Partners in Transition: Lessons for the Next Decade

PARTNERS IN TRANSITION: LESSONS FOR THE NEXT DECADE

A conference for leaders of economic, political and social transition in nations emerging to open market economies.

October 3–5, 1999 Warsaw, Poland Partners in Transition: Lessons for the Next Decade 1999 3

Contents

WELCOME 4

EXECUTIVE SUMMARY 5

AGENDA 6

PLENARY SPEAKERS: BIOGRAPHIES & PHOTOGRAPHS 9

BACKGROUND ISSUES 17

PARTICIPANT LIST 45

Polish Translation 51 Russian Translation 000

1999 Partners in Transition: Lessons for the Next Decade 4

Welcome

Dear Participants:

Welcome to Warsaw and the first Partners in Transition Conference, sponsored by the United States Agency for International Development (USAID) and the German Marshall Fund of the United States. Let me extend special thanks to our hosts—the Republic of Poland and the people of Warsaw—and to all of you who have taken the time to join us here.

Our goals for this conference are many: we hope to effect a better understanding of and appreciation for the steps needed for a successful transition. We hope to renew the call for cooperation among the countries and people of Europe and Eurasia. And we hope to discover new ways reform leaders can continue to share their experiences in the years to come. But mainly, we hope that every participant will be able to take back to his or her community lessons that can help them better the lives of the people there—an ambitious goal, to be sure, but a worthwhile one.

It has been ten years since the Berlin Wall fell and nearly ten since the Soviet Union collapsed; in most countries, the transition process in well under way. Over the next few days, we will look back as well as forward, and say—what have we learned, and how can we manage the challenges the new millennium has in store for us?

How appropriate, then, that this first Partners in Transition conference be held in Warsaw, whose motto is contemnit procellas—“it defies the storms.” Let us hope the lessons we learn here will help us defy storms as well.

USAID and the German Marshall Fund of the United States wish every participant a good stay in Warsaw, and an enjoyable conference. We look forward to learning from all of you.

Sincerely,

Donald L. Pressley Assistant Administrator Bureau for Europe & Eurasia

Partners in Transition: Lessons for the Next Decade 1999 5

Executive Summary

After ten years of experience in transition, reform leaders in the vast region covering the Baltics, Eastern Europe, and the now independent countries of the former Soviet Union have experienced many challenges in fostering the development of democratic systems of government and market economies while civil society undergoes great change. The United States Agency for International Development is providing the opportunity for the region’s leaders of reform to share with each other their experiences in addressing these challenges. Through open dialogue on common concerns, lessons may be learned and partnerships between reformers strengthened, reinforc- ing the prospects for rapid improvement in the lives of the people of the region.

This first forum will be an occasion for reviewing the broad lessons learned from the transition to date including the inter-relationships between democratic and economic change and the implications for standards of living. USAID, by facilitating this environment that is conducive to dialogue, seeks to achieve the following objectives:

◆ To forge sustainable partnerships between participants;

◆ To foster open dialogue to find solutions to the problems of transition;

◆ To recognize and give credit to examples of cooperation and change that have the most significant results and potential;

◆ To create an opportunity to continue sharing the lessons of transition throughout the region.

After this first step in forging new partnerships, USAID anticipates the continuation of subsequent fora. The next event, Partners in Transition 2001, will be hosted by the Republic of Bulgaria.

1999 Partners in Transition: Lessons for the Next Decade 6

Agenda

Sponsored by:

The United States Agency The German Marshall Fund for International Development of the United States

SUNDAY, OCTOBER 3, 1999 4:00–7:00p.m. Delegate Registration

7:30 Reception, with receiving line

8:00 Buffet Supper

MONDAY, OCTOBER 4, 1999 8:00a.m. Delegate Registration

8:15 Introductory Remarks Harriet C. Babbitt, Deputy Administrator, United States Agency for International Development Craig Kennedy, President, German Marshall Fund of the United States

8:30 Welcoming Address Prime Minister Jerzy Buzek, Republic of Poland

8:45 Keynote Address The Transition in an Evolving Global Community,A Historical Perspective Alexander Yakovlev, Chairman of the Presidential Committee on Rehabilitation of Victims of Political Repression; President of “Democracy” Foundation, Russian Federation

Partners in Transition: Lessons for the Next Decade 1999 9:15 First Plenary Session Support For The Democratic Transition President Petar Stoyanov, Republic of Bulgaria

10:15 Coffee Break 10:45–12:30p.m. Breakout Sessions 7 Session I: New Partnership Roles for Government and NGOs in the Road Toward Democracy in Transition Countries Vilija Blinkeviciute, Vice-Minister of Social Security and Labor, Republic of Lithuania Pavol Demes, Director, Slovak Academic Information Agency, Slovak Republic Tolekan Ismailova, Executive Director of the Coalition of NGO for Democracy and Civil Society, Kyrgyz Republic, Peter Nizak, Foundation for the Development of Democratic Rights, Hungary

Session II: Good Governance: Decentralization, Local Initiatives, Political Parties and Interest Group Development Ginka Kapitanova, Executive Director, Foundation for Local Government Reform, Republic of Bulgaria, Vasyl Kuibida, Mayor of Lviv, Ukraine, Jerzy Stepien, Deputy Minister, Ministry of Interior, Republic of Poland

Session III: Independent Press:An Evolving Institution Manana Aslamazian, Executive Director, Internews/Russia, Russian Federation, Giorgi Bokeria, Board Member, Liberty Institute, Georgia, Sarmite Elerte, Chief Editor of Diena, Republic of Latvia, Sandor Orban, Director, Center for Independent Journalism, Hungary

Session IV: Establishing Linkages Between the Rule of Law and Economic Growth Daniel Daianu, Center for Economic Policies, Romania, Valve Kirsipuu, Member of Parliament, Republic of Estonia, Alexandru Muravschi, Vice Prime Minister, Minister of Economy and Reforms, Republic of Moldova, Veniamin F. Yakovlev, Chief Justice Supreme Commercial Court, Russian Federation

12:45 Luncheon 2:15 Second Plenary Session The Transition to a Market Economy:A Comparative Analysis and Approach Deputy Prime Minister and Minister of Finance Leszek Balcerowicz, Republic of Poland

3:15 Tea 3:45–5:30 Breakout Sessions

Session I: Creating An Enabling Environment for New Business Development and Foreign Investment Arunas Degutis, American Chamber of Commerce, Republic of Lithuania, Gregory Marchenko, President of Deutsche Bank Securities, Republic of Kazakhstan Gabor Szorenyi, Deputy Director, Hungarian Energy Office, Hungary

Session II: Effective Strategies for Achieving Environmentally Sound Economic Growth Anca Dumitrescu, MD, Institute for Public Health;Zlatna Health/ Environment Project, Romania, Indulis Emsis, former State Minister for Environment, Republic of Latvia, Maciej Nowicki, Head of Eco Fund, Republic of Poland, Gulnara Roll, Environmental Governance Program, Republic of Estonia

Session III: Economic Development: Perspectives from the National and Local Levels Leonid Grigoriev, Director General, Bureau of Economic Analysis Foundation, Russian Federation, Ivan Miklos, Deputy Prime Minister for Economy, Slovak Republic, Risto Penov, Mayor of Skopje, Republic of Macedonia, Valter Rescic, Deputy Minister of Finance, Republic of Slovenia

Session IV: The Role of Financial Institutions: Banking Supervision and Capital Markets Leslaw Paga, Head of the Securities Exchange Commission, Republic of Poland, Jana Pospisilova, Czech Securities Commission, Czech Republic, Marat Sultanov, Minister of Finance, Kyrgyz Republic, Martin Zaimov, Governor of the Central Bank, Republic of Bulgaria

1999 Partners in Transition: Lessons for the Next Decade 7:30 Reception and Buffet

TUESDAY, OCTOBER 5, 1999 8:15a.m. Opening Remarks Donald L. Pressley, Assistant Administrator for Europe and Eurasia, 8 United States Agency for International Development 8:30 Third Plenary Session National Identity and Ethnicity: Impact on Minority Populations Ljubomir Frckovski, Professor of International Law, University “St. Cyril and Methodius,” Republic of Macedonia, Peter Huncik, Director, Sandor Marai Foundation, Slovak Republic, Katarina Kruhonja, Board Member, Center for Peace, Non-Violence and Human Rights, Republic of Croatia, Dimitrina Petrova, Executive Director, European Roma Rights Center, Republic of Bulgaria

9:45 Fourth Plenary Session Standards of Living: Realities, Expectations and Policies Harriet C. Babbitt, Deputy Administrator, United States Agency for International Development

10:30 Coffee Break 10:45–12:30p.m. Breakout Sessions

Session I: Unemployment and the Labor Market:The Social Cost to Governments and Families Michal Boni, Chief Advisor to Minister of Labor, Republic of Poland, Svetozar Janevski, General Director of Skopje Brewery, Republic of Macedonia, Marina Kokanovic, Economic Advisor to the Union of Autonomous Trade Unions, Republic of Croatia, Vladimirs Makarovs, Minister of Welfare, Republic of Latvia

Session II: Women in the Transition: Leadership Roles in Economics and Democracy

Session III: Individualizing Safety Nets: Moving from Protection by Firms to Empowerment of Citizens, Pension Reform Marek Gora, Professor, Warsaw School of Economics, Republic of Poland, Serjei Holovaty, former Minister of Justice, Ukraine

Session IV: Development and Maintenance of Health Care Systems with Local Initiatives Tatoul Akopyan, Head of the General Department of Provisions, Ministry of Health, Republic of Armenia, Adik Levin, MD, PhD, MSD, Head of Department, Tallinn Children’s Hospital, Republic of Estonia, Tolebai Rakhipbekov, Chairperson, Committee of Health, Republic of Kazakhstan

12:45 Luncheon Guest Speaker First Lady of the United States, Hillary Rodham Clinton

3:00 Closing Remarks Donald L. Pressley, Assistant Administrator for Europe and Eurasia, United States Agency for International Development

Partners in Transition: Lessons for the Next Decade 1999 9

Plenary Speakers Biographies & Photographs

In order of appearance

1999 Partners in Transition: Lessons for the Next Decade Prime Minister Jerzy Karol Buzek Prime Minister, Republic of Poland

10 He was born on 3 July, 1940 at Prime Minister Buzek has been involved Smilowice. He graduated from the in the activity of the “Solidarity” trade Mechanical–Power Engineering union since its formation. He assisted in Department of the Silesian Polytechnic, the organization of the underground specialising in chemical engineering. He structures of “Solidarity” in Silesia and in is technical sciences professor. He was a the Zaglebie region, and he was an active scientific researcher at the Chemical member of the national and regional Engineering Institute of the Polish authorities of clandestine “Solidarity.” He Academy of Sciences in Gliwice. chaired the union’s 1st, 4th, 5th and 6th He has written several dozen articles and National Congress. He sat on the AWS monographs on mathematical modelling, (Solidarity Election Action) team of desulphurisation of exhaust gases and experts and was a co-author of the eco- optimisation of processes. nomic chapter of AWS program.

Alexander Nikolayevich Yakovlev

Chairman, Presidential Committee on Propaganda, of the CPSU Central Rehabilitation of Victims of Political Committee. He held this position until Repressions, President of “Democracy” 1973, when he was appointed the Foundation, Russian Federation Ambassador of the USSR to Canada. Mr. Yakovlev represented the USSR as Mr. Yakovlev was born on December 2, Ambassador to Canada until 1983, at 1923 in the small village of Korolyevo in which time he left the foreign service to the Yaroslavi region of the former Soviet act as Director of the Institute of World Union. In 1941 he was drafted into the Economy and International Relations at army and fought in the Marines Brigade the USSR Academy of Sciences. for a short time, until he was decommis- sioned after being heavily wounded in bat- From 1985 through 1991, Mr. Yakovlev tle. He graduated from the Pedagogical held numerous senior-level positions in Institute with a degree in History in the CPSU Central Committee. In 1985- 1946 and worked as a teacher, journalist 86, he was the Chief of the Department of and a member of the Yuroslavl Regional Propaganda and from 1986 until 1990 Party Committee. he was the Secretary of the CPSU Central Committee and Chairman of the CC From 1953–56 Mr. Yakovlev was a mem- Commission for International Policy and ber of the Department of Schools of the of the Politburo Commission for Further CPSU Central Committee. In the year Study of Materials of the Stalin 1958–59, Mr. Yakovlev was a distin- Repressions. From 1990 until March, guished scholar in the Fulbright postgrad- 1991, Mr. Yakovlev was a member of the uate exchange program at Columbia Presidential Council and from March- University in New York. In 1960 Mr. December 1991 he was the Senior Yakovlev earned a postgraduate degree at Advisor to the USSR President. In early the Academy of Social Sciences and began August 1991, Mr. Yakovlev was expelled a position at the Department of from the CPSU. Throughout the year

Partners in Transition: Lessons for the Next Decade 1999 1991, Mr. Yakovlev served as the State Intelligentsia of Russia. Mr. Yakovlev is Counsellor for Special Missions of the the President of the International President of the USSR. Democracy Foundation, the International Charity and Health Foundation and the Since 1992 Mr. Yakovlev has held the Leonardo Club, Russia. 11 position of Chairman of the Presidential Commission for Rehabilitation of Victims Mr. Yakovlev is the Founder of the of Political Repression. From 1993-95 he International Democracy Foundation was the Head of the Federal Service of (1993), the Movement for Democratic Television and Radio and the Chairman of Reforms (1991), the International Ostankino All-Russian State Television Foundation of Socio-Economic and and Radio Company. Politological Studies (Gorbachev Fund) (1991) and the Foundation for the Support In addition to his position as Chairman of of Christian Culture (1994). He has the Presidential Commission for Honorary Doctorates from Durham and Rehabilitation of Victims of Political Exeter Universities in Great Britain, from Repression, Mr. Yakovlev is currently the Soka University in Japan and from the Chairman of the Russian Party of Social University of New Brunswick in Canada. Democracy and the Public Advisory Board Mr. Yakovlev has been awarded numerous of the Kultura weekly newspaper. He is the distinctions and decorations for his brav- Honorary Chairman of the Board of ery and leadership in military service, as Directors of the Russian Public Television well as his charismatic leadership in peace- Ltd. and a Co-Chairman of the Congress of ful political and social initiatives.

His Excellency, Petar Stoyanov President, Republic of Bulgaria President Stoyanov began his professional of the UDF Parliamentary Group and life as a lawyer, after graduating from Deputy Chairman of the Committee on Sofia University “St. Kliment Ohridski” in Youth, Sports and Tourism. 1976. From 1978 through 1990, he practiced law throughout the Republic of In 1995, President Stoyanov guided Bulgaria. In 1990, President Stoyanov domestic policy design and implementa- became a spokesman of the opposition tion by serving as the Deputy Chairman of Union of Democratic Forces (UDF) in the UDF in charge of domestic policy. Plovdiv. In 1992, he was appointed After winning a primary election in June, Deputy Minister of Justice in the UDF gov- 1996, he was nominated candidate for ernment, the first non-communist govern- President of the Republic by the opposi- ment since 1944. In 1993 the UDF gov- tion coalition United Democratic Forces. ernment collapsed, precipitating President On November 3, 1996, President Stoyanov's resignation at Deputy Minister Stoyanov was elected President of the of Justice. In 1994, he re-entered the Republic of Bulgaria with 57.73% of the political arena and was elected a Member total popular vote. He was sworn in as of Parliament to the 37th National President of the Republic of Bulgaria on Assembly. As a Member of Parliament, he January 19, 1997 and officially took served the Bulgarian people as Chairman office on January 22, 1997.

1999 Partners in Transition: Lessons for the Next Decade Deputy Prime Minster Leszek Balcerowicz

Leszek Balcerowicz was born in Lipno, In 1992 he was awarded the Ludwig Poland in 1947. In 1970 he graduated Erhard Prize from the Ludwig Erhard 12 with distinction from the Foreign Trade Foundation. Leszek Balcerowicz received faculty in the Central School of Planning the Honoris Causa title from the and Statistics in Warsaw (now the Warsaw University of Aix-en-Province in 1993 School of Economics). In 1974 he earned and from the University of Sussex in an MBA at St. John's University in New 1994. In 1996 he received this distinc- York, and in 1975 he received his Ph.D. tion from De Paul University, the Mikolaj in economics at the CSPS. In 1981-1982 Kopernik University of Torun and the he was the Deputy Chairman of the Polish Dundee University in Scotland. Economic Association. Leszek Balcerowicz has given many lec- In September 1989 Leszek Balcerowicz tures and seminars in countries through- became Deputy Prime Minister and out the world, including Austria, France, Minister of Finance in the first non-com- Great Britain, Belgium, Germany, munist government in Poland after World Hungary, Sweden, Japan, the Czech War II. He also served as President of the Republic, India, Italy, Ukraine, Lithuania Economic Committee of the Council of and USA. He has over 100 publications Ministers. In this vital period in Poland’s on economic issues in Poland and abroad. transition he designed and executed the He is a member of the European Economic radical stabilization and transformation Association, Polish Association of of the Polish economy. Leszek Balcerowicz Sociologists and Polish Association of retained his positions in the government Economists. until December 1991. In the Parliamentary Election of 1997, Since October 1992 Leszek Balcerowicz Leszek Balcerowicz became the Deputy has been a professor at the Warsaw School Prime Minister, Minister of Finance and of Economics. Since 1993 he has also President of the Economic Committee of been the Director of International the Council of Ministers in the newly Comparative Studies at WSE. He is a formed AWS-UW coalition government. Chairman of the Center for Social and Economic Research (CASE) and Chairman On October 5, 1998, Mr. Balcerowicz was of the Program Board of the Foundation awarded the title “Finance Minister of the for Economic Education, both based in Year” by a British financial daily, Warsaw. Since April 1995 he has been the Euromoney. On January 21, 1999, the President of the Freedom Union (UW). European Institute of Washington, D.C. granted him the “Transatlantic Leadership His academic distinctions include visiting Award,” for being the most outstanding fellowships at the University of Sussex European personality. (1985), and Marburg University (1988).

