-----11 __ .-1 ______

53875 Public Disclosure Authorized

Transition and Macro-AdJustment Division • Country Economics Department • The World Bank .~------~------The case of national currencies in the former Soviet Union Crov~lning the Estonian Kroon

n Jun{~ 199~! Estonia carried out and hyperinflationary conditions on liberalization atthe startof1992. The a monetary reform to replace the the black markets. overall inflation rate, however, re­ I Soviet rublE with a new national mained high as a result ofcontinuing Public Disclosure Authorized currency, the krl)on (I::TOwn). In doing When Gosbank was disbanded at the rapid increases in the total ruble so, Estonia becEme the first country end of 1991 (together with the Soviet money supply throughout the former of the former S(lviet Union (FSU) to Union), the number of ruble issuers Soviet Union. achieve monet ary independence. fell to a "mere" fifteen, and the prob­ Estonia's example is important not lem of uncoordinated inflationary fi­ Viewed from Estonia's perspective, the only because se {era] other republics nance continued. The monetary over­ case for introducing a national cur­ plan to imrodu~e their own curren­ hang was eliminated by the rise in rency seemed overwhelming. Thegen­ cies, butahobecause Estonia adopted prices thatfollowed the Russian price eral view was that an independent a specific mondary mechanism-a currency board· ·-thElt is designed to make the kroon a stable and convert­ What's inside ... ible currency from the start. China's Party Congress Endorses "So· the understaffed, underfunded judicial infra­ Monetary Chs os cialist Market Economy" structure. (page 6)

Public Disclosure Authorized Economic development should proceed with­ The background to Estonia's monetary Varlet,. ofBunprianTaxes (page 8) outbeing bogged down in an abstract debate reform is the monetary chaos that over what is socialist and what is capitalist, ReeearchUpdBte:ServicesB8BGrowth· emerged in the final years of the So­ announced the recent Party Congress in Promotina Sector in the FSU (page 9) viet Union. Duri 19 1990and 1991 each Beijing, replicating Deng's cat and mice alle­ of the republic~ of the Soviet Union gory: the color ofthe cat is not important as Quotation of the Month: "What Is The established a SE parate central bank, long as it catches mice. (page 4) Market Value ofAny1hinc in Russia operating alonrside the Soviet-wide alter All?" Euromoney Interview with Gosbank. By la:.e 1991 sixteen sepa­ Coastal Winds Blow Inward V":ae~rGeraah.enko.BeadoftheRussian rate central ban ks were issuing ruble Central Bank (page 10) credits with no overall coordination. In the next few years China's free trade Gosbank has taKen care of the Soviet zones are expectedto incorporate the entire Conference Diary (page 11) Union's huge bldget deficit (exceed­ coastal area and even some selected inland ing 20 perl~ent ofthe GNP), financing provinces. (page 5) Mneatones ofTransition (page 12) it through money creation. In addi­ tion, central bf.nks of the republics Legal Reform in Hungary World BankIIMF Acenda (page 13)

Public Disclosure Authorized were financing their enterprises and governments. It all added up to hyper­ The streamlining ofHungary's legal system New Books and Working Paper8 inflation, s,ocialj st-style: the enormous to promote the private sector has made ma­ (page 14) monetary overhang, combined with jor headway, despite difficulties such as price contJ:ols, produced severe short­ clarifying property rights and coping with Selected Articles (page 16) ages in tr,e offidal supply networks The Wor1d Bank/CECTM

nation required an independent cur­ duction o(new currencies in tl'te new reform-with its aim ofachievingthe rency; moreover, it was also thought states of the FSU. Cooperative ar­ immediate current account convert­ that monetary independence was rangements, in which several central ibility of the kroon-seemed vital in needed to escape from the continuing banks had the authority to issue view of the country's high trade de­ inflationary pressures and monetary rubles, were bound to be inflationary, pendence, its urgent need to develop instability in the rest ofthe FSU. The considering the strong political pres­ new exports in Western markets, and Estonians recognized that even if suresfor monetaryexpansionandthe its need to generate competition on Russia were to try to stabilize the institutional weaknesses oftherepub­ the domestic market. The Central ruble, other republics could under­ lican central banks. Russia 'mder~ Bank also aimed to insulate the mon­ mine it by continuing an easy mon­ stood that the only effective means of etary policy from intense lobbying etary policy oftheir own. In fact, do­ establishingcurrency stability was to pressures from industry and govern­ mestic credit expansion in Russia make the Russian Central Bank the ment. To achieve these goals, the Es­ remainedhigh,andpoliticalpressures sole entity authorizedto extend ruble toniangovernmentandCentral Bank for further credits to heavy industry credits. settled on the ideaof a currency board remained strong. (see box). The International Monetary Fund Inflation was not the only problem. (lMF) tried atfirst to delay the intro­ The kroon was to be introduced at a Trade was becoming bogged down by ductionof Estonia's currency, argu­ fixed exchange rate vis-a-vis the large delays in clearing payments ingthatthecountrywasnotyetready deutsche mark (DM), and with full between Estonian andRussian enter­ andthatthecurrency should beintro­ backing ofgold and foreign exchange prises. Moreover, an excess of bank duced late in 1992, or in 1993. As it reserves.All future emissions ofhigh. credits relative to currency notes in turned out Estonian authorities de­ powered money would have to be the ruble arealed to a severe shortage cidedto proceed on their own, in view backed by foreign exchange receipts ofcash in the first halfof 1992. Even of the urgency of the situation and of the Central Bank. In essence, the when enterprises had money in their with confidence that the monetary Central Bank would swear off domes­ bank accounts, they could not draw reform could be carried out quickly tic credit expansion; the kroon's mon­ on them to pay wages because of a and successfully. On the eve of the etary base would rise or fall only as shortage ofcash.As Russia controlled monetary conversion, the IMI!' pro­ the Central Bank bought or sold for­ the printing presses, and therefore vided them some last-minute techni­ eign exchange in returnfor kroons. To the distribution ofnotes,many repub­ cal support, and followed up with ne­ avoid an unnecessary trade collapse lics responded to the cash shortageby gotiations for a standby loan afterthe with the ruble zone, Estonia andRus­ issuingtheir own "coupon" moneys or monetary reform had taken place. sia agreed to maintain trade finane­ other money substitutes, thus adding ingin rubles, with a floating exchange to the chaotic monetary conditions. Smooth Conversion rate between the two currencies.

Russia also hoped for the rapid intro- The Estonian strategy of monetary The monetary conversion was under­ taken duringJune 20-22, ata conver­ sion rate of 10 rubles per kroon for What is a currency board? bank balances, wages, prices, and A currency board's only purpose is to its expenses andto maintain its reserues other contracts. Residents could con­ issue notes (paper currency) and coins at the leuel set by law. vert up to 1,500 rubles into kroons at convertible on demand into a foreign the 10:1 rate, and rubles in excess of asset at a fixed rate ofuchange. The In an economy where capital {lows can that sum at a 50:1 rate. About 2.2 foreign asset can be a foreign currency, occur (any economy with a conuertible billionrublesin cash were exchanged, gold, or some other commodity, ora cur­ currency that has few barriers to for­ and these will be returned to Russia. rency or commodity basket. A currency eign investments), the balance oftr(lde board does not grant loans (except in does not impose any strict limits on a At the time of the conversion, the serving as a clearinghouse for bank currency board system'IJ ability to ex­ market exchange rate was about 75 checks) or accept deposits. As reserves it pandthe money supply. Instead, a more rubles per DM, or 7.5 kroon per DM. holds high-quality, interest-bearing se­ complex but still market-based form of Thenewfixed ratewassetata slightly curities, denominated in the foreign as­ limitation, based on people's estimates more depreciated rate, 8 kroon per set. Its reserves mustbe at least lOOper­ ofprofitability, applies. Hong Kong and DM. At this rate, the initial holdings cent ofits notes andcoins in circulation. Singapore experienced trade deficits for of Central Bank reserves, made up A currency board makes profits from the decades under their currency boCJtrd mostly of monetary gold held in the difference between the interest on the systems, yet their money supplies ex­ West since 1939, more than equalled securities that it holds and the expense panded all the while. of maintaining its notes and coins in the total stock of the broadly under­ circulation. It remits to the gouernment From related studiesby Steve H. Hanke stood kroon supply (M2). Thus, at the all profits beyond what it needs to pay and Kurt Schuler start, the entire money supply, not just the high-powered money (as in

