Adecade of Transition

A DECADE OF TRANSITION: ACHIEVEMENTS AND CHALLENGES ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution A DECADE OF TRANSITION: ACHIEVEMENTS AND CHALLENGES Editors Oleh Havrylyshyn Saleh M. Nsouli IMF Institute International Monetary Fund Washington, D.C. ©International Monetary Fund. Not for Redistribution © 2001 International Monetary Fund Production: IMF Graphics Section Cover design: Sanaa Elaroussi Typesetting: Joseph A. Kumar Library of Congress Cataloging-in-Publication Data A Decade of Transition: Achievements and Challenges/Oleh Havrylyshyn, Saleh M. Nsouli, editors.—Washington, D.C. : International Monetary Fund, IMF Institute, 2001. p. cm. “Selected papers presented at an IMF conference in Washing- ton, D.C., February 1–3, 1999, sponsored by the European I and II Departments and the IMF Institute.” Includes bibliographical references. ISBN 1-58906-013-X 1. Economic stabilization—Europe, Central—Congresses. 2. Economic stabilization—Europe, Eastern—Congresses. 3. Economic stabilization—Former Soviet republic—Congresses. 4. Deflation (Finance)—Europe, Central—Congresses. 5. Deflation (Finance)—Europe, Eastern—Congresses. 6. Deflation (Finance)—Former Soviet republics—Congresses. 7. Europe, Central—Economic condition—1989—Congresses. 8. Europe, Eastern—Economic conditions—1989—Congresses. 9. Former Soviet republics—Economic conditions—1991— Congresses. I. Havrylyshyn, Oli. II. Nsouli, Saleh M. III. Inter- national Monetary Fund. HB3782.9.D32 2001 Price: $26.00 Address orders to: International Monetary Fund, Publication Services 700 19th Street, N.W., Washington, D.C., 20431, U.S.A. Tel.: (202) 623-7430 Telefax: (202) 623-7201 E-mail: [email protected] ©International Monetary Fund. Not for Redistribution Contents Foreword Horst Köhler . .vii Acknowledgments . .ix 11. A Decade of Transition Oleh Havrylyshyn and Saleh M. Nsouli . .1 12. Opening Address Michel Camdessus . .9 13. Disinflation in Transition—1993–97 Carlo Cottarelli and Peter Doyle . .12 14. Growth in Transition Countries, 1990–98: The Main Lessons Oleh Havrylyshyn and Thomas Wolf . .83 15. Inflation and Growth in Transition: Are the Asian Economies Different? Sanjay Kalra and Torsten Sløk . .129 16. Lessons of the Russian Crisis for Transition Economies Yegor Gaidar . .154 17. Time to Rethink Privatization in Transition Economies? John Nellis . .160 18. Banking Sector Reform in Central and Eastern Europe Lajos Bokros . .194 19. Challenges for the Next Decade of Transition Nicholas Stern . .203 10. Institutions and the Underground Economy Simon Johnson and Daniel Kaufmann . .212 11. Transition and the Changing Role of Government Vito Tanzi and George Tsibouris . .229 12. Inequality During the Transition: Why Did It Increase? Branko Milanovic . .251 13. Concluding Remarks Shigemitsu Sugisaki . .268 List of Participants . .270 v ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution Foreword A decade of experience in the transformation of former centrally planned economies to market-oriented economies has produced important lessons. To identify the lessons from the experience of 25 non- Asian transition countries, the IMF held a conference, “A Decade of Transition: Achievements and Challenges,” on February 1–3, 1999, in Washington, D.C. The conference brought together senior government officials, staff from the European Bank for Reconstruction and Devel- opment, the IMF, the World Bank, and academics to answer three questions: How far has the transition progressed in different countries? What factors explain the differences in progress and in economic performance? And what remains to be done? The contributions in this volume cover a broad range of issues rele- vant to transition: financial stabilization, growth recovery, privatization, banking reform, income inequality, and the changing role of government. The conference discussions raised at least as many questions as they answered. The discussions, and the papers in this volume, provide some answers to the three questions posed above. First, transition countries have made substantial progress in financial stabilization, but progress with structural reforms and institutional development has been distinctly greater in Central Europe and the Baltics than in countries farther to the east. Second, although financial stabilization is essential for renewed economic growth, it is not enough: structural reforms and the development of market institutions must also be suf- ficiently advanced. Third, while in the next phase of transition the con- solidation of stabilization will need to continue, the emphasis will need to shift to