Partners in Transition: Lessons for the Next Decade 1999 Ljubomir Frckovski

Ljubomir Frckovski is Professor of Professor Frckovski has participated in International Law at Cyril and Methodius numerous conferences on international University in Skopje,Macedonia. His sub- relations, organized crime, and human 13 jects include international law and the the- rights. He has been a fellow of the ory of international relations. Salzburg Seminar and the 21st Century Trust, and is a member of IFRI, the French From 1990–97, Professor Frckovski held Institute for International Relations and various positions in the Macedonian gov- the Association for International Law in ernment, including Minister of Internal Skopje. He is the author of several articles Affairs and most recently, Minister of and teaching materials on international Foreign Affairs. He also assisted with the relations, democracy in Macedonia,organ- preparations of Macedonia's new ized crime and Macedonia and the Kosovo Constitution. crisis.

Peter Huncik

Dr. Peter Huncik is the Director of the Dr. Huncik has participated in several con- Sandor Marai Foundation in Bratislava, flict resolution and communications con- Slovakia. Since 1993, Dr. Huncik has ferences and seminars in the USA, UK, established and worked with the Ethnic Canada, and Hungary. He has published Conflict Training Centers sponsored by numberous books, articles and poetry. the Foundation. Since 1985, Dr. Huncik has been a psychi- From 1990–1992, Dr. Huncik served as atrist, and continues to treat individual advisor to President Vaclav Havel on minor- patients. Dr. Huncik’s accomplishments ity and human rights issues. In 1989, Dr. also include the foundation of Nova, an Huncik co-founded the first independent independent television company, in political movement in Czechoslovakia, the 1993. Independent Hungarian Initiative. Also in 1989, Dr. Huncik estalished the first independent newspaper in Czechoslovakia, NAP (the Sun).

1999 Partners in Transition: Lessons for the Next Decade Katarina Kruhonja In 1974 Katarina Kruhonja graduated For seven years Ms. Kruhonja served as the with a doctorate in medicine from the elected President of the Center for Peace, 14 School of Medicine at the Universityof Non-Violence and Human Rights-Osijek. Zagreb, and by 1983 she had completed She is one of the well-known NGO human her specialization and postgraduate stud- rights and peace leaders, critical in starting ies. Initially her main professional interest numerous initiatives, i.e., direct assistance was focused on medicine and health. to victims of war, protection of human However, in 1991 with the emergence of rights, development of peace building and the war in the Former Yugoslavia, her pro- educational programs, and provision of fessional interest shifted completely to psychological assistance. Ms. Kruhonja has civil initiatives, peace groups and non-vio- been very critical in supporting reconcilia- lent activities. Consequently, in early tion and peace building not only in the 1992, Ms. Kruhonja, together with a Slavonia region and Croatia but also in group of colleagues, established the Center other countries of the former Yugoslavia. for Peace, Non-violence and Human Rights—Oijek, which is the first human In 1996 Ms. Kruhonja received the rights and peace NGO in the war-affected European Circle Award for Human Rights Slavonia region. The Center was also an (European Movement of Croatia), and in active member of the Anti-War Campaign 1998 she received the alternative Nobel Network of Croatian human rights, sup- Peace Award, “Right Livelihood Award.” porting peace building and reconciliation.

Dimitrina Petrova Dimitrina Petrova is the Executive Between 1982 and 1995 Dimitrina Petrova Director of the European Roma Rights was teaching at the V. St. Kliment Okhridiski Centre which is an international non-prof- University of Sofia, where she lectured on it human rights organisation based in Philosophy and Philosophy of Law. Budapest, Hungary. From 1990 to 1991 she was a member of Previously, from 1992 to 1996 she was the Bulgarian Parliament, where she par- the Chair of the Human Rights Project in ticipated in the drafting of the 1991 Sofia, Bulgaria. This organisation moni- Bulgarian Constitution. tors the human rights situation of Roma in Bulgaria and undertakes legal defense She has worked in various fields of human in cases of human rights abuse. rights movements such as training human rights experts; conducting fact missions In the spring of 1995, she was Chair- on human rights abuses; organising con- holder and held courses on the “Human ferences; participating in a number of con- Rights and Ethnic Relations in Eastern ferences on human rights and related Europe” at the University of Oregon. fields. She was also a visiting lecturer to several universities and issued numerous In 1995–96 she was a Regional Co-ordina- publications. tor for Southeastern Europe, and in 1994 a Field Officer at the International Secretariat She is the recipient of several awards such of the International Helsinki Federation for as the Human Rights Award for 1994 Human Rights in Vienna, Austria. from the American Bar Association.

Partners in Transition: Lessons for the Next Decade 1999 Harriet C. Babbitt Harriet C. Babbitt was sworn in on counterparts from other OAS member December 1, 1997, as deputy administrator states and the OAS secretary general to of the U.S. Agency for International make the organization more responsive 15 Development (USAID). USAID is the govern- and effective, emphasizing democracy, ment agency that provides economic assis- human rights, sustainable development tance and humanitarian relief worldwide. and trade. Its six main objectives include: promoting economic growth and agricultural develop- Prior to joining the administration, ment, advancing democracy, delivering Ambassador Babbitt was an attorney with humanitarian and post-conflict transition Robbins and Green, P.A., from 1974 to assistance, improving health and popula- 1993. tion conditions, advancing education and training, and protecting the environment. Ambassador Babbitt served from 1988 to 1993 on the board of the National Before joining USAID, Ambassador Democratic Institute for International Babbitt was the U.S. permanent represen- Affairs (NDI), where she chaired the Latin tative to the Organization of American American Committee. NDI is an independ- States (OAS) from 1993 to 1997. She led ent organization affiliated with the the successful U.S. effort to reform the Democratic Party that promotes the estab- OAS to concentrate on high priority hemi- lishment and growth of democratic insti- spheric goals. She worked closely with her tutions in foreign countries.

First Lady of the U.S. Hillary Rodham Clinton

Hillary Diane Rodham was born in society to take responsibility for our chil- Chicago, Illinois, on October 26, 1947. dren. In her book, the First Lady empha- After graduating from Wellesley College sizes that while parents are the most in 1969, Hillary enrolled in Yale Law important influence in their children's School, where she developed a strong con- lives, and have primary responsibility for cern for protecting the interests of chil- them, society also plays an important role dren and families, and met Bill Clinton, a in rearing our nation’s children. In addi- fellow law student. tion, since 1995, the First Lady has penned a weekly syndicated newspaper Hillary married Bill Clinton in 1975. column, “Talking It Over.” In this column, While her husband served as Governor of she draws upon her experiences as First Arkansas Advocates for Children and Lady and on her observations of women, Families, introduced Arkansas' Home children, and the families she has met Instruction Program for Preschool Youth, across the country and around the world. and worked tirelessly on behalf of children and families, while practicing law in In addition to her work at home, the First Little Rock. She served on boards of organ- Lady serves as a goodwill ambassador for izations including the Children's Defense the United States during her visits abroad. Fund and the American Bar Association From Europe to Asia, Africa to Latin Commission on Women in the Profession. America, the First Lady takes her message of human rights, health care, and econom- In 1996, the First Lady authored It Takes ic empowerment for women across the A Village and Other Lessons Children globe. During her trips the First Lady has Teach Us, a national call for all sectors of advocated for human rights, promoted

1999 Partners in Transition: Lessons for the Next Decade microcredit as a means to economic self- building, for women's rights, and for he sufficiency, pushed for equality in educa- developing of a voluntary sector in tion for girls and boys, and spoken of the emerging democracies. importance of health care with an 16 emphasis on meeting the critical needs of Like her predecessors, First Lady Hillary women and children, including family Rodham Clinton brings to the role of planning and safe motherhood. She has First Lady of the United States her own also been a leading voice for democracy special talents, experience, and interests.

Partners in Transition: Lessons for the Next Decade 1999 17

Background Issues

en years after nations all over Central and tion (price decontrol), privatization, and macroeco- Eastern Europe and the former Soviet Union nomic stabilization. This led in turn to the expecta- Tundertook the task of transforming their politi- tion that the role of government in the new economies cal and economic systems, they and their Western part- and societies would be drastically diminished, as gov- ners have accumulated a wealth of experience in reform- ernments withdrew from resource allocation taken ing economies and political systems from central plan- over by market forces. That would defuse political con- ning and authoritarian rule to free market and pluralis- flicts of transition, as allocation of economic resources tic democracy. At the same time, they have encountered was transferred from the domain of public decision numerous problems, some that were not foreseen at making into the domain of voluntary exchanges early stages of transition, others that have proven to be between private parties. Relieved of excessive adminis- much more difficult to solve than was initially hoped. trative and fiscal burdens of centralized economic This paper provides a discussion, necessarily gener- management, governments would assume and effec- al, of issues encountered across the 27-country region tively handle the much less arduous functions of pro- and some suggestions for topics that might form the viding essential public goods for the economy and basis for discussions during the course of the two-day society, and maintaining safety nets for those unable Partners in Transition Conference. It is not meant to to earn adequate income in the marketplace. cover all topics related to the transition or to foreclose Although the role of economic, legal and political discussion of any topic at the conference. Rather its aim institutions of market democracy was generally appre- is to provide a general framework and a set of starting ciated, the task of establishing such institutions was points for discussion and debate. Those attending the not viewed as an urgent reform priority. This de- conference bring immense knowledge and experience to emphasis was predicated on the assumption, often bear on the themes of this meeting and a paper such as implicit, that institution building would occur sponta- this can best serve the limited purpose of provoking that neously to accommodate the interests of economic capability into conversation at the conference. agents. These interests, in their turn, would be articu- The paper has four main sections: cross-cutting lated through democratic political processes, and post- issues, democratic reforms, economic reforms and evo- communist governments would respond to grassroots lution of safety nets. The topics are inter-related and demand with necessary legislative acts. the suggestions for discussion are not meant to neces- The evident failures and the gigantic waste of the sarily be limited to a particular conference session. old system had created expectations that reforms were bound to lead to a significant and immediate improve- 1. BACKGROUND ment of living standards and that the anticipated economic gains would be broadly shared. It was not assumed that specific groups, such as women, would A. Expectations be made more vulnerable by the transition itself. Reform was supposed to transform initial hopes for a At the beginning of the transition most reform propos- better life into a sustainable support of the new eco- als included three main elements: economic liberaliza- nomic order at the ballot boxes. Social peace would be

1999 Partners in Transition: Lessons for the Next Decade cemented by the new, liberal, concept of justice, based economic stabilization), have only limited and often on individual freedoms, equal opportunities, and superficial impact, leading to emergence of the “virtu- rewards that are dependent on effort and merits. This al economy.” The latter provides a means to evade was an appealing alternative to the discredited egali- badly needed restructuring at the cost of growing tarian doctrine with its disincentives and de-facto imbalances and rapidly accumulating public debt, ulti- privileges to the “nomenclatura” elites. mately leading to monetary and fiscal meltdowns. 18 Value-creating activities in these countries are usually B. Lessons Learned confined within a small number of regions and industries, with the rest of the economy remaining severely Why have some nations managed to establish legal depressed. Narrow bases for market income lead to and political institutions conducive to economic growing inequality and poverty, which, in turn, nar- restructuring and growth and imposing necessary row political support for government policies. checks and balances upon governments, while in other Another lesson of the past decade is that econom- transitional countries political and institutional risks ic, political, legal and social transformations are tight- deter investors, public officials lack accountability, ly linked with each other. Newly established economic and corruption and abuse of power are rife? institutions will be functional or moribund depending Ten years of post-communist transition in over on incentives of economic agents and available institu- two dozen nations in Europe and Asia have produced tional alternatives. Draft laws have to be evaluated, mixed results. In some countries dramatic progress inter alia, by the extent to which they reflect economic has been made; in others progress seems stalled in and political realities, as well as the human and social many areas. The former have accomplished relatively capital of the country. Lasting macroeconomic stabili- quick economic turnarounds and since then sufficient- ty cannot be accomplished unless the labor market ly robust growth and political stability. In places with becomes fully functional and large social groups cease less reform, economic growth, if any, has often been to rely on explicit and implicit government subsidies. short-lived and fragile. Several countries have stagnat- ed for most of the decade or, worse yet, seen their output and living standards on a steady decline, breeding chronic political instability. There has been little con- vergence between the two groups of countries. And of course within countries there has been wide disagreement about the best course forward. Political explanations for stalled reform shed little light on why in some countries political processes were favorable for economic reform, whereas elsewhere they were not. It appears that processes of post- communist transition have their inner dynamics, which were little known and certainly downplayed ten years ago. These dynamics feature the powerful influence of initial circumstances that lead to distinctly different outcomes. Thus, countries differ from each other not only in rates of growth (or lack thereof) and other economic indicators, but also, and perhaps most importantly, in institutional setups. Countries that have been failing in their economic transition have developed surrogate institutions instead of the conventional ones required for efficient functioning of a market economy. Institutional surrogates include non-monetary transactions (via barter, non-payments, dubious notes of exchange etc.), private enforcement of outstanding contractual obligations, and sprawling informal sectors that outperform and crowd out economic units complying with officially sanctioned rules and institutions. Against these back- drops, otherwise sound policies (e.g., aimed at macro-

Partners in Transition: Lessons for the Next Decade 1999 Political stability and support for sound policies can- government could greatly expedite transition by offer- not be assured without a robust and sufficiently ing leadership, accumulating institutional require- numerous middle class, which is also an important mentsof dispersed economic agents, and constraining prerequisite for truly independent mass media. the level of political transactions that serve narrow All these linkages mean that successful transition interests at the expense of society at large. The prob- is a holistic problem, which requires thorough coordi- lem is that in reality post-communist governments nation of partial reform efforts. Such coordination is often fail the tests of administrative efficiency and 19 particularly important when economic failures aggra- political accountability, and as a result are unable to vate social and political problems, and political insta- perform these roles. Policy stalemates due to govern- bility, in its turn, hampers economic reform and ment inaction are common. restructuring. Initial blueprints for transition did not An often-proposed remedy is decentralization of foresee such vicious circles and therefore had no sug- reform, which parallels decentralization of govern- gestions as to how to find ways out of them. ment. First, this should alleviate policy conflicts, Earlier reform programs had only cursory imple- since populations of smaller units tend to be more mentation blueprints, and in particular paid little homogeneous than nation-wide agglomerations, attention to the interaction of government and society which makes it easier to reconcile individual prefer- in the course of reform. Both were often viewed as ences over policy options. Second, sub-national juris- constraints upon transition policies—governments dictions can experiment with different policies, legal because of their incompetence and proneness to cor- and regulatory regimes, thus opening a competitive ruption, and society because of likely resistance to “market” for institutions and providing for selection painful “shock therapies.” While the outcome of tran- and dissemination of best policies. However, the suc- sition was expected to bring about harmony based on a cess of this scenario is contingent upon sufficient eco- social contract between free citizens and a limited gov- nomic integration of regions, high spatial mobility of ernment protecting their rights, the roles of govern- capital and labor, and certain coordinating constraints ment and society in advancing reform were largely upon regional initiatives. Implementation of these downplayed. The notable exception was the aforemen- conditions, known as “market-preserving federalism,” tioned ideology of rapid privatization as a means to is in the hands of the central government, which is create an empowered constituency with vested inter- responsible for policing the unity of the national mar- ests in secure property rights—a constituency that ket and enforcing constitutional provisions on divi- would press the government through advocacy efforts sion of power between tiers of government. A failure into actions upholding the new economic order. of the central government to perform these functions Much of the reform “triad”—liberalization, priva- produces political incentives for sub-national adminis- tization and financial stabilization—was aimed at the trations to control regional economies, rather than set curbing power and discretion of the previously oppres- impartial rules for economic agents. sive and overly invasive government. Indeed, liberal- A credible commitment of government to pursue ization removes government controls over production reform policies must be based on a broad consensus in and exchange, privatization transfers production the society that would welcome a market democracy. assets from government ownership into private hands, The common explanation of unsuccessful transition due and financial stabilization requires the government’s to a lack of political will is incomplete: it does not adherence to strict rules of macroeconomic policy. address the question why such a will is missing. A more Extrapolation of this drive had led to the general con- accurate diagnosis would examine the social base for clusion “less government = more reform.” market reform. Expanding such a base is an urgent prior- While few questioned the role of the government ity for the countries that have been less than successful in provision of conventional public goods, such as law in their earlier efforts. At present this problem is much and order, economic infrastructure, and social safety more difficult than a decade ago when expectations were nets, the notion that market democracy in itself is a high, and the idea of economic freedoms and democracy major public good and its delivery might require an had not been undermined by the policy setbacks and integrated and positive view of a limited, but effective hardship that followed. Today’s opposition to reforms is state was much less common. This coordination was often fed not only by a lack of progress up to date, but often regarded as redundant, if not potentially harm- also by widespread skepticism about the future. ful, an impediment to spontaneous growth of new Reversing this trend is a complex social, political institutions from the grassroots. and economic problem. Desired social transformations The present view of government’s role is more bal- include strengthening and expansion of the middle anced. Today it is broadly recognized that a pro-active class. Well-targeted and adequately funded safety nets