October 1992 --"--r'-~'II"-I ____------­

Transition some other currency board arrange­ property. There is a new attention to institutional bulwark (such as a cur­ ments), was backed by more than 100 financial reform, because banksand rency board arrangement) and by percent currency and gold reserves. other intermediaries must now sur­ sound fiscal policy. vive by their profitability rather than The post-conversion monetary policy through cheap credits from the Cen­ It is time to move rapidly to create guarantees theconvertibility ofkroon tral Bank. M~or policy initiatives in national currencies inthe FSU, linked into DM at the fixed 8;1 rate for all several ofthese areas will be backed by floatingexch ange rates, andbacked current account transactions. Profits by an IMF standby loan concluded in by ample and timely international fi­ and capital arising from foreign in­ September. Estonia is also seeking nancial assistance. vestment can be freely repatriated. other balance ofpayments support to Estonian residents are not, however, helpcushion themove to energy prices boo Hansson and Jeffrey Sachs allowed to open f)reign currency bank at world levels and the restructuring The authors adv ised the government accounts abroad. except with special ofthe industrial sector. of Estonia and the Central Bank of permission,norcan they establish new Estonia on the monetary conversion. foreign currency accounts in domes­ The Estonian monetary reform clearly Ardo Hansson is Research Fellow, tic banks. Domestic credit expansion points the way for the new states of Stockholm Institute ofEast European by the Central Eank is generally pro­ the FSU. Most, or all, will have their Economics. and Economic Advisor to hibited, and th~l Central Bank's op­ own national currencies. Estonia's the Prime Minister ofEstonia. Jeffrey erations are larl~ly restricted to for­ experience demonstrates that it is Sachs is Galen L. Stone Professor of eign exchange operations at the possible to move to a stable and con­ International Trade at Harvard Uni­ official exc:hange rat.e. In particular, vertible currency rightfrom the start, versity. the currency board precludes central ifthe policies are supportedbya sound bank credits to finance the budget. Therefore, the g,wernment ofEstonia undertook several strong fiscal ac­ tions, including tax increases, to Ut, lat. manat. manatl, rubel... undergird the llew monetary policy. Among the Baltic states Lithuania re­ and Ukraine where non-ruble curren­ Newbank supervision procedures are placed the ruble on October 1 with tem­ cies have been introduced.) also being putinto place to strengthen porary coupons that will be used until the banking sy!,tem. the new Lithuanian currency, the lit, is Other ex-Soviet states also announced introduced. Latvia issued the Latvian intentions to replace the ruble with Good Results ruble in July and postponed introduc­ theirowncurrencies:forexample Geor­ tion of the lat. gia ("maneti"), Azerbaijan ("manat,,), The results oftile first three months Uzbekistan, Armenia, Kazakhstan, are extremely iJ,ositive. The currency Ukraine has put off the debut of its and Kyrghyzstan. Moldovan Econom­ hasbeen stable ,md convertible, while grivna; the government will instead in­ ics MinisterSergiu Certan said in early troduce the c8rbovanets by the end of October that "it would be a mistake to the ruble has continued to depreciate the year for accounting purposes and introduce a national currency now sharply. Indeed, monetary policy in linkit to the ruble, said the deputy head when Moldovaisin an economic crisis." the ruble area turned out to be much of the country's central bank. In the worse than eXlJected, with the ruble meantime coupons--mone'tary surro­ Those states thatrename their curren­ money supply nearly doubling over gates since 1991-should take on all cies would not necessarily leave the the summer months. After an initial aspectsofa currency (for example, since ruble zone. At the CIS summit in exchange rate of 10 rubles per kroon January salaries have been paid only in Bishkek in late September, Armenia, in late June, the Estonian currency coupons). Belarus, Kazakhstan, Kyrghyzstan, appreciated to around 20 rubles per Russia, and Uzbekistan signed an kroon by late Beptember. The main Belarus has withdrawn the ruble from agreement to maintain the ruble zone. shortcoming of'~he new system to date circulation in areas bordering is that ruble-ba sed trade with Russia Lithuania and Ukraine. The has yet to develop effectively; there is rubel ("bel" standsfor Belarus), as yet no well-fllnctloning foreign ex­ introduced last June to circu­ change market in Tallinn for convert­ late alongside old Soviet ing ruble:; and kroon. banknotes, would now be the only legal tender for all types of The mODE!tary "eform has given fresh transactions in those border impetus t() othc~r areas ofreform. Fis­ areas. (A National Bank official cal policy has been subjected to re­ explained that the Bank wants newed discipline. Privatization is to prevent an influx of rubles moving fhrward more rapidly, with a into Belarus from Lithuania OM Bel4rus ruble. sounder base for auctioning state

Volume 3, Number)l 3 The World Bank/CECTM No October Surprise in Beijing The buzzword: Socialist market economy The recent Congress of the Chinese often repeated, and more colorful China-and by implication criticizes Communist Party (Beijing, October aphorism "it doesn't matter ifa cat is planning. The Report notes thatprac­ 12-18) has been hailed as a major vic­ black or white, as long as it catches tice in China has proved that where tory for the reform forces in China­ mice." market forces are given full play, the and a major personal victory for se­ economy exhibits vigorous and sound nior leader Deng Xiaoping who has The emphasis on economic develop­ development. seen his reform proposals adopted as ment also signals an abandonment of the guiding principles for the coming the very cautious targets of the 8th The Congress reaffirmed that the periodand reform-minded candidates Five-Year Plan. Instead ofthe 6 per­ household responsibility system (in appointed to the leading positions in cent per year growth target ofthe Plan, other words private farming) will be the Party. The Congress saw the el­ the work report calls for 8-9 percent retained as the basic rural policy and evation of what is called "Deng economic growth. (In the Bank's re­ thattheSpecial Economic Zones policy XiaopingThought"to the same stand­ cent economic report on China, it was will be extended to many parts of ing as Marxism-Leninism and Mao also estimated thatwith faster reform, China, including border areas and the Zedong Thought. growth could rise to an average of8.5 Yangtze valley (see box, page 5). The percent.) The report placed particu­ Congress reaffirmed multiple forms Deng's Thinking Prevails lar emphasis on the growth of the ser­ of ownership, "so long as the public vice sector and explicitly called ~Dr an sector remains dominant." However, Deng's approach to policymaking, early startto the famous Three Gorges public sector is defined as embracing which is essentially the art of prag­ project. not only collective enterprises, butalso matism, has now been enshrined in locally owned Township and Village the "theory of building socialism with Ownership Targets Enterprises (TVE) and the Chinese Chinese characteristics." The Consti­ share in joint ventures. This broad tution of the Party was amended at The Congress has made it clear that definition gives great scope for the the Congress to include this theory. reform policies are to remain at the continued decline in the share of state­ The Work Report (the basic document heart of policy making and that the owned enterprises in total output. presented to the Congress for ap­ reform era is regarded as China's sec­ proval) emphasizes economics devel­ ond revolution. The Chinese economy The Party now seems poised for a opment as a central task. The report is now a socialist market economy, major rationalization of the state­ also asserts: "We must not get bogged and where previous reports all used owned enterprises. The Work Report down in an abstract debate over what the word "planning," thecurrent'Work underlines the need for price reforms is socialist andwhatis capitalist."This Report gives the strongest endorse­ and new incentives so that "efficient is a more explicit version of Deng's ment to the role of the market in enterprises will prosper and the inef­ ficient ones will disappear." The changing property mix in China One of the main initiatives launched Shares of industrial output (percent) Industrial output growth by sector (percent) by the Congres~ is a program of gov­ 100 70 • State o Collective ernmentreform, to be completed over 60 I] Private, joint a three-year period. A major rational­ 80 venture, and ization of the central government and 50 others theabolition ofseveral ministries and 60 40 agencies are expected, with the goal of creating a government organiza­ 30 tion that is mOre in line with the re­ 40 form objectives andthatexercises only 20 indirect control of the economy. 20 10 The One·Party System Remains o ~.u~~UL.u"U.UL~'~ o 1980 82 84 86 88 90 2000 1986 87 88 89 90 91 The Congress reaffirmed Deng Note: 1991 and 2000 data are preliminary. Source: Official Chinese statistics, Xiaoping's long-held view on political