several other tasks: carrying through the unfinished structural agenda (especially in lagging countries), accelerating institutional development, addressing egregious cases of income inequality, and dealing firmly with corruption and the growth of vested interests. I believe that this volume will contribute to deepening the under- standing of the challenges still facing the transition economies and the policies needed to address them. The tasks that remain are great, re- quiring continued determined effort by the countries concerned. Horst Köhler Managing Director vii ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution Acknowledgments Many people contributed to the success of the conference, A Decade of Transition: Achievements and Challenges, and to the ensuing book. We wish to express our appreciation to all the conference participants whose presentations and interventions made for a lively discussion, and to the authors of a comprehensive and insightful set of papers that appear in this volume. We are grateful to the three organizing departments, the European I and II Departments and the IMF Institute, and in particular to their Directors, Michael Deppler, Mohsin S. Khan, and John Odling-Smee, for their encouragement and support. Further, we want to thank Deirdre Clark, Gabriele Monnett, and Chris Withee of the Administrative Division of the IMF Institute for their valuable as- sistance in organizing the conference, as well as Joan Campayne of the European II Department, who contributed tirelessly from the inception stage to the final preparation of this volume. We also want to thank Farah Ebrahimi, who, along with Mike Treadway, edited the volume and saw it through production; Frank Welffens, for editorial assis- tance; and Marie Therese Culp for her thoroughness and hard work in preparing the final manuscript. ix ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution A Decade of Transition 1 Oleh Havrylyshyn and Saleh M. Nsouli Since the fall of the Berlin Wall nearly a decade ago, the former centrally planned economies of Central and Eastern Europe and the Baltics, Russia, and other former Soviet Union countries have made major strides in moving toward market-based economies. Initially, this historic transformation was accompanied by considerable price and output instability. In many countries, stabilization programs sup- ported by the IMF and the World Bank helped contain this instability and bolstered the momentum for structural reforms. Yet by 1998, only countries in Central Europe had achieved sustained growth and recovery from the recession that followed the transition. And even in that region, Albania, Bulgaria, and Romania suffered setbacks during 1996–97. The crisis that beset Russia in 1998 not only exacerbated the recession in the region, it highlighted the key challenge of transition: achieving sustained economic growth. To take stock of the accomplishments of the transition economies over the past 10 years and identify the challenges ahead, in February 1999 the IMF organized a conference for senior officials from transition countries, academics, and staff of international organizations. This volume contains the papers presented at the conference. The chapters explore a broad set of issues in the transition process—from the overarching macroeconomic problems of achieving stabilization and sustained growth to the microeconomic building blocks of the transformation. Specifically, the chapters examine private sector development, financial sector evolution, external sector relations, social protection, and most important, the proper role of government, the rule of law, and the effective functioning of market-friendly institutions. In his opening remarks, former IMF Managing Director Michel Camdessus set the tone of the IMF conference. He pointed to the progress made, but cautioned that important challenges remained, re- minding participants that most countries now had to turn to the much more difficult and time-consuming task of implementing second- generation reforms, at the heart of which is: “enforcing the rule of law and fostering a culture that respects and welcomes a framework of law, regulation, and codes of good practice.” 1 ©International Monetary Fund. Not for Redistribution 2 Oleh Havrylyshyn and Saleh M. Nsouli Achievements, Shortfalls, and Lessons The non-Asian transition economies have generally achieved considerable inflation control, and many have begun to grow. The economic literature on the transition process has grappled with two criti- cal questions on disinflation. First, how

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