1999 Partners in Transition: Lessons for the Next Decade and efforts to reduce barriers blocking access to the recipient relationships, common for the first years of labor market and suppressing development of small transition. It is expected that this conference will be businesses would lead to broader acceptance of a new an important step in this direction. economic regime. These and other similar changes have to be triggered in the political sphere, where ear- C. Multiple Outcomes of Transition: lier unsuccessful attempts to build unwieldy alliances How to Unlock “Bad Equilibria”? 20 and manipulate the electoral processes should give way to broad participatory approaches, public discus- The tendency of successfully reforming countries to con- sions and social evaluation of policy options. tinue to improve while in other places slow reform and Today, as ten years ago, post-communist nations slow growth reinforce each other, is based on a number are faced with numerous policy dilemmas and intellec- of factors and mechanisms. One of them is complemen- tual challenges. The difference is that in 1989 there tarity between economic progress and political stability. was a broad agreement, among reformers at least, Successful implementation of a reform program in a about necessary policy measures. A decade later in less democratic political environment is much more likely successful transitional countries these earlier when a program produces sufficiently broad social and approaches and premises are subject to revision and economic benefits, or at least credible and broadly re-assessment, and workable alternatives are still to be shared expectations of an economic turnaround. In found and broadly shared. Answering these urgent other words, to bring a post-communist nation to pros- questions requires a new partnership of reformers perity, the government needs popular support, which from different transitional countries with each other lends credibility to government policies, reassures and with their Western partners. investors, and makes it possible to overcome the resist- A large amount of real life experience—both posi- ance of narrow interests that gain from an unreformed tive and negative—of institutional transformations has economy. Such support, however, is in turn contingent been accumulated by post-communist leaders inside upon economic progress to date. This mechanism, when and outside of government. This experience includes political and economic successes and failures are feed- unlocking legislative stalemates, building social sup- ing upon each other, leads to divergent outcomes. port for reforms and reaching consensus about policy Successful nations continue to do well and those less options, facilitating small business development and fortunate stagnate. Where the institutional foundations reducing entry barriers for new entrepreneurs, discover- for a market economy remain absent or shaky, the weak- ing and testing new institutional forms, customizing ness deters investments, confines market exchanges to formal institutions to the realities of transition nations primitive spot trading, and stimulates capital flight. and thus making them work. Apart from being of great Another, closely related, component of a difficult practical importance, country-specific experience and transition is a weak government. The weakness of the the results of local experimentation are highly valuable government increases non-compliance with laws and for a general understanding of processes of economic official regulations, and in particular tax evasion. development, institutional change and political trans- Breach of law becomes a natural choice when authori- formations, and indeed, of the very nature of market ties lack resources to reward law-abiding individuals economies and democracies. However, this experience, and firms with high-quality public services, or to pun- although a vitally important intellectual resource for ish violators. This further undermines the govern- future reforms, remains highly dispersed and therefore ment’s capacity and creates another vicious circle. unavailable in its entirety to potential users across the Weak governments are almost invariably plagued with region. Putting this experience in the public domain is corruption. When violation of official rules is endemic, therefore an urgent priority. non-compliance is hard to conceal, and it requires the There are three reasons to suggest that the answers paid complicity of authorities. Low pay to public ser- to today’s intellectual and policy challenges of post- vants and short horizons of politicians and officials communist transition can be sought through an inten- make them less concerned about their reputations and sive international and interdisciplinary dialog and raise the attractiveness of kickbacks. Worse yet, as partnership of reformers from different countries and widespread corruption becomes a social routine, such fields of professional expertise, and their Western expectations become self-fulfilling. counterparts. The three areas are interdependency of Desperate to collect revenue, a weak government reform policies in different fields, the dispersion of sets excessively high tax rates, which makes tax eva- the relevant experience and the likelihood that there is sion a matter of survival for producers faced with more than one solution to similar problems. Such dia- competitors who en masse, are escaping the taxman. log and partnership should replace traditional donor- This leads to vast informal sectors, which offer produc-

Partners in Transition: Lessons for the Next Decade 1999 21

ers better terms of operation than the official time periods. The difference between good and bad economies. A large informal sector, however, is a outcomes is in the scope and scale of institutional dis- highly imperfect goal, since its institutions lack legit- tortions and un-law-bound behavior. What factors imacy and credibility and cannot form a basis for were responsible for a particular outcome is still long-term economic commitments. debatable. The “distance” that a transitional country One of the most damaging constraints is the had to cover in the process of its post-communist inability of a weak government to create a pre- transformation has surely played a major role: the dictable and enforceable legal and regulatory envi- greater the distance, the more difficult is the transi- ronment that would attract private investment. tion. Such distances have institutional and structural Stalled investments are the central problem of stag- dimensions. The former is concerned with existence nating post-communist economies, which lack a prior to transition of “proto-institutions” of market modern industrial base and economic infrastructure. economy, civil society, law and order and modern gov- Investments are badly needed not only for creation ernment. Arguably, such proto-institutions greatly of new firms—they also facilitate closures of old and facilitate reforms as they form a natural basis for a unprofitable ones without raising unemployment to new institutional order, which does not have to be socially unacceptable levels. When a nation is built from scratch. The role of the structural compo- trapped in a bad equilibrium, domestic and foreign nent, i.e. the depth of economic distortions left by cen- investors alike are deterred by prohibitively high tral planning, is still largely underestimated. And yet, institutional and political risks and erratic govern- such distortions greatly complicate transition, not just ment policies, and these concerns outweigh the pent- because they call for deeper and thus lengthier restruc- up demand for capital and potentially high return turing, but also by triggering political processes that that it could earn under better conditions. block such badly-needed restructuring. The problems of a malfunctioning public sector When patterns of informality and corruption are are compounded by “informal” modalities of private widespread, they become the rational choice of an transactions, such as barter and arrears. As with cor- individual agent. This means that “bad equilibria” ruption, acceptance of these highly inefficient means have no internal mechanisms for their gradual of exchange depends on their commonality: when improvement, and can linger indefinitely, depleting barter and arrears are known to be endemic, they are the resources of a nation. Another conclusion is that a acceptable for lack of better option. bad equilibrium is likely to resist and reject partial All of the above problems have been observed by reform efforts. Unlocking such equilibria requires con- all of the transitional nations in varying degrees and certed across-the-board changes, involving the coordi-

1999 Partners in Transition: Lessons for the Next Decade tional legitimacy, and are not challenged by any political force of significance, including those seeking major economic redresses. The idea of constitutionality has gained wider acceptance, and even though there are exceptions, significant political and economic changes are often being resolved by constitutional means. 22 An appealing strategy for implementing reform under democratic conditions, without going through a complex and largely unpredictable process of dealing simultaneously with a wide range of difficult institutional issues at an early stage, was to allow the new institutional order to emerge spontaneously. This scenario called for fixing a socially acceptable status quo and allowing the interested parties to bargain out of this status quo in search of a better allocation of economic resources, property rights, etc. This bargaining would result not only in better allocation of privately- held resources, but also in efficiency-enhancing public arrangements, such as institutions of the market economy, as well as laws and regulations enacted by the government in response to private pressure. The outcome of such bargaining was expected to be economically efficient. Based on voluntary exchanges, it should also be perceived as fair—otherwise it would have not been endorsed by the involved parties. For the same reason, this outcome should also be credible, that is, perceived as serving interests of the public which nated action of the government, affected economic would thus uphold and defend it. agents, and society at large. Although this approach has never been adopted as an official government policy, it was employed de facto D. New Institutional Order: to different extents by various transitional countries. Efficiency, Fairness, Credibility Its implementation, however, has revealed several problems, all of which could be illustrated by the Russian As has been suggested, the new economic and political privatization program. The main immediate objective order can only be sustained by popular endorsement. of the program was to privatize the predominantly Social consensus is the ultimate cornerstone of the state-owned firms as quickly as possible in order to cre- market democracy. Normally such consensus evolves ate an economically empowered constituency of private over long periods of time. In post-communist countries owners—natural agents for secured property rights. fundamental changes in economies and societies have Once the initial privatization was completed, new own- been compressed within a few years. This was bound to ers were expected to start pressing the government for produce acute political and distributional conflicts. To necessary legislation and at the same time engage in a steer reform through the turbulence of this period, it mutually beneficial trade in property rights, thus cor- was often suggested that reforms be sequenced, starting recting the inevitable misallocation of assets resulting with economic transformations and postponing politi- from a landslide privatization. cal liberalization until the new economic order is firm- The difficulty with this approach is the assump- ly rooted. With the notable exception of China and tion that all relevant groups will be represented in Vietnam, this option has never been implemented. such bargaining. Obviously, large social groups that Although some of post-communist nations in the are economically and politically disenfranchised can- course of their transition have employed more auto- not effectively participate in such bargaining. cratic forms of government, this has not proven to be a Consequently, the outcome will not reflect these successful way to strengthen market institutions, speed groups’ interests and won’t have their seal of approval up restructuring and facilitate economic growth. (a broad rejection by the Russian public opinion of the Elsewhere in the region, democratic forms of govern- controversial “loans-for-shares” schemes implemented ment have been broadly accepted and gained constitu- in 1996 is a case in point). The closely related second

Partners in Transition: Lessons for the Next Decade 1999 problem is that the pre-bargaining status quo was in rights shortens the time horizons of private owners, itself a result of poorly regulated and non-transparent making them less interested in the long-term market process riddled with irregularities. The outcome of value of their assets, than in opportunities to reap this process has never been endorsed by a majority of short-term gains. Such an attitude often leads to asset- population and is broadly perceived as unfair (The stripping and capital flight. Another option is to use designers of the Russian privatization program were economic assets for political influence, which allows primarily concerned with “buying” consent of then- so-called “oligarchs” controlling large fortunes to 23 current stakeholders who were capable of blocking pri- dominate both the economy and political life. vatization at the outset). The dubious legitimacy of Somewhat counter-intuitively, oligarchs could be the initial privatization makes insecure all the future opposed to secured property rights as a public institu- transactions and stifles development of an efficient tion, as it would complicate their economic and politi- market for corporate control. This leads to the third cal expansion. The expected grassroots demand for an problem: the insecurity of newly established property efficient institution thus fails to materialize.

1999 Partners in Transition: Lessons for the Next Decade 24

2.THE DEMOCRATIC and responsibilities of governmental entities of all sorts represent undertakings of historic proportion. TRANSITION Yet too often the new laws go unimplemented, decrees are ignored and bureaucrats go on doing (or not doing) A. General what they have always done. Despite hopes that repressed political voice would, once freed, flower The process of politics has undergone dramatic change quickly to guide and constrain political actors, the in the region. Among the most notable accomplish- reforms have not always proceeded smoothly or con- ments is the increased number of elections deemed sistently. The demand for better political institutions free and fair by international observers. Greater inde- may have been broad, but it has proved difficult to pendence of the press and reduced constraints on polit- translate into specific reforms. Wide agreement about ical and social associations have increased the means the problems of the old regime has not translated auto- by which governments communicate with citizens. matically to agreement on the way forward. This has And more slowly, institutional changes that provide at least two sources: real disagreement on what steps for the rule of law are being established. Among these are needed and resistance to change by interests that are courts able to enforce contracts, to constrain exec- are either already in place or that have found profit in utive branch agencies and officials, and to arbitrate the uncertainty. debates about newly emerging, fundamental political Attention to the positive aspects of reform—draft- institutions. Against this must be balanced concerns ing of laws that respond to the needs of market partici- about widespread corruption (both petty and grand), pants—has come in advance of progress in under- the weakness of government institutions in the face of standing or implementing reforms that constrain local or sectoral powers, and the evolution of political predatory behavior of either private or public entities. institutions toward more democratic and economical- Even more difficult to establish have been the range of ly useful outcomes. The resilience of prior interests policies and constraints on the use of the power of and patterns of decision-making has surprised some. government to establish special policy preferences or While the importance of transition to a society gov- exemptions for selected private interests. The web of erned by the "rule of law" is generally agreed, the steps constraining governance mechanisms that might limit necessary and the way to accomplish them are not at all such reform-undermining efforts are evolving more clear, and even when clear not necessarily easy to imple- slowly and less uniformly among the transition coun- ment. Societies tend to function in familiar ways and tries. These institutions include effective legislative arrangements must take account of existing interests oversight, checks on administrative irregularity, more and processes. At the same time, the process of massive transparent policy development and implementation, and peaceful institutional change is itself not well and broader and more frequent participation in these developed. Thus, just as economic and social programs steps by the affected publics. face challenges that grow out of the existing circum- The degree of change is remarkable, even if there stances and challenges inherent in the transformation are significant variations among the 27 countries. For itself, so too does political reform. The interrelationship most of the new states, this transition has involved not of the three areas of reform makes both discussion and only a change of regime, but the breakup of a prior state action difficult to compartmentalize. and reconstitution of new states. Others have either The number of laws that have been drafted and changed regime (such as Albania, Bulgaria, Hungary, passed, the number of decrees that have been issued, Poland or Romania) or inherited federal structures from and the extent of reorganization of the structure, size predecessor states (Russia, the Federal Republic of

Partners in Transition: Lessons for the Next Decade 1999 Yugoslavia and the Czech Republic). Violence has con- Russia, for example, ambiguity as to the scope of region- strained political reform in several states as well, the al or central authority has led to ad hoc negotiation of examples are mainly in the Caucasus, Southeastern center-region relationships, resulting in an asymmetric Europe and Central Asia. federal structure. Further, debate about authority for deciding the scope of local government further confuses B. Constitutions and Elections the constitutional landscape. The cases of Bosnia- Herzegovina and the Federal Republic of Yugoslavia pose 25 Background. While constitutions exist as the highest their own continuing issues in this regard. On the other formal declaration of a state’s scope, their importance hand, resolution of the scope of sub-national authority to political and economic life varies widely among has advanced usefully in places such as Poland. countries. Every country in the region, except The variety of constitutional success should not Hungary, has adopted a new written constitution since diminish the accomplishment represented by the hold- 1989, and some have made subsequent changes as ing of multi-party elections in every post-communist well. The adoption of a constitution, of course, does state except Turkmenistan. Most countries have held not lead inexorably to the “rule of law,” to smooth elections that meet international standards of fairness functioning of all branches of government, or protec- and regularity. Development of agreed-upon processes tion of the rights of citizens. To the extent that the of political contest have evolved faster in some places debates about constitutions provide for public airing than others. That great efforts are made to comply of issues fundamental to the functioning of democra- with constitutional procedures, even when these are cies, these have been productive parts of the transi- uncomfortable or unfamiliar for many leaders, speaks tion. Places where the debates have been more con- to the advance of constitutionalism in the region. At tentious and protracted (Poland only adopted a new the same time there remain in a subset of countries Constitution in 1997) have not necessarily suffered significant examples of voting irregularity, prosecu- for lack of a new document. Places where the constitution of opposition figures, disbanding of elected par- tional reform process occurred more quickly may liaments and broader constraints on civil rights and reflect less open debate of important issues, leading to political freedoms. later conflict and confrontation, or simply a by-pass- ing of parliament. So it is not clear that the timing of Issues for Discussion formal constitutional reform is as important as is ◆ When and how can remaining constitutional some means of attention to "constitutional" issues. issues be best addressed? The political structures provided for in the new ◆ What are the payoffs to free and fair elections? constitutions have had mixed success in establishing ◆ What steps are possible for countries to move out of checks and balances among the branches of govern- authoritarian or unbalanced political structures? ment. Systems with very strong presidencies or with ◆ What are the implications of party lists or single- unclear division of authority have made less overall member electoral methods? Do lower thresholds progress toward consolidating democratic reforms. If a for party parliamentary participation increase rep- parliament can remove a government and a President resentation or retard consensus? can in turn dissolve the parliament, the opportunities ◆ How can devolution of political authority be for conflict are abundant. This conflict leads to policy peacefully accomplished? In what areas do regions uncertainty at best; it has also led to violent confronta- and center complement each other? In what areas tion and to use of extra-constitutional methods of do they compete? political action such as electoral irregularities or call- ◆ In what areas of the transition should government ing of rushed referenda. serve as the "institutional architect?" What areas In places with relatively unchecked presidential ought to best develop spontaneously? power, political parties have not developed, parliaments have tended to be complaisant, presidential decrees have been more common, and constitutional C. Rule of Law: courts have been less effective arbiters of political Courts, the Procuracy and Enforcement structure issues. In several countries, the authority to call referenda has been used to extend presidential Background. Under communist governments, the terms beyond constitutional limits. exercise of government power was relatively uncon- Similarly, the constitutional attention to the rela- strained by the rule of law. Courts had little prestige tionship between regional governments and central and little power, and the law was not a principal authorities has not always resolved deeper issues. In means of resolving disputes. Similarly, individuals