4 October 1992 ---,.--!'-.I«__ ..J ______

Transition

reform. Despite the debate about re­ forming the system of People's Con­ Coastal winds blow Inward gresses, a very clear statement em­ phasized: "the [political] goal of the China's rapid growth is expected to • Inland regions are relatively concen, reform is to build a socialist democ­ continue over the next decade or more, trated in the energy andrawmaterials racy suited to Chinese conditions and based on two fundamental conditions: sectors, which are the least reformed absolutely not a western, multiparty high savings and investment rates and part of the state economy. State price parliamentary system." a work force that is relatively skilled controls on these items act like an addi­ and healthy for a low-income country. tional tax on inland regions. The new Centra I Committee has ap­ During the 1980s, economic liberaliza­ • Foreign investors have been unwin­ pointed a Political Bureau expanded tion proceeded at similar rates in the ing to invest in the interior's abundant to twenty persons, with much stron­ country. As a result, growth was fairly natural resources because ofdepressed ger represE!ntati,)n of reform-minded evenly spread nationwide. However, in global commodity markets. With leadersfrom such citil~s and provinces the late 1980s coastal regions began to China's stilI underdeveloped capital asShanghai,Tiwljin, and Guangdong. develop much faster than inland re­ markets, it falls to the central govern­ The StandingCcmmittee ofthe Polit­ gions. Following 1989 the "coastal de­ mentto mobilize the large sums ofcapi­ buro-the most powerful group in velopment strategy" was criticized and tal necessary for resource development, China-nowhas seven members, and an "industrial policy" that would apply leaving the interior highly dependent two ofits oldermembershave retired. impartially to the whole nation was ad­ on the state economy. Among thE! three new members are vocated. During the bitter ideological Vice-Premier Zhu Rongji, the former battle, however, foreign trade reforms Coastal regions, by contrast, are poised mayor ofShangt,ai, and an economist were moving ahead, facilitated by the to grow rapi dly as they are furtheri nte· who has contributed to several World fact that elements of decentralization grated into the East Asian and world Bank studies on China. were already built into the system and economies. Thus far, only the provinces driven by the need to export and the ofGuangdong and Fujian have experi­ The strong offici 11 backing for contin­ fact that local leaders could reap ben­ enced integration into the global mar­ ued refonns in China is not an unex­ efits from attracting foreign trade and kets. Successful reform policies have pected developm ent; nonetheless it is investment. been a precondition for this develop­ of major importance. There is wide­ ment. However, transfer oflow technol­ spread expectation that the rest of The economies ofthe coastal provinces, ogy, labor-intensive manufacturing which were better placed to take ad­ from adjacent Hong Kong (China) and this decadf~ will witness an economic vantage of trading opportunities, grew Taiwan (China) played a crucial part. performance eVEiry bit as spectacular more rapidly. In late 1991, and particu­ and enviable as was observed during larly with Deng Xiaoping's southern This integration process has not ex­ the first dncade of reform. tour in early 1992, the emphasis was hausted its potential. Transnational again on opening the economy to for­ manufacturing is spreading rapidly Peter Harrold, EA2CO, eign participation-a far easier task throughou t Southeast Asia, and south­ The World Bank than framing coherent reform policies ern China is becoming increasingly in­ for the domestic economy. As a result, tegrated into these networks. Although there has been increasing differentia­ the region as a whole remains depen­ tion between coastal andinland China. dent on the U.S. market, demand for This is likely to continue to shape de­ final goods within the region is also velopment in the 1990s for the follow­ growing-slightly faster than U.S. de­ ,r ing reasons: mand. • Becauseofpoorcommunicationsand The economic regions of northern and less skilled work forces, inland facto­ southern coastal China are expected to ries are not as efficient as coastal facto­ expand and meet in the Lower Yangtze ries--producing between 15 percent and region around Shanghai and then ex­ 40 percent less per unit of input. tend up the Yangtze vaney. By 2000, the ~1 entire coastal area will be integrated • Transport costs for inland producers into international tradingrelationships, to access world markets are signifi­ with the "accelerated growth area" also cantly higher than costs for coastal pro­ incorporating selected inland provinces, ducers. And information about world such as Hubei and Hunan. market opportunities is less available. Nt! (Based on Oxford Analytica) From thil Polish weeUy NlF.

Volume 3, Numter9 The Wond Bank/CECTM The Challenge of Legal.Reform in Hungary An assessment and some proposals

Property Rights is attempting to transfer the bulk of reforming the regulation and financ­ state assets into private hands. ing of property development and use. In Hungary-as in other CEE coun­ In the regulatory area, reforms are tries-clarifying property rights is For real estate, Act I of 1987 on Land needed in rent control, zoning, and perhaps the most difficult and slow­ has been instrumental in freeing up construction standards. With regard moving area oflegal reform. Not only . the private market. A private dtizen to financing, reforms are needed in does it require confronting the vested (either natural or legal) may now ac­ collateral and foreclosure laws and interests of former owners, existing quire real estate in Hungary without institutions. Mortgages on real estate users, and newly emerging business any legal limitation. However, other have long been legally possible but interests, but it mustbe Carried out in practical impediments, such as ambi­ rare. Interest and availability of fi­ a setting plagued by poor records, guity in title to property and difficult nancing is now growing in the case of struggling institutions, and a legacy access to credit, continue to retard commercial property. although direct of distorted public policies. the development of a real estate mar­ foreign financing of commercial prop­ ket. Foreigners are prohibited from erty development is prohibited by the In late 1989 and 1990 Hungarypassed owning agricultural land (unlel;s spe­ inability offoreigners to register mort­ extensive amendments to the social­ cifically permitted by another' law), gage liens on Hungarian real estate. ist constitution, which now asserts a but may own non-agricultural land In the case of housing, lenders have commitment to a market economy and and immovable real property after been discouraged from making sub­ encourages entrepreneurship and receiving permission from the Minis­ stantial mortgages because of thelack competition. Itestablishes protection try of Finance. In contrast, Hungar­ of effective legal mechanisms to re­ of private property, including compen­ ian corporate entities that are partly possess the collateral in case of de­ sation in the event of expropriation, or wholly foreign-owned are entitled fault. Tenant protection laws, and assures the right to freedom of to own real property related to the grounded in the still-applicable 1971 association. The most important pro­ company's objectives. Housing Act, make foreclosure and visions on property in the Civil Code eviction a cumbersome and futile en­ have also been amended. Private own­ Title to both publicly and privately deavor. Collateral other than real es­ ership is now fully accepted in Hun­ held real estate is not likely to be tate is not used at all because oflegal gary, and the privatization program complicated by restitution (or and institutional shortcomings that "reprivatization") in Hungary as it is need to be resolved. Markets and law in Poland, Romania, East Germany, Czechoslovakia, or Slovenia. For intellectual property rights, pro­ The legal framework in a market Hungary's solution to the perceived tection has generally been considered economy serves at least four purposes injustices caused by socialist expro­ better in Hungary than in other CEE (loosely related to specific and well· priations is the Compensation Act of countries. However, inadequate recognized areas oflaw): 1991. This law partially compensates means for investigation and enforce­ • 7b define property rights, whether both Hungarians and foreigners ment remain a problem, resulting in for real, tangible, or intellectual prop­ whose property was expropI'iated widespread piracy, mainly of software, erty (through the constitution and through regulations enacted after music, and pharmaceuticals.As Hun­ more specific laws). 1939. Compensation coupons (em­ gary begins to recognize and protect • To establish a framework of rules bodying lump-sum settlement.s but private property rights generally, in­ for exchanging those rights (generally not exceeding 5 million forints) may tellectual property may also begin to through contract law). be used as full or partial payment for be better protected. This will, how­ • 7b set ground rules for entry into property sold by the state, including ever, require stronger investigative and exit out ofthe productive process apartments, shares in privatized and enforcement policies, without (entry is governed by company and state-owned industries, and farm­ which infringements will be difficult foreign investment law, while bank­ ownere~ to curb. ruptcy and liquidation laws govern land. Only former land may exit). use their coupons to purchase farm­ • To oversee market structureandbe­ land. Company Law havior to promote competition (through antimonopoly and unfair Although rules on real property own­ In the late 1980s Hungary imple­ competition laws). ership are now firmly market-ori­ mented a series of reforms designed ented, much more work is needled in to further its transformation to a

