journal of Public Policy viet Republics: Dream oreal- cember 1992.: (U.S) 12(1):37-59. ity? Communist Economies and SEcon:omic Transformation (U.K) 4 :Cochrane, N., and others. The Im- Sliver, J.:L, andJ.Tesche. Rela- :(4):439-67,December 1992. pact of:lhe 19921Drought on Cen- tive Sentsitivi oftheBungar- tralEuropean Grain Importsand iian Economy to Internal and Foster, C.J., and S.S. Sh d-ffiel ivstProduction. Eonomies External Shocks. Southern Eco- FormerUSSR: 199ag e :ltura: in TRansition-Agricultural Update nwmic Joubrnal(U.S.) 59:210-31, Production and Trade Survey. (U.S.) 1-9, September/October 1992. October 1992. Economies in TransitionAg icul-i (Information: Nancy Cohrane, ERS, tural Update (U.S.), (September/ tel: (202) 219-0623.) Smyslov, D. Economic Problems :October): 22-31, 1992. (Information: of Eastern Europe within the Nancy Cochrane, ERS, tel: (202) The Czech Republic. A Financial Context of the East-West Rela- 219-0623.) Times Supplement. Financial Times tionships. Journal of Regional .(U.K),pp. I-XI, January 11, 1993. Policy (Italy) 12:239-50,June 1992. Russian; Telecom Update: EmergingStabiityamidPoliti- Fiat's $2 Billion for the FSM [The SymposiumonDevelopments in callRumlings. EasternEuropean largestforeign investment in Poland]. East European Law. Michigan and Soviet Telecom Report (U.S.) 3 East European Investment Magazine Journal oflnternationalLaw (U.S.) (11):10-11,November 1, 1992. (In- (U.S.)-82-85, December 1992. (Infor- 13(4):741-1001, Summer 1992. formation: EESTR, 1724Kalorama mation: EEIM, 119 Fifth Ave., New

TRANSITION is a regular publication-of the World Bank's Transition and Macro-Adjustment Division, Country Economics Department. The findings, views, and interpretations published in the articles are those of the authors and should not be attributed to the Word Bank or its affiliated orianizations. Nor do any of the interpretations or conclusions necessarily represent official policy.of the World Bank or of its Executive Directors or the countries they represent. Richrd Hirschler is the editor and production manager. To be on the distribution hst, send name and address to Richard Hirscher, RomN.8O27, The World Bank, 18181HSet NW, Washington, D.C. 20433 or call (202) 473-6982, or fax (202) 676- 0439. Information on upcooing conferences on socialist economies, indication of subjects of special interest to our readers, letters to the editor, and any other reader contributions are appreciated.:

20 D ecember 1992-January 1993