1999 Partners in Transition: Lessons for the Next Decade facing the power of the state could not rely upon ade- into two distinct functions and administrative struc- quate legal representation against the state or unbi- tures to enhance the independence of the judiciary and ased adjudication of controversies. In general, the law the law-based neutrality of outcomes. Reform of the was not a guarantee against the arbitrary exercise of functions of procurators, reassignment of some func- state power, but rather its instrument. tions to other governmental bodies, and mechanisms Significant progress towards an effective rule of for increasing the accountability of the procuracy, have 26 law has been made since that period in many of the been widely undertaken, But inconsistencies in reforms transition countries. For example, a recent survey of leave anomalies in place in many countries. The impor- firms in Russia found that both the law and courts tant role of the procuracy in reviewing the legality of were important elements in resolving disputes between administrative actions while it is dependent on admin- firms and promoting the enforcement of contracts. istrative authorities on matters concerning appoint- At the core of this progress has been the emer- ment, budget support and location of procurators, cre- gence of wide consensus about the building blocks of ates obvious conflicts of interest. Furthermore, an an effective legal system, and the agenda which must unavoidable paradox is created by the fact that the dis- be pursued in light of the communist experience. cretion of the procuracy must be constrained at the Some countries in transition have made greater same time that crime and corruption are widely viewed progress on this agenda than have others, but for all, a as major measures of the weakness of the state. fully effective legal system consistent with democratic Third, across the region there has been a flurry of governance remains an as yet imperfectly realized law drafting. Civil codes have been reviewed and goal. Some of the key elements and issues in this agen- rewritten to take account of the needs of markets. da are the following. Hundreds of other laws have been drafted and enacted First, the law as a neutral, principled and unbiased as well. Criminal codes and procedures have been arbiter of disputes is a critical element, and that must rewritten. However, though valuable, these newly- mean the development of a judiciary genuinely inde- drafted laws have had less success than expected in pendent of influence from the parties to a dispute and advancing the rule of law, for several reasons. One is from the state itself. This may or may not require that the overall weak credibility of the state as a provider of the judiciary be administratively separate from the consistent policy: newly-drafted laws are sometimes executive branch of government, but it surely means incompatible with other existing laws or inconsistent termination of the conflict between being the operator with routines and expectations upon which relation- of the justice system and the supervisor of its legality ships in place depend, and sometimes the changes are at the same time. Achieving an effective and independ- haphazardly communicated to affected public con- ent judiciary consequently requires a judiciary knowl- stituencies. Another reason is the continuing low edgeable in the law, and with clear incentives to reliance on formal legal institutions in economies char- achieve a high level of competence and independence. acterized by barter, dependent on pre-existing commer- Ongoing training to enhance judicial competence, and cial relationships, and increasingly dominated by tax or the development of adequate mechanisms of judicial corruption-avoiding informal economic activity. discipline, removal, and appointment, remain items A fourth issue that must be addressed in many of on the agendas of most transition countries. the transition countries is assuring the effectiveness Furthermore, providing private parties with choices as of the enforcement of judgments. Too often, transi- to the adjudicating body can, in appropriate cases, tion countries have struggled to improve the quality introduce competition into the system to create incen- of their courts and the laws those courts implement, tives for improved quality and to permit the parties only to have those efforts sabotaged by inadequate more freedom in handling their legal affairs. ability to enforce the decisions of the courts. The rea- Second, the procurator can no longer play as large a sons for these difficulties are manifold, from inade- role in state policy as it once did, and to some extent quate legal doctrines such as weak statutes relating to this change has occurred across the region. Under the fraudulent transfers, to banking and company law communist governments, the procuracy was "the which permits assets to be too easily hidden to evade supreme and general supervisor of legality," a central- collection efforts, to inadequate incentives for agents ized hierarchical organization with broad powers in to succeed in achieving collection of judgments. The criminal and civil matters that dominated the adminis- issue of enforcement has been too little addressed, tration of justice at the expense of neutral and inde- and often seen as a detail of only marginal relevance pendent courts. Both constitutional and statutory to the activities of the courts. Ultimately, without changes are altering that skewed allocation of discre- adequate enforcement measures, public reliance on tion between courts and procurators, separating them the law to resolve disputes cannot be enhanced, and

Partners in Transition: Lessons for the Next Decade 1999 the problems of enforcement must be addressed with ing important roles in the transition countries as well. the same seriousness that more traditional areas of At the same time, organizations aimed at influencing law have received. political outcomes and indeed gaining political power, Fifth, increasing the respect for the rule of law also constitute important parts of the transition land- involves increasing the professionalism and capabili- scape—parts that are neither state nor private. A full ty of lawyers. Part of this demand relates to new consideration of civil society ought to include not roles as advocates or arbiters of matters related to only non-governmental organizations (NGOs) and 27 market transactions. But it also relates to the alloca- other organizations that are non-profit or charitable, tion of responsibility and authority for law enforce- but also those that have strictly policy advocacy ambi- ment, from investigation to prosecution to enforce- tions. Thus for the current purposes it seems useful to ment of judgments. Training and information are consider two aspects of civil society: that activity two key resources to be applied to this challenge. aimed at providing social services and that aimed at Much of this must be the province of bar associa- influencing government policy even as some organizations and judicial associations, through which legal tion engage in both activities. Community activism professionals can work together to enhance their and empowerment to advance common goals are own effectiveness and bring an independent and con- important assets for any democracy. Increasing the cerned voice to the choices made by the government role of NGOs of various sorts broadens opportunity for with respect to legal matters. citizen involvement in public affairs, stimulates inno- This is not an exhaustive list of issues affecting vation in delivery of services and diversifies voices the ongoing development of the rule of law. A change participating in policy development and oversight of of governmental philosophy as massive as that which government. the transition countries have undergone in the last decade will unquestionably have effects and problems NGOs and Social Services. Disentangling the state that reach into every corner of the legal system. from cradle-to-grave social support is a complicated political, fiscal and social challenge. Compounded by Issues for Discussion the constraints of economic contraction, by structural ◆ What constitutional constraints have helped distortions of the inherited economy and by uncertain- reform the role of the procuracy? To which branch ty about the location of governmental social service of government should the procurator report? responsibility, these challenges have left a gap in deliv- What functions should be assigned to others (pris- ery of a wide variety of social services. Development of ons, criminal investigation a new consensus on the nature and level of state social ◆ Given the widely reported levels of crime and cor- support is taking time as political processes determine ruption, should we be limiting the reach of the the allocation of state effort. As this occurs, individuals procuracy? dependent on such services find themselves without ◆ What steps have led to a more independent and access or voice. NGOs specializing in social services capable judiciary, and to a more accountable have sometimes stepped into these gaps. In addition, procuracy? empowerment of the beneficiaries of various social ◆ Should steps focus on judges themselves or on services is an important contributor to more responsive other inputs to consistent, rights-respecting judi- and efficient design and delivery of programs. cial performance? Civic initiatives and communal activity existed ◆ What circumstances affect the utility of importing prior to the advent of the communist regimes and laws from successful market democracies? indeed in a constrained form, throughout the period of ◆ How can non-government bodies assist in train- state control of society. Many organizations prior to ing, oversight or on-going information needs of the transition served as modest outlets for the expres- judges, prosecutors, bailiffs and others? sion of political interests. Industry, regional or occupa- tion-specific groups come to mind. In addition, informal networks or groups among intellectuals, technical D. The Role of Civil Society elites and youth served as precursors to NGOs that have blossomed since political liberalization. Background. Voluntary and non-profit organizations The legal apparatus recognizing the NGO sector play important roles in most market democracies. By typically consists of a law on the legal status of volun- providing social services, creating and disseminating tary, self-governing, non-commercial organizations set information, or advocating on behalf of members, self- up for various public purposes; of tax laws providing formed non-profit or voluntary organizations are play- for treatment of the revenue and expenses of such

1999 Partners in Transition: Lessons for the Next Decade organizations; of laws on charitable giving and of a political parties in the region often begin as social variety of regulatory requirements. Attention to a new organizations. Even social service NGOs often play legal environment for NGOs among the 27 countries important roles as advocacy organizations as well. of the region varies in parallel with more general polit- During the transition the need to resolve funda- ical liberalization, with greater scope for NGOs provid- mental matters of constitutional and economic poli- ed in countries with more open political life. cy contributed to the rapid evolution of existing 28 Sustainability. New laws have not been adequate interests groups into lobbying organizations. in themselves to develop the NGO sector and will not Traditional trade associations organized by industry insure the longer term role of civil society organiza- or region, and labor organizations associated with tions. First, weaknesses in the initial laws have often individual firms insured that the status quo was well limited the development of NGOs by complicating represented in policy debates. New organizations, registration and leaving important matters either particularly those representing new professions or unclear or still subject to state interference. Second, new industries, have had a more difficult time estab- dependable revenue sources and professional manage- lishing themselves as effective voices. An exception ment are linked to sustainability of the sector and to is the banking sector where resources for political realization of the several benefits that flow from a activity are more readily available. In contrast, stronger NGO sector. organization of new or small firms is hampered by Funding for NGOs comes from a wide variety of the issues facing all NGOs as well as a range of issues sources: members, contracts and grants from govern- related to non-transparent policy processes that dis- ment and foreign donors. Sources of sustainable, courage outsiders. (This constraint might lead such domestic support depend on development of broader organizations to focus on providing services to mem- traditions of charitable giving, simplification of pro- bers rather than on seeking their own special interest curement process for contracting out of services to legislation or subsidies. But this does not suggest the NGO sector and improvement in the fund-raising that a useful counterbalance to the well-organized capability of NGO operators. Success in this regard interests will emerge easily.) will come as NGOs themselves develop professional As with the recognition of political parties of governance and management systems to insure regu- diverse viewpoints, accepting political activity of larity of financial operations and to assure pursuit of non-profit organizations or associations does not the core goals. These both relate to increasing the lev- necessarily insure that such activity advances devel- els of confidence among citizens and others. opment of democratic or market institutions. In Policymakers in the region face other issues order to gain and maintain members, most associa- related to non-profit organizations that are similar to tions will need to provide direct services and/or those faced in more settled political environments. access to benefits that can be provided by the govern- These include ways of legally and practically distin- ment. Often these take the form of increased budget- guishing the scope of appropriate activity defined as ary support or legislative special treatment for mem- non-profit or for-profit, limits on the commercial bers of the organization or protection from domestic activity of non-profits, the political activity of NGOs or foreign competition of various sorts. Even organi- receiving state support, and other areas where state zations that begin with appeal to broad concerns or organs or officials may participate in NGOs. with external support may find that pressures to Resolution of these issues in a way that leaves clear maintain momentum force them to target or obtain guidelines for NGO decision-making without erect- selective incentives that benefit only those who are ing or maintaining a state regulatory role is an active members. emblematic challenge of the transition. Increasing the voice of associations representing new or traditionally under-represented groups will Influencing Government Policy. Political advocacy be facilitated as public policy is developed in more organizations aim to affect government policy. Political open and transparent fashions. Publication of pro- parties do this too, though only parties formally proposed policies, consultation with affected popula- pose candidates for elected office. During the transi- tions, and the development of independent research tion, as political freedoms have expanded, the role for and analysis organizations all reduce the advantages both types of organizations has changed dramatically. of proximity to political power. Dozens of such poli- Both parties and advocacy organizations are essential cy analysis centers have been established during the to reducing the alienation of individuals from society transition, with varying degrees of independence and improving the responsiveness of politics to the from political or state organs. But the level of infor- needs of citizens. It is symptomatic that full-fledged mation and analysis contributing to transition poli-

Partners in Transition: Lessons for the Next Decade 1999 cy discussion is in many countries increasing the medium relied upon for news, is still controlled by the diversity of viewpoints in useful ways. state in most countries of the region. There are notable exceptions to this; Russia and Romania are two. And Issues for Discussion despite state ownership, there has been impressive ◆ What role can NGOs have in improving policy growth in the number of independent stations. Even development? here, however, independence from the state has not ◆ How relevant are democratic procedures within meant that there have developed editorial standards that 29 civil society organizations? create pressure for political and economic reporting that ◆ Is it important to distinguish among social service is independent of the owners of the press entity. NGOs, advocacy or lobbying groups? Given historical practices as well as conflicts ◆ What level of state oversight of fundraising, inherent in any governmental regulation, the develop- finances, governance or activity is consistent with ment of professional standards and ethical norms in advancing democratic practices? the media seems particularly suited for self-governing ◆ What functions, formerly the responsibility of the standards effort. Development of regularized access to central government can be transferred to other government-held information can play a role in organizations such as non-government organiza- increasing public expectations of media quality. tions or local government? One constraint on the independence of the media is libel laws making it either a crime or imposing civil E. Independence of the Press liability for offending officials or criticizing the government. In places where courts are functioning rela- Background. Freedom of expression, limitations on tively independently, such actions have not advanced state control of the media and access to government as serious threats to press independence. information all advance democratic processes. Independence of the media and access of political par- Issues for Discussion ties to the media are important not only for the suc- ◆ What steps can lead to professionalization of the cess of elections, but also in the development of specif- media? ic government policies and programs and in oversight ◆ How can standards for media independence and of government performance. disclosure of conflicts of interests be advanced? Is In general, there have been dramatic increases in self-regulation practical? How should such stan- press independence and pluralism. Newspapers and dards be balanced with individual remedies for other media are now freer to criticize government defamation? actions and to present the views of opposition parties. ◆ How concerned should we be with concentration But the picture is not uniformly positive. Television, the of media ownership in private hands?

1999 Partners in Transition: Lessons for the Next Decade 30

3. ECONOMIC A. Achieving Macroeconomic Stability

TRANSFORMATION Macroeconomic stability was and remains one of the top priorities of transitional policy-making. Stable There have been wide differences among the CEE/NIS money is imperative for efficient market exchange, countries with regard to the extent and depth of struc- encouragement of saving and investment, and ulti- tural changes undertaken in their economies. But vir- mately sustainable economic growth. A majority of tually all these countries experienced, in the late post-communist nations were burdened at early stages 1980s and early 1990s, a sharp fall in GDP, arising of their reforms by macroeconomic imbalances inher- from a combination of the collapse of the central plan- ited from the old regimes and further fueled by trans- ning system, the dissolution of the mutual trading formational recessions. As a result, almost all of these arrangements under COMECON, and the inevitable countries experienced a period of falling output and delays in building a new, market-based economic sys- high inflation, which inflicted heavy social and eco- tem. In nearly all these countries, the fall in output nomic losses. In general, stabilization programs imple- was accompanied by high inflation. In some countries, mented across the region have delivered the desired generally those where economic reforms are most results, reducing inflation to economically acceptable advanced, positive growth has resumed since 1995 levels and maintaining steady exchange rates of (i.e., in most Central and Eastern European countries, national currencies. In several countries, however, outside the CIS). However, even in these countries, price and exchange rate stability remain a problem. In over-employment in large state enterprises remains a most countries output is still below pre-transition lev- threat to the unemployment situation in the future. In els, although in many countries positive economic Russia, the largest country of the region, the only year growth has resumed. of even small GDP growth was 1997; output fell again Some countries achieved macroeconomic stability in 1998, with the financial crisis of the summer, and relatively quickly, and since then have been reaping the it is likely to fall further in 1999.1 Similar develop- expected benefits of low inflation and stable currencies. ments have plagued the other CIS countries. This financial well-being is sustained by healthy eco- The huge task of restoring growth and building a nomic fundamentals, such as prudent fiscal policies, dynamic, market-based economy is discussed here that render credible the commitments of governments under the following headings. First, there is the and central banks to maintain stable national curren- achievement of macroeconomic stability, itself a prereq- cies. This credibility, in turn, suppresses inflationary uisite for stimulating the saving and investment expectations and stimulates investment and growth. required for sustained growth. Next, there is discussion Elsewhere in the region, the hard-won financial of the problems involved in building the markets for stability remains more fragile. Normally, the key to labor and capital required for a properly functioning such stability is a sound banking system, in which market economy, followed by the closely related topic of banks serve as intermediaries channeling financial how to create an environment attractive to domestic resources into the economy and transforming savings entrepreneurs and foreign investors. The final topics in into investments. All of the transition countries have this section are local economic development and the put in place two-tier banking systems, with a central role of local government, and environmental protection. bank and a system of commercial banks. But in many countries, commercial banks are plagued by non-per- 1. See footnote 2. It is difficult to estimate the extent to which forming loans, poor management, and less-than-arm’s- these measured falls in output are mitigated by increases in length relations with businesses and governments. unmeasured informal economic activity.