6 October 1992 ,,-i'_il,.....,~___------­

Transition market economy. Unlike Poland, itdid investments made pfi.er 1993 (see box 528 in 1991 to 3,403 (786 as reorgani­ not revive its prewar company law. on page 8). zations and 2,617 as liquidations) in Rather, Hungary used the opportu­ the first quarter of 1992 alone. Be­ nity to draft an entirely new code, the Contracts cause the law came into effect Janu­ Act on Economic Associations, based ary 1, 1992 and requires reporting on German andAustrian models. The In Hungary two distinct spheres of after ninety days in default, there was law recognizes various forms of busi­ contractual relations existed during an even greater surge of3,540 filings ness organization, inc1udingthejoint­ the socialist period: private transac­ inApril-including2,259 reorganiza­ stock company, r,he limited liability tions among individuals, usually for tion filings and l,2811iquidation fil­ company, and general and limited sman monetary amounts or equiva­ ings. This surge in cases demonstrates partnerships. lents, for which the Civil Code was the difficulty of applying the tradi­ (and still is) adequate to set a frame­ tional solution-judicial bankruptcy Since Hungary ,)pened its doors to work for bargaining and to resolve proceedings-to the systemic prob­ foreign investment in 1988, the coun­ any qisputes thatmay arise; and com­ lems of enterprise insolvency in CEE try has enjoyed a level of foreign in­ mercial contracts between state en­ countries. Itis highly improbable that vestment lmma':;ched by any other terprises, which were instruments of any judicial system-much less one CEE country. This was initially be­ the state economic plan. Butnowcom­ with relatively little exposure to eco­ cause Hungary's ori8:inal foreign in­ mercial transactions in the economy nomic matters-could handle such a vestment law, Act XXN of 1988, was are increasingly being conducted ac­ surge in caseload efficiently and ef­ the most liberal investment law in cording to the Civil Code (originally fectively. the region. The l~,w has been modified designed for the small, noncommer­ periodically sincl~ then, but it still re­ cial private transactions). The appli­ Competition Law tains the basic features that are at­ cable sections of the Code embody tractive to foreign investors. The law standard western contract concepts. Competition law can be an important allows foreign individuals and enti­ Because courts have little experience tool to prevent abusive monopolistic ties to own up to 100 percent of a with commercial contract cases, court behavior. In Hungary a new competi­ Hungarian investment, includingthe interpretations and decisions over the tion law. Act LXXXVI of 1990 on the real property associ~tted with it. No coming years will determine justhow Prohibition of Unfair Market Prac­ special permission is needed. In the far "freedom of contract'" extends, tices, took effect on January 1, 1991. event of exproprlation, the law guar­ particularly when it collides with The law deals with the traditional antees foreign ir.vestors full compen­ other social concerns. areas of antimonopoly enforcement, sation in the currency of the original including horizontal and vertical investment. Bankruptcy Law agreements among firms, abuse by a single firm of a dominant position, Although the HtJlgarian forint is not Hungary's Law on Bankruptcy Proce­ and merger control, and it sets up a yet formany convertible, the foreign dures, Liquidation Procedures, and specialized antimonopoly office, the investment law does allow foreign Final Settlement was passed by par­ Office of Economic Competition, to investors to repatriate their forint liament in September 1991. The law enforce these provisions (subject to profits in the currency of the original differs from the previous one in sev­ review upon appeal by the Budapest investment (at the official exchange eral important respects. Itencourages district court). rate), "provided the company has the reorganization in lieu of liquidation equivalent amoilnt in forint on re­ when feasible, and it tries to encour­ The law also covers unfair competi­ serve.'" Foreign individuals and com­ age real as well as financial restruc­ tion and prohibits such activities as panies with foreign participation are turing to make surviving firms more misleading advertising or "unfair" permitted to maintain hard currency competitive in the longer run. It tries acquisition and use of business se­ accounts in any Hungarian commer­ to balance the distribution of control crets. One important element miss­ cial bank. '1:he foreign investment law over assets and bargaining power ing from the law is authority of the also offers generous industry-specific between debtor and creditors. And it antimonopolyoffice to order the break­ tax incentives to foreign investors. establishes time limits on the differ­ up oflarge ttlonopolisticfirms prior to However, these have been widelycriti­ ent stages of the bankruptcy and liq­ privatization. Such a link between cized by economists and tax policy uidation procedure in order to speed antimonopoly policy and privatization experts, both because they discrimi­ up the process. exists in Poland and Czechoslovakia nate against domestic investmentand and is a useful tool to prevent the because they caLIse tremendous rev­ The number ofbankruptcyfilings has privatization ofpublic monopolies into enue loss and c(lmplicate tax admin­ skyrocketed in the first few months private ones (which are certainly istration. Recogrdzingthese problems, under the new law. Although data is much harder to control or break up Hungary h as m(J ved recently to elimi­ somewhat sketchy, the number offil­ once in private hands). The Office of nate special tax incentives on foreign ings appears to have increased from Economic Competition, in addition to

VohlmA ~ \lllmh,::,( 0 The World Bank/CECTM handling individual complaints, Capitalism already? A variety of Hungarian taxes should educate the public about the Corporate 7hx. The general rate for the distortions caused by monopoly be­ andoutside Hungary. Nonresidents are entrepreneurial profit tax (corporate taxed on their in-country income. (Aper­ havior and lobby the government and tax) is 40 percent. The following tax parliament to minimize barriers to son is a Hungarian resident ifhe or she incentives will apply to foreign invest­ has a permanent home there or is international trade-the most pow­ ments made before the end of 1993: present for 183 days in a calendar year.) erful antimonopoly force of all. For tax rates, no distinction is drawn • Joint ventures with founding assets between foreign source and local source Judicial Institutions worth more than 50 million forints and income. The personal income tax rate a foreign stake ofatleast 30 percent are hasranged between 0 and 40 percent in Over the pastfew years thejudiciary's eligible for a 60 percent profit tax: con­ 1992 (compared with 0-60 percent in workload in Hungary has more than cession in the first five years of opera­ 1989 and 0-50 percent in 1990-91): doubled because ofthe registration of tion and for a 40 percent concession in new private companies, the rapid rise the next five years-as long as at least Income brackets in the numberofcommercial disputes, 50 percent of their activity can be de­ forints tax rate (percent) fined as material production. the rash ofnew compensation claims, Up In 100,000 0 and growing criminal activity. In or­ • If a joint venture satisfies the above 100,000-200,000 25 der to accommodate private sector requirements and its activity is classi­ 200,000-500,000 25,000 forints + activities, the judicial infrastructure fied as being of special interest t,o the 35 percent on income will need to be upgraded through country (such as electronics; the manu­ exceeding 200,000 training, staffing, and equipment.An facture ofvehicle parts and components, more than 500,000 130,000 forints + area needing particular attention is machine tools, and agricultural, food­ 40 percent on income excaeding 500,000 debt collection. Of 700,000 lawsuits processing, and forestry machinery; medicine; the production of vegetable filed nationwide last year (a 60 per­ protein; packaging technology; and tour­ The budget draft for 1993 (still await­ centincrease from the previous year), ism-related operations), a full tax holi­ ing parliamentary approval) stipulates two-thirds involved uncollectible day is granted for the first five years, that the tax rate for the top income debts. Streamlining debt collection, followed by a 60 percent reduction for bracket increases to 50 percent.Accord­ perhaps by allowing private debt col­ the subsequent five years. ingly, an income of 1,000,000 forints lection in uncontested cases or reduc­ • Ifajoint venture ploughs in its prof­ would be taxed at a rate of 330,000 ing procedural requirements in judi­ its or reinvests them elsewhere in Hun­ forints +50 percentofincome exceeding cial cases, could relieve much of the gary, a tax reduction-identical to the 1,000,000 forints. current strain on the courts. Also, amountofreinvested profits in the same arbitration could be a useful alterna­ year-applies. Social Insurance. Based on employees' tive to court procedures as a means to gross wages, employers pay 44 percent resolve commercial disputes among After December 31, 1993, the above in­ and employees 10 percent in contribu­ private parties. centiveswill be eliminated,buta "grand­ tions to social insurance. Additionaliy father law" will remain in effect for joint an unemployment contribution was in­ In sum, Hungary has been atthe fore­ ventures set up before that date. troduced lastyear to hel p fund retrain­ front of CEE countries in reforming ing programs and unemployment ben­ its legal framework to promote pri­ Value Added 7hx. The value added tax efits. Employers' contributions to this vate sector development. Yet in the (VAT) system copies a common Euro­ fund are 5 percent and employees' 1 face of numerous legal and institu­ pean type. It must be fully borne by the percent-again, based on employees' tional difficulties, the challenge of end-user or final consumer, unless the gross wages. implementing all of this new legisla­ product or service in question is des­ tined for export, in which case u full TDC. A technical development contri­ tion is truly daunting. refund of the VAT can be claimed. Until bution (TDC) of 4.5 percent is paid from the endof1992 most basic products and companies' profits. TDC payments are Cheryl Gray W. services are tax-exempt or carry an "0" put in a special state-handled fund for CECTM, the World Bank VAT rate. Other services are subject to technical development, which is allo­ a 15 percen t rate, and for some products cated by tendering or by individual ap­ The article is based on "Legal Reform a 25 percent rate applies. The rates are plication. Joint ventures can apply. for Hungary's Private Sector," by the same for imported goods. ('Ib in­ Cheryl W. Gray, Rebecca Hanson, and crease tax revenues, the 1993 budget Local Taxes. Building, real estate, busi­ Michael Heller, World Bank PR Work­ draft proposes a two-tier 25 percentand ness, communal, and tourist taxes can ing Papers, WPS 983,1992. 7border: 8 percent rate and the elimination of be levied. The basis and level of taxa­ Maxine Berg, the World Bank, Rm. N­ the 0 rate and exemptions.) tion depend on the needs of the commu­ 11·021, tel: (202) 473-6969. nities in question, within limits deter­ Personal Income Tax. Residents are mined by the law. taxed on their totalincome-both within