Partners in Transition: Lessons for the Next Decade 1999 Moreover, governments faced with severe fiscal imbal- questioned at times. A system like that in Estonia, ances have resorted to massive borrowing, paying a with a currency board ensuring tight linkage of the premium interest rate on their bonds, with the result money supply to hard currency reserves, is sometimes that high-yield government securities have dominated suggested as a more credible, if inflexible, alternative. banks’ investment portfolios and crowded out indus- The important and, perhaps, most difficult task is trial investments. At the same time, tax evasion tends to restore trust in national banking systems. to discourage businesses from using the banking sys- Confidence building is critically important for stopping 31 tem for purposes of payments and saving, encouraging capital flight and for inducing households to take their them instead to resort to foreign exchange or surrogate savings, often in hard currencies, from under mattresses non-monetary transactions. and turn them into a potential investment resource for Under these conditions stable money does not the national economy. A large number of banks, some trigger steady economic growth, and servicing the with numerous clients in the industry and the house- mounting public debt against the backdrop of a stag- hold sector, have serious balance sheet problems stem- nating economy becomes increasingly difficult. This ming from the past legacy of the “soft budget con- endangers hard-won financial stability, and a fiscal straint.” Bailing out these banks would preserve their and monetary meltdown, as the 1998 crisis in Russia infrastructure and spare their clientele massive losses, has shown, is an ever-present possibility. Nevertheless, but such bailouts need to be highly selective, in order with the exception of Russia, other countries in the not to weaken the incentives of financial institutions to region weathered the global financial problems of exercise diligence and prudence in their future invest- 1997–1998 quite well. ments and lending. Likewise, introduction of a deposit Foreign investments, instead of providing an impe- insurance system, while critical for strengthening pub- tus to economic growth, could make matters worse. lic confidence in the national banking system, must be While in some countries (notably Hungary, Poland and designed so as not to dilute the incentives to depositors the Czech Republic) foreign direct investment has been to choose sound financial institutions. Strengthening substantial and growth-enhancing, in other countries, technical aspects of banking systems, like payments sys- to the extent that there is foreign investment at all, it tems and collateral registries, is also crucial to making tends to flow into highly liquid assets that allow a banks serve the needs of the public and businesses. The quick repatriation of funds at first signs of an availability of credit for small and medium-size enter- approaching crisis. Such reflows contribute, of course, prises is a problem requiring particular attention if a to self-fulfilling expectations of a devaluation of the growth dynamic is to be restored to these economies. national currency and foreign debt problems. The Russian financial crisis of 1998 has height- While a number of transition countries have gone ened debates about the order and sequence of financial far toward developing effective and credible mecha- liberalization. Financial institutions that enjoy free- nisms of macroeconomic management and financial dom of action in an incomplete legislative and regula- regulation, in many countries central banks—despite tory environment are not constrained by effective safe- de jure independence—have not yet developed the guards against incompetence and abuse, including tools to ensure that the goal of financial stability is abuse originating with links to governments. met. First, even if the central bank is in full control of Attempts to fill the legislative and regulatory void monetary policy instruments, fiscal policies are in the after an initial liberalization have sometimes been government’s hands, and given the dominant role of impeded by powerful financial interests. government securities on financial markets of fiscally troubled nations, the executive branch’s decisions Issues for Discussion strongly interfere with the central bank’s policies. ◆ How can confidence in the financial systems of Second, the ability of the central bank to regulate the CEE/NIS countries be strengthened? national banking system and other financial institu- ◆ To what extent do governments of CEE/NIS coun- tions is often sharply reduced by a non-cooperative leg- tries bear responsibility for systemic banking islature. Third, central banks themselves are still in crises? What should be government policies the process of building capacity to carry out pruden- towards banks and their clients who have become tial oversight of national financial systems, and have victims of such crises? occasionally been engaged in dubious practices. For all ◆ What role could foreign banks play in establishing of the above reasons, not to mention the vulnerability efficient and credible financial institutions in of monetary authorities to lobbying pressures from transition countries? narrow interest groups, the very idea of sovereign con- ◆ What measures should be taken to reverse capital trol over transitional nations’ monetary policies is flight and turn domestic savings into investments?

1999 Partners in Transition: Lessons for the Next Decade ◆ How should financial liberalization be coordinat- Instead of alleviating these disparities, structural ed with regulatory and legislative reforms? How changes under economic transition could make them can the banking system be made more responsive worse. At early stages of reform new business develop- to the needs of depositors and borrowers? ment is largely confined within the service sector. ◆ How can monetary, fiscal and other macroeconom- Unlike manufacturing, services cater to local demand ic policies be coordinated among the central banks, and tend to be concentrated within areas with higher 32 executive agencies and the national legislature? household incomes. This pattern of structural change does not assist adjustments in the cities and regions of B. Market Development and Restructuring "rust belts," where "poverty traps" retard development of small and medium business and leave highly ineffi- Economic recovery and growth in transition countries cient subsistence production, like the cultivation of must be based on a reallocation of the existing stock of small plots of land, as the only recourse. It makes pover- human, physical, natural and financial resources. This ty chronic and leads to massive waste of human capital. alone can produce broad efficiency gains, eliminating Another important prerequisite for successful eco- the structural distortions and wasteful use of nomic restructuring is an adequate legal and regulatory resources prevalent under the previous system and framework for corporate governance. Corporate gover- thereby bringing the level of output closer to the econ- nance is particularly sensitive to the quality of the omy’s potential capacity. Efficient allocation of nation’s legal and regulatory setup, and its malfunc- resources, in turn, requires a set of well-functioning tioning in the transition countries that are lagging markets. While markets for final sale to consumers behind in their institutional reforms and experience have developed rapidly in these countries, the develop- chronic political instability comes as no surprise. It ment of the input markets required for redeployment was mentioned earlier that sweeping privatization of wrongly allocated resources is often hampered by programs have not necessarily led to concentration of various barriers, both natural and man-made. property rights in the hands of "effective owners" con- The inefficiency of labor markets in most transi- cerned about the market value of their assets. In par- tional countries is manifested by the large discrepan- ticular, corporate managers often face few constraints cies between output contractions—sometimes as high in pursuing their own objectives at the expense of as 50% of the pre-reform level—and relatively low shareholders and the economic health of their firms. official unemployment figures, rarely exceeding 10% Another problem is domination in corporate decision of the labor force. Workers are reluctant to quit their making of large economic and financial groups, which old employers for a lack of better options, and tolerate put the goal of expanding their clout ahead of con- instead meager salaries and chronic wage arrears. This cerns about the profitability and efficiency of the is partly due to an overall shortage of vacancies, but firms they control. In this environment, the rights of even when aggregate demand for labor is weak, in minority shareholders and foreign investors are often severely distorted economies there is still plenty of disregarded and abused. Energetic implementation of room for efficiency-enhancing turnover within the reformed corporate law and regulation is necessary to labor force. In fact, labor mobility is also restricted by offset these tendencies. inadequate and poorly administered unemployment Bankruptcies, which are supposed to be a potent insurance systems, vast price differentials of real means to discipline managers and create incentives for estate between relatively prosperous and stagnating raising firms’ efficiency, have so far failed to fully per- areas, and administrative barriers, often unconstitu- form these roles in transition countries. One of the tional, erected by local authorities to hold off migra- reasons for this is that privatization has often not suc- tion from other regions. While distance is not such an ceeded in eliminating subsidies and influence-ped- important factor for geographically smaller countries dling and in imposing "hard budget constraints" on with well-developed transportation systems, it leads to firms. In reality, discretionary subsidies to nominally spatial segmentation of labor markets in the larger private companies continue, especially in implicit CEE/NIS nations, and consequently to deep interre- forms such as tax offsets and toleration of arrears to gional wage and income differentials. Workers are government-controlled natural monopolies. In fact, in often trapped within recession-hit cities and regions, some transition countries collusion between govern- where jobs used to be concentrated at a few—some- ment officials and private businesses might well be on times one or two—large enterprises that are presently the rise, since concentration of economic power facili- defunct. In addition, important social services are tates lobbying. The second reason for delayed bank- often tied to employment—housing, health care, and ruptcies is social: the social costs of layoffs, high as child care, to name a few key ones. they are in developed market economies, are often pro-

Partners in Transition: Lessons for the Next Decade 1999 hibitive under conditions of systemic crises, chronic this involvement, local authorities build up their hold- recession and poorly developed social safety nets. ings of firms’ shares, which they acquire in lieu of Stalled liquidation and downsizing, apart from non-paid taxes. Finally, privatization programs that perpetuating inefficient or even predatory manage- transferred large portions of equity to firms’ insiders ment, deprives the fledgling private sector of produc- have revived the idea of labor management. Despite the tion assets and other resources that could have been well-known deficiencies of labor-managed firms, they released in the process. In some countries in Eastern offer a solution to the problem of abuse by managers 33 and Central Europe, restructuring has proven to be when a conventional corporate control market is highly important for a successful economic turn- defunct. In particular, labor management is an effec- around, where initial recessions due to a sharp reduc- tive safeguard against asset stripping. tion of output of traditional firms were quickly It remains unclear whether the above forms of cor- reversed by the rapid growth of private firms. porate control are temporary second-best adjustments Transition countries have had various degrees of to imperfections of transitional institutional setups, success in establishing capital markets. Unfortunately which will be evolving towards conventional patterns, the countries which need these markets most—namely or whether they have lasting merits and could be pre- those with badly distorted industrial profiles—have served in the long run as viable alternatives to the been least successful in promoting security trading standard model. It should be kept in mind, however, because of political and financial instability, lack of that prevailing forms of behavioral and organizational protection of shareholders’ rights, and high institution- adjustment to the existing incomplete institutional al risks. These countries’ stock markets are unstable environments are likely to have a strong impact on the and disproportionately thin, and their capitalization subsequent process of institutional change. remains low. There is, of course, a close relationship between the preconditions for establishing a properly Issues for Discussion functioning capital market and those for encouraging ◆ How can labor mobility in CEE/NIS economies be direct foreign investment (see section 3.c, below). enhanced? (See also issues for discussion, Section While most CEE/NIS countries still have a long 4.b) way to go until they have full-fledged and efficiently ◆ How can the social costs of bankruptcies be functioning markets for corporate control, they are reduced or compensated? experimenting with non-conventional forms of manage- ◆ What policies could initiate the restructuring of ment and ownership. One of these forms is financial- regional economies dominated by obsolete firms industrial conglomerates comprising companies and and industries? financial institutions. Such conglomerates, which are ◆ Can the private sector best be developed from pri- surrogates for corporate mergers, are able to internalize vatized traditional firms or from newly estab- transactions among their members, thus partly making lished private companies? up for the immaturity and volatility of transitional ◆ How can the accountability of managers to share- markets. Cross-ownership, coordination, and trust holders be strengthened? within close-knit company managements solve prob- ◆ Should the participation of regional governments lems arising from inadequate market information and in the ownership and control of industrial firms facilitate financing of participating companies. On the be encouraged or resisted? negative side, conglomerates restrict competition, put ◆ Should transitional countries view development in question the soundness of lending decisions of par- of stock markets as an urgent priority or as a long- ticipating banks, and often acquire massive political term goal? clout that is used to seek preferential treatment by the government. The opposite, and often hailed, trend is C. Environment for New Business breaking up large firms into several independently oper- and Foreign Investments ated entities, which reduces the cost of managerial mis- takes and relieves potentially viable parts of a company The initial contraction of output in most CEE/NIS of the burden of supporting the loss-making units. economies has been at least partly reversed by indus- Another pattern is participation of subnational trial investments and small business development. governments in ownership and control of firms. This Both small businesses and private investments are form, which has proven to be highly effective in highly sensitive to the quality of the institutional China, is becoming increasingly popular in Russia, environment. Unlike the spot markets that have where regional administrations are increasingly inter- sprouted up instantly throughout the region in vening in corporate decision making. To legitimize response to economic liberalization, small business

1999 Partners in Transition: Lessons for the Next Decade development and investment activities show profound numerous market niches, absorbing labor released in variations from one CEE/NIS country to another. the course of restructuring, and stimulating entrepre- Most transition economies feature various niches neurship and innovation at the grassroots level. Small in their industrial structures that promise potentially business development usually spearheads an economic high returns to investment capital. However, these nat- turnaround in transitional countries, as it provides for ural and structural advantages could be utilized only if quick and efficient redeployment of available human 34 investors are satisfied with the country’s institutional and physical resources. setup, legal system, fiscal and financial policies and Small entrepreneurs also play a very important overall political stability. Promises of good investment social and political role by forming a core of the middle climates are common for governments throughout the class—the centerpiece of support for reform policies. region, but the critical issue is the credibility of govern- Women entrepreneurs are a major—though often ments’ commitments to honor investors’ rights. This unrecognized—component of this class. For example, credibility is in part based on past policies: better-per- in Hungary, women created more than 40% of business- forming transition economies can build on their earlier es established between 1990 and 1997, and in Poland, successes, whereas less fortunate nations are haunted 38% of all registered businesses are women-owned. by past crises and policy failures, and as a result are Small businesses thrive in a competitive environ- unable to raise private capital that they need so badly. ment with moderate taxes and efficient market infra- The domestic investment resources of CEE/NIS structure, including public protection of property countries are typically insufficient to meet the needs rights, law and order, and access to capital and other of their economies, which induces these countries to resources. Unlike large firms, individual small busi- vie for foreign investment. In today’s world, countries’ nesses have no political clout and cannot wrest from own financial resources are losing their importance as the government exclusive benefits and concessions. a factor of economic development in comparison with Accordingly, the health of small business is a litmus the quality of their infrastructure and of their human test of the country’s ability to create a rule-based com- and social capital. The latter, in particular, increases petitive economic environment. returns to investment in the national economy, Once the political constituency of small entrepre- reduces investment risks, and thereby could help raise neurs is firmly established, it can become politically necessary capital on global markets. One important influential, pressing government to respond to its benefit of direct foreign investment is that it is gener- needs by sustaining and further improving the envi- ally accompanied by the transfer of new technologies, ronment for business. Creating a broad constituency modern know-how and efficient management. for small business reduces the likelihood of successful Not just the volume, but the structure of foreign special interest lobbying by particular industries. investment is of key importance. High interest rates However, if small business development is retarded, and temporarily fixed exchange rates may attract tem- national policy making tends to be dominated by a few porary inflows of capital from abroad. However, such powerful political and economic groups that are not inflows do not lead to accumulation and moderniza- interested in policies supporting competition and tion of production capital, because investors are seek- reducing barriers to entry. In this case, natural obsta- ing speculative capital gains rather than corporate cles to the formation of small businesses— such as profits and dividends, and, as a result, such foreign sluggish consumer demand during a recession, diffi- investment has little impact on economic perform- culties to raise start-up capital, and insufficient infor- ance. The record of those countries and companies mation and know-how—are exacerbated by man-made that have been able attract long-term loan and equity hurdles, such as oppressive taxation and unnecessarily capital from abroad give important examples to be fol- restrictive regulations, both of which inevitably breed lowed by other parts of the post-communist world. corruption. In such an environment, the government Despite the need for direct foreign investment for may not offer small businesses protection against the modernization and restructuring of traditional enter- criminal underworld, and small and medium-size prises and creation of new industrial firms, stimulat- firms will tend to join the informal sector. ing investment from domestic sources is an important Improvement of the environment for small busi- first step towards economic recovery and growth, not ness remains an urgent priority of many transition least because domestic capital accumulation signals nations. An important policy problem is which of international investors that those best informed about these improvements could be accomplished at the the local situation find it sufficiently promising and grassroots level within the community of small entre- trustworthy. In the process of stimulating domestic preneurs through professional associations, credit investment, small businesses play a key role by filling unions, and small business support institutions, and

Partners in Transition: Lessons for the Next Decade 1999 which of them require government actions. In both Decentralization of government therefore opens cases, the critical problem is consolidation and coordi- an opportunity to advance reform "from the bottom nation of efforts of small and medium entrepreneurs up." Indeed, devolution of power, which has become a — either for the sake of advocacy of their interests, or standard feature of successful post-communist transi- for other types of collective actions. tion, has made it possible to target more precisely and raise the efficiency of social programs, spur local eco- Issues for Discussion nomic development through infrastructure projects 35 ◆ What have been the most successful approaches to and incentives to private investors, increase the trans- attracting direct foreign investments: offering parency of the public sector, and stimulate broad civic prospective investors tax breaks and similar bene- participation in communal affairs. fits, or improving the overall investment climate Nevertheless, the experience of the past decade has of the country? also shown that the success of government decentral- ◆ What have been successful techniques for CEE/NIS ization depends on certain conditions. The first of countries to improve their previously negative these conditions is a balanced, predictable and effi- investment image? cient system of intergovernmental public finance, ◆ Should there be restrictions on repatriation of for- which matches the responsibilities of regional and eign investment capital (such restrictions could municipal units with their own tax revenues and, prevent an investment panic, but at the same time where necessary, grants from higher-level govern- they negatively affect investor’s confidence)? ments. Such grants should be designed so as to stimu- ◆ What approach has been most useful in best serv- late local fiscal efforts; in particular, regional units ing the needs of small businesses: through private should be subject to hard budget constraints that cre- business support firms, business associations, or ate incentives to expand local tax bases and cut waste by government agencies? in the government. Another condition is the coordina- ◆ How might collective action problems among tion of regional policies and regimes by market-pre- numerous and dispersed small and medium entre- serving national legislation that prevents local preneurs best be dealt with? attempts to curb competition, protects property and ◆ How might access of small businesses to start-up contract rights, and supports other economic and capital and other resources best be facilitated? political freedoms. Finally, successful decentralization ◆ Women start one-third of new businesses in the is more likely if there is sufficient mobility of capital region: how can this contribution to economic and labor between jurisdictions, to enable people to growth be further stimulated? “vote with their feet” for better regional policies. When some or all of the above conditions are vio- D. Local Economic Development lated, decentralization is in danger of replacing national rules with local government discretion, and of con- Decentralization of economic policy making and devo- fiscation and redistribution of wealth in favor of the lution of power to regions and localities increases the cronies and political supporters of the local leaders. accountability of public servants and makes it possible Poorly functioning markets under such regimes tend to customize the provision of public goods and choice of to make local residents economically and politically regulatory regimes to local needs and preferences. Local dependent on the local administration, which can use governments can experiment with various policies and this dependence to strengthen its hold on power. Non- approaches and compete for economic resources, first transparent relations between the central and local and foremost capital, by offering investors more attrac- government budgets dilute responsibilities for provi- tive and business-friendly conditions. This opens up a sion of social services and programs and stimulate competitive market for local institutional regimes and influence activities, which lead to politically motivat- economic development policies, which might be partic- ed decisions instead of those based on principles of ularly appealing for transition countries. In addition, economic efficiency and social justice. "Unfunded when national policy-making is in gridlock due to con- mandates" of sub-national governments make pro- flicting interests, it might be easier to reach a consensus claimed social rights and entitlements fiscally unfeasi- for reform within a smaller locality with relatively ble, and actual provision of social services becomes a homogeneous economic and political preferences, than matter of bureaucratic discretion. in the more heterogeneous national polity. Once reform This analysis suggests that regional policies to a policies are implemented by more advanced regions and large extent depend on the national regulatory, institu- have proven their superiority, they will tend to be emu- tional and fiscal environment. If the central govern- lated by other localities. ment is able to effectively police the national market,

1999 Partners in Transition: Lessons for the Next Decade protect property rights, and maintain rational and sta- while few studies have been published documenting a ble fiscal relations with localities, the latter will seek clear link between these hazards and unusually high to attract investment through efficient tax and expen- instances of cancers, birth defects and other health diture regimes and pro-market policies. But regional problems in some communities, many people believe efforts to foster competitive markets and create an in such causality based on observation of population environment conducive for private investments, in the groups with high exposure. 36 absence of such efforts nationally, lack credibility and Concern about environmental hazards, including are overshadowed by country-wide political, institu- the growing evidence of health effects, contributed to tional and economic risks. Under such conditions public support for change in Central and Eastern efforts to advance the reform “from bottom up” are far Europe and in the Soviet Union in the late 1980s, and less likely to succeed. loosely-organized groups of citizen environmental activists became among the most vocal advocates of Issues for Discussion political and economic change and of greater citizen ◆ Which reform policies are most appropriate for involvement in public decisions affecting the quality national implementation, and which should be of people’s lives. The accident at Chernobyl was a par- passed to regions? ticularly powerful catalyst for the growth of this ◆ What are the necessary constraints on regional movement. economic policy initiatives, and how are these The environmental impacts of the transition since constraints related to the economic situation in 1989 and 1991 have been mixed. A silver lining to the country? the severe economic contraction experienced by most ◆ How can incentives be strengthened for local gov- countries has been the clearing of the air and the ernments to improve revenue collection and the reduction of discharges into waterways around the efficiency of budgetary programs? many heavy industrial factories that have closed or ◆ How much discretion should localities have in operated far below capacity. Increased energy prices, choosing their taxes and setting tax rates? while leading immediately to non-payment by many ◆ How can central governments prevent the forma- financially-stressed industries, households and govern- tion of economic and political monopolies in the ment agencies, have laid the foundation for improve- regions? ments in energy efficiency and related pollution reductions. Privatization of businesses and housing stock, E. Protecting the Environment and of land in some countries, has led to improved environmental protection of these assets. The transition countries face enormous environmen- But economic downturn has also led to reductions tal challenges. During the pre-transition years, many in state budgets that have led, in turn, to the inability countries enacted strict environmental controls but to maintain infrastructure such as water treatment virtually none were effectively enforced because eco- and solid waste disposal systems. Budgetary problems nomic incentives exerted powerful forces in contrary have also led to further weakening of regulatory directions. Heavy subsidies on natural resource prices enforcement and non-payment of some technical per- led to overuse of fuels and power. As a result, coun- sonnel responsible for operating and maintaining pub- tries of Eastern Europe and the New Independent lic environmental systems, further eroding environ- States use 2-4 times as much energy to produce a unit mental quality. And the vast investments that would of GDP as do the industrial countries of Western be required to clean up polluted sites from the past Europe and North America. The same influences, have been far beyond the reach of both central and combined with a failure to consider the value of con- local governments in virtually all countries. serving resources and maintaining clean air and water Opinion polls indicate that public support for bet- (or the corollary costs of pollution and waste), led to ter environmental conditions remains strong among excessive emissions, poorly controlled disposal of educated groups, but understanding of the causes and toxic and hazardous wastes (including radioactive remedies of pollution is limited among the general byproducts of weapons manufacture), over-use of pes- public. Some of the non-governmental organizations ticides and other agricultural chemicals, and over- (NGOs) dedicated to environmental issues have grown exploitation of forests and other natural resources. and evolved into formal political parties whose leaders These practices left 27 countries with a legacy at serve in parliaments and governments, but many independence that included countless contaminated NGOs have faced organizational and financial prob- industrial and military sites, heavily polluted water- lems, including lack of legal protection of their advoca- ways, degraded lands and reduced biodiversity. And cy rights, governmental restrictions on their access to

Partners in Transition: Lessons for the Next Decade 1999 information, and taxation of any financial contribu- cost of cleanup. In such cases, there is evidence that tions they receive. And in those countries where the some privatizing companies have actually brought fall in output and increase in incidence of poverty higher prices than they would otherwise have done, have been especially severe, the public has tended to thus compensating the government for the cost of give environmental concerns second place to what are cleanup. perceived to be more immediate and urgent economic Higher energy and natural resource prices have problems. led to efforts to improve energy efficiency in some 37 For the many privatized and not-yet-privatized public facilities such as municipal hospitals and firms that are struggling to remain in existence, as schools, and to reduce waste and prevent pollution in well as new firms, there is a natural tendency to evade new and privatized businesses, especially those the additional cost burden of complying with environ- under new management. While such projects enjoy mental regulations, and the same considerations apply favorable economic returns, financing them has been to worker safety laws. And the same fiscal constraints a challenge. Some countries have undertaken creative already alluded to have limited the government’s approaches to financing. Environmental funds offer- capacity to monitor and enforce environmental and ing grants and loans to municipalities and business safety regulations. In some countries, economic recov- for environmental investment have been created in ery has meant recovery also in the sectors—natural most Central and Eastern European countries. resources, energy, metallurgy and chemicals—whose Poland has an entire system of funds at three levels activities were especially harmful to the environment. of government that currently pumps about $500 This leads to the arguable perception that there is, at million into investments in environmental improve- least in the short run, a trade-off between the level of ment each year. In the Czech Republic, commercial economic activity and the extent of environmental banks have established a lending market for environ- harmful discharges of industrial wastes. mental infrastructure in which municipalities have In spite of these difficulties and constraints, some participated as increasingly creditworthy borrowers. countries have taken decisive steps to deal with their Further, the share of environmental project financ- environmental problems over the last few years. Many ing provided by loans rather than grants by the countries have enacted environmental protection legis- Czech State Environmental Fund, has steadily lation that is more appropriate to market economies increased in recent years. Poland and Bulgaria have and democratic systems than their old laws. Some both undertaken "debt-for environment swaps" that have included explicit provision for citizen lawsuits have provided funds for local environmental proj- and public disclosure of environmental information, ects. Three countries—Russia, Ukraine and including facts on potential health hazards. Kazakhstan—have made commitments to establish Implementation, enforcement and strengthening of systems for trading emissions credits for greenhouse environmental regulatory entities remain as signifi- gases if a global system for emissions trading comes cant challenges throughout the region, however. to fruition under the Kyoto Protocol on Global In Eastern Europe, countries’ efforts toward Climate Change. If such a system does develop, these accession to the European Union (EU) have begun to countries stand to benefit financially from selling drive reform of environmental laws, policies and reg- credits that are available because their emissions lev- ulatory practices. Conforming to EU environmental els are now below 1990 levels—another silver lin- directives is expected to cost these countries billions ing to the economic downturn. of dollars, however. A few of the region’s private The unfinished environmental agenda remains exporters into European and American markets have daunting throughout the region. In general, transition begun to improve their environmental management countries need to continue to focus first on getting systems in order to comply with market standards, laws, institutions and incentives in place to promote including voluntary labeling systems. Market mecha- better environmental performance in the future, while nisms, such as tax incentives and waste discharge foregoing for now most costly cleanup of past prob- fees, are being used in a few places to encourage envi- lems. As environmental leaders better understand that ronmentally-friendly investment. clean production is good business and good econom- Recognizing that concern over potential liability ics—since preventing pollution and minimizing waste for industrial environmental hazards has been a seri- are far more cost-effective than cleaning up contami- ous impediment to privatization and new investment nation or controlling emissions through "end-of-pipe" in privatized firms, a number of countries have creat- technologies—their challenge is to build a broad con- ed environmental liability laws to indemnify pur- stituency for this view among economic policy-makers chasers and/or reduce sales prices by the anticipated and business managers. Together, political, business

1999 Partners in Transition: Lessons for the Next Decade and environmental leaders need to work toward envi- ◆ How effective have been “command-and-control” ronmentally sustainable economic growth. regulatory approaches for improved environmental performance? What has been the experience in the Issues for Discussion region with using market-based instruments and ◆ How can countries in the region better integrate information-based policies to provide incentives to the goals of economic growth and environmental supplement the regulatory approach? How applica- 38 quality? How can ministries of environment, ble is this experience throughout the region? health, finance and economy work together ◆ To what extent can public sector financing meet toward such integrated policies? How should the environmental investment needs of the responsibilities for environmental protection be region? How can governments, donors and devel- shared among different levels of government? opment banks more effectively target resources ◆ How can regional (e.g., EU requirements) and toward the greatest needs? How can government global market forces that are increasing demands policies stimulate private sector financing for for improved environmental performance and such environmental improvements as recycling, environmentally sound goods and services be recovery of polluted land, and restoring water- used to advantage by businesses in transition ways and lakes? economies? ◆ How can public/private and private/private part- ◆ How can cross-border dialogue among govern- nerships be enhanced to improve environmental ments, businesses, and NGOs in the region and performance? the international community be enhanced to ◆ How can countries in the region better assess envi- more effectively share experiences in applying ronmental health risks and communicate the links innovative environmental policies, practices and between improved environmental quality and technologies? improved health?

Partners in Transition: Lessons for the Next Decade 1999 39

4. EVOLUTION OF THE of finding new revenue sources in a market economy with declining or stagnant income. All but a few of the SOCIAL SECTOR— CEE/NIS countries continue to face these economic SELECTED ISSUES difficulties in varying degrees. Social insurance systems and other measures sometimes referred to as the social safety net are intended to A. Introduction protect citizens from the effects of either changes that affect the lives of individuals (such as becoming dis- The social responsibilities of government have not abled or reaching retirement age or contracting serious diminished with the transition from central planning illness) or systemic changes (such as economic to market-based economies in the CEE/NIS region. reforms) that affect large numbers of individuals. In However, this transition has brought with it a change in either case, systems must be established that are both the role of the state, implying a transformation of the equitable and financially sustainable. It obviously fol- way in which these responsibilities are discharged. Of lows that at a time of increasing income inequities these responsibilities, three are chosen for focus in this and declining national income and government rev- paper: dealing with failures in the labor market; the sys- enues, there is a simultaneous rise in the need (and tem of social insurance and selected related aspects of political demand) for social protection and shrinkage the social safety net; and health care. (These three top- in the resources that can be mobilized to meet these ics correspond to breakout sessions planned for the con- demands. The governments of transition economies ference on “Partners in Transition”; it does not deal are thus faced with especially difficult choices in their with such important issues as education and humani- attempt to design and implement effective social tarian relief for victims of conflicts and disasters.) insurance and safety net systems. Social problems and policies in the CEE/NIS The policy issues confronting governments in this Region can be seen as the result of both pre-transition region can be broken down into two main, if some- conditions and the problems arising specifically from what overlapping, categories: the social and economic developments created by the transition itself, referred to below as transition-related ◆ Systemic (structural, medium-term) problems, and developments. Examples of pre-transition conditions ◆ Immediate problems (urgently required response include overly generous, poorly targeted pension and to conditions created by the fall in output and rise disability systems—which reflected over-employment in unemployment). in a heavily subsidized and largely low-productivity state sector—as well as growing health problems Systemic problems include: pension and disability pay- reflecting both the deteriorating physical environment ments; unemployment benefits and labor market insti- and the stagnating economies in most of these coun- tutions; the health care system; and, finally, poverty tries. Examples of transition-related developments relief and other income transfer/consumer subsidy include reduced income and increased unemployment policies. These problems arise from or are exacerbated because of price and output shocks of the transition,2 by the privatization of enterprises, declining state rev- and growing fiscal problems because of the difficulties enues, and changes in the economic role of the state.

2. In making these statements, it should be noted, first, that there is a wide range of difference between some countries where income levels have recovered or nearly recovered to pre-transition levels (Poland, Hungary, Slovenia, etc.) and others where they remain significantly or even greatly below, in some cases still falling. Second, data is poor and misleading, probably exaggerating income falls by not account- ing adequately for the much increased activity in the private, informal sector, as well as for the greater availability and choice, and better quality, of goods and services. Third, effective income inequality was greater than appeared in pre-transition economies, because the elite enjoyed ready availability of otherwise scarce goods and resources, as well as generous in-kind “perks.”

1999 Partners in Transition: Lessons for the Next Decade In some cases, new systems can be built using the access to employment-related benefits like municipal structures and personnel that existed previously; in housing. Published data show great differences among others, systems have to be built more or less from countries in the region, due less to differences in their scratch. In all cases, the problems are complicated by actual situations than in the way unemployment is reg- the process of creating and implementing a new struc- istered, measured and dealt with. Thus, no one suppos- ture of government revenues and expenditures. es that Hungary, with reported unemployment rates of 40 Immediate problems include: raising pension, dis- about 11% in the period 1992–1997, was worse off ability and unemployment payments to levels that than Russia, with reported unemployment of only arrest the erosion of real income for recipients of these 3–4% (or 8–10%, according to a different source) dur- benefits; and creation of unemployment benefits, in ing the last years of this period. GDP data tell quite a conjunction with other labor market measures, so as to different story, showing, in this case, some recovery in create incentives to facilitate rather than block neces- the Hungarian economy, with little measured improve- sary adjustments. The humanitarian need to assure the ment from the initially steep fall in Russian output. As survival and dignity of the poorer groups of the popula- mentioned earlier, as a broad generalization, the coun- tion—among whom the impact on women and chil- tries that have been most determined in carrying out dren has often been especially severe—and the political economic reforms at an early stage in the transition demands that are associated with this need in the more have seen the greatest recovery of output. democratic countries, put great pressure on governments to find necessary resources, at a time when rev- Social background. The behavior and expectations enues have been tending to decline. One way of doing of workers and enterprises are heavily influenced by so has been to replace subsidies to enterprises with such pre-transition conditions as heavily subsidized increased subsidies to individual citizens and families. consumer goods, housing, power, transportation, There is, of course, obvious interaction between the free health care (often dispensed within the enter- systemic and immediate problems: for instance, grow- prise), and free day care and education. This substan- ing unemployment tends to encourage governments tial labor compensation paid in kind mitigated the and enterprises to push older workers into the pen- impact of low monetary wages and limited availabil- sioner and disabled categories, thereby increasing the ity of goods in stores. Transition-related develop- difficulties of transition to a more sustainable and ments, which include continued low monetary wages efficient pension system. At the same time, the fiscal (now determined to a greater extent by market pressures created by a declining ratio of actively forces, reflecting the generally low labor productivi- employed workers to those supported by the govern- ty in much of the industrial sector), are accompanied ment tend to result in declines in the real support pro- by the gradual attrition of compensation in kind and vided to unemployed and other dependent individuals. of consumer subsidies. These developments have had Thus, the government faces an increased poverty prob- a devastating effect on living standards in most lem, as well as reduced real demand and output. And CEE/NIS countries, and create economic and politi- there is also the well-known dilemma that the more cal pressures to maintain the previous arrangements, generous are unemployment and other welfare bene- even when this slows down adjustment to a market- fits, the lower are the incentives for unemployed recip- oriented and eventually more prosperous economy. ients of benefits to seek new employment. Other post-transition trends relevant to the labor sit- With these problems and interconnections in uation include: the increase in skewedness of mind, we will set out the discussion under the follow- income distribution, both among social groups and ing headings: (1) labor markets and unemployment among regions; the initial fall in income and output benefits, (2) pension, disability and other income (in all countries, with stronger recovery seen in CEE transfers, and (3) the health care system. countries than in the NIS); declines in all types of income transfers and health care, resulting from the B. Labor Market Reform fall in output itself and from the fiscal crisis that and Unemployment Benefits has arisen (from both the output drop and new role of the state in a market-oriented economy); and the Current situation and trends. Data on unemploy- tendency for governments to be lax in enforcing safe- ment (and, where available, informal employment) are ty and environmental regulations on already strug- difficult to interpret, because of the large amount of gling enterprises, with inevitable effects on worker hidden unemployment still existing in state-owned well-being. It should be added that to the extent (and some privatized) enterprises that keep workers for- workers are laid off, there has been a tendency to dis- mally employed in order to assure their continued criminate against women.