October 1992 Transition Research Update: Services as Growth Sector in the FSU

A new World B~nk research project, On the eve ofGorbachev's perestroika, vices). Particular emphasis will be "Services as a Growth-Promoting Sec­ in 1985, only 39 percent ofthe Soviet given to the last category. tor in the Fonner Soviet States," will labor force was employed in services, analyze services in the new states of and a mere 40 percent of gross na­ Historical data on services in the the FSU, study the gap between an­ tional product came from the service fonner Soviet Union will then be used ticipated and actual services, and industries. The Soviet Union trailed to explore differences in the level of chart the experience with growth in far behind the middle- and upper-in­ services among the former Soviet services of other (post)socialist coun­ come countries, where 53 percent of states in recent years. This quantita­ tries in transitic,n. the labor force was employed in ser­ tive analysis will be complemented vices, accounting for 50 percent of by a qualitative analysis of the evolu­ Neglected Sector gross national product. In five less­ tion of services, especially business developed industrial countries and consumer services, since 1985 in For a combination of reasons-the (Greece, Ireland, Portugal, Spain, and the former Soviet states and in other system of central planning, a bias Turkey), the respective figures were economies in transition such as China, against consumption, Marxism's doc­ 43.1 and 55 percent. In the industri­ Czechoslovakia, eastern Germany, trinal bias aga;nst "nonproductive" alized countries as a whole, the per­ Hungary, and Poland. services,the monopoly position of pro­ centages of labor force in and gross viders, and the abolition of private national product from services were With a look toward the future, the production-the service sector as­ each 61 percent. The United States' study will simulate the potential con­ sumed over the years a rather limited service sector led the statistics with tribution of services to future value role in the Soviet economy (and So­ 69 percent and 67percentrespectively. added, employment, and household viet-type Elconomies). The Soviet eco­ consumption and identify a policy nomic structure, compared with simi­ New states of the FSU can benefit agenda to facilitate the rapid expan­ larly developed countries, was from the dynamism of the service sec­ sion of services. uniquely lopsidBd, with a large indus­ tor, especially of business and con­ trial base and 11. small service sector. sumer services. The latter is a major Data Sources Besides bt~ing small, the service sec­ factor in increasing static and dynamic tor was inefficient and client-"un­ efficiency, improving quality of life, Information on the characteristics of friendly." TheJ.igh cost of transac­ generatingjobs, and providing ample the service sectors in Western coun­ tions and. lack of services were opportunities for the expansion of the tries and in some Central and East­ partially offset over the years by the private sector-through joint ven­ ern European countries are available second ecCtnom}" which toward the end tures and locally owned companies. from various data bases, including of the old regime might have accounted those of the World Bank and OECD. for up to 20 per( entof all transactions Comparative Analysis Certain data on the Soviet Union and in the househdd sector-and prob­ partial information for some of the ably an ,wen higher proportion of Drawingon international, cross-coun­ fonner republics for previous years many individual services. try time series data sets, the research are available in official statistical re­ will first undertake a comparative ports of Goskomstat. Data also are The lack of pnvately owned, small­ analysis of the importance of services being provided by the Center for Tech­ scale services and the almost total at different levels of development. nology of Social Policy in Moscow, and absence of small-scale production in Services will be measured by value by Genadii Zoteev. Other data sources the "official economy" had dire conse­ added, employment, compensation of include the IMF, the CIA, and the U.S. quences for both quality of life and employees, investment, and house­ Census Bureau. economic efficiency. Inadequate con­ hold consumption; various proxy in­ sumer services imposed a heavy bur­ dicators, as well as per capita gross The project was begun in April 1992 den on the time management ofhouse­ national product, will be used for the and will be completed in April 1993. It hold members especially in view of level of development. Services will be is managed by Martha de Melo, Wil­ the almost full participation of work­ broken down into three subsectors: liam Easterly, and Gur Ofer, CECTM, ing age womer, in the labor force. (It infrastructure services (housing, the World Bank. (For additional in­ has been estimated that the time transportation, and communication), formation contact Martha de Melo, tel: people spent standing in line equaled public services (health, education, and (202) 473-9073, or William Easterly, full-time employment for 11 million public administration), and business tel: (202) 473-8965, or Gur Ofer, tel: people.) and consumer services (all other ser­ (202) 473-8970.)

Volume 3. Nurr ber () 9 The World Bank/CECTM Quotation·of the Month: "What Is the Market Value of Anything in Russia after All?" Skeptical views of the chairman of the Russian Central Bank

. Victor Gerashenko, chairman of the Q. You are saying that privatizcltion uidation by his committee. In the past Russian Central Bank, believes that should come before price reform? six months interenterprise debts-39 the state needs to interfere more in billion rubles at the beginning of the the running of the economy until A. It's a chicken-and-egg question­ year-have begun to snowball and market reforms take root. He ex­ whatcomes first? [But] how can we go have now reached 3.2 trillion rubles. plained his views in an interview pub­ through privatization now when we We were headed for a liquidity and lished in the September issue of the [still] have distorted prices and val­ bankruptcy crisis for a simple and London-based Euromoney. Excerpts ues? Should we sell shares in state obvious reason: the wholesale price from the interview follow: enterprises or should we distribute index increased sixteenfold in the first them? I think distributioI\ is wrong six months ofthe year and firms sim­ Q. How bad is the economic situation ? because people will take less care of ply couldn't afford to buy anything. It what's been given to them than they isjustlike whathappened to ordinary A. The situation is quite serious. The will of what they have earned. Prop­ Russians when retail prices were lib­ main task is to create conditions that erty should be earned. eralized. The state gave them a help­ will enable us to produce more and to ing hand by raising wages and pen­ do so at reasonable prices and that Q. But is there any other alternative to sions. The same approach is valid in will create competition between dif­ thegovemment's share give-awaypro­ boostingthe working capital of enter­ ferent sorts of enterprises. It will be gram? prises. Commercial banks will evalu­ two years before real progress toward ate enterprises' requests for loans and a market economy can be made. Un­ A. No population, whether here ()r in their ability to repay. But with such der these conditions [we must] main­ Britain or in the United States, is the high interest rates as we have now, tain production of necessary items-­ prime mover of its economy acting enterprises can't afford the interest using profitable or even unprofitable solely through ownership of busi­ [payments] and they have no possi­ methods, because the state is the main nesses and factories. It's difficult to bility of raising money in the stock owner of production capacity and we guess how successful the government's market because we haven't got one. I have made little progress in privatization plans will be. Even dis­ admit that some managers were rais­ privatization. For the time being it is cussion of the value of the vouchers is ing prices in an abuse of their mo­ the responsibility of the government becoming more and more acute. The nopoly position but anyone would to manage state firms to ensure maxi­ bulk of the people will not turn their behave like this underour conditions. mum use of productive assets as long vouchers into shares but will instead In such cases the state should again as firms are producing goods in de­ try to convert them into cash. We will regulate prices. mand in the market. end up with only a certain number of proprietors ready to take risks Q. Some people think your credit deci­ Q. What should be the priorities for through the vouchers program l!Ild sion was highly inflationary. Isn tin­ reform? with their own capital. We will need flation a major problem? to create investment funds similar to A. Under the Soviet system the cost of those in Czechoslovakia to help them A. Inflation is a problem, I agree. We labor was low and basic goods and to become share-owners. discussed the debt problem with services were either free or cheap. [prime minister] Gaidar and with With salaries low, the tax system had Q. The central bank has decided to Chubais. The credits from the central to depend on the pricing ofretail goods. guarantee debts between state enter­ bank will be used to repay We had massive distortion and the prises. Won't this send a signal elwt interenterprise debts at levels as of value ofmoney was artificial. Itwasn't the state willbail out firms that refuse the middle ofSeptember and to supple­ a unit of value but simply a unit of to respond to market signals? ment the finance ministry's credits, accounting. So we must first of all which were insufficient and inad­ find a proper price structure to move A. I disagree with the assessment. equate. Any money left. over will be to a market economy. The older gen­ When the decision was published, the used to increase the working capital eration, which grew up under the privatization Chief,Anatoly Chubais, of enterprises. state-administered economy, prefers felt that the central bank was inter­ an evolutionary approach to price re­ fering with his responsibility to com­ Q. But won't that boost the money sup­ form using administered price rises. pel firms to pay their debts or face liq­ ply?