Partners in Transition: Lessons for the Next Decade 1999 Labor market background. The labor problems that wage is at a poverty level, there is some case to be have arisen since 1989 should not be construed as made for subsidies, for instance housing allowances, new developments. There were a number of pre-transi- which allow families to live at a low but acceptable tion conditions, which included hidden unemploy- standard of living. But such allowances, at a time of ment (symptoms were low productivity, early retire- fiscal constraint, compete against other uses of scarce ment ages, and generous disability policies) and the government resources, like health services and child lack of labor mobility. In part, the persistence of these care: the choices are painful and difficult. 41 phenomena can be traced to the "soft budget constraint" that faced the many enterprises with low or Policies to improve unemployment benefits. negative value-added. There were also politically Despite the recent improvements in employment that motivated restrictions on the free movement of per- have taken place in a few CEE/NIS countries, and the sons, as well as such practical problems as housing possibility of further improvements through labor shortages in the cities to which workers might have market reforms, the need to deal with unemployment moved if free to do so. Of the many transition-related remains severe in most countries in the region. Most developments affecting the labor market, open or governments in the region have undertaken some form incipient unemployment was created by the revision of unemployment compensation program, but to of relative prices after the gradual lifting of govern- achieve maximum benefits with scarce resources, ment controls, the greater foreign competition that ways must be found to target benefits more accurate- was officially permitted, the collapse of COMECON ly—for instance, avoiding multiple benefits for the (which resulted in falling demand for many enterpris- same individuals. At the same time, benefits need to es). Although the measured rates differ, depending on be designed to provide incentives both to enterprises the methodology used, women are experiencing high- to shed unneeded labor and to unemployed individuals er unemployment rates than men in many countries. to seek employment. To the first of these ends, it is For example, in Ukraine, women are 61 percent of necessary to provide adequate unemployment bene- the registered unemployed. One result of this trend is fits, to avoid inducing workers to stay in nominal roles the increasingly high poverty rates of female-headed in their old workplace in order to continue receiving households. in-kind benefits; for the second end, unemployment benefits should be for a limited period (replaced if nec- Policies to improve labor market. Economic decline essary by poverty relief), with built-in incentives and and unemployment is not uniform across regions or assistance to job search. urban centers in countries. Overall unemployment might decline if unemployed workers were given bet- Issues for Discussion ter opportunities to find jobs elsewhere. What is need- ◆ What ways have been found, in practice, to obtain ed, however, is first of all the freedom to move, which and provide information on new jobs that are is still restricted by bureaucratic fiat in some coun- available? To provide training to unemployed tries. On top of this, there may be instances where workers with low or obsolete skills? To create new subsidies to move to areas where jobs are more plenti- jobs in communities affected by layoffs? To ful might be in the interest of the society, combined remove bureaucratic, institutional and market with improved information about available jobs impediments to mobility? (through labor exchanges or other mechanisms) and ◆ Do these labor-market responses, particularly skill retraining. Special efforts need to be made to tar- training and job creation, take women—who are get women, who have been especially hurt by layoffs, at least 50% of the unemployed—adequately into and to design job creation activities based on women’s account? skill base. Another impediment to labor mobility is ◆ How can unemployment benefits be better targeted? often poor housing availability and poorly or non- ◆ What ways of financing adequate levels of benefits operating housing markets. A social safety net for the have been found? temporarily homeless and jobless might also facilitate ◆ How can benefits be provided in ways that do not the movement of labor out of especially depressed provide disincentives to layoffs in enterprises with areas. Allowing real wages to fall so as to reflect the over-employment and to job seeking by workers marginal productivity of labor might also improve who are laid off? enterprise competitiveness and ultimately employ- ◆ What are the implications of labor, price, trade, ment; there is evidence that there has in fact been a investment and other economic policies on positive relationship between the decline in real wages employment? and the buoyancy of employment. Where the real

1999 Partners in Transition: Lessons for the Next Decade C. Other Types of Income Transfers working force, including the growing numbers that are (pensions, disability payments, family and presently evading their tax responsibilities by hiding in children allowances, housing allowances) the “informal sector.”

General. Depending on the country, benefits—such as Disability payments. As in the case of pensions, pre- pensions and health care—were often dispensed transition conditions for disability payments included 42 through enterprises, which in turn were compensated generous benefits that were easy to obtain. Like early for their social outlays by price adjustments and vari- retirement ages, this policy was both a way of dealing ous types of cross-subsidization vis-à-vis the govern- with underlying hidden unemployment but also ment and other enterprises. Some of this has persisted reflected the poor and often deteriorating health of the into the transition period, especially in the NIS. In population (see below). Again, as with pensions, tran- general, however, central governments bore, and con- sition-related developments included new economic tinue to bear, the responsibility for pensions, disabili- incentives to push older workers into early retire- ty programs, and social safety net programs, although ment—for which disability could be a convenient in some countries administration and even responsi- excuse—together with reduced funding available, as bility for these programs have been decentralized. growing unemployment, declining wages, and the flight to the informal sector all tended to lower contri- Pensions. The pre-transition conditions characterizing butions to social funds and taxes. At the same time, CEE/NIS countries featured early retirement ages and there was a tendency for the real value of disability high ratios of pensions to wages, features that make pensions and the availability of health care to decline. pensions for an aging population increasingly difficult The policy implications of these developments are clear to sustain. One might hypothesize that the reason this but difficult to implement: for a start, there must be extremely generous system was developed was to miti- stricter requirements for, and more accurate targeting gate the hidden unemployment resulting from the gov- of recipients. At the same time, like pensions, the rev- ernment’s commitment to universal employment, and enue base must become broader and more reliable. the low labor productivity generally prevailing; another hypothesis might be that it reflected the realities of Housing allowances. As is well known, the pre-transi- poor health (see below). Under pre-transition regimes, tion condition faced at the onset of transition was free pensions were paid on a pay-as-you-go (PAYG) basis, or heavily subsidized housing, which formed a major often financed by payroll taxes paid into a special fund. element in the compensation package for workers and This legacy has greatly complicated the economic tran- retirees. Housing was state-owned, in line with social- sition since 1989. The chief transition-related develop- ist principles, so that virtually no housing market ments have been fiscal difficulties constraining pension existed at the time the transition began. Furthermore, payments, and labor market pressures on older workers because housing was linked with jobs, labor mobility to move into early retirement, while many pensioners was rendered extremely difficult, quite apart from who had been eking out their pensions with active bureaucratic restrictions to movement. The transition- employment on the side tended to make up another related development of privatization of home ownership substantial part of the increase in unemployment. The and the creation of a housing market has been more money value of pensions has tended to fall behind the marked in the CEE countries, and in some large NIS price inflation that has taken place in almost all these cities, than in the rest of the CEE/NIS region. While countries, owing chiefly to fiscal problems. The chief these developments can be expected to lead to economic policy implications of these developments are, in the incentives to build housing in response to demand, the short run, the need to increase retirement ages while end of state ownership has also meant that a large trying to avoid further deterioration in the real value of number of people could be exposed to homelessness if pensions. For the longer run, governments need to put jobless or receiving reduced real wages or pensions. in place a system that replaces the pay-as-you-go system One problem is that housing is usually registered in the with a multi-pillar system in which there is growing name of male family members, leaving women increas- importance for the defined contribution and voluntary ingly “homeless” on paper. The clear policy implication contribution pillars. A system of this sort has now been has been to introduce—as notably in Ukraine—hous- introduced in Hungary. But even where pension reform ing allowances. While such a program can serve to pre- is underway, the state-run segment will for the foresee- vent social catastrophe, it must be carefully designed to able future remain dominant—and will prove unsus- avoid unnecessary waste or inequities. Precise target- tainable at present benefit levels unless financed by ing is essential, for instance, not extending this benefit broadly based, equitable contributions from the entire to those who can actually afford housing. At the same

Partners in Transition: Lessons for the Next Decade 1999 time, steps should be taken to create an efficient hous- sible systems for better targeting of such benefits? ing market with information exchanges, credit facili- What are feasible systems for better targeting vul- ties, mortgage acceptances, etc. In this area, donor nerable women? assistance has proved useful. ◆ How can cost-of-living adjustments be more adequately built into all these systems? Poverty relief, child and family allowances. Pre- ◆ How could fiscal resources be found to fund such transition conditions: Although various monetary programs more adequately? 43 allowances, especially child or family allowances, were common in Communist countries, and have per- D. Health Care sisted into the transition, they tended not to be large, since such a large part of workers’ compensation General considerations. Health indicators depend on packages were in kind. Because these benefits were four factors: income, lifestyle, environmental pollu- aimed at complementing low wages and redistribut- tion and occupational risks, and the quality of avail- ing income, but not specifically designed to alleviate able health care. Experts agree that the first two of poverty, the continuation of these systems has partial- these factors are the most important. All four, howev- ly cushioned the effect of the transition on house- er, probably explain the decline in health indicators in holds but have not been targeted to the most vulnera- many CEE/NIS countries both before and after the ble groups. Transition-related developments: Since onset of the transition to market-oriented economies. long-term unemployment benefits tend to disincen- In examining these factors, it is also essential to ana- tivize job seeking, it is advisable to use some kind of lyze the differential impacts on men and women, relief or “welfare” system to provide a floor to the since they have dissimilar morbidity and mortality incomes of the unemployed. Family, or children, rates resulting from different factors. For example, allowances, for the working poor as well as the unem- men suffer more from cardiovascular disease, and ployed, reflect the fact that low-wage families are women suffer significant morbidity and mortality tipped into poverty without additional income sup- from reproductive health complications. port for children. Inflation and limited fiscal Pre-transition conditions. Health care was financed resources have tended to make these already low and delivered by the government, free to patients, in allowances even lower in real terms, or too inconsis- these countries, although the availability of such care tently administered, to prevent destitution among was in fact not equally distributed (more in cities than women and children, who have suffered especially in the countryside, and under-the-table payments by from the general economic decline. The chief policy wealthier patients sometimes secured better care). implications of these developments are easy to state Despite universal access to health care, some health but difficult to implement: resources in transition indicators, such as life expectancies, were steadily economies are especially scarce, and for any welfare declining in most of these countries, owing apparently system to make effective use of scarce resources, care- to environmental and lifestyle factors. ful targeting and monitoring of benefits are absolute- ly essential. A system of individual identity numbers, Transition-related developments. In many coun- and simplification of welfare systems, would help tries, notably Russia, there has been a further decline ease the task of efficient, equitable implementation. in health indicators, although in a few of the "advanced reformer" countries, notably Poland, there Issues for Discussion have been positive trends. Declining income, and fur- ◆ What are feasible paths for pension reform in ther deterioration in environmental and lifestyle fac- these countries? Could the Hungarian reform be tors, may explain the negative shifts. A number of replicated elsewhere? CEE/NIS countries have been shifting toward an insur- ◆ How could disability payment systems be more ance-based system, although a number still maintain economically targeted? the government-based system (with health care often ◆ How might eligibility criteria (such as retirement delivered at the workplace). To the extent that health ages) be changed to make these programs more care is still based on government finance and delivery, sustainable? How might they be funded? How can the fiscal contraction in all CEE/NIS countries has led cost-of-living adjustments be more adequately to declining pay of medical personnel, deteriorating built into such systems? conditions in hospitals and closing of some facilities, ◆ How could local communities be more effectively and shrinkage of available care and benefits. Shortages used to dispense housing allowances, family of medicines, and decline in preventive programs like allowances and other poverty relief? What are fea- vaccination, have also been observed. The skewed

1999 Partners in Transition: Lessons for the Next Decade income distribution noted earlier, combined with Issues for Discussion increased tendency for medical care to be paid out of ◆ What are the factors that have led to deterioration the patient’s pocket, has led to a related skewedness in in health care and indicators in particular coun- medical care among income groups. tries? What has been the role of fiscal constraints? Of enterprises shedding previous health-care Policies. As already noted, some CEE/NIS countries responsibilities? have moved toward a health system based on universal 44 ◆ The factors that have led to deterioration in health health insurance, but most of these systems are at an care and indicators are different for men and early stage of development, and there are gaps in rev- women. Are these being taken into account? enue collection, coverage and monitoring. There has ◆ How can resources be found to finance health been a decline in the absolute and relative amounts of care? What should be the relative roles of the pub- income spent on health care. In view of the fall in lic and private sectors? Of local and national gov- income and government revenue, there is a need for ernments? more accurate targeting of health care (for instance, ◆ What measures need to be taken to build up health more emphasis on preventive and primary care, rather care resources over the long run? How can donor than tertiary care), and generally more efficient use of assistance be most useful in this respect? benefits (e.g., financing spa attendance by Russian ◆ How can health care resources be better targeted? workers can be cut in favor of more widespread vacci- What factors determine the allocation of resources nation and public education). As the formal privatiza- among preventive, primary and tertiary care? tion (much is already informally privatized) of health Between high-income patients paying for private care proceeds, and health insurance systems are devel- care and indigent patients dependent on govern- oped, health care access for poverty-stricken groups ment assistance? What steps can be taken to and individuals needs to be provided in a more reliable improve this allocation? and systematic way.

This paper was written at the IRIS Center of the University of Maryland, College Park, Maryland, USA. IRIS has been contracted to support USAID’s organization of this conference. The authors are Leonid Polishchuk, Charles Cadwell and Anthony Lanyi. The views expressed here are not necessarily those of the University of Maryland, USAID, the US Government or any of the other conference sponsors.

Partners in Transition: Lessons for the Next Decade 1999 45

Participants Plenary and Mr. Genc Ruli, President, Institute of Contemporary Studies Keynote Speakers Mr. Andrea Stefani, Local Media Coordinator, IREX His Excellency Petar Stoyanov, President, Republic of Bulgaria Republic of Armenia Prime Minister Jerzy Buzek, Republic of Poland First Lady of the United States, Hillary Rodham Mr. Karen Galustyan, First Deputy Minister, Clinton Ministry of Energy Deputy Prime Minister, Minister of Finance, Mr. Davit Hakobyan, Deputy Minister, Ministry of Leszek Balcerowicz, Republic of Poland Social Security Ms. Harriet C. Babbitt, Deputy Administrator, United Mr. Armen Khudaverdyan, Deputy Minister, States Agency for International Development Ministry of Territorial Administration Mr. Alexander Yakovlev, Chairman of the Mr. Seyran Martirosyan, Director, Shirak Regional Presidential Committee on Rehabilitation of Center Victims of Political Repression; President of Mr. Eduard Muradyan, Head of Securities Market “Democracy” Foundation Inspectorate Dr. Ljubomir Frckovski, Professor of International Mr. Boris Navasartov, Chairman, Yerevan Press Club Law, University “St. Cyril and Methodius,” Ms. Susanna Vardanyan, President, Women’s Rights Republic of Macedonia Center Dr. Peter Huncik, Director, Sandor Marai Foundation, Speaker Slovak Republic Mr. Tatoul Akopyan, Head of the General Dr. Katarina Kruhonja, Board Member, Center for Department of Provisions, Ministry of Health Peace, Non-Violence and Human Rights, Republic of Croatia Republic of Belarus Dr. Dimitrina Petrova, Executive Director, European Roma Rights Center, Republic of Bulgaria Dr. Tatyana Bykova, President, Union of Entrepreneurs and Leaseholders Mr. Pavel Daneiko, Vice-President, Institute of Republic of Albania Privatization and Management Mr. Haxhi Aliko, Chairman, Parliamentary Mr. Vladimir Kolas, Deputy Director, Belarussian Commission on Agriculture Lyceum for Human Studies Mr. Albert Brojka, Mayor of Tirana Mr. Alexander Milenkevich, Director, RATUSHA Mr. Arben Demeti, Minister, Ministry of Local NGO Resource Center Government Dr. Alexander Milyutin, Rector, International Ms. Juliana Hoxha, Director, ORT DemNet Project Sakharov Institute Mr. Ilir Panda, Minister, Ministry of Justice Dr. Vladislav Ostapenko, Director, Institute of Ms. Ermelinda Meksi, Minister, Ministry of Radiation Medicine Economic Cooperation and Trade Dr. Leonid Zaiko, President, Center for Strategy Initiatives