,,, Odoher 1992 ~·---···--'·--r'-

Transition

A Wholesale prices have increased A I was notcriticizing the IMF, I was method andspeedofreform. Decisions sixteenfold while money supply has . justbeing skeptical about our ability cannot be made if the population is only a factor of 2.2-<10 you reany to negotiate with the Fund and ex­ not ready for them. think that the money supply is big plain [to them] what's going on. The enough? I don't think so. Yes, credits credit ceiling of 700 billion rubles is Q. How long will it take before reform between enterprisesare quasi-money partly economic, but mostly it is a goals are reached? and are a component of the money political requirement. [Achieving] supply. But whEm the state commer­ single-digit inflation in December is A To create competition we need in­ cial banks pass on the credits of the thesame.The essential economic aims vestment, whether local or foreign. central bank to enterprises, bank and should be amended to [take into ac­ We need to improve tax legislation. enterprise relations will become more count] realities in Russia. Ifwe liber­ It's too rigid. We need a land law, a businesslike. alize energy prices, we will go full circle mortgage law. But the foreign inves­ and have high inflation as a result. tor will move rapidly only when our Q. If the budgE,t defICit is the main We are not in the position ofwestern own investment reaches a certain cause of inflation, can't the central economies ofbeingableto apply proper level. He won't climb into the cage bank refuse to fi'lance the budget in its monetary policies. until there's already a similar sort of fight against inflation? animal there. For this we need Q. How troublesome are the differences privatization. This will give everyone A. We have no laws like this.... Be­ ofviews on policy between the govern­ a chance. The main aim of cause the govEimment has low tax ment, the central bank, and the par­ privatization should be the creation revenues as a result ofdeclining pro­ liament? of a private housing sector.... Then duction, we would lose social support we1l have labor mobility. We asked for reform ifthe central bank refused Parliament chairman Ruslan the IMF how we could assess the val­ to provide credits because ofsome anti­ Khasbulatov was right when he said ues of enterprises when our pricing inflation principles. that we all want to reform the system is in such disarray. They said economy. Either the government is it would be very difficult. We1l prob­ Q. You have saiithe value ofthe ruble always right as was the reality in the ably end up basing evaluations on re­ on the currency exchange is far too past, or we, the public and the mass placement value. Whatis the market low. Why is it ~o low? media, should have the right to ana­ value ofanything in Russia after all? lyze and give our own opinion. The The government's present reform ef­ A. The vc,lume of transactions on the presstends toignorethisand support forts arenotcorrectingthe price struc­ currency exchB,nge is not representa­ only one view - the government's. ture.... I'm always afraid when people tive. In t.he Pflst eight months only There are real differences about start trying to find the final solution. $1.3 billion wai; sold. Buthalfofitwas central bank :,ntervention. The for­ diary eign trade mirlistry says that export Conference receipts should be $2 billion to $2.5 Market Economy and Business­ ested in cooperation with foreign firms billion per m :>nth. So where's the Belarus '93 and experts. Theoonference will include money? The turnover is much too January 18·24, 1993, Minsk, Belarus plenary sessions and presentations, as small. The rEtention allowance is well as individual meetings with po­ wrong. Our balance of payments dif­ Brown University's Center for Foreign tential partners. Factory tours can be ficulties don't give us the ability to Policy Development (CFPD) is co-spon­ organized upon request of Western maintain thecarrentsystemwhereby soring its third conference in Minsk, participants. exporters can retain 30 or 40 percent Belarus together with BelASBI, the CFPDis organizing similar conferences oftheir export receipts. One hundred Belarussian Computer-Aided Business in Ukraine (March 22-29) and tenta­ percent I)f eXIJ,ort receipts should be Information system. The conference aims to develop business between West­ tively in Uzbekistan Oate spring). sold to the central bank and then any­ ern and Belarussian participants and More information: Tania Lozansky, body who wantstoimportcan cometo make recommendations on improving Centerfor ForeignPolicy Development, the bankfor h2rrd currency-probably the legal, financial, and business infra­ Brown University, Box 1948, Provi­ withsome restrictions on luxurygoods structures in Belarus. dence, RI 02912, tel: (401) 863·3465, and so on. We need a foreign law com­ fax: (401) 274-8440. pelling enterprises to bring their for­ Western participants are expected tobe eign exchangl~ into Russia from for­ practitioners and experts of relevant Editor's note: 7b enable us to inform eign banks. business, financial and legal issues. our readers onforthooming conferences, Belarussian participants represent a please send us tM necessary details at Q. How are the IMF talks going? You wide cross-section of government insti­ least three months ahead oftM scMd· previously criticized the conditions the tutions and private enterprises inter- uled date. IMF hat: set for providing credits.

Volume 3, Nur:1ber 9 11 The World Bank/CECTM Milestones of Transi'tion

In late October Czech and Slovak lead­ 1993. The Agency on Privatization, four-point plan as the basis for set­ ers agreed on a customs union be­ which prepared the plan, was to deal tling their dispute over the Gabcikovo tweenthe two republics after Czecho­ with eleven companies worth more hydroelectric dam project on the slovakia splits on January 1, 1993 than 10 million leva. Dan ube.According to Hungarian Sec­ (duty-free exchange of goods and ser­ retary of State Janos Martonyi the vices, common trade and customs poli­ Russian First Deputy Premier four points include an immediate halt cies toward third countries). A joint Vladimir Shumeiko has said that en­ to work on the dam by Czechoslova­ council and a permanent secretariat ergy supplies to other members of the kia; the acceptance of binding inter­ will coordinate these policies. Slovak CIS might be reduced by 60 to 63 per­ national arbitration; a commitment Premier Vladimir Medar said that cent in 1993. He justified this on the to maintain the normal volume of the Czechoslovak koruna will remain grounds that the former Soviet re­ water in the original riverbed; and the common currency indefinitely, but publics and East European countries the creation of a small group to exam­ that either side could pull out of the were re-exporting Russian fuel and inethe immediate consequences of the arrangement at any time. The next raw materials. As an example, he Danube damming. round ofpre-breakup talksis expected named Hungary, which, he claimed, to cover financial issues, including had earned $1 billion this year by re­ The Polish cabinet approved in late taxation and protection ofinvestments exporting Russian oil, fertilizers, and October a deficit of 85 trillion zlotys, and the division offederal property. metals. It is thought that Russia has or 5.3 to 5.5 percent of GNP, in a draft recently cut back on oil supplies to budget that projects 2 percent GNP Bulgaria's Prime Minister Filip CIS members who were in arrears. growth and a fall in inflation to 38 Dimitrov resigned on October 28 af­ percent for 1993 from a current rate terlosing a parliamentary vote of con­ Industrial production in Russia fell of more than 40 percent. The budget, fidence called over the economy and by 18 percent in the first nine months which is to go to parliament for ap­ alleged arms sales to former Yugosla­ of 1992 compared with the same pe­ proval before mid-November, forsees via. Earlier, the government approved riod last year, the government re­ a 2 percent drop in real wages next a 30 percent price increase for elec­ ported. The production slump inten­ year, after a fall of up to 7 percent in tricity starting in November. It has sified in August, reaching a low of 27 the first half of 1992. Taxes would also announced plans to use 5 billion percent as compared with August account for almost 80 percent of rev­ leva ($215 million) of state funds in a 1991. The October rate of inflation enue, while social outlays and debt one-off action to assume responsibil­ (CPl) is expected to increase to 25 servicing would be the biggest items ity for nearly all investment credits percent, the highest since the price on the spending side. granted before 1991 and to help re­ liberalization in January. The ruble solve the problem of overdue debts fell to 398 per dollar on October 29 in Mongolia's government has warned between state firms and banks. Total trading on the Moscow Interbank thatliving standards will collapse this inter-enterprise debt in Bulgaria is Currency Exchange (from 393 on Oc­ winter ifforeign donors do not step up estimated atmore than 60 billion leva tober 27). aid. Chultemiin Ulaan, chairman of ($2.55 billion). The government also Mongolia's National Development wanted to begin privatization of at Hungarian and Czechoslovakoffi­ Board, told delegates at an interna­ least ninety-two companies before cials had agreed in principle em a tional aid conference in Ulan Bator thateconomic output was plunging at "Buy now, while you still belong to the middle class." a rate of almost 20 percent per year. The conference, organized by the United Nations Development Pro­ gram, was primarily focused on Mongolia's long-term needs.

Tanzania's President Ali Hassan Mwinyi says that privatization is the only way to revive state-run corpora­ tions whose debt is estimated at $3.1 billion, AFP reports. International donors try to persuade the country to dismantle or sell 400 unprofitable From the Hungarilln daily Magyar Hirlap. state-run firms to private investors.

12 October 1992 '~---'-i'-'I--+------I -

Transition World Bank/IMF Agenda

World Bank and IMF Support to pharmaceuticals. (All three Baltic Institute, which offers courses in eco­ Lithuania states joined the Bank this year; Es­ nomic and financial management and tonia on June 23, Lithuania on July 6, public administration for officials and A $60 million World Bank loan to and Latvia on August 11.) private sector executives of Central Lithuania (approved on October 22) and Eastern Europe and the former will help the COWltry to maintain es­ IDA Brings Good Things to Soviet Union. The Institute is spon­ sential services in energy and health Laos••• sored by theWorld Bank, the IMF, the care and help sustain adequate agri­ EBRD, the BIS, the OECD, and the cultural production. (Badly needed With the support of a new $36 million European Commission. imports include vaccines, drugs, and International Development Associa­ blood-control SUpp1iE~S; feed grain, tion (IDA) creditto Laos,14,500 house­ Hungary to Chair 1993Annual protein meal, an d veterinary medi­ holds in thesouthern and central parts Meetings cines; lubricants; and fire-resistant ofthe country will be able to switch on cable.) Of the $60 million, $45 million the lights-300villages will be linked Hungary's Finance Minister Mihaly will finance imports directly, and $15 to the national power grids. (IDA is Kupa has been named Chairman of million will be made available for the World Bank's affiliate for theAnn ual Meetings for 1993. Mexico purchase with lo,~al currency in com­ concessionallending.)At present only and Zimbabwe will name Vice-Chair­ mercial banks to m'Olet the import a sixth of the 4.1 million population men. needs of local en !;erprises. The Fund has access to electricity. The funds has approvl~d an ;~82 million stand-by will also finance training for staff of World Bank Opens Hungarian credit for LithuEmia, to support the the country's power utility and steps Office country's economic reform program. to improve network efficiency by re­ The credit (thefiri5t one since the Baltic ducing losses and improving billing The World Bank opened its Budapest state joined the j:'und in April 1992), methods. Part of the money will pay office on October 26 with Andrew P. can be drawn o'{er the next eleven for a study on expandingthe country's Rogerson as Resident Representative. months. The economic program is first and largest dam, the NamNgum, Address: World Bank Field Office, designed to brinl~ down inflation to a where electricity is produced for do­ Suba Trade Center, 4th Floor, monthlyrateof2 perc.mt by next sum­ mestic use and for export toneighbor­ Nagymezo utca 44, Budapest 1065, mer, and to limit the fall in real GDP ing Thailand. (The World Bank has Hungary. Tel: (361) 269-0389 or 269­ to about 2~! percent for the program approved lending totaling $227 mil­ 0393. year. (Consumer prices increased by lion to Laos since its government about 2,200 percent from January launched economic reforms in 1985.) Consultative Groups to 1991 to July 199:~, and GDPfell more Coordinate FSU Aid? then 30 percen!:. since early 1990.) ••• and Helps China's Financial Envisaged structural reforms include Reforms Japanese Prime Minister Kiichi furtherpriee liberalization, privatiza­ Miyazawa, hosting the end-October tion, creating a government securi­ A $60 million IDA credit will contrib­ Conference on Assistance to States of ties market, finllncia.l sector reform, ute to a more efficient mobilization of the Former Soviet Union, called for and designing ~md implementing a savings and their allocation to high­ the World Bank to be put in charge of social safety net. priority productive investments in overseeing long-term assistance to China. Projects include establishing those countries. Russian Deputy Pre­ World Bank Helps Latvia Keep a sound payments and clearing sys­ mier Aleksander Shokhin said that Warm tem in the central bank for settlement while Russia welcomed the idea of ofmonetary transactions, bringingthe consultative groups, it wanted au­ A $45 million World Bank loan to country's accounting standards in line thority shared between the World Latvia win pro'Vide foreign currency with international standards, and Bank and Russia's Agency for Inter­ to buy critical imports in the energy, strengtheningthe role of the Finance national Cooperation and Develop­ agriculture, and health sectors. Im­ Ministry in debt management. ment. British Overseas Development ports include heavy fuel oil (to assure Minister Linda Chalker, speaking on adequate heat :md electrical power Vienna Institute for Human behalf of the European Community, this winter); a~:rochemicals, veteri­ Investment told the conference it would be help­ nary medicines, and machinery for ful if all countries were to call upon food production; and drugs, vaccines, In Vienna six international institu­ the World Bank to convene consulta­ and supplies for local production of tions inaugurated the Joint Vienna tive groups.

Volume 3, Numter 9 13 The Wood Bank/CECTM

New Books and Working Papers * .. The CECTM unit of the World Bank regrets that it is unable to supply the publications ,risted.

World Bank publications: The Livestock Sector in Eastern [Theoretical explanation of mac roe co­ Europe-Constraints andOppor­ nomic instability during transition.] Poland-Health System Reform tunities WP No. 69, Washington, D.C., 1992, A Country Study, Washington, D.C., Discussion Paper No. 174, Washing­ 23p. 1992,104 p. ton, D.C., 1992, 51 p. 7b order: IMF Publication Services, Since the 1970s, health indicators in Ramgopal Agarwala 700 - 19th Street, NW, Washington, Poland have plummeted. Life expect- . China: Reforming Inter­ D.C. 20431, tel: (202) 623-7430, fax: ancy is down and postneonatal mor­ governmental Fiscal Relations (202) 623-7201. tality is worse than in other Euro­ Discussion Paper No. 178, Washing­ pean countries. Polish men die ton, D.C., 1992, 76 p. • • • prematurely from cardiovascular dis­ ease, cancer, and accidents and inju­ Available from the World Bank book· Henry Y. Wan, Jr. ries. The health system suffers from store or to order: World Bank Publica· The Market Transition in Taiwan ineffective service delivery and a tions, tel: (908) 225·2165 or P.O. Box [China]:Any Relevance for PRe? heavy reliance on public funds. Basic 7247·8619, Philadelphia, PA 19170· WPS Transitions from State Social­ medical supplies are scarce, facilities 8619. ism, No.5, 1992,57 p. are inadequate, and health workers To order: Cornell University, M. are demoralized by hard work and • • • Einaudi Center, Ithaca, NY. low pay. As a result, health care is poor in quality and hard to obtain. IMF publications: Chinese entrepreneurs still make The government pays most costs and decisions in an environment different confines private services to diagnos­ M.I. Blejer, M. Mecagni, R. Sabay, R. from their counterparts elsewhere. tic tests and ambulatory care for acute Hides, B. Johnston, P. Nagy, R. Peper The wage contract still borders on ex­ illnesses. Albania: From Isolation 'lbward ploitation. The criterion for success is Reform the ability to navigate the socio­ A government health care task force Occasional Paper No. 98, Washington political milieu and not the ability to worked with the Bank in June 1990 to D.C., 1992, 84 p. solve technological and marketing draft reforms. In the short term, re­ problems. The latter function is exer­ forms aim to protect past achieve­ E.R. Borensztein,D.G. Demekas, and cised by foreign partners, either in a ments, prevent a worsening of health J.D.Ostry joint venture, or in a trading relation­ status in vulnerable groups, and bal­ The Output Decline in the After­ ship like international subcontract­ ance care between public and market math ofReform:The CasesofBul­ ing. And it is the foreign partners who control. In the medium term, the sys­ garia,Czechoslovakia,andRoma­ retain the initiative in business deal­ tem must cope with the rising burden nia ings and earn the lion's share of prof­ of chronic, noncommunicable dis­ WP No. 59, Washington, D.C., 1992, its, according to this paper. eases; upgrade technology; and ad­ 41 p. justthe mix ofchronic and acute care. The Chinese economy has every op­ The drastic changes ahead will notbe Guillermo A. Calvo and Fabrizio portunity to perform at least as well easy, the study says. "Even with the Coricelli as the Taiwanese economy. The ob­ most favorable possible increase in Output Collapse in Eastern. Eu­ stacle is not the socialist bias against spending on health-which would rope: The Role ofCredit monopolistic capitalism but bureau­ come at the cost of much-needed in­ WP No. 64, Washington, D.C., 1992, cratic institutions that prevent com­ vestment in other sectors-Poland 22p. petition, claims the author. Instead of would have to face the trade-off be­ keeping inefficient firms alive, prior­ tween equity and efficient delivery of Adam Benett and Susan Schadler ity should be given to management health services. InterestRate Policiesin CEE:The reform and inefficient businesses Influence ofMonetary Overbang should be exposed to competitive China-Long-TermIssues andOp­ and Weak Enterprise Discipline forces. tions in the Health Transition WP No. 68, Washington, D.C., 1992, Country Study, Washington, D.C., 21 p. Other papers in this series: 1992,133 p. Shoukang Lin • VictorNee.SleepingwiththeEn. Cornelis de Haan, Tjaart Schi11horn A Simple Monetary Model of a einy: Why Communists Love the van Veen, and Karen Brooks Shortage Economy Market. No. 92.1,36 p.