1999 Partners in Transition: Lessons for the Next Decade Bosnia Czech Republic Mr. Zlatko Bars, Director, Banking Agency Federation Mr. Roman Ceska, Former Deputy Minister, Ministry Mr. Nedeljko Despotovic, Minister without Portfolio of Privatization Ms. Fatima Leho, Former Canton Governor Mr. Tomas Jezek, Commissioner, Czech Securities Mr. Senad Pecanin, Editor-In-Chief, DANI Magazine Commission Mr. Slobodan Popovic, President, SDP Municipal Mr. Ladislav Macka, Chairman and Chief Executive 46 Board Banja Luka Officer, Czech Moravian Guarantee and Mr. Rajko Tomas, Professor, University of Banja Luka Development Bank Ms. Gordana Vidovic, President, Peasant Party Mr. Jan Mladek, Deputy Minister, Ministry of Finance Republic of Bulgaria Mr. Zdenek Tuma, Vice Governor, Czech National Bank Speakers Ms. Petya Atzinova, Executive Director, Regional Ms. Jana Pospisilova, Czech Securities Commission Economic Development Agency Ms. Nelly Koutzkova, Chairperson, Sofia District Republic of Estonia Court Mr. Solomon Passy, President, The Atlantic Club Mr. Kalle Kagi, Secretary General, Estonian Tax Dr. Ognian Shentov, President, Center for the Study Payers Association of Democracy Speakers Mr. Stefan Sofianski, Mayor, Sofia Municipality Ms. Valve Kirsipuu, Member of Parliament Ms. Vera Tagarinska, Senior Expert, Office of the Professor Adik Levin, M.D. , Ph.D., M.D.S., Head of President Department, Tallin Children’s Hospital Dr. Zhelyu Zhelev, Past President, Republic of Dr. Gulnara Roll, Director, Center for Transboundary Bulgaria Cooperation Speaker Ms. Ginka Kapitanova, Executive Director, Georgia Foundation for Local Government Reform Mr. Martin Zaimov, Deputy Governor, Central Bank Ms. Tamara Beruchashvili, Minister, Ministry of Trade and Foreign Economic Relations Republic of Croatia Mr. Lado Chanturia, Chairman, Supreme Court of Georgia Ms. Katarina Jagic, President, Small and Medium Dr. David Gzirishvili, Manager, Curatio Health Plan Entrepreneur Association (SMEA) Mr. Merab Kakulia, Deputy Governor, National Bank Mr. Damir Ostovic, Deputy Minister, Ministry of of Georgia Privatization Ms. Elene Tevdoradze, Head, Parliamentary Ms. Katarina Ott, Director, Croatian Institute of Subcommittee on Human Rights Public Finance Speaker Ms. Cvjetana Pavsa-Matic, Head, Croatian Mr. Giorgi Bokeria, Board Member, Liberty Institute Government Office for Cooperation with NGOs Mr. Zdravko Rogic, Deputy Governor, Croatian Hungary National Bank Speakers Mr. Laszlo Kallay, Director, Institute for Small Ms. Marina Kokanovic, Advisor for Economic and Business Development Social Interests, Union of Autonomous Trade Ms. Maria Kostyal, Associate Professor, Budapest Unions (UATUC) University of Economics Mr. Laszlo Teleki, President, National Roma Minority Self Government Dr. Zsuzsa Verkerdy, President, Soft Foundation Mr. Gusztav Bager, Head of Department, Ministry of Finance

Partners in Transition: Lessons for the Next Decade 1999 Speakers Mr. Esengul Omuraliev, Vice Prime Minister and Mr. Peter Nizak, Executive Director, Foundation for Minister, Ministry of External Trade and Industry the Development of Democratic Rights Ms. Alevtina Pronenko, Member of Parliament Mr. Sandor Orban, Director, Center for Independent Mr. Ulan Sarbanov, Chairman, NBRK Journalism Speakers Mr. Gabor Szorenyi, Deputy Director, Hungarian Ms. Tolekan Ismailova, Executive Director, Coalition Energy Office of NGOs for Democracy and Civil Society 47 Mr. Peter Szendrenyi, Head of Department, Ministry Mr. Marat Sultanov, Former Minister, Ministry of of Economy Finance; Chairman, National Bank Republic of Kazakhstan Republic of Latvia Ms. Natalia Chumakova, Deputy Director, Center for Ms. Eizenija Aldermane, Head, The Naturalization the Support of Democracy Board Ms. Nesipbala Ermekova, Department Head, Mr. Karlis Cerbulis, Representative, NCH Investment Department of Human Development Fund Ms. Zhanna Ertlesova, Vice Minister, Ministry of Mr. Uldis Cerps, President, Riga Stock Exchange Finance Mr. Viktors Gustsons, Chairman, Securities Market Mr. Oraz Jandosov, First Deputy Prime Minister and Commission Minister of Finance Ms. Ingrida Labucka, Special Advisor to the Minister Mr. Zeinolla Kakimzhanov, Minister of Revenues of Justice Mr. Dosmakhambet Koshim, Chairman, Center for Mr. Janis Naglis, Director, Latvian Privatization Democracy Development Agency Ms. Valentina Kulikova, Director, Shymkent Mr. Ilmars Rimsevics, Deputy Governor, Bank of Television Station Latvia Mr. Kairat Mami, Deputy Head, Head of State, Law Speakers Department of the Presidential Administration Ms. Sarmite Elerte, Editor-In-Chief, Newspaper, Mr. Nikolai Radostovets, Chairman, Committee for Diena Regulation of Natural Monopolies Mr. Indulis Emsis, Advisor to the Prime Minister, Ms. Fakhra Usmanova, Director, Department of “Euroconsultants” Foreign Trade Policy, Ministry of Energy Mr. Vladimirs Makarovs, Minister, Ministry of the Speakers Economy Dr. Tolebai Rakhipbekov, Chairperson, Committee of Health Republic of Lithuania Mr. Grigoriy Marchenko, President, Deutsche Bank Securities Mr. Petras Austrevicius, Director General, European Committee to the Government of Lithuania Kyrgyz Republic Mr. Arturas Keleras, President, Central Securities Depository Ms. Aiura Ibraimova, Deputy General Director, Ms. Violeta Latviene, Vice Minister, Ministry of Mandatory Health Insurance Fund Finance Dr. Ainagul Isakova, President, Family Group Dr. Gitanas Nauseda, Member of the Board, Bank of Practice Association Lithuania Mr. Buribai Juraev, Member of Parliament, Zhogorku Mr. Gediminas Rainys, Advisor to the Prime Kenesh (Kyrgyz Parliament); Head, Committee on Minister Agriculture Speakers Mr. Marat Kaiypov, Department Head, Legal Ms. Vilija Blinkeviciute, Vice Minister, Ministry of Department, President’s Administration Social Security and Labor Dr. Tilek Meimanaliev, Deputy Minister, Ministry of Mr. Arunas Degutis, CEO, Hertz Lithuania Health Mr. Tolobek Omuraliev, Director, State Land Registration Agency

1999 Partners in Transition: Lessons for the Next Decade Republic of Macedonia Mr. Ryszard Lawniczak, Advisor to the President on Finance and Economy Ms. Milijana Danevska, Minister, Ministry of Mr. Adam Michnik, Editor-In-Chief, Gazeta Development Wyborcza Ms. Ilinka Mitreva, Member of Parliament Mr. Krzysztof Ners, Undersecretary of State, Ministry Mr. Dzevdet Nasufi, Minister, Ministry of Local Self of Finance Government 48 Mr. Jacek Piechota, Member of Parliament, Chairman Mr. Toni Popovski, Minister, Ministry of the of the Small and Medium Size Enterprise Environment Commission Speakers Mr. Krzysztof Pietraszkiewicz, Director, Polish Mr. Svetozar Janevski, General Director, Skopje Bank Association Brewery Dr. Jan Szomburg, President, Gdansk Institute for Mr. Risto Penov, Mayor of Skopje Market Economics Mr. Piotr Uszok, Mayor of Katowice, Chairman of Republic of Moldova Polish Cities Association Ms. Hanna Gronkiewicz-Waltz, President, National Ms. Valentina Badrajan, First Deputy Minister, Bank of Poland Ministry of Finance Mr. Jacek Wojnarowski, Executive Director, Stefan Mr. Anatol Gudym, Executive Director, Center for Batory Foundation Strategic Studies and Reforms Speakers Mr. Ion Munteanu, Vice Minister, Minister of Mr. Michal Boni, Chief of the Advisory Team to the Economy, and Reforms Ministry of Labor and Social Policy Mr. Veaceslav Negruta, Senior State Advisor, Dr. Marek Gora, Professor, Warsaw School of Government of Moldova Economics Speaker Mr. Maciej Nowicki, President of Eco Fund Mr. Alexandru Muravschi, Vice Prime Minister, Mr. Leslaw Paga, President, Deloitte and Touche Ministry of Economy and Reforms Central Europe, former Chairman of the Securities and Exchange Commission Republic of Poland Mr. Jerzy Stepien, Judge, Constitutional Court Mr. Piotr Aleksandrowicz, Editor-In-Chief, Rzeczpospolita Romania Mr. Marek Belka, Advisor to the President on Finance Dr. Ion Anton, President, International Center for and Economy Entrepreneurial Studies Ms. Henryka Bochniarz, President, NICOM Mr. Stefan Boboc, Chairman, Romanian National Consulting, Ltd. Security Commission Mr. Marek Borowski, Vice-Speaker of Parliament, Professor Ovidiu Nicolescu, President, National Member of Parliament Council on SME Privatization Ms. Franciszka Cegielska, Minister of Health, Mr. Mirel Tariuc, President, Agency for Small and Ministry of Health Medium Size Enterprise Ms. Agnieszka Chlon, Economist, Consultant to Speakers Ministry of Labor Mr. Daniel Daianu, Center for Economic Policies Dr. Marek Dabrowski, Vice Chairman, CASE Center Ms. Anca Dumitrescu, Medical Doctor, Institute for for Social and Economic Research Public Health Mr. Roman Dziekonski, Deputy Mayor of Warsaw Dr. Krzysztof Herbst, President, The Foundation of Social of Economic Initiatives Russian Federation Ms. Teresa Kaminska, Coordinator of Social Sector Ms. Marina P. Pisklakova, Director, Women’s Crisis Reform Center “Anna” Mr. Andrzej Krawczyk, President, Polish Know-How Mr. Aleksei Valentinovich Uljukaev, Deputy Fund Director, Institute for Economy in Transition

Partners in Transition: Lessons for the Next Decade 1999 Speakers Speakers Ms. Manana Aslalmazian, Executive Director, Mr. Pavol Demes, Director, Slovak Academic Internews/Russia Information Agency Mr. Leonid Grigoriev, Director General, Bureau of Mr. Ivan Miklos, Deputy Prime Minister, Ministry for Economic Analysis Foundation Economy Mr. Veniamin F. Yakovlev, Chief Justice, Supreme Commercial Court Republic of Slovenia 49 Republic of Tajikstan Mr. Joze Mencinger, Rector, Ljubljana University, Former Minister of Economy Ms. Tochinisso Azizova, Chief, Legal Department of Ms. Alenka Selak, State Undersecretary, Ministry of the President’s Office Finance Mr. Gulomjon Babaev, State Advisor to the President Mr. Marko Voljc, President and Chief Executive on Economy Officer, Nova Ljubljana Banka Mr. Nuriddin Karshiboev, Executive Director, Ms. Alenka Kajzer, Advisor to the Government, Association of Independent Electronic Mass Media Slovenian Institute for Macroeconomic Analysis of Tajikistan (TAJANESMI) and Development Ms. Dilbar Khalilova, Executive Director, NGO, Speaker “Fidokor” Mr. Valter Rescic, State Secretary, Ministry of Finance Mr. Khalifabobo Khamidov, Legal Advisor, President’s Legal Subcommission of CNR Ukraine Mr. Isomiddin Salokhiddinov, Senior Advisor, President’s Office on Relations with Public Ms. Vira Nanivska, Director, International Center for Communities, Information, and Culture Policy Studies Mr. Khabibullo Sanginov, Chairman, Refugee Mr. Volodimir Oliynyk, Mayor, Cherkasy Executive Subcommission of CNR Committee Mr. Serhei Tyhypko, Vice Prime Minister, Economic Turkmenistan Reform Mr. Yuri Yechanurov, Rada Deputy Mr. Mukhamedberdy Berdyev, International Mr. Victor Yushchenko, Governor, National Bank of Cooperation Coordinator, Cabinet of Ministers Ukraine Mr. Rashid Meredov, Deputy Minister, Ministry of Speakers Foreign Affairs Mr. Serhei Holovaty, Former Minister of Justice, President, Ukrainian Legal Foundation Slovak Republic Mr. Vasyl Kuibida, Mayor of Lviv Ms. Edit Bauer, State Secretary, Ministry of Labor, Republic of Uzbekistan Social Affairs and Family Mr. Pal Csaky, Deputy Prime Minister, Human Rights Ms. Khushvakt Akramova, Deputy Khokim, City of Mr. Jan Fule, President, Slovak Syndicate of Bukhara Journalism Dr. Murotjon Muminov, Deputy Akim, Fergana Mr. Daniel Lipsic, General Secretary, Ministry of Oblast Justice Mr. Yuldash Nazarov, Group Head, “Group of Ms. Katarina Mathernova, Special Advisor to the Experts” for the President Deputy Prime Minister for Economic Affairs Dr. Feruz G. Nazirov, Minister, Ministry of Health Mr. Juraj Mesik, Director, EKOPOLIS Foundation Ms. Oral Ataniyazova, Director, NGO Center Mr. Viktor Niznansky, Executive Director, MESA “Prezent” Mr. Ivan Saktor, President, Confederation of Trade Mr. Janabai Sadykov, Committee Head, Legislation Unions Committee; Deputy, Karakhlpakistan Parliament

1999 Partners in Transition: Lessons for the Next Decade German Marshall Fund of Ms. Paula Feeney, Director, Office of European Country Affairs the United States Mr. Robin Phillips, Director, Office of New Mr. Craig Kennedy, President Independent States Country Affairs Mr. Steve Grand, Director, Policy and Opinion Ms. Gloria Steele, Director, Office of Operations and Leaders Information Management 50 Mr. Richard Burns, Director, Office of Privatization and Economic Restructuring Foundation Representatives Ms. Patricia Matheson, Director, Program and Other Participants Coordination and Strategy Ms. Colette Cowey, Deputy Director, Office of Ms. Barbara Blaszczyk, President, Center for Social Program Coordination and Strategy & Economic Research Mr. Richard Hough, Mission Director, Serbia Mr. Jon Blyth, Program Director, Charles Stewart Mr. Jeffrey Evans, Senior Program and Policy Advisor Mott Foundation Ms. Shona Sabnis, Special Assistant Ms. Catherine Day, Director, European Commission Ms. Irene Grzybowski, Country Director for Poland, European Bank for Reconstruction and Global Bureau Development Ms. Jennifer Windsor, Deputy Assistant Mr. Robert Herman, Member, Policy Planning Staff, Administrator US Department of State Dr. Edward Kozlowski, Krakow Real Estate Institute Foundation U.S.Agency for Mr. Grigorij Meseznikov, President, IVO, Institute International Development for Public Affairs Mr. Michal Rutkowski, A Sector Leader for Social Mission Directors and Protection, Europe and Central Asia, The World Representatives Bank Mr. Howard Sumka, Republic of Albania Mr. John Tedstrom, Director for Russia, Ukraine & Ms. Dianne Tsitsos, Republic of Armenia Eurasia, National Security Council, USA Mr. Robert Simpson, Republic of Belarus Mr. Craig Buck, Bosnia U.S.Agency for Mr. John Grant, Republic of Bulgaria International Development, Mr. Glen Anders, Central Asian Republics Ms. Harriett Destler, Program Officer, USAID Washington, DC Almaty Ms. Harriet C. Babbitt, Deputy Administrator Mr. Gary Linden, Chief, Office of Market Transition, USAID Almaty Mr. Charles Aanenson, Republic of Croatia Bureau for Europe and Mr. Michael Farbman, Georgia Eurasia Ms. Patricia Lerner, Hungary Mr. Howard Handler, Republic of Latvia Mr. Donald L. Pressley, Assistant Administrator Ms. Christine Sheckler, Republic of Lithuania Mr. George Ingram, Deputy Assistant Administrator Mr. Stephen Haynes, Republic of Macedonia for Eurasia Mr. Thomas Lofgren, Republic of Moldova Mr. John Tennant, Deputy Assistant Administrator Mr. William Frej, Republic of Poland for Europe Mr. Denny Robertson, Romania Ms. Viviann Gary, Head of Democracy and Ms. Carol Peasley, Russian Federation Governance Ms. Paula Goddard, Slovak Republic Mr. Mark Karns, Director, Office of Enterprise Mr. Christopher Crowley, Ukraine Development Ms. Pamela Baldwin, Director, Office of Environment and Energy

Partners in Transition: Lessons for the Next Decade 1999