14 October 1992 --_.-1II_~·L--I' ______

I

Transition

• Janet Mitchell. Creditor Passiv­ highest incomes, the mos~ favorable • Izabela Bolkowiak and Andrzej ityandBankruptcy:Implications location, thefewest agricultural prob­ Wernik. Problems ofFiscal Policy for Economic Reform. No. 92.2, lems, booming trade with the EC, the in Poland. WP No. 28. 25p. bestrecord oftransition, andthe least • Grzegorz W. Kolodko. Stabiliza· • Sijin Suo Motivations of Profit­ threatening migratory pressures. tion, Recession and Growth in Seeking Behavior and Market­ [Editor's note: The newly independent Postsocialist Economies. WP No. Oriented Growth of Chinese Slovenia is not included in the au­ 29, 1992, 60 p. Firms. No. 92.3, 35 p. thors' assessment.] Poland comes • Yusheng Pengo Wage Determina­ next, and the Baltic states might be Information: IF, Information and tion in Rural and Urban China. readyas soon as Poland. Bulgaria and Publication Section, Warsaw, No. 92.4,42 p. Romania are further behind economi. Swietokrzyska 12. • Valerie Bunce and Maria Csanadi. cally and politically and are more A Systematic Analysis of a Non­ likely to generate major migration • • • System:PostCommunisminEast­ flows, contends the CEPR report. ern Europe. No. 92.6,26 p. Recent publications in the Hungar­ Thorder:CEPR,25-280ldBurlington ian Ministry of Finance series, "Pub­ Th order: Soviet and East European St., London WIXlLB. TeI:(4471) 734­lic Finance in Hungary"; Studies Program ,Rakey Cole, 164Uris 9110, fax:(4471) 734-8760. Hall, Ithcu:a, N'114853·7601. Infor­• 'lechnica1 'lerms Used in Pub· mation: Ms. J oA 'ln DiPerna, tel:(607) • • • lic Finance in Hungary. No. 100, 255-1004. 1992,170 p. CERGE, Charles University, Prague, • TheBudapestStockExchange, • • • Faculty of Social Sciences 2 Years Old. No. 101. • New Labor Code in Hungary. Is Bigger Betf;t~r? The Economics Working papers: No. 102 . of EC Enlargement • NewActonPublicFinances.No. Centre for Economic Policy Research, • Karel Dyba and Jan Svejnar. Sta­ 103. London, Monit£·ring European Inte­ bility and 'li"ansition in Czecho­ • Act on Employees' Stock Own­ gration NC). 3, 1992, 115 p. slovakia [in early 1992]. WPS 7, 30 ership Program.. No. 104, 21 p. p. Key observ'atiolls of the 1992Annual • KatherineTerell.Productivityof Th order: Perfect Publisher, 1075 Report on furth3r enlargement of the Western and Domestic Capital in Budapest. Rumbach S.u.15/a. Community: Polish Industry. WPS B. • Zdenek Drabek. Convertibilityor • • • • The Ce,ntral and East European Payment Union? Convertibility! Countries (CEI;Cs) would be expen­ WPS 12. New books: sive entrants, "ith current EC "cohe­ sion" policies entailing annual trans­ Lecture transcripts: Robert W. Cambell fers from curretlt members ofB billion The Failure of Soviet Economic ecu to Czechoslovakia, Hungary, and • MartBakal. ForeignInvestment Planning Poland and 5 billion to Bulgaria and and Privatization Projects. April Indiana University Press, Romania. 2, 1992, 20 p. Bloomington, 1992. • Immediate free trade should be • Miles Valta. The Establishment introduced bet',veen the CEECs and of Stock Exchanges and Privat­ V. Samonis and C. Hunyadi the EC for all goods and services, in­ ization in the CSFR. May 13, 1992, BigBang and Acceleration: Mod­ cluding agriculture and other sensi­ 13p. els for the Postcommunist Eco­ tive sectors; high capital mobility nomic 'li"ansformation should be formalized in a new Euro­ 7b order:CERGE. Thboritska23. es­ Nova Science Publishers, Commack, pean Economic Space (EES). 130 87 Prague, Czechoslovakia. Tel: NY, 1992, 65 p. • Although current income dispari· (422) 277-251, fax: (422) 277-249. Information:NSP,tel:(516)499-3103. ties probably will not generate migra­ fax: (516) 499-3146. tion in excess Df 5 percent of CEEC • • • population OVI~r twenty years, free labor mobility should not be intro· Recent working papers ofthe Warsaw duced now. Institute of Finance, Poland:

At present thl~ Czech republic and • Grzegorz W. Kolodko. Structural Hungary appear the most plausible Adjustment Policy in Poland. WP candidates fol' admission with the No. 26.

Volume 3. Number 9 15 The Wand Bank/CECTM

Bibliography of Selected Articles Staff may contact the Joint Bank·Fund Library, (202) 623-7054.

Postsocialist Economies Kraft, E. and M. Vodopivec. How Soft lsthe Asia Bud~et Constraint for Yu~oslav f'll'ms? Chilosi. A. Market Socialism: A Histori­ Journal of Comparative Economics (U.S.) Bourdet, Y. Reforming Laos' Economic cal View and the RetrospectiveAsse&s­ 16:432-55, September 1992. System.. Economic SY8tem8 (Germany) 16 ment. Economic SY8tem8 (Germany) (1):63-89, 1992. 16(1):171-87.1992. Poznanski, K. Privatisation of the Polish Economy: Problems of Transition. Soviet Clemens, Scott D. andMichael M. Hickman. Entrepreneurship Support Systems: Studie8 (U.K.) 44(4):[641]-64. 1992. What Protection for Investors in Chi­ Thematic Issue. Quarterly Journal of the nese B Shares? I ntemational Financial International Center for Public Enterprises Schonfeld. R. Germany n: Privatising the Law Review (U.K.) 11:26-30, July 1992. (lCPE) (Ljubjana. Slovenia) 12(1·2):1-172, East. World 7bday (U.K.) 48:152-55, August· March.June 1992. September 1992. Lou. J. On Division otEconomic Power Information: ICPE, LJubjana, Slovenia, tel: between Central and Local Levels. Chi­ (3861) 182-331, fax: (3681) 346-389. 'Threll, K. Productivity ofWestern a.nd Do­ nese Economic Studie8 (U .S.) 25:25-34, Sum­ mestic Capital in Polish Industry.Journal mer 1992. Evstigneeva, L. andV. Perlamutrov. Evolu­ ofComparative Economic8 (U.S.) 16:[494]-514, tion otSocialism: The End ofthe Twen­ September 1992. Shen, L. andY. Dai. Formation ot"Duke· tieth Century. Russian Social Science Re· dom Economies" and Their Causes and view; A Journal of Translations (U.S.) CIS and the BaInes Defects. Chinese Economic Studies (U.S.) 33:17.37, July.August 1992. 25:6-24, Summer 1992. Brady. R., M. McNamee. and P. Galuszka. Murphy, Kevin M., Andrei Shleifer, andRob· Project Capitalism [in Russia]: Special Sueyoshi, T. Measurin~ the Industrial ert W. Vishny. Transition to a Market Report.Business Week (U.S.) 3285:104·08, Sep. Performance ofChinese Cities by nata Economy: Pitfalls ot Partial Reform. tember 28. 1992. Envelopment Analysis. Socio·Economic Quarterly Journal of Economics (U.S.) Planning Sciences (U.K.) 26:75·88. April 107:[889}906, August 1992. Ennakov, S.P. and A.A. Kiselev. ECOJllomic 1992. Aspects ot Health [in the ex-USSRJ. World Salter. John. On the Interpretation ot Health Statistic8 Quarterly International Tang, Fengyi andothers. PropertyRights: Bukharin'sEconomicIdeas.Soviet Stud­ 45(1):50-60, 1992. Rationalizing the Crull: of Retorm and ies (U.K.) 44( 4): [563]-78, 1992. Development. Chinese Economic Studies Fairlamb. D. How theIMFIsKillingRu.ssia (U.S.) 25:48·59, Summer 1992. Welfens, J.J.P. The Socialist Shadow with Kindness. Institutional Inve8tor, Inter­ Economy: Causes, Characteristics, and national Edition (U.S.) 17:65·70, September Wilson·Smith, P. IsTimeRunningOutfor RoleforSystemicReforms.Economic Sys. 1992. Bank Reform in Vietnam? Institutional tems (Gennany), 16(1):11347, 1992. Investor.International Edition (U.S.) 17:89­ Gavrilov, VN. In Searchofa New Logic tor 90, September 1992. Zhou, Huizhong. Explanation ofCoexist· Collaboration.. Studie8 on Soviet Economic ence of Taut Plannin~ and Hidden Re· Development (USSR) 3:261-63. August 1992. Africa servesinCentrallyPlannedEconomies. Journal of Comparative Economics (U.S.) Krylatykh. EN. Land Reform: The First Aeroe, A. New Pathways to 16:456-78, September 1992. Steps. Studies on Soviet Economic Develop­ IndustrialisationinTanzania:Theoreti­ ment (USSR) 3:24548, August 1992. cal and Strategic Considerations. IDS Central and Eastern Europe Bulletin. University ofSussex, Institute of Rakovskaya.O.A. Economic and Social Development Studies (U.K.) 23:15·20, July Caaba, L. Convalescent Economy. New Problems otWomen. Studie8 on Soviet Eco­ 1992. Hungarian Quarterly (Hungary) 33:3·13, nomic Development (USSR) 3:322-27, August Summer 1992. 1992. Riley, B. Analysis ofthe Use ofCounter­ part Funds in Mozambique. IDS Bulle· Gati, C. From Sarajevo to Sarajevo. For· Sachs, J. and D. Lipton. Ru&&ia: 'Thwards a tin, UniversityofSussex, Institute of Devel· eignAffairs (U.S.) 71:[64]-78, Fall 1992. Market·Based Monetary System. Central opment Studies (UK.) 23:4145,AprilI992. Banking (U.K) 3:29·53, Summer 1992. Hun~ary.AFinancial7Imes (U.K.) supple. ment, pp. 27.30, October 29, 1992.

TRANSITION is a regular publication of the World Bank's Transition and Macro-Acljustment Division, Country Economics Department. The findings, views, andinterpretations published inthe articles arethose of the authorsandshould not beattributedto theWorld Bankorits affiliated organizations. Nordo any ofthe interpretations or conclusions necessarily represent official polley ofthe World Bank orofitsExecutive Directors or the countries they represent. Richard Hirschler is the editor and production manager. Desktopping is by Mary Mahy for the Policy Research Dissemination Center. To be on the distribution list, send name and address to Richard Hirschler, Room N-6027, The World Bank, 1818 H Street NW. Washington, D.C. 20433 orcall (202) 473·6982, orfax (202) 676-0439. Information on upcoming conferences on socialist economies. indication ofsubjects of special interest to our readers, letters to the editor. and any other reader contributions are appreciated.

16 October 1992